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Verrica Pharmaceuticals(VRCA) - 2023 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Unaudited Condensed Financial Statements This section presents Verrica Pharmaceuticals Inc.'s unaudited condensed financial statements and detailed notes for periods ending September 30, 2023, and December 31, 2022 Condensed Balance Sheets Condensed Balance Sheet Highlights (in thousands) | Metric | Sep 30, 2023 | Dec 31, 2022 | Change (vs. Dec 31, 2022) | Assets (in thousands) | Asset Category | Sep 30, 2023 | Dec 31, 2022 | Change | Liabilities and Stockholders' Equity (in thousands) | Liability/Equity Category | Sep 30, 2023 | Dec 31, 2022 | Change | Condensed Statements of Operations and Comprehensive Loss Key Financial Performance (Three Months Ended September 30, in thousands) | Metric | Sep 30, 2023 | Sep 30, 2022 | YoY Change | Key Financial Performance (Nine Months Ended September 30, in thousands) | Metric | Sep 30, 2023 | Sep 30, 2022 | YoY Change | - Net loss significantly increased for both the three and nine months ended September 30, 2023, primarily due to increased operating expenses related to the commercial launch of YCANTH and higher R&D costs10 Condensed Statements of Stockholders' Equity Stockholders' Equity Changes (January 1, 2023 to September 30, 2023, in thousands) | Item | Amount | Stockholders' Equity Changes (January 1, 2022 to September 30, 2022, in thousands) | Item | Amount | Condensed Statements of Cash Flows Cash Flow Summary (Nine Months Ended September 30, in thousands) | Cash Flow Activity | 2023 | 2022 | Change | - Net cash provided by financing activities significantly increased in 2023 due to proceeds from a new credit agreement and common stock/warrant issuance, offsetting increased cash used in operating activities16 Note 1—Nature of Business - Verrica Pharmaceuticals Inc. is a dermatology therapeutics company, incorporated in Delaware in 2013, focused on developing and selling medications for skin diseases18 - The company received FDA approval for YCANTH (VP-102) topical solution for molluscum contagiosum on July 21, 2023, and launched commercial operations in August 202318 - Despite substantial operating losses since inception and an accumulated deficit of $205.8 million as of September 30, 2023, the company believes its $84.3 million cash and cash equivalents will be sufficient to operate into the first quarter of 20251921 - In July 2023, the company secured a Credit Agreement for up to $125.0 million in debt, with an initial borrowing of $50.0 million (net proceeds of $44.1 million)20 Note 2—Significant Accounting Policies - The unaudited interim condensed financial statements are prepared in accordance with GAAP, reflecting normal recurring adjustments, and should be read with the 2022 Form 10-K22 - Revenue from YCANTH sales is recognized upon physical delivery to the pharmaceutical wholesaler/distributor, with gross product sales reduced by gross-to-net (GTN) estimates for returns, chargebacks, rebates, and fees333436 - Prior to FDA approval in July 2023, approximately $5.7 million in YCANTH manufacturing costs were expensed as R&D; these costs will now result in a lower average per unit cost of materials for product revenue over the next nine months3142 - Basic and diluted net income (loss) per share calculations include pre-funded warrants as common stock equivalents due to their non-substantive exercise price44 Note 3—Property and Equipment Property and Equipment, Net (in thousands) | Category | Sep 30, 2023 | Dec 31, 2022 | - Construction in process, primarily for a product assembly and packaging line, remained substantial at $2.5 million as of September 30, 202348 Note 4 - Inventory Inventory Composition (in thousands) | Category | Sep 30, 2023 | Dec 31, 2022 | - Following FDA approval of YCANTH on July 21, 2023, the company began capitalizing inventory purchases, resulting in $279 thousand in total inventory as of September 30, 2023, up from zero at December 31, 202249 Note 5—Accrued Expenses and Other Current Liabilities Accrued Expenses and Other Current Liabilities (in thousands) | Category | Sep 30, 2023 | Dec 31, 2022 | Change | - Total accrued expenses and other current liabilities increased significantly to $9.1 million as of September 30, 2023, from $2.7 million at December 31, 2022, primarily driven by new gross-to-net reserves and higher clinical trial and compensation costs50 Note 6—Leases - The company leases office space in West Chester, PA (expiring Sep 2027) and Scotch Plains, NJ (expiring Apr 2025), classified as operating leases5152 - An automobile fleet lease program for the sales force commenced, with a ROU asset of $0.1 million recognized as of September 30, 202353 Lease Expense (in thousands) | Lease Type | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | Note 7—Debt - On July 26, 2023, the company entered into a new Credit Agreement for a five-year senior secured credit facility of up to $125.0 million, with an initial borrowing of $50.0 million (net proceeds of $44.1 million)5758 - The new Loan Facility matures on July 26, 2028, and interest accrues at SOFR (or 4.00%) plus 8.00%, with additional tranches available contingent on revenue targets58 - In connection with the new debt, the company issued warrants to purchase 518,551 shares of common stock to the Initial Lender, valued at $2.0 million5960 Debt Composition (as of September 30, 2023, in thousands) | Item | Amount | Note 8—Stockholders' Equity - In February 2023, the company completed an underwritten offering, generating $30.3 million in net proceeds from the sale of common stock and pre-funded warrants63 Outstanding Warrants (as of September 30, 2023) | Type of Warrant | Number of Warrants | Exercise Price | Expiration Date | Stock-Based Compensation Expense (in thousands) | Category | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | - Total unrecognized compensation related to unvested stock options was $13.1 million as of September 30, 2023, to be recognized over 2.7 years67 - Compensation expense of $8.2 million was recognized for vested Restricted Stock Units (RSUs) during the three and nine months ended September 30, 2023, with $2.1 million remaining unrecognized7071 Note 9—Related Party Transactions - The company has a Services Agreement with PBM VP Holdings, an affiliate of its largest stockholder, for advisory and consulting services, incurring $15,000 and $45,000 in expenses for the three and nine months ended September 30, 2023, respectively7374 - A clinical service agreement with Clinical Enrollment LLC (controlled by a related party) for VP-315 clinical trial recruitment incurred $0.1 million in R&D expenses for the nine months ended September 30, 202376 Note 10—Commitments and Contingencies - The company is a defendant in a putative class action lawsuit alleging federal securities law violations related to manufacturing deficiencies for VP-102, which is in early stages of litigation77 - The company maintains a supply agreement for crude cantharidin material, with $0.7 million in additional purchases agreed upon during Q3 20237980 Note 11—License and Collaboration Agreements - The Torii Agreement grants Torii an exclusive license to develop and commercialize cantharidin product candidates (including VP-102) in Japan, with potential for $50 million in additional milestone payments and tiered transfer price payments8182 - Collaboration revenue from Torii for clinical supplies and development activity was $0.1 million for the three months ended September 30, 2023, and $0.3 million for the nine months ended September 30, 202384 - The Lytix Agreement provides an exclusive worldwide license for VP-315 for dermatological oncology indications, with potential milestone payments up to $111.0 million and tiered royalties85 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial condition, operations, YCANTH launch, pipeline development, and liquidity for periods ended September 30, 2023 and 2022 Overview - Verrica Pharmaceuticals is a dermatology therapeutics company focused on clinician-administered therapies, with YCANTH (VP-102) approved for molluscum contagiosum and three product candidates (VP-102 for warts, VP-315 for oncology, VP-103 for plantar warts)89 - YCANTH received FDA approval on July 21, 2023, as the first FDA-approved product for molluscum, and commercial operations launched in August 2023, achieving over 112 million covered lives90 - The company is advancing VP-315 (Phase 2 for basal cell carcinoma, expected completion H1 2024) and evaluating Phase 3 trials for VP-102 in common warts and external genital warts929495 - The company secured a $125 million senior secured credit facility in July 2023, with $50 million initially drawn, and believes existing cash ($84.3 million as of Sep 30, 2023) will fund operations into Q1 2025102103 Critical Accounting Estimates - The preparation of financial statements requires management to make estimates and assumptions that affect reported amounts, which are evaluated on an ongoing basis104 - Additional accounting policies disclosed in Note 2 are crucial for understanding and evaluating financial results105 Components of Results of Operations - Product revenue from YCANTH is recognized upon physical delivery to the distributor, with gross sales reduced by gross-to-net (GTN) estimates for returns, chargebacks, Medicaid rebates, patient assistance, and administrative fees106107109110111112113 - Collaboration revenue primarily stems from the Torii Agreement for the development and commercialization of cantharidin product candidates in Japan114 - Selling, general and administrative (SG&A) expenses are expected to increase due to YCANTH commercialization, headcount growth, and public company operational costs116 - Research and development (R&D) expenses are anticipated to rise with increased personnel, new clinical trials for VP-102 (warts), VP-315 (oncology), and VP-103 (plantar warts), and regulatory filings118 - Cost of product revenue includes direct manufacturing and supply chain costs; however, approximately $5.7 million in pre-FDA approval manufacturing costs were expensed as R&D, leading to a temporarily lower per-unit cost of materials121 Results of Operations for the Three Months Ended September 30, 2023 and 2022 Financial Performance (Three Months Ended September 30, in thousands) | Metric | 2023 | 2022 | Change | - Product revenue, net was $2.8 million in Q3 2023, marking the first revenue from YCANTH's commercial launch, compared to zero in Q3 2022126 - Collaboration revenue decreased significantly from $8.3 million in Q3 2022 (due to an $8.0 million milestone payment) to $0.1 million in Q3 2023127 - Selling, general and administrative expenses surged by $16.1 million to $20.1 million in Q3 2023, driven by YCANTH commercial activities, sales force ramp-up, and restricted stock unit vesting128 - Research and development expenses increased by $3.7 million to $6.5 million in Q3 2023, primarily due to higher clinical costs for VP-315, CMC costs, and stock compensation129 R&D Expense by Product Candidate (Three Months Ended September 30, in thousands) | Product Candidate/Category | 2023 | 2022 | Change | - Interest income increased to $0.8 million in Q3 2023 due to higher cash balances and interest rates, while interest expense rose to $1.7 million due to the new OrbiMed Credit Agreement132133 Results of Operations for the Nine Months Ended September 30, 2023 and 2022 Financial Performance (Nine Months Ended September 30, in thousands) | Metric | 2023 | 2022 | Change | - Product revenue, net was $2.8 million for the nine months ended September 30, 2023, following YCANTH's commercial launch136 - Collaboration revenue decreased from $9.0 million in 2022 (including an $8.0 million milestone) to $0.3 million in 2023137 - Selling, general and administrative expenses increased by $16.1 million to $30.3 million, driven by commercial activities for YCANTH, sales force expansion, and restricted stock unit vesting138 - Research and development expenses rose by $5.8 million to $15.0 million, mainly due to increased CMC and clinical costs for VP-102 and VP-315, and higher stock compensation139 R&D Expense by Product Candidate (Nine Months Ended September 30, in thousands) | Product Candidate/Category | 2023 | 2022 | Change | - Interest income increased to $1.9 million in 2023 due to higher cash balances and interest rates, while interest expense decreased to $1.7 million due to the repayment of the Mezzanine Loan Agreement in 2022 and the new OrbiMed Credit Agreement142143 Liquidity and Capital Resources - The company has historically funded operations through equity sales and borrowings, including $30.3 million net proceeds from a February 2023 offering and $44.1 million net proceeds from the July 2023 OrbiMed Credit Agreement145150 - As of September 30, 2023, cash and cash equivalents totaled $84.3 million, projected to support operations into the first quarter of 2025146158 Cash Flow Summary (Nine Months Ended September 30, in thousands) | Cash Flow Activity | 2023 | 2022 | - Operating activities used $24.1 million cash in 2023 (vs. $13.7 million in 2022), primarily due to net loss offset by non-cash stock-based compensation153154 - Financing activities provided $74.2 million cash in 2023 (vs. used $16.9 million in 2022), driven by proceeds from the OrbiMed Credit Agreement and equity issuance156157 - Future capital requirements are substantial and depend on YCANTH commercialization, R&D costs, regulatory approvals, and intellectual property protection; additional financing will be needed157158 Contractual Obligations and Commitments - There have been no material changes to the company's contractual obligations and commitments since the Annual Report on Form 10-K for the fiscal year ended December 31, 2022162 Item 3. Quantitative and Qualitative Disclosures About Market Risks No material changes to market risk disclosures have occurred since the December 31, 2022, Annual Report on Form 10-K - No material changes to quantitative and qualitative disclosures about market risk have occurred since the December 31, 2022, Annual Report on Form 10-K163 Item 4. Controls and Procedures Management concluded disclosure controls were effective as of September 30, 2023, with no material changes to internal control over financial reporting - Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective at a reasonable assurance level as of September 30, 2023164 - No material changes in internal control over financial reporting occurred during the quarter ended September 30, 2023165 PART II. OTHER INFORMATION Item 1. Legal Proceedings The company discloses a class action lawsuit regarding VP-102 manufacturing deficiencies, asserting no material financial impact from legal proceedings - A putative class action complaint was filed on June 6, 2022, alleging federal securities law violations related to undisclosed manufacturing deficiencies for VP-102166 - The litigation is in early stages, and the company intends to vigorously defend against the allegations166 - Management believes that the ultimate liabilities from all routine legal proceedings will not materially affect the company's financial position, results of operations, or cash flows167 Item 1A. Risk Factors Updated risk factors include YCANTH product liability exposure and the company's ability to service debt and borrow under its Loan Facility - The company faces inherent product liability risk from YCANTH commercialization and clinical trials, with potential for substantial liabilities from claims of injury169 - Current product liability insurance coverage of $10 million may not be adequate, and maintaining sufficient coverage could become expensive170 - The Credit Agreement includes affirmative and restrictive covenants (e.g., limits on debt, mergers, dividends) and requires maintaining at least $10 million in unrestricted cash172 - Failure to meet revenue targets could prevent borrowing additional tranches of the $125 million Loan Facility, negatively impacting funding for operations175 Item 6. Exhibits This section lists all exhibits filed with the Quarterly Report on Form 10-Q, including organizational documents and certifications - The exhibit index includes key documents such as the Amended and Restated Certificate of Incorporation and Bylaws, Credit Agreement, Pledge and Security Agreement, and Warrant Certificate related to the OrbiMed debt facility178 - Certifications from the Chief Executive Officer and Chief Financial Officer, pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002, are also included178 Signatures This section contains the official signatures of the registrant's authorized officers, certifying the report filing on November 9, 2023 - The report is duly signed by Ted White, Chief Executive Officer and President, and P. Terence Kohler Jr., Chief Financial Officer, on November 9, 2023183