Verrica Pharmaceuticals Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Filed August 5, 2020. Verrica is a clinical-stage dermatology therapeutics company; it had no approved products and generated no product revenue.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $0 | $0 |
| Research and development | $3.5 million | $3.9 million | $8.4 million | $8.4 million |
| General and administrative | $5.1 million | $3.6 million | $10.1 million | $7.1 million |
| Total operating expenses | $8.6 million | $7.5 million | $18.5 million | $15.5 million |
| Net loss | $9.4 million | $7.0 million | $19.2 million | $14.5 million |
| Net loss per share | $0.38 | $0.28 | $0.77 | $0.58 |
- Six-month operating cash use was $16.5 million, versus $12.0 million a year earlier. Investing activities provided $21.4 million, largely from net marketable-security sales and maturities; financing provided $34.8 million, primarily from the new loan.
- At June 30, cash and cash equivalents were $48.9 million and marketable securities were $30.7 million, totaling $79.6 million. Management said this supported planned operations at least through Q4 2021; elsewhere it said it believed funds could meet operating requirements for at least 12 months from issuance of the statements.
- The company had $34.7 million of net debt reported as current, including $35.0 million principal and accrued final-payment fee net of unamortized debt costs. The term loan bears floating interest, with a 7.25% floor, and matures March 1, 2024 under its stated schedule. The $5 million revolving facility was available subject to eligible receivables; no draw was reported.
- Gross margin is not applicable because there was no revenue. The company reported no operating profit and an accumulated deficit of $80.4 million.
Material changes and operating developments
- In July 2020, after the reporting date, FDA issued a Complete Response Letter for VP-102’s molluscum contagiosum NDA. FDA requested additional chemistry, manufacturing and controls information and human-factors validation; it did not identify clinical deficiencies. Approval timing is uncertain, and the company planned to request a Type A meeting.
- The delay caused management to consider it probable the company would not meet its minimum product-revenue loan covenant if triggered. The covenant may become effective as early as September 30, 2020 if specified unrestricted funds held at Silicon Valley Bank fall below twice outstanding mezzanine obligations. Lender discussions over an amendment were ongoing, with no amendment finalized as of the filing. The potential covenant issue and subjective acceleration provisions led the company to classify outstanding principal and final-payment fees as current.
- Compared with 2019, six-month net loss increased $4.8 million. G&A rose $3.0 million, attributed to headcount, insurance, professional fees, operating costs and pre-commercial activity. R&D was broadly unchanged for the half year; lower molluscum development spending was offset by compensation and clinical costs for other VP-102 indications. New loan interest expense and lower interest income also weighed on results.
- COVID-19 had not significantly affected the reported six-month financial results, according to management, but the company delayed planned Phase 3 common-warts trials for VP-102 and a Phase 2 plantar-warts trial for VP-103. It cited potential disruption to enrollment, sites, suppliers, regulatory work and commercialization preparations.
Outlook, risks and other notable items
- The company expects continuing losses and increased expenses for development, regulatory work, manufacturing scale-up and potential commercialization; additional financing may be needed. Failure to raise capital could require delaying, reducing or ending programs.
- The loan includes a 7.5% final payment fee on original term-loan principal and potential prepayment and default fees. The lender may accelerate debt under specified events, including certain covenant breaches or subjective material-adverse-change provisions.
- A putative securities class action filed July 14, 2020 alleges failures to disclose VP-102 safety risks and likely regulatory delays. The company disputes the claims; it could not estimate any potential loss.
- Management reported disclosure controls and internal control over financial reporting were ineffective at June 30, 2020 because of an IT general-controls material weakness involving segregation of duties and dependent process controls. Administrative access was transferred to a third-party IT vendor in April; remediation was not yet considered complete.
- On August 4, 2020, the company entered an exclusive option agreement with Torii Pharmaceutical for potential Japan rights to candidates for molluscum and common warts, including VP-102. Torii paid $0.5 million for the option.
Important facts for investors to verify
- Progress and timing of the FDA Type A meeting, required CMC and human-factors work, and any VP-102 NDA resubmission.
- Whether lenders amend or waive the revenue covenant before it becomes effective, and whether any event triggers acceleration or other loan remedies.
- Cash burn, actual liquidity runway, and funding needs in light of the delayed regulatory path and planned clinical programs.
- COVID-19 effects on clinical trials, manufacturing and launch readiness; status of the securities lawsuit; and completion of internal-control remediation.