vrca-10q_20180930.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, 2018

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number 001-38529

 

Verrica Pharmaceuticals Inc.

(Exact name of registrant as specified in its charter)

 

 

 

 

 

Delaware

 

46-3137900

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

10 North High Street, Suite 200

West Chester, PA 19380

(Address including zip code of principal executive offices)

(484) 453-3300

(Registrant’s telephone number, including area code)

 

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, 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 the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided 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  

 

Class of Common Stock

 

Outstanding Shares as of November 2, 2018

Common Stock, $0.0001 par value

 

25,696,371

 

 


 

VERRICA PHARMACEUTICALS INC.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements (Unaudited)

 

1

 

 

 

 

 

Item 2.

 

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

 

14

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risks

 

21

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

21

 

 

 

 

 

PART II. OTHER INFORMATION

 

22

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

22

 

 

 

 

 

Item 1A

 

Risk Factors

 

22

 

 

 

 

 

Item 2.

 

Recent Sales of Unregistered Securities and Use of Proceeds

 

57

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

57

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

57

 

 

 

 

 

Item 5.

 

Other Information

 

57

 

 

 

 

 

Item 6.

 

Exhibits

 

57

 

 

 

 

 

Signatures

 

59

 

 

 


PART I. FINANCIAL INFORMATION

 

Item 1.

Unaudited Condensed Financial Statements

VERRICA PHARMACEUTICALS INC.

CONDENSED BALANCE SHEETS

(in thousands, except share and per share amounts)

(Unaudited)

 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

38,311

 

 

$

8,663

 

Marketable securities

 

 

58,664

 

 

 

 

Prepaid expenses and other assets

 

 

1,702

 

 

 

420

 

Total current assets

 

 

98,677

 

 

 

9,083

 

Property, plant and equipment, net

 

 

114

 

 

 

 

Deposits

 

 

14

 

 

 

 

Total assets

 

$

98,805

 

 

$

9,083

 

LIABILITIES, CONVERTIBLE PREFERRED STOCK AND

   STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,067

 

 

$

153

 

Accrued expenses

 

 

1,346

 

 

 

449

 

Accounts payable and accrued expenses - related party

 

 

38

 

 

 

14

 

Total current liabilities

 

 

2,451

 

 

 

616

 

Total liabilities

 

 

2,451

 

 

 

616

 

Commitments and Contingencies (Note 5)

 

 

 

 

 

 

 

 

Convertible preferred stock - Series A - 0 and 21,302,972 shares authorized,

   issued and outstanding as of September 30, 2018 and December 31, 2017,

   respectively

 

 

 

 

 

10,508

 

Convertible preferred stock - Series B - 0 and 1,937,984 shares authorized,

   issued and outstanding as of September 30, 2018 and December 31, 2017,

   respectively

 

 

 

 

 

5,000

 

Total convertible preferred stock

 

 

 

 

 

15,508

 

Stockholders’ equity (deficit):

 

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value; 10,000,000 shares authorized; no shares

   issued and outstanding as of September 30, 2018 and December 31, 2017

 

 

 

 

 

 

Common stock, $0.0001 par value; 200,000,000 and 33,236,900 shares authorized

   as of September 30, 2018 and December 31, 2017, respectively; 25,801,515 shares

   issued and 25,696,371 shares outstanding as of September 30, 2018 and 3,804,643

   shares issued and 3,699,499 shares outstanding as of December 31, 2017,

   respectively

 

 

3

 

 

 

 

Treasury stock, at cost, 105,144 shares as of September 30, 2018 and

   December 31, 2017

 

 

 

 

 

 

Additional paid-in capital

 

 

123,365

 

 

 

5,394

 

Accumulated deficit

 

 

(27,007

)

 

 

(12,435

)

Accumulated other comprehensive loss

 

 

(7

)

 

 

 

Total stockholders’ equity (deficit)

 

 

96,354

 

 

 

(7,041

)

Total liabilities, convertible preferred stock and stockholders’ equity (deficit)

 

$

98,805

 

 

$

9,083

 

 

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

 

1


VERRICA PHARMACEUTICALS INC.

CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(in thousands, except share and per share amounts)

(Unaudited)

 

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

3,484

 

 

$

1,120

 

 

$

8,022

 

 

$

2,612

 

General and administrative

 

 

3,681

 

 

 

238

 

 

 

7,170

 

 

 

411

 

Total operating expenses

 

 

7,165

 

 

 

1,358

 

 

 

15,192

 

 

 

3,023

 

Loss from operations

 

 

(7,165

)

 

 

(1,358

)

 

 

(15,192

)

 

 

(3,023

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

427

 

 

 

 

 

 

621

 

 

 

 

Other expense

 

 

(1

)

 

 

 

 

 

(1

)

 

 

 

Interest expense - related party

 

 

 

 

 

(1

)

 

 

 

 

 

(1

)

Total other income (expense)

 

 

426

 

 

 

(1

)

 

 

620

 

 

 

(1

)

Net loss

 

$

(6,739

)

 

$

(1,359

)

 

$

(14,572

)

 

$

(3,024

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share, basic and diluted

 

$

(0.27

)

 

$

(0.48

)

 

$

(1.30

)

 

$

(1.06

)

Weighted average common shares outstanding, basic and diluted

 

 

24,847,512

 

 

 

2,850,640

 

 

 

11,230,401

 

 

 

2,850,143

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(6,739

)

 

$

(1,359

)

 

$

(14,572

)

 

$

(3,024

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss on marketable securities

 

 

(7

)

 

 

 

 

 

(7

)

 

 

 

Comprehensive loss

 

$

(6,746

)

 

$

(1,359

)

 

$

(14,579

)

 

$

(3,024

)

 

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

 

 

2


VERRICA PHARMACEUTICALS INC.

CONDENSED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)

(in thousands, except share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

Total

 

 

 

Series A Convertible

 

 

Series B Convertible

 

 

Series C Convertible

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

Stockholders’

 

 

 

Preferred Stock

 

 

Preferred Stock

 

 

Preferred Stock

 

 

 

Common Stock

 

 

Additional

 

 

Accumulated

 

 

Treasury Stock

 

 

Comprehensive

 

 

Equity

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

 

Shares Issued

 

 

Amount

 

 

Paid­In Capital

 

 

Deficit

 

 

Shares

 

 

Cost

 

 

Loss

 

 

(Deficit)

 

Balance as of December 31, 2017

 

 

21,302,972

 

 

$

10,508

 

 

 

1,937,984

 

 

$

5,000

 

 

 

 

 

$

 

 

 

 

3,804,643

 

 

$

 

 

$

5,394

 

 

$

(12,435

)

 

 

105,144

 

 

$

 

 

$

 

 

$

(7,041

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,099

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,099

 

Series C convertible preferred stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,606,267

 

 

 

21,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance costs for Series C preferred

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conversion of preferred stock

   into common stock

 

 

(21,302,972

)

 

 

(10,508

)

 

 

(1,937,984

)

 

 

(5,000

)

 

 

(4,606,267

)

 

 

(20,993

)

 

 

 

16,246,872

 

 

 

2

 

 

 

36,499

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

36,501

 

Issuance of common stock in connection

   with IPO, net of offering costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,750,000

 

 

 

1

 

 

 

78,373

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

78,374

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(14,572

)

 

 

 

 

 

 

 

 

 

 

 

(14,572

)

Unrealized loss on marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7

)

 

 

(7

)

Balance as of September 30, 2018

 

 

 

 

$

 

 

 

 

 

$

 

 

 

 

 

$

 

 

 

 

25,801,515

 

 

$

3

 

 

$

123,365

 

 

$

(27,007

)

 

 

105,144

 

 

$

 

 

$

(7

)

 

$

96,354

 

 

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

 

 

3


VERRICA PHARMACEUTICALS INC.

CONDENSED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

 

 

For the Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(14,572

)

 

$

(3,024

)

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

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

3,099

 

 

 

3

 

Accretion of discounts on marketable securities

 

 

(47

)

 

 

 

Depreciation expense

 

 

10

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other assets

 

 

(1,296

)

 

 

(531

)

Accounts payable

 

 

914

 

 

 

710

 

Accrued expenses

 

 

897

 

 

 

(22

)

Accounts payable and accrued expenses - related party

 

 

24

 

 

 

128

 

Net cash used in operating activities

 

 

(10,971

)

 

 

(2,736

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases of marketable securities

 

 

(58,624

)

 

 

 

Purchases of property, plant and equipment

 

 

(124

)

 

 

 

Net cash used in investing activities

 

 

(58,748

)

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from the issuance of common stock in connection with IPO

 

 

86,250

 

 

 

 

Payment of offering cost in connection with issuance of common stock in

   connection with IPO

 

 

(7,876

)

 

 

 

Proceeds received from Series A preferred stock subscription receivable

 

 

 

 

 

2,700

 

Stock issuance costs related to Series A preferred stock

 

 

 

 

 

(95

)

Proceeds received from issuance of Series C preferred stock

 

 

21,000

 

 

 

 

Stock issuance costs related to Series C preferred stock

 

 

(7

)

 

 

 

Net cash provided by financing activities

 

 

99,367

 

 

 

2,605

 

Net increase (decrease) in cash and cash equivalents

 

 

29,648

 

 

 

(131

)

Cash and cash equivalents at the beginning of the period

 

 

8,663

 

 

 

527

 

Cash and cash equivalents at the end of the period

 

$

38,311

 

 

$

396

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

 

 

$

1

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of noncash investing and financing activities:

 

 

 

 

 

 

 

 

Conversion of preferred stock into common stock

 

$

36,501

 

 

$

 

 

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

 

 

 

4


 

VERRICA PHARMACEUTICALS INC.

Notes to Condensed Financial Statements

(Unaudited)

Note 1—Organization and Description of Business Operations

Verrica Pharmaceuticals Inc. (the “Company”) was formed on July 3, 2013 and is incorporated in the State of Delaware. The Company is a clinical-stage medical dermatology company focused on identifying, developing and commercializing innovative pharmaceutical products for the treatment of skin diseases with significant unmet needs, with an initial focus on addressing molluscum contagiosum.

Reverse Stock Split

On June 4, 2018, the Company effected a 1.714-for-one reverse stock split of Company’s common stock. No fractional shares were issued in connection with the stock split. The par value and other terms of the common stock were not affected by the stock split.

All share and per share amounts, including stock options, have been retroactively adjusted in these condensed financial statements for all periods presented to reflect the 1.714-for-one reverse stock split. Further, exercise prices of stock options have been retroactively adjusted in these condensed financial statements for all periods presented to reflect the 1.714-for-one reverse stock split. The number of shares of the Company’s preferred stock were not affected by the reverse stock split; however, the conversion ratios were adjusted to reflect the reverse stock split.

Liquidity and Capital Resources

The Company has incurred substantial operating losses since inception and expects to continue to incur significant operating losses for the foreseeable future and may never become profitable. As of September 30, 2018, the Company had an accumulated deficit of $27.0 million.

On February 20, 2018 and March 7, 2018, the Company issued an aggregate of 4,606,267 shares of Series C convertible preferred stock, at an issuance price of $4.559 per share, for gross proceeds of $21.0 million.

On June 19, 2018, the Company completed an initial public offering (“IPO”) of its common stock, which resulted in the issuance and sale of 5,750,000 shares of its common stock at a public offering price of $15.00 per share, generating net proceeds of $78.4 million after deducting underwriting discounts and other offering costs. Upon the closing of the IPO, all outstanding shares of the Company’s Series A, Series B and Series C convertible preferred stock were automatically converted into 16,246,872 shares of the Company’s common stock. In addition, upon the closing of the IPO, the Company’s amended and restated certificate of incorporation authorized the Company to issue up to 200,000,000 shares of common stock, $0.0001 par value per share, and 10,000,000 shares of preferred stock, $0.0001 par value per share, all of which shares of preferred stock will be undesignated.

Note 2—Significant Accounting Policies

Basis of Presentation

The accompanying unaudited interim condensed financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) as determined by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the unaudited interim condensed financial statements reflect all adjustments, which include only normal recurring adjustments necessary for the fair statement of the balances and results for the periods presented. They may not include all of the information and footnotes required by GAAP for complete financial statements. Therefore, these financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto for the year ended December 31, 2017 included in the Company’s final prospectus for its IPO dated as of June 14, 2018 and filed with the Securities and Exchange Commission (the “SEC”) on June 15, 2018 pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended. The results of operations for any interim periods are not necessarily indicative of the results that may be expected for the entire fiscal year or any other interim period.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. The most significant estimates in the Company’s

5


 

financial statements relate to the valuation of common stock and stock options. These estimates and assumptions are based on current facts, historical experience and various other factors believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of expenses that are not readily apparent from other sources. Actual results may differ materially and adversely from these estimates. To the extent there are material differences between the estimates and actual results, the Company’s future results of operations will be affected.

Segments

Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker in making decisions regarding resource allocation and assessing performance. The Company views its operations and manages its business in one operating segment.

Cash, Cash Equivalents and Marketable Securities

The Company considers all highly liquid investments purchased with original maturities of 90 days or less at acquisition to be cash equivalents. Cash and cash equivalents include cash held in banks and money market mutual funds.

The Company classifies its marketable securities as “available-for-sale”, pursuant to ASC 320, Investments—Debt and Equity Securities, carries them at fair market value and classifies them as current assets on its balance sheets. There were no marketable securities with a maturity of greater than one year as of September 30, 2018. Unrealized gains and losses on marketable securities are recorded as a separate component of accumulated other comprehensive loss included in stockholders’ equity (deficit).

The following table presents the Company’s marketable securities as of September 30, 2018 (in thousands):

 

 

 

September 30, 2018

 

 

 

Amortized

 

 

Gross Unrealized

 

 

Gross Unrealized

 

 

Fair

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

Commercial paper

 

$

34,569

 

 

$

 

 

$

(1

)

 

$

34,568

 

U.S. treasury securities

 

 

12,702

 

 

 

 

 

 

(1

)

 

 

12,701

 

Asset-backed securities

 

 

11,400

 

 

 

 

 

 

(5

)

 

 

11,395

 

Total marketable securities

 

$

58,671

 

 

$

 

 

$

(7

)

 

$

58,664

 

 

Concentrations of Credit Risk and Off-Balance Sheet Risk

Cash, cash equivalents and marketable securities are financial instruments that are potentially subject to concentrations of credit risk. The Company’s deposits are in accounts at large financial institutions, and amounts may exceed federally insured limits. The Company believes it is not exposed to significant credit risk due to the financial strength of the depository institutions in which the funds are held. The Company has no financial instruments with off-balance sheet risk of loss.

Research and Development Costs

The Company’s research and development expenses consist primarily of costs associated with the Company’s clinical trials, salaries, payroll taxes, employee benefits, and equity-based compensation charges for those individuals involved in ongoing research and development efforts. Research and development costs are expensed as incurred. Advance payments for goods and services that will be used in future research and development activities are expensed when the activity has been performed or when the goods have been received rather than when the payment is made.

Fair Value Measurement

ASC 820, Fair Value Measurements, provides guidance on the development and disclosure of fair value measurements. Under this accounting guidance, fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability.

The accounting guidance classifies fair value measurements in one of the following three categories for disclosure purposes:

 

Level 1:

Quoted prices in active markets for identical assets or liabilities.

 

Level 2:

Inputs other than Level 1 prices for similar assets or liabilities that are directly or indirectly observable in the marketplace.

6


 

 

Level 3:

Unobservable inputs which are supported by little or no market activity and values determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation.

The following table presents fair value of the Company’s marketable securities as of September 30, 2018 (in thousands):

 

 

 

Fair Value Measurement as of September 30, 2018

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

$

 

 

$

34,568

 

 

$

 

 

$

34,568

 

U.S. treasury securities

 

 

12,701

 

 

 

 

 

 

 

 

 

12,701

 

Asset-backed securities

 

 

 

 

 

11,395

 

 

 

 

 

 

11,395

 

Total assets

 

$

12,701

 

 

$

45,963

 

 

$

 

 

$

58,664

 

 

Stock-Based Compensation

The Company expenses stock-based compensation to employees and board members over the requisite service period based on the estimated grant-date fair value of the awards. The Company accounts for forfeitures as they occur. Stock-based awards with graded-vesting schedules are recognized on a straight-line basis over the requisite service period for each separately vesting portion of the award. The Company estimates the fair value of stock option grants using the Black-Scholes option-pricing model, and the assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. All stock-based compensation costs are recorded in general and administrative or research and development costs in the statements of operations based upon the underlying individual’s role at the Company.

Stock-based compensation for non-employee stock options is recorded over the vesting period and remeasured at fair value until they vest.

Income Taxes

Income taxes are recorded in accordance with ASC 740, Income Taxes (“ASC 740”), which provides for deferred taxes using an asset and liability approach. The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are provided, if based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. In its interim financial statements, the Company utilizes an expected annual effective tax rate in determining its income tax provisions for the interim periods. The expected annual effective tax rate differs from U.S. statutory rates primarily as a result of a valuation allowance related to the Company’s net operating loss carryforward as a result of the historical losses of the Company.

The Company accounts for uncertain tax positions in accordance with the provisions of ASC 740. When uncertain tax positions exist, the Company recognizes the tax benefit of tax positions to the extent that the benefit would more likely than not be realized assuming examination by the taxing authority. The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position as well as consideration of the available facts and circumstances. The Company recognizes any interest and penalties accrued related to unrecognized tax benefits as income tax expense.

Net Loss Per Share

Net loss per share of common stock is computed by dividing net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding for the period. Diluted net loss per share excludes the potential impact of Series A, Series B and Series C Preferred Stock, common stock options and unvested shares of restricted stock because their effect would be anti-dilutive due to the Company’s net loss. Since the Company had a net loss in each of the periods presented, basic and diluted net loss per common share are the same.

7


 

The table below provides potential shares outstanding that were not included in the computation of diluted net loss per common share, as the inclusion of these securities would have been anti-dilutive:

 

 

 

As of September 30,

 

 

 

2018

 

 

2017

 

Shares issuable upon conversion of Series A Preferred

 

 

 

 

 

12,428,773

 

Shares issuable upon exercise of stock options

 

 

1,507,268

 

 

 

90,429

 

Non-vested shares under restricted stock grants

 

 

848,859

 

 

 

848,859

 

 

 

Recently Adopted Accounting Pronouncements

In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting, which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The Company adopted this guidance effective January 1, 2018 and the adoption of the guidance had no impact on the Company’s financial statements and related disclosures.

Recently Issued Accounting Pronouncements Not Yet Adopted

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). Under the new guidance, lessees will be required to recognize all leases (with the exception of short-term leases) on the balance sheet as a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which creates a new, optional transition method for implementing ASU 2016-02 and a lessor practical expedient for separating lease and non-lease components. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently assessing the provisions of the guidance and has not determined the impact of adoption on its financial statements.

In June 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, which simplifies the accounting for share-based payments granted to nonemployees for goods and services. Under the ASU, most of the guidance on such payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. The changes take effect for public companies for fiscal years starting after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted, but no earlier than an entity’s adoption date of ASC 606, Revenue from Contracts with Customers. The Company is currently evaluating the impact of adopting this standard on its financial statements and related disclosures but does not expect it to have a material impact.

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework–Changes to the Disclosure Requirements for Fair Value Measurement, which makes a number of changes meant to add, modify or remove certain disclosure requirements associated with the movement amongst or hierarchy associated with Level 1, Level 2 and Level 3 fair value measurements. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted upon issuance of the update. The Company does not expect the adoption of this guidance to have a material impact on its financial statements.

 

In August 2018, the FASB issued ASU 2018-15, Intangibles–Goodwill and Other–Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The guidance also requires the entity to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement, which includes reasonably certain renewals. The guidance becomes effective for the Company in the year ending December 31, 2020 and early adoption is permitted. The Company is currently assessing the impact that this guidance will have on its consolidated financial statements.

Note 3—Related Party Transactions

Prior to the IPO, the Company was controlled by PBM VP Holdings, LLC (“PBM VP Holdings”), an affiliate of PBM Capital Group, LLC. Paul B. Manning, who is the President and Chief Executive Officer of PBM Capital Group, LLC and the current chairman of the Company’s Board of Directors (the “Board”), and certain entities affiliated with Mr. Manning, continue to be the Company’s largest shareholder on a collective basis.

8


 

On December 2, 2015, the Company entered into a Services Agreement (a “SA”) with PBM Capital Group, LLC. Pursuant to the terms of the SA, which had an initial term of twelve months (and was automatically renewable for successive monthly periods), PBM Capital Group, LLC rendered advisory and consulting services to the Company. Services provided under the SA included certain business development, operations, technical, contract, accounting and back office support services. In consideration for these services, the Company was obligated to pay PBM Capital Group, LLC a monthly management fee of $2,500.

On March 29, 2018, the Company amended the SA with PBM Capital Group, LLC, effective as of April 1, 2018. Pursuant to the terms of the SA, as amended, which has an initial term of twelve months (and is automatically renewable for successive monthly periods), PBM Capital Group, LLC will render advisory and consulting services to the Company. Services provided under the SA may include certain business development, operations, technical, contract, accounting and back office support services. In consideration for these services, the Company is obligated to pay PBM Capital Group, LLC a monthly management fee of $50,000. The SA, as amended, provides for the termination by the Company with 30 days advance notice or a mutually agreed upon effective date for transition as individual services are cancelled with a corresponding reduction in the monthly management fee.

For the three months ended September 30, 2018 and 2017, the Company incurred expenses under the SA of $150,000 and $7,500, respectively, which were primarily included in general and administrative expenses. For the nine months ended September 30, 2018 and 2017, the Company incurred expenses under the SA of $307,500 and $22,500, respectively, which were primarily included in general and administrative expenses.

As of September 30, 2018 and December 31, 2017, the Company had a payable due to PBM Capital Group, LLC and its affiliates of $38,000 and $14,000, respectively. These balances include amounts due for other miscellaneous expenses incurred by PBM Capital Group, LLC and its affiliates.

Note 4—Accrued Expenses

Accrued expenses consisted of the following (in thousands):

 

 

 

As of

September 30,

2018

 

 

As of December 31,

2017

 

Compensation and related costs

 

$

855

 

 

$

49

 

Clinical trials and drug development

 

 

83

 

 

 

233

 

Consulting - former Chief Scientific Officer

 

 

282

 

 

 

 

Professional fees

 

 

26

 

 

 

129

 

Other

 

 

100

 

 

 

38

 

Total accrued expenses

 

$

1,346

 

 

$

449

 

 

Note 5—Commitments and Contingencies

Litigation

As of September 30, 2018 and December 31, 2017, there was no litigation against the Company.

Supply Agreement and Purchase Order

On March 22, 2018, the Company executed a purchase order with a supplier, denominated in Chinese yuan, pursuant to which the Company agreed to purchase approximately $2.3 million of crude cantharidin material. As of September 30, 2018, the Company purchased approximately $0.5 million of crude cantharidin material under this purchase order.

On July 16, 2018, the Company entered into a supply agreement with the supplier. The executed purchase order is covered under the terms of the supply agreement. Pursuant to the supply agreement, the supplier has agreed that it will not supply cantharidin, any beetles or other raw material from which cantharidin is derived to any other customer in North America, subject to specified minimum annual purchase orders and forecasts. The supply agreement has an initial five-year term, which is subject to automatic renewal absent termination by either party in accordance with the terms of the supply agreement. Each party also has the right to terminate the supply agreement for other customary reasons such as material breach or bankruptcy.

 

9


 

Agreements with Former Chief Scientific Officer

On May 31, 2018, the Company and the former Chief Scientific Officer (“CSO”) executed a transition agreement to resign from employment as well as a Consulting Agreement (the “Consulting Agreement”) that began upon the closing of the IPO.

The Consulting Agreement provides for cash payments to the former CSO of $29,375 per month for the first 12 months of the agreement. After the first 12 months, the former CSO will receive $300 per hour for each hour of consulting services provided. As of September 30, 2018, $0.3 million was accrued under this Consulting Agreement.

Note 6—Stockholders’ Equity

Common Stock

The Company has authorized 200,000,000 and 33,236,900 shares of common stock, $0.0001 par value per share, as of September 30, 2018 and December 31, 2017, respectively. Each share of common stock is entitled to one voting right. Common stock owners are entitled to dividends when funds are legally available and declared by the Board.

On June 19, 2018, the Company completed an IPO of its common stock, which resulted in the issuance and sale of 5,750,000 shares of its common stock at a public offering price of $15.00 per share, generating net proceeds of $78.4 million after deducting underwriting discounts and other offering costs. The shares commenced trading on the Nasdaq Global Market on June 15, 2018 under the ticker symbol “VRCA.”

Restricted Stock

Pursuant to an Amended and Restated Stock Purchase Agreement (the “Amended and Restated Agreement”) between the Company and the former CSO, 848,859 shares held by the former CSO are subject to repurchase at $0.0001 per share. These shares will be released from the repurchase option on the earliest to occur of (i) a change in control, (ii) regulatory approval of the Company’s new drug application for cantharidin, (iii) commercial sale of products and (iv) a covered termination, as defined in the Amended and Restated Agreement.

Convertible Preferred Stock

On December 2, 2015, the Company issued an aggregate of 21,302,972 shares of Series A Preferred Stock to fourteen investors for cash consideration of $1.9 million, conversion of previously outstanding notes payable and accrued interest of $0.5 million and a stock subscription receivable of $8.5 million. The Company incurred aggregate issuance costs of $0.4 million, related to the issuance of the Series A Preferred Stock and subsequent settlement of the stock subscription receivable. PBM VP Holdings paid the Company $0.5 million during the year ended December 31, 2016, and $8.0 million during the year ended December 31, 2017 to settle the stock subscription receivable. Upon the closing of the IPO on June 19, 2018, all outstanding shares of the Company’s Series A Preferred Stock were automatically converted into 12,428,773 shares of the Company’s common stock.

On December 15, 2017, the Company issued and sold an aggregate of 1,937,984 shares of Series B Preferred Stock, at an issuance price of $2.58 per share, for gross proceeds of $5.0 million. The Company did not incur any issuance costs for the Series B Preferred Stock. Upon the closing of the IPO on June 19, 2018, all outstanding shares of the Company’s Series B Preferred Stock were automatically converted into 1,130,679 shares of the Company’s common stock.

On February 20, 2018 and March 7, 2018, the Company issued and sold an aggregate of 4,606,267 shares of Series C Preferred Stock, at an issuance price of $4.559 per share, for aggregate gross proceeds of $21.0 million. Upon the closing of the IPO on June 19, 2018, all outstanding shares of the Company’s Series C Preferred Stock were automatically converted into 2,687,420 shares of the Company’s common stock.

The Company classified its Convertible Preferred Stock outside of stockholders’ deficit because redemption of the Convertible Preferred Stock, upon a deemed liquidation event, was not solely within the Company’s control.

Note 7—Stock-Based Compensation

In June 2018, the Board adopted and approved the 2018 Equity Incentive Plan (the “IPO Plan”), which amended and restated the Company’s prior 2013 Equity Incentive Plan (the “2013 Plan”) and became effective in connection with the IPO pricing on June 19, 2018. Prior to the effectiveness of the IPO Plan, the 2013 Plan provided for the grant of share-based awards to employees, directors and consultants of the Company. As a result of the effectiveness of the IPO Plan, no further grants may be made under the 2013 Plan.

10


 

The IPO Plan provides for the grant of incentive stock options to employees, and for the grant of nonstatutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance-based stock awards and other forms of stock awards to employees, including officers, consultants and directors. The IPO Plan also provides for the grant of performance-based cash awards to employees, including officers, consultants and directors. The Company has initially reserved 3,738,199 shares of common stock for issuance under the IPO Plan, which is the sum of (1) 2,198,198 new shares, plus (2) the number of shares reserved for issuance under the 2013 Plan at the time the IPO Plan became effective, plus (3) any shares subject to outstanding stock options or other stock awards that would have otherwise returned to the 2013 Plan (such as upon the expiration or termination of a stock award prior to exercise). The number of shares of common stock reserved for issuance under the IPO Plan will automatically increase on January 1 each year, for a period of ten years, from January 1, 2019 through January 1, 2028, by 4% of the total number of shares of the Company’s common stock outstanding on December 31 of the preceding calendar year, or a lesser number of shares as may be determined by the Board. As of September 30, 2018, 1,989,033 shares were available for grant under the IPO Plan.

Stock Options

The Company’s employee stock options generally vest as follows: 25% after 12 months of continuous services and the remaining 75% on a ratable basis over a 36-month period from 12 months after the grant date. Stock options granted during the nine months ended September 30, 2018 have a maximum contractual term of 10 years. The stock options are subject to time vesting requirements through 2022, are nontransferable, and have term expiration dates set to expire through 2028.

The fair value of each employee and non-employee stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The Company historically has been a private company and lacks company-specific historical and implied volatility information. Therefore, it estimates its expected stock volatility based on the historical volatility of a publicly traded set of peer companies. Due to the lack of historical exercise history, the expected term of the Company’s stock options for employees has been determined utilizing the “simplified” method for awards. The expected term of stock options granted to non-employees is equal to the contractual term of the option award. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is zero based on the fact that the Company has never paid cash dividends and does not expect to pay any cash dividends in the foreseeable future.

Prior to the Company’s IPO, in order to determine the fair value, the Company considered, among other things, contemporaneous valuations of the Company’s common stock, the Company’s business, financial condition and results of operations, including related industry trends affecting its operations; the likelihood of achieving a liquidity event, such as an initial public offering, or IPO, or sale, given prevailing market conditions; the lack of marketability of the Company’s common stock; the market performance of comparable publicly traded companies; and U.S. and global economic and capital market conditions.

The grant date fair value of employee stock option awards is determined using the Black-Scholes option-pricing model. The following assumptions were used during the three and nine months ended September 30, 2018 and 2017 to estimate the fair value of employee stock option awards:

 

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2018

 

 

2017*

 

 

2018

 

 

2017

 

Exercise price

 

$14.36 - $16.32

 

 

 

 

 

$6.52 - $16.32

 

 

$0.90

 

Risk-free rate of interest

 

2.80% - 3.03%

 

 

 

 

 

2.58% - 3.03%

 

 

1.92% - 2.23%

 

Expected term (years)

 

6.19

 

 

 

 

 

 

6.13

 

 

 

6.25

 

Expected stock price volatility

 

79.31% - 83.18%

 

 

 

 

 

70.58% - 83.67%

 

 

79.02% - 79.12%

 

Weighted average estimated fair

   value share price

 

$10.90

 

 

 

 

 

$6.91

 

 

$0.12

 

Dividend yield

 

 

 

 

 

 

 

 

 

 

 

 

*

The Company did not grant stock options during the three months ended September 30, 2017.

 

11


 

Non-employee options are remeasured to fair value each period through operations using a Black-Scholes option-pricing model until the options vest. There were no stock options granted to non-employees during the three and nine months ended September 30, 2018 and 2017. Key assumptions used to estimate the fair value of the non-employee stock options measured during the three and nine months ended September 30, 2018 and 2017 are as follows:

 

 

 

For the Three Months Ended September 30,

 

For the Nine Months Ended September 30,

 

 

2018

 

2017

 

2018

 

2017

Exercise price

 

$0.90

 

$0.90

 

$0.90

 

$0.90

Risk-free rate of interest

 

2.81% - 3.01%

 

2.16% - 2.33%

 

2.33% - 3.01%

 

2.16% - 2.48%

Expected term (years)

 

7.54

 

8.54

 

7.67

 

8.61

Expected stock price volatility

 

79.34% - 83.81%

 

77.92% - 78.84%

 

68.98% - 83.81%

 

77.92% - 79.12%

Weighted average share price

 

$15.78

 

$0.15

 

$13.92

 

$0.15

Dividend yield

 

 

 

 

 

The following table summarizes the Company’s employee stock option activity under the 2013 Plan and the IPO Plan for the nine months ended September 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

Weighted average

 

 

 

 

 

 

 

 

 

 

 

Weighted average

 

 

remaining contractual

 

 

Aggregate intrinsic

 

 

 

Number of shares

 

 

exercise price

 

 

life (in years)

 

 

value

 

Outstanding as of December 31,

  2017

 

 

17,502

 

 

$

0.90

 

 

 

 

 

 

 

 

 

Options granted

 

 

1,416,839

 

 

 

8.31

 

 

 

 

 

 

 

 

 

Outstanding as of September 30, 2018

 

 

1,434,341

 

 

$

8.22

 

 

 

9.4

 

 

$

11,517,050

 

Options vested and exercisable as of

   September 30, 2018

 

 

7,294

 

 

$

0.90

 

 

 

8.3

 

 

$

111,963

 

 

The following table summarizes the Company’s non-employee stock option activity under the 2013 Plan and the IPO Plan for the nine months ended September 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

Weighted average

 

 

 

 

 

 

 

 

 

 

 

Weighted average

 

 

remaining contractual

 

 

Aggregate intrinsic

 

 

 

Number of shares

 

 

exercise price

 

 

life (in years)

 

 

value

 

Outstanding as of December 31,

   2017

 

 

72,927

 

 

$

0.90

 

 

 

 

 

 

 

 

 

Options granted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding as of September 30, 2018

 

 

72,927

 

 

$

0.90