The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
Notes to Financial Statements
(unaudited)
1. Organization and Basis of Presentation
Dermata Therapeutics, Inc., (the “Company”), was formed in December 2014 as a Delaware limited liability company (“LLC”) under the name Dermata Therapeutics, LLC. On March 24, 2021, the Company converted from an LLC to a Delaware C-corporation and changed its name to Dermata Therapeutics, Inc. 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 and diseases.
Initial Public Offering
On August 17, 2021, the Company completed its initial public offering (“IPO”), in which it sold 160,714 shares of its common stock, par value $0.0001 per share (“Common Stock”), together with 160,714 warrants to purchase one share of Common Stock with an exercise price of $112.00 per share, at a combined offering price of $112.00. Additionally, the underwriters exercised their option to purchase an additional 24,106 warrants to purchase Common Stock with an exercise price of $112.00 per share, resulting in total IPO warrants issued of 184,820 at an exercise price of $112.00. The Company received net cash proceeds of approximately $15.4 million from the IPO after deducting underwriters’ discounts and offering expenses of approximately $2.6 million.
The Company’s shares of Common Stock and warrants are listed on the Nasdaq Stock Market LLC under the symbols “DRMA,” and “DRMAW,” respectively, and both began trading in August 2021.
Reverse Stock Split
On March 13, 2023, the Company effected a reverse split of shares of the Company’s Common Stock at a ratio of 1-for-16 pursuant to an amendment to the Company’s certificate of incorporation approved by the Company’s board of directors and stockholders. The par value was not adjusted as a result of the reverse split. All issued and outstanding Common Stock shares and per share amounts contained in the financial statements have been retroactively adjusted to reflect this reverse stock split for all periods presented.
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 March 31, 2023, cash and cash equivalents totaled $8.8 million and the Company had an accumulated deficit of $47.8 million. For the three months ended March 31, 2023, and the year ended December 31, 2022, the Company used cash of $1.6 million and $8.8 million, respectively, in operations. During March 2023, the Company raised $5.0 million in gross proceeds from an at-the-market public offering of Common Stock and warrants. The Company’s cash balances are expected to fund operations into the first quarter of 2024. The Company anticipates that it will continue to incur net losses for the foreseeable future. These factors raise substantial doubt about the Company’s ability to continue as a going concern for the one-year period following the date that these financial statements were issued.
Historically, the Company’s principal sources of cash have included proceeds from the issuance of common and preferred equity securities and proceeds from the issuance of debt. The Company’s principal uses of cash have included cash used in operations and payments for license rights. 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. The Company’s ability to raise additional capital may be adversely impacted by potential worsening of global economic conditions, potential future global pandemics or health crises, and the recent disruptions to, and volatility in, the credit and financial markets in the United States.
The Company has raised additional capital through the initial public offering of its Common Stock and warrants, as well as a private placement financing in April 2022 and an at-the-market public offering in March 2023; however, prior completed financings do not alleviate substantial doubt about the Company’s ability to continue as a going concern.
Basis of Presentation
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.
Cash and Cash Equivalents
The Company deposits its cash with reputable financial institutions that are insured by the Federal Deposit Insurance Corporation (“FDIC”). This cash is held in checking and cash sweep accounts. At times, deposits held may exceed the amount of insurance provided by the FDIC. The Company maintains an insured cash sweep account in which cash from its main operating checking account is invested overnight in highly liquid, short-term investments. The Company considers all highly liquid investments with a maturity date of 90 days or less at the date of purchase to be cash equivalents.
Fair Value Measurement
The Company uses a three-tier fair value hierarchy to prioritize the inputs used in the Company’s fair value measurements. These tiers include Level 1, defined as observable inputs such as quoted prices in active markets for identical assets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. The Company believes the carrying amount of cash and cash equivalents, accounts payable and accrued expenses approximate their estimated fair values due to the short-term nature of these assets and liabilities.
Interest Income
Interest income consists of interest income earned on cash equivalents from interest bearing demand accounts.
Patent Costs
Patent costs related to obtaining and maintaining patent protection in both the United States and other countries are expensed as incurred. Patents costs are classified as general and administrative expenses.
Research and Development
Research and development costs consist of expenses incurred in connection with the development of the Company’s product candidates. Such expenses include expenses incurred under agreements with contract research organizations, manufacturing and supply scale-up expenses and the cost of acquiring and manufacturing preclinical and clinical trial supply, outsourced laboratory services, including materials and supplies used to support the Company’s research and development activities, and payments made for license fees and milestones that have not been demonstrated to have commercial value. Such costs are expensed in the periods in which they are incurred. Upfront payments and milestone payments for licensed technology are expensed as research and development as incurred or when the milestone is achieved or is determined to be probable of being achieved. Advanced payments for goods or services to be received in the future for research and development activities are recorded as prepaid expenses and expensed as the related goods are received or services are performed.
Income Taxes
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 on the basis of the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
The Company recognizes net deferred tax assets to the extent that the Company believes these assets are more likely than not to be realized. In making such a determination, management considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If management determines that the Company would be able to realize its deferred tax assets in the future in excess of their net recorded amount, management would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
The Company records uncertain tax positions on the basis of a two-step process whereby (1) management determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, management recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. The Company recognizes interest and penalties related to unrecognized tax benefits within income tax expense. Any accrued interest and penalties are included within the related tax liability.
Stock-Based Compensation
In March 2021, the Company’s board of directors and shareholders approved the 2021 Omnibus Equity Incentive Plan (“the 2021 Plan”). For stock options granted under the 2021 Plan, the Company measures and recognizes compensation expense for all stock-based awards made to employees, directors, and non-employees, based on estimated fair values recognized using the straight-line method over the requisite service period. The fair value of options to purchase Common Stock granted to employees is estimated on the grant date using the Black-Scholes valuation model. The calculation of stock-based compensation expense requires that the Company make certain assumptions and judgments about variables used in the Black-Scholes model, including the expected term of the stock-based award, expected volatility of the underlying Common Stock, dividend yield, and the risk-free interest rate. Forfeitures are accounted for in the period they occur. Restricted stock units (“RSUs”) granted under the 2021 Plan are measured at the grant date fair value of the Common Stock, with corresponding compensation expense recognized ratably over the requisite service period. Refer to Note 5 - Equity Incentive Plan for further discussion.
Comprehensive Loss
Comprehensive loss includes net loss and other comprehensive income (loss) for the periods presented. The Company did not have other comprehensive income (loss) items such as unrealized gains and losses and so for the three months ended March 31, 2023, and 2022, comprehensive loss was equal to the net loss.
Net Loss Per Common Share
Basic net loss per share is calculated by dividing net loss attributable to common shareholders by the weighted-average number of shares outstanding during the period, contingently issuable restricted stock units for which no future service is required as a condition to the delivery of the underlying Common Stock, and pre-funded warrants because their exercise requires only nominal consideration for the delivery of shares (collectively, “basic shares”), without consideration of common share equivalents. Diluted net loss per share is calculated by adjusting basic shares outstanding for the dilutive effect of common share equivalents outstanding for the period. For purposes of the diluted net loss per share calculation, preferred shares, and warrants to purchase preferred shares are considered to be common share equivalents but are excluded from the calculation of diluted net loss per common share if their effect would be anti-dilutive.
As the Company has reported a net loss for the periods presented, diluted net loss per common share is the same as the basic net loss per common share for the periods presented.
| | Three Months Ended March 31, | |
| | 2023 | | | 2022 | |
| | | | | | |
Net loss | | $ | (2,240,142 | ) | | $ | (2,786,152 | ) |
| | | | | | | | |
Basic and diluted net loss per common share | | $ | (2.27 | ) | | $ | (5.35 | ) |
Weighted-average basic and diluted common shares | | | 985,848 | | | | 520,539 | |
The common share equivalents that are not included in the calculation of diluted net loss per common share but could potentially dilute basic earnings per share in the future are as follows:
| | As of March 31, | |
| | 2023 | | | 2022 | |
Common stock options | | | 102,074 | | | | 62,582 | |
Common stock warrants | | | 3,786,617 | | | | 201,253 | |
Total potentially dilutive securities | | | 3,888,691 | | | | 263,835 | |
Recent Accounting Pronouncements
For the three months ended March 31, 2023, the Company has reviewed recent accounting standards and does not expect the future adoption of recently issued accounting pronouncements to have a material impact on the Company's financial position and results of operations.
3. Balance Sheet Details
The following provides certain balance sheet details:
| | March 31, | | | December 31, | |
| | 2023 | | | 2022 | |
Prepaid expenses and other current assets: | | | | | | |
Prepaid insurance | | $ | 366,314 | | | $ | 586,407 | |
Prepaid research and development costs | | | 74,807 | | | | 92,581 | |
Prepaid other | | | 80,867 | | | | 11,604 | |
Interest receivable | | | 6,358 | | | | 12,602 | |
Total prepaid expenses and other current assets | | $ | 528,346 | | | $ | 703,194 | |
| | | | | | | | |
Accrued and other current liabilities: | | | | | | | | |
Accrued research and development costs | | $ | 422,597 | | | $ | 254,787 | |
Accrued compensation and benefits | | | 131,257 | | | | 170,389 | |
Accrued legal fees | | | 159,929 | | | | - | |
Accrued other | | | 381 | | | | 756 | |
Total accrued and other current liabilities | | $ | 714,164 | | | $ | 425,932 | |
4. Equity Securities
Common Stock
On March 20, 2023, the Company closed a public offering (the “2023 Offering”) priced at the market under Nasdaq rules, in which it sold an aggregate of (i) 85,000 shares of Common Stock, (ii) pre-funded warrants (the “2023 Pre-Funded Warrants”) to purchase up to an aggregate of 1,533,123 shares of Common Stock with an exercise price of $0.0001 per share, (iii) Series A warrants (the “Series A Common Warrants”) to purchase up to an aggregate of 1,618,123 shares of Common Stock, and (iv) Series B warrants (the “Series B Common Warrants” and collectively with the Series A Warrants, the “2023 Offering Warrants”) to purchase up to an aggregate of 1,618,123 shares of Common Stock. The 2023 Offering Warrants have an exercise price of $2.82 per share. The 2023 Pre-Funded Warrants were fully exercised by March 31, 2023, adding 1,533,123 common shares. No 2023 Pre-Funded Warrants were outstanding as of March 31, 2023.
On April 25, 2022, the Company closed a private placement (“PIPE”), in which it sold 56,161 shares of its Common Stock together with 179,687 pre-funded warrants to purchase up to an aggregate of 179,687 shares of Common Stock with an exercise price of $0.0001 per share (“Pre-funded Warrant”), and 235,849 warrants to purchase up to an aggregate of 235,849 shares of Common Stock with an exercise price of $21.20 per share (“PIPE Common Warrant”) at a combined offering price of $21.20. The PIPE Common Warrants related to the private placement were to expire on May 12, 2027. The Company received net cash proceeds of approximately $4.3 million from the PIPE after deducting underwriters’ discounts and offering expenses of approximately $0.7 million. The PIPE Pre-funded Warrants were exercised fully during 2022, and no Pre-Funded Warrants were outstanding as of December 31, 2022, or March 31, 2023, related to the 2022 PIPE.
In connection with the March 2023 Offering, the Company agreed to amend the terms of the PIPE Common Warrants, which are held by the purchaser in the 2023 Offering. The exercise price of the PIPE Common Warrant was reduced from $21.20 to $2.82 per share upon closing of the 2023 Offering. The original expiration date of the PIPE Common Warrant was May 12, 2027, which was extended to five years after the closing of the 2023 Offering, or March 20, 2028. The modification of the PIPE Common Warrants resulted in an increase in additional paid-in capital since the warrants are equity classified before and after the modification in connection with the March 2023 Offering.
Stockholders’ Agreements
On July 11, 2022, the Company filed a Certificate of Amendment (the “Certificate of Amendment”) to the Company’s Amended and Restated Certificate of Incorporation (the “Certificate of Incorporation”) with the Secretary of State of the State of Delaware to increase the number of authorized shares of the Company’s Common Stock from 90,000,000 shares to 250,000,000 shares. The increase in the number of authorized shares was approved by the holders of a majority of the outstanding shares of Common Stock of the Company at its annual meeting on July 11, 2022.
On March 13, 2023, the Company filed a Certificate of Amendment to the Company’s Amended and Restated Certificate of Incorporation, as amended, with the Secretary of State of the State of Delaware on March 14, 2023, a 1-for-16 reverse stock split of the Company’s issued and outstanding shares of Common Stock. 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.
Preferred Stock
While the Company has 10,000,000 shares of preferred stock authorized with a par value of $0.0001, no shares of preferred stock are outstanding as of March 31, 2023, or December 31, 2022.
Warrants
The Company performs an assessment of warrants upon issuance to determine their proper classification in the financial statements based upon the warrant’s specific terms, in accordance with the authoritative guidance provided in Financial Accounting Standards Board Accounting Standards Codification, or ASC, 480 Distinguishing Liabilities from Equity, and ASC 815, Derivatives and Hedging. The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480 and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed in the Company's own common stock and whether the warrant holders could potentially require cash settlement of the warrants. Additional accounting guidance regarding modifications is provided in Accounting Standards Update, or ASU, 2021-04 Earnings Per Share (Topic 260), Debt — Modifications and Extinguishments (Subtopic 470-50), Compensation — Stock Compensation (Topic 718), and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (a consensus of the Emerging Issues Task Force), effective as of January 1, 2022.
For issued or modified warrants that meet all the criteria for equity classification, the warrants are required to be recorded as a component of additional paid-in capital. For issued or modified warrants that do not meet all the criteria for equity classification, the warrants are required to be liability classified and recorded at their initial fair value on the date of issuance and remeasured at fair value at each balance sheet date thereafter. The Company has performed an assessment of all warrants issued and modified and determined that the Company’s warrants are equity classified.
Common and Pre-Funded Warrants issued with Public Offering
In March 2023, the Company completed the 2023 Public Offering, in which it sold 85,000 shares of its Common Stock together with 1,533,123 2023 Pre-funded Warrants to purchase up to an aggregate of 1,533,123 shares of Common Stock with an exercise price of $0.0001 per share, and 1,618,123 Series A Common Warrants to purchase up to an aggregate of 1,618,123 shares of Common Stock with an exercise price of $2.82 per share, and 1,618,123 Series B Common Warrants to purchase up to an aggregate of 1,618,123 shares of Common Stock with an exercise price of $2.82 per share, at a combined offering price of $3.09. Each Series A Common Warrant is immediately exercisable at the option of the holder and expires March 20, 2028. Each Series B Common Warrant is immediately exercisable at the option of the holder and expires July 20, 2025.
In connection with the 2023 Offering, the Company issued Placement Agent Warrants to purchase up to 113,269 shares of Common Stock at an exercise price equal to $3.8625 per share. The Placement Agent Warrants are exercisable immediately upon issuance and expire on March 16, 2028.
During the quarter ended March 31, 2023, 1,533,123 of the 2023 Pre-funded Warrants were exercised. No additional 2023 Pre-funded Warrants are outstanding as of March 31, 2023.
Summary of Warrants Outstanding
The table below lists outstanding warrants for the dates presented. The fair value of the Company’s warrants is $1.29 per warrant share, the Company’s closing stock price as of March 31, 2023. Since the exercise price of the warrants listed are greater than the fair value as of March 31, 2023, the intrinsic value of the warrants is zero.
| | Quantity of Warrants Outstanding as of | | | Exercise | | | Expiration | |
Description | | March 31, 2023 | | | December 31, 2022 | | | Price | | | Date | |
Series 1a Warrants | | | 4,321 | | | | 4,321 | | | $ | 328.00 | | | 11/15/2026 | |
Class B Common Unit Warrants | | | 4,077 | | | | 4,077 | | | $ | 91.84 | | | 12/31/2024 | |
IPO Warrants | | | 184,820 | | | | 184,820 | | | $ | 112.00 | | | 8/17/2026 | |
IPO Underwriter Warrants | | | 8,035 | | | | 8,035 | | | $ | 128.80 | | | 8/17/2026 | |
PIPE Common Warrants | | | 235,849 | | | | 235,849 | | | $ | 2.82 | | | 3/20/2028 | |
Series A Common Warrants | | | 1,618,123 | | | | - | | | $ | 2.82 | | | 3/20/2028 | |
Series B Common Warrants | | | 1,618,123 | | | | - | | | $ | 2.82 | | | 7/20/2025 | |
Placement Agent Warrants | | | 113,269 | | | | - | | | $ | 3.8625 | | | 3/16/2028 | |
Total warrants outstanding | | | 3,786,617 | | | | 437,102 | | | | | | | | |
5. 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. Effective January 1, 2022, an evergreen provision contained in the Company’s 2021 Plan increased the total number of shares of common shares issuable under the 2021 Plan in an amount equal to one percent of the Company’s common shares outstanding as of December 31, 2021. This evergreen provision resulted in an additional 5,205 common shares issuable pursuant to the 2021 Plan as of January 1, 2022. This evergreen provision resulted in an additional 7,701 common shares issuable pursuant to the 2021 as of January 1, 2023, increasing the total authorized shares available for issuance under the 2021 Plan to 115,919 as of January 1, 2023. Stock awards may be granted at an exercise price per share of not less than 100% of the fair market value at the date of grant. Stock awards granted are exercisable over a maximum term of 10 years from the date of grant and generally vest over a period of four years for employees and one year for directors of the Company’s board and consultants.
As of March 31, 2023, there remain an additional 127 shares reserved for issuance under the 2021 Plan.
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. |
The following table presents the weighted-average assumptions used for the stock option grants:
| | Three Months Ended March 31, | |
| | 2023 | | | 2022 | |
Grant date fair value | | $ | 4.23 | | | $ | 25.12 | |
Risk-free interest rate | | | 3.9 | % | | | 1.39 | % |
Dividend yield | | | 0.00 | % | | | 0.00 | % |
Expected life in years | | | 6.1 | | | | 5.3 | |
Expected volatility | | | 112 | % | | | 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.
The following table summarizes the total stock-based compensation expense related to stock options and RSUs included in the Company’s statements of operations:
| | Three Months Ended March 31, | |
| | 2023 | | | 2022 | |
Research and development | | $ | 48,425 | | | $ | 55,201 | |
General and administrative | | | 82,835 | | | | 157,679 | |
| | $ | 131,260 | | | $ | 212,880 | |
Stock Option Award Activity
A summary of the Company’s Equity Plan stock option activity is as follows:
| | Number of Options Outstanding | | | Weighted- Average Exercise Price | | | Weighted- Average Remaining Contractual Term (in Years) | |
Balance at December 31, 2022 | | | 65,983 | | | $ | 60.32 | | | | 8.2 | |
Options granted | | | 36,091 | | | | 4.96 | | | | 9.8 | |
Options exercised | | | - | | | | - | | | | - | |
Options cancelled | | | - | | | | - | | | | - | |
Balance at March 31, 2023 | | | 102,074 | | | $ | 40.77 | | | | 8.6 | |
| | | | | | | | | | | | |
Options exercisable at March 31, 2023 | | | 46,346 | | | $ | 64.31 | | | | 8.1 | |
The aggregate intrinsic value of options exercisable as of March 31, 2023, is calculated as the difference between the exercise price of the underlying options and the closing market price of the Company’s common stock on that date, which was $1.29 per share. The intrinsic value of options outstanding and exercisable as of March 31, 2023, was zero.
As of March 31, 2023, total unrecognized compensation cost related to stock options was approximately $1.0 million and the weighted average period over which this cost is expected to be recognized is 2.3 years.
6. Commitments and Contingencies
License Agreements
On March 31, 2017, the Company entered into a license agreement, as amended (the “License Agreement”) with Villani, Inc. whereby Villani has granted the Company an exclusive, sub-licensable, royalty-bearing license (the “License”) under the Licensed Patents (as defined in the License Agreement), to formulate, develop, seek regulatory approval for, make or sell products that contain Spongilla lacustris (alone or in combination with other active or inactive ingredients) for the treatment of diseases, disorders and conditions of the skin, including but not limited to acne, rosacea, psoriasis, atopic dermatitis, seborrheic dermatitis, actinic keratosis and eczema that were developed using certain licensed know-how (“Licensed Products”). The Company is responsible for the development (including manufacturing, packaging, non-clinical studies, clinical trials and obtaining regulatory approval and commercialization (including marketing, promotion, distribution, etc.)) for all Licensed Products. The original License Agreement was amended in 2019, and pursuant to the amended License Agreement, the Company was required to make future milestone payments to Villani in an aggregate amount of up to $20.25 million upon the achievement of specified development and sales milestones, payable in cash or in equity, at the option of Villani, as well as single-digit royalty payments on net sales. On July 30, 2021, the Company further amended the License Agreement in the Second Amendment to the License and Settlement Agreement (the “Second Amendment”). Pursuant to the Second Amendment, the Company is required to make future milestone payments to Villani in an aggregate amount of up to $40.5 million upon the achievement of specified development and sales milestones, payable in cash or in equity, at the option of Villani, as well as single-digit royalty payments on net sales. The Second Amendment includes customary terms relating to, among others, indemnification, intellectual property protection, confidentiality, remedies, and warranties.
Supplier Agreement
As a result of Russia’s invasion of Ukraine, the United States, the United Kingdom, and the European Union governments, among others, have developed coordinated sanctions and export-control measure packages against Russian individuals and entities. The Company is currently a party to an exclusive supply agreement for the supply of the Spongilla raw material used in DMT310 and DMT410. The counterparty to this supply agreement is a Russian entity. The imposition of enhanced export controls and economic sanctions on transactions with Russia and Russian entities by the United States, the United Kingdom, and/or the European Union could prevent the Company from performing under this existing contract or any future contract it may enter or may prevent the Company from remitting payment for raw material purchased from the Company’s supplier. The Company received two shipments of raw material from its supplier during fiscal year 2022 containing additional quantities of Spongilla raw material which will provide the Company with sufficient quantities of Spongilla to initiate and complete two Phase 3 studies in moderate-to-severe acne and support filing a new drug application for DMT310 in acne upon the successful completion of two Phase 3 studies. Depending on the extent and breadth of new sanctions or export controls that may be imposed against Russia, otherwise or as a result of the impact of the war in Ukraine, it is possible that the Company’s ability to obtain additional supply of the Spongilla raw material used in DMT310 and DMT410 could be negatively impacted, which could adversely affect its business, results of operations, and financial condition.
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.