vrca-10q_20200331.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

 

 

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

 

For the quarterly period ended March 31, 2020

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 of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (484) 453-3300

 

 

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

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, $0.0001 par value

 

VRCA

 

The Nasdaq Stock Market LLC

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   

 

As of May 4, 2020, the registrant had 25,814,493 shares of common stock, $0.0001 par value per share, outstanding.

 

 

 


 

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

 

13

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risks

 

19

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

20

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

21

 

 

 

 

 

Item 1A.

 

Risk Factors

 

21

 

 

 

 

 

Item 2.

 

Recent Sales of Unregistered Securities and Use of Proceeds

 

22

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

22

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

22

 

 

 

 

 

Item 5.

 

Other Information

 

22

 

 

 

 

 

Item 6.

 

Exhibits

 

22

 

 

 

 

 

Signatures

 

24

 

 

 


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)

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

54,486

 

 

$

9,241

 

Marketable securities

 

 

33,896

 

 

 

52,776

 

Prepaid expenses and other assets

 

 

2,265

 

 

 

2,966

 

Total current assets

 

 

90,647

 

 

 

64,983

 

Property and equipment, net

 

 

2,375

 

 

 

2,090

 

Operating lease right-of-use asset

 

 

45

 

 

 

111

 

Other non-current assets

 

 

1,375

 

 

 

1,240

 

Total assets

 

$

94,442

 

 

$

68,424

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,103

 

 

$

1,185

 

Accrued expenses and other current liabilities

 

 

2,066

 

 

 

2,036

 

Operating lease liability

 

 

133

 

 

 

130

 

Total current liabilities

 

 

3,302

 

 

 

3,351

 

Operating lease liability

 

 

23

 

 

 

58

 

Long-term debt, net

 

 

34,434

 

 

 

 

Other liabilities

 

 

75

 

 

 

 

Total liabilities

 

 

37,834

 

 

 

3,409

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

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

   issued and outstanding as of March 31, 2020 and December 31, 2019

 

 

 

 

 

 

Common stock, $0.0001 par value; 200,000,000 authorized;

   25,919,637 shares issued and 25,814,493 shares outstanding as of March 31, 2020 and

   25,912,137 shares issued and 25,786,330 shares outstanding as of December 31, 2019

 

 

3

 

 

 

3

 

Treasury stock, at cost, 105,144 shares as of March 31, 2020 and

   December 31, 2019

 

 

 

 

 

 

Additional paid-in capital

 

 

127,599

 

 

 

126,594

 

Subscription receivable

 

 

 

 

 

(410

)

Accumulated deficit

 

 

(71,014

)

 

 

(61,192

)

Accumulated other comprehensive gain

 

 

20

 

 

 

20

 

Total stockholders’ equity

 

 

56,608

 

 

 

65,015

 

Total liabilities and stockholders’ equity

 

$

94,442

 

 

$

68,424

 

 

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 March 31,

 

 

 

2020

 

 

2019

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

$

4,892

 

 

$

4,487

 

General and administrative

 

 

4,988

 

 

 

3,539

 

Total operating expenses

 

 

9,880

 

 

 

8,026

 

Loss from operations

 

 

(9,880

)

 

 

(8,026

)

Other income (expense):

 

 

 

 

 

 

 

 

Interest income

 

 

278

 

 

 

547

 

Interest expense

 

 

(220

)

 

 

 

Total other income

 

 

58

 

 

 

547

 

Net loss

 

$

(9,822

)

 

$

(7,479

)

 

 

 

 

 

 

 

 

 

Net loss per share, basic and diluted

 

$

(0.39

)

 

$

(0.30

)

Weighted average common shares outstanding, basic and diluted

 

 

24,964,167

 

 

 

24,857,771

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(9,822

)

 

$

(7,479

)

Other comprehensive gain:

 

 

 

 

 

 

 

 

Unrealized gain on marketable securities

 

 

 

 

 

28

 

Comprehensive loss

 

$

(9,822

)

 

$

(7,451

)

 

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

 

 

2


VERRICA PHARMACEUTICALS INC.

CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

Total

 

 

 

Common Stock

 

 

Additional

 

 

Subscription

 

 

Accumulated

 

 

Treasury Stock

 

 

Comprehensive

 

 

Stockholders’

 

 

 

Shares Issued

 

 

Amount

 

 

Paid-in Capital

 

 

Receivable

 

 

Deficit

 

 

Shares

 

 

Cost

 

 

Gain (Loss)

 

 

Equity

 

January 1, 2020

 

 

25,912,137

 

 

$

3

 

 

$

126,594

 

 

$

(410

)

 

$

(61,192

)

 

 

105,144

 

 

$

 

 

$

20

 

 

$

65,015

 

Repayment of subscription receivable

 

 

 

 

 

 

 

 

 

 

 

410

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

410

 

Stock-based compensation

 

 

 

 

 

 

 

 

998

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

998

 

Exercise of stock options

 

 

7,500

 

 

 

 

 

 

7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,822

)

 

 

 

 

 

 

 

 

 

 

 

(9,822

)

March 31, 2020

 

 

25,919,637

 

 

$

3

 

 

$

127,599

 

 

$

 

 

$

(71,014

)

 

 

105,144

 

 

$

 

 

$

20

 

 

$

56,608

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 1, 2019

 

 

25,809,900

 

 

$

3

 

 

$

122,526

 

 

$

 

 

$

(33,083

)

 

 

105,144

 

 

$

 

 

$

(17

)

 

$

89,429

 

Stock-based compensation

 

 

 

 

 

 

 

 

780

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

780

 

Exercise of stock options

 

 

3,729

 

 

 

 

 

 

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,479

)

 

 

 

 

 

 

 

 

 

 

 

(7,479

)

Unrealized gain on marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

28

 

 

 

28

 

Adoption of ASU 2018-07 (See Note 2)

 

 

 

 

 

 

 

 

(98

)

 

 

 

 

 

98

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

 

 

25,813,629

 

 

$

3

 

 

$

123,211

 

 

$

 

 

$

(40,464

)

 

 

105,144

 

 

$

 

 

$

11

 

 

$

82,761

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(9,822

)

 

$

(7,479

)

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

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

998

 

 

 

780

 

Accretion of discounts on marketable securities

 

 

(93

)

 

 

(359

)

Depreciation expense

 

 

14

 

 

 

11

 

Non cash interest expense

 

 

65

 

 

 

 

Reduction in operating lease right-of-use asset

 

 

66

 

 

29

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other assets

 

 

701

 

 

 

(46

)

Other receivable - related party

 

 

 

 

 

(6

)

Accounts payable

 

 

(82

)

 

 

215

 

Accrued expenses and other current liabilities

 

 

279

 

 

 

4

 

Accounts payable and accrued expenses - related party

 

 

 

 

 

(38

)

Operating lease liability

 

 

(32

)

 

 

(28

)

Net cash used in operating activities

 

 

(7,906

)

 

 

(6,917

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Sales and maturities of marketable securities

 

 

24,355

 

 

 

42,365

 

Purchases of marketable securities

 

 

(5,382

)

 

 

(21,295

)

Purchases of property and equipment

 

 

(699

)

 

 

 

Net cash provided by investing activities

 

 

18,274

 

 

 

21,070

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from exercise of stock options

 

 

7

 

 

 

3

 

Proceeds from issuance of debt, net

 

 

34,460

 

 

 

 

Repayment of subscription receivable

 

 

410

 

 

 

 

Net cash provided by financing activities

 

 

34,877

 

 

 

3

 

Net increase in cash and cash equivalents

 

 

45,245

 

 

 

14,156

 

Cash and cash equivalents at the beginning of the period

 

 

9,241

 

 

 

10,271

 

Cash and cash equivalents at the end of the period

 

$

54,486

 

 

$

24,427

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of noncash investing and financing activities:

 

 

 

 

 

 

 

 

Property and equipment purchases payable or accrued at period end

 

$

333

 

 

$

285

 

Debt discount costs included in accrued expense at period end

 

$

125

 

 

$

 

 

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

 

 

 

4


 

VERRICA PHARMACEUTICALS INC.

Notes to Condensed Financial Statements

(Unaudited)

Note 1—Nature of Business

Verrica Pharmaceuticals Inc. (the “Company”) was formed on July 3, 2013 and is incorporated in the State of Delaware. The Company is a dermatology therapeutics company committed to the development and commercialization of novel treatments that provide meaningful benefit for people living with skin diseases.

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 March 31, 2020, the Company had an accumulated deficit of $71.0 million.

 

Since inception, the Company has financed its operations through sales of convertible preferred stock and the sale of common stock in the Company’s initial public offering, with aggregate gross proceeds of $123.2 million and net proceeds of $114.9 million and the issuance of debt with aggregate gross proceeds of $35.0 million and net proceeds of $34.5 million. As of March 31, 2020, the Company had cash, cash equivalents and marketable securities of $88.4 million.

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 the 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, 2019 filed with the Securities and Exchange Commission (the “SEC”) on March 13, 2020. 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.

 

The Company has been actively monitoring the novel coronavirus (“COVID-19”) situation and its impact globally. Management believes the financial results for the three months ended March 31, 2020 were not significantly impacted by COVID-19. In addition, management believes the remote working arrangements and travel restrictions imposed by various governmental jurisdictions have had limited impact on the Company’s ability to maintain internal operations during the quarter. The full extent to which the COVID-19 pandemic will directly or indirectly impact the Company’s business, results of operations and financial condition will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain it or treat COVID-19. As a direct result of COVID-19, the Company has decided to delay the initiation of its Phase 3 clinical trials to evaluate VP-102 in subjects with common warts as well as its planned Phase 2 clinical trial to evaluate VP-103 in subjects with plantar warts until conditions are appropriate. 

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. These estimates and assumptions are based on current facts, historical experience as well as other pertinent industry and regulatory authority information, including the potential future effects of COVID-19, 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.

Significant Accounting Policies

There have been no material changes in the Company’s significant accounting policies to those previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

5


 

Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued Accounting Standard Update (“ASU”) 2016-02, Leases (Topic 842) in order to increase transparency and comparability among organizations by, among other provisions, recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous GAAP. For public companies, ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 (including interim periods within those periods) using a modified retrospective approach and early adoption is permitted. In transition, entities may also elect a package of practical expedients that must be applied in its entirety to all leases commencing before the adoption date, unless the lease is modified, and permits entities to not reassess (a) the existence of a lease, (b) lease classification or (c) determination of initial direct costs, as of the adoption date, which effectively allows entities to carryforward accounting conclusions under previous GAAP. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provides entities an optional transition method to apply the guidance under Topic 842 as of the adoption date, rather than as of the earliest period presented. The Company adopted Topic 842 on January 1, 2019, using the optional transition method to apply the new guidance as of January 1, 2019, rather than as of the earliest period presented, and elected the package of practical expedients described above. Based on the analysis, on January 1, 2019, the Company recorded an operating lease right-of-use asset of $304,000 and an operating lease liability of $306,000 and eliminated deferred rent of $2,000. See Note 6 for additional information.

 

In June 2018, the FASB issued ASU No. 2018-07, Compensation-Stock Compensation (Topic 718): 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. The Company adopted this ASU as of January 1, 2019 and recorded an adjustment to accumulated deficit and additional paid-in capital of $98,000.

 

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. The adoption of this guidance as of January 1, 2020 did not have an impact on the 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. The adoption of this guidance as of January 1, 2020 did not have an impact on the financial statements.

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 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.

 

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 March 31,

 

 

 

2020

 

 

2019

 

Shares issuable upon exercise of stock options

 

 

2,563,674

 

 

 

2,051,725

 

Non-vested shares under restricted stock grants

 

 

1,148,859

 

 

 

848,859

 

 

Note 3—Investments in Marketable Securities

 

Investments in marketable securities consisted of the following as of March 31, 2020 and December 31, 2019 (in thousands):

6


 

 

 

 

March 31, 2020

 

 

 

Amortized

 

 

Gross Unrealized

 

 

Gross Unrealized

 

 

Fair

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

U.S. Treasury securities

 

$

6,718

 

 

$

40

 

 

$

 

 

$

6,758

 

Commercial paper

 

 

17,859

 

 

 

 

 

 

(14

)

 

 

17,845

 

Asset-backed securities

 

 

9,299

 

 

 

 

 

 

(6

)

 

 

9,293

 

Total marketable securities

 

$

33,876

 

 

$

40

 

 

$

(20

)

 

$

33,896

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019

 

 

 

Amortized

 

 

Gross Unrealized

 

 

Gross Unrealized

 

 

Fair

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

U.S. Treasury securities

 

$

7,397

 

 

$

3

 

 

$

 

 

$

7,400

 

Commercial paper

 

 

31,913

 

 

 

7

 

 

 

(1

)

 

 

31,919

 

Asset-backed securities

 

 

13,446

 

 

 

11

 

 

 

 

 

 

13,457

 

Total marketable securities

 

$

52,756

 

 

$

21

 

 

$

(1

)

 

$

52,776

 

 

Unrealized gains and losses on marketable securities are recorded as a separate component of accumulated other comprehensive gain included in stockholders’ equity. Realized gains (losses) are included in interest income (expense) in the statement of operations and comprehensive loss on a specific identification basis. There were no marketable securities with a maturity of greater than one year for either period presented. To date, the Company has not recorded any impairment charges on marketable securities related to other-than-temporary declines in market value.

 

Accretion of bond discount on marketable securities and interest income on marketable securities is recorded as interest income on the statement of operations and comprehensive loss.

 

Fair value is the price 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.  Financial assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:

 

Level 1 — Quoted market prices in active markets for identical assets or liabilities.

 

Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

The following tables presents fair value of the Company’s marketable securities (in thousands):

 

 

 

Fair Value Measurement as of March 31, 2020

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury securities

 

$

6,758

 

 

$

 

 

$

 

 

$

6,758

 

Commercial paper

 

 

 

 

 

17,845

 

 

 

 

 

 

17,845

 

Asset-backed securities

 

 

 

 

 

9,293

 

 

 

 

 

 

9,293

 

Total assets

 

$

6,758

 

 

$

27,138

 

 

$

 

 

$

33,896

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurement as of December 31, 2019

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury securities

 

$

7,400

 

 

$

 

 

$

 

 

$

7,400

 

Commercial paper

 

 

 

 

 

31,919

 

 

 

 

 

 

31,919

 

Asset-backed securities

 

 

 

 

 

13,457

 

 

 

 

 

 

13,457

 

Total assets

 

$

7,400

 

 

$

45,376

 

 

$

 

 

$

52,776

 

 

7


 

Note 4—Property and Equipment

Property and equipment, net consisted of (in thousands):

 

 

 

As of

 

 

As of

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Leasehold improvements

 

$

68

 

 

$

68

 

Office furniture and fixtures

 

 

48

 

 

 

48

 

Office equipment

 

 

31

 

 

 

31

 

Construction in process

 

 

2,326

 

 

 

2,027

 

 

 

 

2,473

 

 

 

2,174

 

Accumulated depreciation

 

 

(98

)

 

 

(84

)

Total property and equipment, net

 

$

2,375

 

 

$

2,090

 

 

The Company has recorded an asset classified as construction in process associated with the construction of a product assembly and packaging line that would be placed into service for commercial manufacturing upon future regulatory product approval.

Note 5—Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following (in thousands):

 

 

 

As of

March 31,

2020

 

 

As of December 31,

2019

 

Compensation and related costs

 

$

577

 

 

$

1,195

 

Clinical trials and drug development

 

 

527

 

 

 

733

 

Construction in process

 

 

333

 

 

 

 

Professional fees

 

 

275

 

 

 

89

 

Interest expense

 

 

155

 

 

 

 

Other accrued expenses and other current liabilities

 

 

199

 

 

 

19

 

Total accrued expenses and other current liabilities

 

$

2,066

 

 

$

2,036

 

 

8


 

Note 6—Leases

Effective January 1, 2019, the Company accounts for its leases under ASC 842, Leases (Topic 842). Under this guidance, arrangements meeting the definition of a lease are classified as operating or financing leases and are recorded on the balance sheet as both a right-of-use asset and lease liability, calculated by discounting fixed lease payments over the lease term at the rate implicit in the lease, if available, otherwise at the Company’s incremental borrowing rate. Lease liabilities are increased by interest and reduced by payments each period, and the right-of-use asset is amortized over the lease term. For operating leases, interest on the lease liability and the amortization of the right-of-use asset result in straight-line rent expense over the lease term. Variable lease expenses, if any, are recorded when incurred.

 

In calculating the right-of-use asset and lease liability, the Company elects to combine lease and non-lease components. The Company excludes short-term leases having initial terms of 12 months or less from the new guidance as an accounting policy election and recognizes rent expense on a straight-line basis over the lease term.

 

The Company leases office space in West Chester, Pennsylvania under an agreement classified as an operating lease that expires in May 2021. The Company does not act as a lessor or have any leases classified as financing leases. On July 1, 2019, the Company entered into a lease for 5,829 square feet of office space located in West Chester, Pennsylvania that is expected to serve as the Company’s new headquarters. On March 12, 2020 the Company entered into an amendment to the lease agreement. The amendment expands the original premises to include 5,372 square feet of additional office space increasing the total rentable premise to 11,201 square feet of space.  From the commencement date through December 31, 2020 the base rent is based on the square footage of the original premises. The Company anticipates the commencement date to be during the third quarter of 2020, but may be delayed due to impacts of COVID-19 mandates on office building construction activities.  The initial term will expire seven years after the commencement date. Base rent over the initial term is approximately $2.4 million, and the Company is also responsible for its share of the landlord’s operating expense. As a result, amortization of the right-of-use asset associated with the current property lease is now amortized over the revised remaining useful life. In addition, the useful life of associated leasehold improvements has been accelerated to reflect the expected abandonment of the property, such that they will be fully amortized when the property is vacated.

 

As of March 31, 2020, the Company had an operating lease liability of $156,000, of which $133,000 was classified as current, and an operating right-of-use asset of $45,000.

 

The components of lease expense are as follows (in thousands):

 

 

 

For the Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Operating lease:

 

 

 

 

 

 

 

 

Operating lease costs

 

$

58

 

 

$

34

 

Short-term lease costs

 

 

6

 

 

 

5

 

Total rent expense

 

$

64

 

 

$

39

 

 

Maturities of the Company’s operating lease, excluding short-term leases, as of March 31, 2020 are as follows (in thousands):

 

Remainder of 2020

 

$

105

 

2021

 

 

58

 

Total lease payments

 

 

163

 

Less imputed interest

 

 

(7

)

Operating lease liability

 

$

156

 

The weighted-average remaining term of the Company’s operating lease was 1.2 years and the weighted-average discount rate used to measure the present value of the Company’s operating lease liability was 6.75% as of March 31, 2020.

Note 7—Debt

On March 10, 2020 (the “Effective Date”), the Company entered into (i) a mezzanine loan and security agreement (the “Mezzanine Loan Agreement”) with Silicon Valley Bank, as administrative agent and collateral agent (the “Agent”), and Silicon Valley Bank and West River Innovation Lending Fund VIII, L.P., as lenders (the “Mezzanine Lenders”), pursuant to which the Mezzanine Lenders have agreed to lend the Company up to $50.0 million in a series of term loans, and (ii) a loan and security agreement (the “Senior Loan Agreement”, and together with the Mezzanine Loan Agreement, the “Loan Agreements”) with Silicon Valley Bank, as lender (the “Senior Lender”, and together with the Mezzanine Lenders, the “Lenders”), pursuant to which the Senior Lender has agreed to provide the Company a revolving line of credit of up to $5.0 million. Upon entering into the Loan Agreements, the Company borrowed $35.0 million in term loans from the Mezzanine Lenders (the “Term A Loan”).

 

9


 

Under the terms of the Mezzanine Loan Agreement, the Company may, at its sole discretion, borrow from the Mezzanine Lenders up to an additional $15.0 million in term loans (the “Term B Loan”, and together with the Term A Loan, the “Term Loans”) upon the Company’s achievement of (i) a specified amount in trailing six-month net revenue and (ii) an equity raise of at least $40.0 million (the foregoing clauses (i) and (ii), collectively, the “Term B Milestone”).  The Company may draw the Term B Loan during the period commencing on the date of the occurrence of the Term B Milestone and ending on the earliest of (i) December 31, 2021 and (ii) the occurrence of an event of default.

 

Under the terms of the Senior Loan Agreement, the Company may, at its sole discretion, borrow from the Senior Lender one or more advances on the revolving credit line (the “Revolving Loans”, and together with the Term Loans, the “Loans”) in an aggregate amount not to exceed the lesser of (i) 85% of the aggregate amount then-contained in the Company’s eligible accounts receivable and (ii) $5.0 million. The Senior Loan Agreement provides for the Company to make three anniversary payments of $25,000 each in addition to the $25,000 due upon the Effective Date for an aggregate of $100,000 in total anniversary payments.  In the event the Senior Loan Agreement is terminated prior to maturity, any unpaid portion of the total anniversary payments are due immediately.  The Company recorded the total anniversary fee payment obligation at inception.  As of March 31, 2020, $25,000 and $75,000 of anniversary payments were recorded within other current liabilities and other liabilities, respectively, within the Company’s accompanying balance sheet. 

 

The Company’s obligations under the Senior Loan Agreement and the Mezzanine Loan Agreement are secured by, respectively, a first priority perfected security interest and second priority perfected security interest in substantially all of the Company’s current and future assets, other than its intellectual property (except rights to payment from the sale, licensing or disposition of such intellectual property).  The Company has also agreed not to encumber its intellectual property assets, except as permitted by the Loan Agreements.  

 

All of the Loans mature on March 1, 2024 (the “Maturity Date”). The Term Loans will be interest-only through March 31, 2022, followed by 24 equal monthly payments of principal and interest; provided that if the Company draws the Term B Loan, the Term Loans will be interest-only through September 30, 2022, followed by 18 equal monthly payments of principal and interest. The Term Loans will bear interest at a floating per annum rate equal to the greater of (i) 7.25% and (ii) the sum of (a) the prime rate reported in The Wall Street Journal on the last business day of the month that immediately precedes the month in which the interest will accrue, plus (b) 2.50%. The Revolving Loans will bear interest at a floating per annum rate equal to the greater of (i) 6.00% and (ii) the sum of (a) the prime rate reported in The Wall Street Journal on the last business day of the month that immediately precedes the month in which the interest will accrue, plus (b) 1.25%.

 

The Company will be required to make a final payment fee of 7.50% of the original principal amount of the Term Loans drawn payable on the earlier of (i) the Maturity Date, (ii) the acceleration of any Term Loans, or (iii) the prepayment of the Term Loans (the “Final Payment”).  The Company is recording the final payment fee using the effective interest rate method over the term of the Term Loan with an increase in long-term debt. The Company may prepay all, or any portion (in increments of at least $1.0 million), of the Term Loans upon 5 business days’ advance written notice to the Agent, provided that the Company will be obligated to pay a prepayment fee equal to (i) 3.00% of the principal amount of the applicable Term Loan prepaid on or before the first anniversary of the Effective Date, (ii) 2.00% of the principal amount of the applicable Term Loan prepaid between the first and second anniversary of the Effective Date, and (iii) 1.00% of the principal amount of the applicable Term Loan prepaid thereafter, and prior to the third anniversary of the Effective Date (each, a “Prepayment Fee”).  

 

The Company may terminate the revolving credit line under the Senior Loan Agreement at any time upon 3 business days’ advance written notice to the Senior Lender. If the Company terminates the revolving credit line prior to the Maturity Date, it must pay to the Senior Lender an early termination fee of $50,000 (the “Termination Fee”).

 

The Company is subject to a number of affirmative and restrictive covenants pursuant to the Loan Agreements, including covenants regarding achieving minimum product revenues, delivery of financial statements, maintenance of inventory, payment of taxes, maintenance of insurance, protection of intellectual property rights, dispositions of property, business combinations or acquisitions, incurrence of additional indebtedness or liens, investments and transactions with affiliates, among other customary covenants. As of March 31, 2020 the Company is in compliance with all covenants.

 

Upon the occurrence of certain events, including but not limited to the Company’s failure to satisfy its payment obligations under the Loan Agreements, the breach of certain of its other covenants under the Loan Agreements, or the occurrence of a material adverse change, cross defaults to other indebtedness or material agreements, judgment defaults and defaults related to failure to maintain governmental approvals failure of which to maintain could result in a material adverse effect, the Agent and the Lenders will have the right, among other remedies, to declare all principal and interest immediately due and payable, to exercise secured party remedies, to receive the Final Payment and Termination Fee and, if the payment of principal and interest is due prior to the Maturity Date, to receive the applicable Prepayment Fee. The Loan Agreements also include subjective acceleration clauses that permit the

10


 

Lenders to accelerate the maturity date under certain circumstances, including a material adverse change in the Company’s business, operations, or financial condition or a material impairment of the prospect of repayment of the Company’s obligations to the Mezzanine Lenders. Beginning on September 30, 2020 and at any time thereafter, if the balance of the Company’s unrestricted cash, cash equivalents, and marketable securities in accounts maintained at Silicon Valley Bank is less than two times the Company’s aggregate outstanding obligations to the Mezzanine Lenders, the covenant regarding achieving minimum product revenues would be effective. If the Company’s planned commercialization of VP-102 is delayed or adversely affected and the covenant regarding achieving minimum product revenues balance is in effect, the Company may not satisfy the covenant and, absent any waiver granted by the Mezzanine Lenders, the Mezzanine Lenders may call the debt and all outstanding principal, interest, prepayment penalties and final payment obligations are due upon demand. Although the Company believes the acceleration of the due date may be reasonably possible given the current level of uncertainty around the COVID-19 pandemic, it does not believe that it is probable and, therefore, the debt is classified as a non-current liability in the accompanying balance sheet as of March 31, 2020.

 

Upon entering into the Loan Agreement, the Company received proceeds of $35.0 million in term loans and incurred debt discount and issuance costs of $3.3 million, including the final payment fee of $2.7 million, classified as a contra-liability on the condensed balance sheet.  The Company incurred additional debt issuance costs related to the revolving credit line of $0.1 million, classified as other non-current assets in the condensed balance sheet.  These costs will be amortized to interest expense over the life of the loans using the straight-line method.

 

For the three months ended March 31, 2020, the Company recognized interest expense of $0.2 million, of which $155.0 thousand was accrued interest on the term loan and $65.0 thousand was non-cash interest expense related to the amortization of deferred debt issuance costs and accrual of the final payment fee.

 

The following table summarizes the composition of debt as reflected on the balance sheet as of March 31, 2020 (in thousands):

 

Gross proceeds

 

$

35,000

 

Accrued final payment fee

 

 

2,625

 

Unamortized debt discount and issuance costs

 

 

(3,191

)

Total long-term debt, net

 

$

34,434

 

Aggregate maturities of long-term debt as of March 31, 2020 are as follows (in thousands):

 

Remainder of 2020

 

$

 

2021

 

 

 

2022

 

 

13,125

 

2023

 

 

17,500

 

2024 (1)

 

 

4,375

 

 

 

$

35,000

 

(1) Excludes the final payment fee due at time of maturity.

 

 

 

 

 

Note 8—Stock-Based Compensation

Stock-based compensation expense, which includes expense for both employees and non-employees, has been reported in the Company’s condensed statements of operations for the three months ended March 31, 2020 and 2019 as follows (in thousands):

 

 

 

For the Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Research and development

 

$

177

 

 

$

140

 

General and administrative

 

 

821

 

 

 

640

 

Total stock-based compensation

 

$

998

 

 

$

780

 

Stock Options 

The following table summarizes the Company’s stock option activity for the three months ended March 31, 2020:

11


 

 

 

 

 

 

 

 

 

 

 

 

Weighted average

 

 

 

 

 

 

 

 

 

 

 

Weighted average