Verrica Pharmaceuticals Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Financial Statements Report of Independent Registered Public Accounting Firm 88 Balance Sheets as of December 31, 2020 and 2019 89 Statements of Operations and Comprehensive Loss for the years ended December 31, 2020 and 2019 90 Statements of Stockholders' Equity for the years ended December 31, 2020 and 2019 91 Statements of Cash Flows for the years ended December 31, 2020 and 2019 92 Notes to Financial Statements 93 87 Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors Verrica Pharmaceuticals Inc.: Opinion on the Financial Statements We have audited the accompanying balance sheets of Verrica Pharmaceuticals Inc. (the Company) as of December 31, 2020 and 2019, the related statements of operations and comprehensive loss, stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ KPMG LLP We have served as the Company’s auditor since 2017. Philadelphia, Pennsylvania March 17, 2021 88 VERRICA PHARMACEUTICALS INC. BALANCE SHEETS (in thousands, except share and per share amounts) December 31, 2020 2019 ASSETS Current assets: Cash and cash equivalents $ 10,686 $ 9,241 Marketable securities 54,784 52,776 Prepaid expenses and other assets 2,180 2,966 Total current assets 67,650 64,983 Property and equipment, net 3,102 2,090 Operating lease right-of-use asset 1,836 111 Other non-current assets 1,566 1,240 Total assets $ 74,154 $ 68,424 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 348 $ 1,185 Accrued expenses and other current liabilities 3,114 2,036 Operating lease liability 198 130 Deferred revenue 500 — Current debt, net 35,315 — Total current liabilities 39,475 3,351 Operating lease liability 1,693 58 Total liabilities 41,168 3,409 Commitments and Contingencies (Note 7) Stockholders’ equity: Preferred stock, $ 0.0001 par value; 10,000,000 shares authorized; no shares issued and outstanding as of December 31, 2020 and 2019 — — Common stock, $ 0.0001 par value; 200,000,000 authorized as of December 31, 2020 and 2019; 25,546,257 shares issued and 25,441,113 shares outstanding as of December 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 December 31, 2020 and 2019 — — Additional paid-in capital 136,868 126,594 Subscription receivable — ( 410 ) Accumulated deficit ( 103,886 ) ( 61,192 ) Accumulated other comprehensive gain 1 20 Total stockholders’ equity 32,986 65,015 Total liabilities and stockholders’ equity $ 74,154 $ 68,424 The accompanying notes are an integral part of these financial statements. 89 VERRICA PHARMACEUTICALS INC. STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (in thousands, except share and per share amounts) For the Year Ended December 31, 2020 2019 Operating expenses: Research and development $ 15,673 $ 15,436 General and administrative 24,508 14,644 Total operating expenses 40,181 30,080 Loss from operations ( 40,181 ) ( 30,080 ) Other income (expense): Interest income 521 1,877 Interest expense ( 3,033 ) — Other expense ( 1 ) ( 4 ) Total other (expense)/income ( 2,513 ) 1,873 Net loss $ ( 42,694 ) $ ( 28,207 ) Net loss per share, basic and diluted $ ( 1.71 ) $ ( 1.13 ) Weighted-average common shares outstanding, basic and diluted 24,995,556 24,897,889 Net loss $ ( 42,694 ) $ ( 28,207 ) Other comprehensive loss: Unrealized (loss)/gain on marketable securities ( 19 ) 37 Comprehensive loss $ ( 42,713 ) $ ( 28,170 ) The accompanying notes are an integral part of these financial statements. 90 VERRICA PHARMACEUTICALS INC. STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands, except share amounts) Accumulated Total Additional Treasury Other Stockholders’ Common Stock Paid­In Subscription Accumulated Stock Comprehensive Equity Shares Issued Amount Capital Receivable Deficit Shares Cost (Loss) Gain Balance as of December 31, 2018 25,809,900 $ 3 $ 122,526 $ — $ ( 33,083 ) 105,144 $ — $ ( 17 ) $ 89,429 Stock-based compensation — — 3,333 — — — — — 3,333 Exercise of stock options 74,908 — 423 — — — — — 423 Subscription receivable (Note 9) 27,329 — 410 ( 410 ) — — — — — Adoption of ASU 2018-07 (Note 2) — — ( 98 ) — 98 — — — — Net Loss — — — — ( 28,207 ) — — — ( 28,207 ) Unrealized gain on marketable securities — — — — — — — 37 37 Balance as of December 31, 2019 25,912,137 3 126,594 ( 410 ) ( 61,192 ) 105,144 — 20 65,015 Stock-based compensation — — 9,821 — — — — — 9,821 Repurchased and retired common stock ( 424,429 ) — — — — — — — — Exercise of stock options 58,549 — 453 — — — — 453 Repayment of subscription receivable (Note 9) — — — 410 — — — — 410 Net loss — — — — ( 42,694 ) — — — ( 42,694 ) Unrealized loss on marketable securities — — — — — — — ( 19 ) ( 19 ) Balance as of December 31, 2020 25,546,257 $ 3 $ 136,868 $ — $ ( 103,886 ) 105,144 $ — $ 1 $ 32,986 The accompanying notes are an integral part of these financial statements. 91 VERRICA PHARMACEUTICALS INC. STATEMENTS OF CASH FLOWS (in thousands) For the Year Ended December 31, 2020 2019 Cash flows from operating activities Net loss $ ( 42,694 ) $ ( 28,207 ) Adjustments to reconcile net loss to net cash used in operating activities: Stock-based compensation 9,821 3,333 Accretion of discounts on marketable securities ( 138 ) ( 1,063 ) Depreciation expense 43 64 Noncash interest expense on debt 940 — Amortization on operating lease right-of-use asset 186 193 Changes in operating assets and liabilities: Prepaid expenses and other assets 786 ( 1,621 ) Accounts payable ( 838 ) 263 Accrued expenses 1,394 ( 213 ) Accounts payable and accrued expenses - related party — ( 38 ) Deferred revenue 500 — Operating lease liability ( 207 ) ( 119 ) Net cash used in operating activities ( 30,207 ) ( 27,408 ) Cash flows from investing activities Purchases of marketable securities ( 71,738 ) ( 89,854 ) Sales and maturities of marketable securities 69,849 117,715 Purchases of property, plant and equipment ( 1,470 ) ( 682 ) Increase in deposits ( 221 ) ( 1,224 ) Net cash (used in) provided by investing activities ( 3,580 ) 25,955 Cash flows from financing activities Proceeds from exercise of stock options 453 423 Proceeds from issuance of debt, net 34,460 — Debt issuance cost ( 91 ) — Repayment of subscription receivable 410 — Net cash provided by financing activities 35,232 423 Net increase (decrease) in cash and cash equivalents 1,445 ( 1,030 ) Cash and cash equivalents at the beginning of the year 9,241 10,271 Cash and cash equivalents at the end of the year $ 10,686 $ 9,241 Supplemental disclosure of noncash investing and financing activities: Property and equipment purchases payable or accrued at period end $ 318 $ 733 Subscription receivable on exercise of options $ — $ 410 Right-of-use asset obtained in exchange for lease obligation $ 1,910 $ — Change in unrealized gain/(loss) on marketable securities $ ( 19 ) $ 37 Cash paid for interest $ 1,875 $ — Debt issuance costs included in accrued expenses at year end $ 100 $ — The accompanying notes are an integral part of these financial statements. 92 VERRICA PHARMACEUTICALS INC. Notes to Financial Statements 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 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 December 31, 2020, the Company had an accumulated deficit of $ 103.9 million. In March 2020, the Company entered into a Mezzanine Loan Agreement (Note 11), pursuant to which the Company borrowed (i) $ 35.0 million in March 2020 that remains outstanding as of December 31, 2020 and (ii) $ 5.0 million on March 1, 2021. On March 17, 2021, the Company entered into the Torii Agreement (Note 13), pursuant to which Torii is obligated to make an upfront payment of $ 11.5 million. As discussed in Note 12, the Mezzanine Loan Agreement was amended on October 26, 2020 and now includes a minimum liquidity covenant. If the Company is not in compliance with the minimum liquidity ratio covenant, the outstanding debt and any related final payment fees, prepayment fees, and accrued interest become due upon demand. The Company believes that, without additional financing, it is probable that it will not be in compliance with the minimum liquidity ratio covenant at some point in the next twelve months. Even if the Company is not in compliance with the minimum liquidity covenant and the debt becomes due, management believes the Company currently has sufficient funds to meet its operational requirements for at least the next twelve months from the issuance of these financial statements. Note 2—Significant Accounting Policies Basis of Presentation The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Any reference in these notes to applicable guidance is meant to refer to the authoritative United States generally accepted accounting principles as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Update (“ASU”) of the Financial Accounting Standards Board (“FASB”). The Company’s functional currency is the U.S. dollar. The Company has been actively monitoring the novel coronavirus (“COVID-19”) pandemic and its impact globally. Management believes the financial results for the year ended December 31, 2020 were not significantly impacted by COVID-19. In addition, management believes the remote working arrangements, travel restrictions and any other regulations imposed by various governmental jurisdictions have had limited impact on the Company’s ability to maintain internal operations during the year. 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 decided to delay the initiation of its previously planned Phase 3 clinical trials to evaluate VP-102 in subjects with common warts as well as its previously planned Phase 2 clinical trial to evaluate VP-103 in subjects with plantar warts. 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 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 93 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 December 31, 2020. Unrealized gains and losses on marketable debt securities are recorded as a separate component of accumulated other comprehensive gain or loss included in stockholders’ equity. 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. Property and Equipment Property and equipment is recorded at cost less accumulated depreciation. Depreciation and amortization is calculated using the straight line method over the expected useful life of the asset, after the asset is placed in service. The Company generally uses the following depreciable lives for its major classifications of property and equipment: Description Useful Lives Equipment 5 years Leasehold Improvements Lease term Office Furniture and Fixtures 3 years Expenditures associated with upgrades and enhancements that improve, add functionality, or otherwise extend the life of property and equipment are capitalized, while expenditures that do not, such as repairs and maintenance, are expensed as incurred. The Company reviews long-lived assets, including property and equipment, for impairment whenever events or changes in business circumstances indicate that the carrying amount of an asset may not be fully recoverable. If the estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount, an impairment loss would be recognized if the carrying value of the asset exceeds its fair value. Fair value is generally determined using discounted cash flows. No impairment losses have been recorded during the years ended December 31, 2020 or 2019. 94 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. 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. Comprehensive Loss Comprehensive loss is defined as the change in equity of a business enterprise during a period from transactions, and other events and circumstances from non-owner sources. For the years ended December 31, 2020 and 2019, comprehensive loss includes net loss and unrealized gain (loss) on marketable securities. Stock-Based Compensation The Company accounts for stock-based compensation awards in accordance with ASC 718, Compensation –Stock Compensation . The Company uses the Black-Scholes option-pricing model to value its stock option awards. For stock-based awards granted to employees, non-employees and to members of the board of directors for their services, the Company estimates the grant date fair value of each option award and recognizes compensation expense on a straight-line basis over the vesting period of the award. The use of the Black‑Scholes option-pricing model requires management to make assumptions with respect to the expected term of the option, the expected volatility of the common stock consistent with the expected life of the option, risk‑free interest rates, and, for grants prior to the Company’s IPO, the value of the common stock. The expected life of stock options was estimated using the “simplified method,” as the Company has limited historical information to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior for its stock options grants. The simplified method is based on the average of the vesting tranches and the contractual life of each grant. 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. The risk-free interest rate is based on U.S. Treasury notes with a term approximating the expected life of the option. Expected dividend yield is zero based on the fact that the Company has never paid cash dividends and does no t expect to pay any cash dividends in the foreseeable future. The fair value of restricted stock awards are based on the closing price of the Company’s common stock on the grant date. 95 Income Taxes Income taxes are recorded in accordance with ASC 740, Income Taxes , 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 bases 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. 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. 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 December 31, 2020 2019 Shares issuable upon exercise of stock options 2,901,908 1,914,545 Non-vested shares under restricted stock grants 475,000 1,148,859 Recently Adopted Accounting Pronouncements 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. 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 96 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 February 2016, the FASB issued 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 10 for additional information. Note 3—Investments in Marketable Securities Investments in marketable securities consisted of the following as of December 31, 2020 and 2019 (in thousands): As of December 31, 2020 Amortized Gross Unrealized Gross Unrealized Fair Cost Gains Losses Value U.S. treasury securities $ 11,607 $ 2 $ — $ 11,609 Commercial paper 41,674 — ( 1 ) 41,673 Asset-backed securities 1,502 — — 1,502 Total marketable securities $ 54,783 $ 2 $ ( 1 ) $ 54,784 As of 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 debt securities are recorded as a separate component of accumulated other comprehensive gain (loss) 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. The Company recorded nominal realized gains and losses during the years ended December 31, 2020 and 2019. The Company has not recorded any impairment charges on marketable securities related to other-than-temporary declines in market value during the years ended December 31, 2020 or 2019. 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. There were no marketable securities with a maturity of greater than one year for either period presented. 97 The following tables presents fair value by level in accordance with ASC 820 (see Note 2) of the Company’s marketable securities (in thousands): Fair Value Measurement as of December 31, 2020 Level 1 Level 2 Level 3 Total U.S. treasury securities $ 11,609 $ — $ — $ 11,609 Commercial paper — 41,673 — 41,673 Asset-backed securities — 1,502 — 1,502 Total $ 11,609 $ 43,175 $ — $ 54,784 Fair Value Measurement as of December 31, 2019 Level 1 Level 2 Level 3 Total U.S. treasury securities $ 7,400 $ — $ — $ 7,400 Commercial paper — 31,919 — 31,919 Asset-backed securities — 13,457 — 13,457 Total $ 7,400 $ 45,376 $ — $ 52,776 N ote 4—Property and Equipment Property and equipment, net consisted of (in thousands): As of December 31, 2020 2019 Office furniture and fixtures $ 117 $ 48 Machinery and equipment 102 — Leasehold improvements 101 68 Office equipment 52 31 Construction in process 2,857 2,027 3,229 2,174 Accumulated depreciation ( 127 ) ( 84 ) Total property and equipment, net $ 3,102 $ 2,090 Depreciation expense for the years ended December 31, 2020 and 2019 was $ 43,000 and $ 64,200 , respectively. The Company has recorded an asset classified as construction in process associated with the construction of a product packaging line that would be placed into service for commercial manufacturing upon future regulatory product approval. Note 5—Related Party Transactions Prior to the completion of the initial public offering (“IPO”) of the Company’s common stock in June 2018, the Company was controlled by PBM VP Holdings, LLC (“PBM VP Holdings”) an affiliate of PBM Capital Group, LLC (“PBM”). Paul B. Manning, who is the Chairman and Chief Executive Officer of PBM and the current chairman of the Company’s Board of Directors, and certain entities affiliated with Mr. Manning, continue to be the Company’s largest shareholder on a collective basis. 98 On December 2, 2015, the Company entered into a Services Agreement (the “SA”) with PBM. Pursuant to the terms of the SA, which had an initial term of twelve months (and was automatically renewable for successive monthly periods), PBM 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 a monthly management fee. On January 1, 2019, the Company amended the SA with PBM, decreasing the monthly fee to $ 26,333 . On October 1, 2019, the SA was amended to reduce the monthly management fee to $ 5,000 as a result of a reduction in services provided by PBM. For the years ended December 31, 2020 and 2019, the Company incurred expenses under the SA of $ 60,000 and $ 252,500 , respectively, which were primarily included in general and administrative expenses. As of December 31, 2020 and 2019, the Company had no payables due to PBM and its affiliates. Note 6—Accrued Expenses Accrued expenses consisted of the following (in thousands): As of December 31, 2020 2019 Compensation and related costs $ 1,338 $ 1,195 Clinical trials and drug development 611 733 Professional fees 447 89 Construction in process 277 — Interest expense 219 — Other accrued expenses and other current liabilities 222 19 Total accrued expenses and other current liabilities $ 3,114 $ 2,036 Note 7—Commitments and Contingencies Litigation On July 14, 2020, plaintiff Isaiah Potter (“Potter”) filed a putative class action complaint captioned Potter v. Verrica Pharmaceuticals Inc., in the U.S. District Court for the Eastern District of Pennsylvania against the Company and certain of its executive officers, or the Defendants. The complaint alleged that Defendants violated federal securities laws by, among other things, failing to disclose certain supposed safety risks attendant to the VP-102 drug-device and likely delays to regulatory approval of VP-102. The complaint sought unspecified compensatory damages on behalf of Potter and all other persons and entities that purchased or otherwise acquired our securities between September 16, 2019 and June 29, 2020. On December 14, 2020, Potter voluntarily sought to dismiss this case and the parties filed a stipulation of dismissal, which the court granted on December 21, 2020. The case was dismissed with prejudice as to Potter and without prejudice as to the unnamed class members. Supply Agreement and Purchase Order On July 16, 2018, the Company entered into a supply agreement with a supplier of crude cantharidin material. All executed purchase orders for crude cantharidin in the ordinary course of business are expected to be 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 by the Company. 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. 99 During 2019, the Company executed a single purchase order pursuant to which the Company agreed to purchase $ 1.8 million of crude cantharidin material. As of December 31, 2019, the Company had made a prepayment of $ 1.1 million against this purchase order. The Company received the shipments of material in 2020, and as of December 31, 2020, this purchase order was fulfilled, and the Company has no remaining obligation. Agreements with Former Chief Scientific Officer On May 31, 2018, the Company and the former Chief Scientific Officer (“CSO”) executed a transition agreement related to his resignation from employment as well as a Consulting Agreement (the “Consulting Agreement”) that began upon the closing of the IPO and terminated in 2020. The Consulting Agreement provided 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 received $ 300 per hour for each hour of consulting services provided. As of December 31, 2020 and 2019, the Company has no remaining obligation under this Consulting Agreement. Note 8—Stockholders’ Equity Common Stock The Company had authorized 200,000,000 shares of common stock, $ 0.0001 par value per share, as of each of December 31, 2020 and 2019. Each share of common stock is entitled to one vote. Common stock owners are entitled to dividends when funds are legally available and declared by the Board. Note 9—Stock-Based Compensation In June 2018, the Board adopted and approved the 2018 Equity Incentive Plan (the “2018 Plan”), which amended and restated the Company’s prior 2013 Equity Incentive Plan (the “2013 Plan”) and became effective in connection with the IPO. Prior to the effectiveness of the 2018 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 2018 Plan, no further grants may be made under the 2013 Plan. The 2018 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 2018 Plan also provides for the grant of performance-based cash awards to employees, including officers, consultants and directors. The Company initially reserved 3,738,199 shares of common stock for issuance under the 2018 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 2018 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 2018 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 December 31, 2020, 1,992,231 shares were available for grant under the 2018 Plan. Stock Options The Company’s employee and non-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 year ended December 31, 2020 have a maximum contractual term of 10 years. The stock options are subject to time vesting requirements through 2024 , are nontransferable, and have term expiration dates set to expire through 2030 . 100 The grant date fair value of employee and non-employee stock option awards is determined using the Black-Scholes option-pricing model. The following assumptions were used during the years ended December 31, 2020 and 2019 to estimate the fair value of employee and non-employee stock option awards: For the Year Ended December 31, 2020 2019 Exercise price $6.56 - $15.91 $7.95 - $14.65 Risk-free rate of interest 0.27% - 1.67% 1.42% - 2.56% Expected term (years) 6.0 5.98 Expected stock price volatility 76.71% - 85.97% 72.1% - 78.3% Dividend yield — — Weighted average grant date fair value $ 7.00 $ 7.84 The following table summarizes the Company’s employee and non-employee stock option activity under the 2013 Plan and 2018 Plan for the years ended December 31, 2020 and 2019: Weighted average Weighted average remaining contractual Aggregate intrinsic Number of shares exercise price life (in years) value Outstanding as of December 31, 2018 1,529,883 $ 8.03 Options granted 830,918 11.57 Exercised ( 102,237 ) 8.15 Forfeited ( 344,019 ) 10.37 Outstanding as of December 31, 2019 1,914,545 9.14 Options granted 1,193,956 10.35 Exercised ( 58,549 ) 7.73 Forfeited ( 125,377 ) 10.78 Expired ( 22,667 ) 12.00 Outstanding as of December 31, 2020 2,901,908 $ 9.57 8.0 $ 7,702,295 Options vested and exercisable as of December 31, 2020 1,148,578 $ 8.50 6.8 $ 4,123,882 The aggregate intrinsic value in the above table is calculated as the difference between fair value of the Company’s common stock price and the exercise price of the stock options. The weighted average grant date fair value per share for the employee and non-employee stock options granted during the years ended December 31, 2020 and 2019 was $ 7.00 and $ 7.84 , respectively. As of December 31, 2020, the total unrecognized compensation related to unvested employee and non-employee stock option awards granted was $ 10.7 million, which the Company expects to recognize over a weighted-average period of 2.7 years. The Company utilizes a designated broker to process exercises of stock options. In late December 2019, there was an exercise of 27,329 vested stock options for which the Company did not receive the net proceeds from the designated broker until early January 2020. The net proceeds have been reflected as a stock subscription receivable as of December 31, 2019 in the balance sheet. Restricted Stock Pursuant to the 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 were subject to repurchase by the Company at $ 0.0001714 per share in the event the former CSO ceased to be a consultant to the 101 Company. These shares were to 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 VP-102 for the treatment of molluscum, (iii) commercial sale of products and (iv) a covered termination, as defined in the Amended and Restated Agreement. In December 2020, the Company and the former CSO amended the agreement whereby 424,430 shares were no longer subject to repurchase and the remaining 424,429 shares were repurchased and retired by the Company at $ 0.0001714 per share. The Company accounted for the December 2020 amendment as a modification to a share-based payment arrangement whereby the shares no longer subject to repurchase represent a new grant. The value of the new grant was $ 4.8 million and was recognized immediately. Prior to the December 2020 modification, no compensation expense had been recognized for these nonvested shares as these shares were performance-based and the triggering event was not determined to be probable. In November 2019 and August 2020, the Company granted 300,000 and 250,000 restricted stock units to its executive officers. The restricted stock units vest 50 % upon receipt of regulatory approval of the Company’s new drug application for VP-102 for the treatment of molluscum (the “Approval Date”) and 50 % shall vest on the one year anniversary of the Approval Date subject to the holders’ continuous service through each applicable date. No compensation expenses has been recognized for these nonvested restricted stock units as these shares are performance based and the triggering event was not determined to be probable as of December 31, 2020. As of December 31, 2020, the total unrecognized compensation expense related to the restricted stock was $ 5.6 million. The following table summarizes restricted stock awards: Weighted Average Grant Date Fair Number of Shares Value Non-vested as of December 31, 2018 848,859 $ 0.33 Granted 300,000 15.71 Non-vested as of December 31, 2019 1,148,859 4.35 Granted 250,000 8.17 Forfeitures ( 499,429 ) 2.64 Vested ( 424,430 ) 11.27 Non-vested as of December 31, 2020 475,000 $ 11.74 Stock-based compensation expense, which includes expense for both employees and non-employees, has been reported in the Company’s statements of operations for the years ended December 31, 2020 and 2019 as follows (in thousands): For the Year Ended December 31, 2020 2019 Research and development $ 813 $ 609 General and administrative 9,008 2,724 Total stock-based compensation $ 9,821 $ 3,333 Note 10—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. 102 In calculating the right-of-use asset and lease liability, the Company elec ted to combine lease and non-lease components. The Company excludes short-term leases having initial terms of 12 months or less from the 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 finance 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. For the first six months following the commencement date of September 1, 2020, the base rent is based on the square footage of the original premises. The initial term will expire on September 1, 2027 . 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. At the commencement date of the new lease, the Company recorded a right-of-use asset of $ 1.9 million and a lease liability of $ 1.9 million on the balance sheet. As of December 31, 2020, the Company had an operating lease liability of $ 1,891,000 , of which $ 198,000 was classified as current, and an operating right-of-use asset of $ 1,836,000 . The components of lease expense are as follows (in thousands): For the Year Ended December 31, 2020 2019 Operating lease: Operating lease costs $ 164 $ 211 Short-term lease costs 22 17 Total rent expense $ 186 $ 228 Maturities of the Company’s operating lease, excluding short-term leases as of December 31, 2020 are as follows (in thousands): 2021 $ 312 2022 343 2023 349 2024 355 2025 360 Thereafter 612 Total lease payments 2,331 Less imputed interest ( 440 ) Total lease liability $ 1,891 The remaining term of the Company’s operating lease was 6.7 years and the discount rate used to measure the present value of the Company’s operating lease liability was 6.25 % as of December 31, 2020. Note 11–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 103 to provide the Company with 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 ”). On October 26, 2020, the Company entered into (i) the first amendment to the Mezzanine Loan Agreement (the “Mezzanine Loan Amendment”) and (ii) the first amendment to the Senior Loan Agreement (the “Senior Loan Amendment” and together with the Mezzanine Loan Amendment the “Loan Agreement Amendments”) with the Lenders, under which the Company borrowed an additional $ 5.0 million in term loans on March 1, 2021 from the Mezzanine Lenders (the “Term B1 Loan”). Under the terms of the Mezzanine Loan Agreement, as amended, the Company may, at its sole discretion, borrow from the Mezzanine Lenders up to an additional $ 10.0 million in term loans (the “Term B2 Loan”). The Term B1 Loan and Term B2 Loan, together with the Term A Loan, are referred to herein as the “Term Loans.” The Term B2 Loan will be available for draw if the Company receives approval from the FDA of the NDA for VP-102 prior to September 30, 2021 and the Company maintains compliance with the minimum liquidity covenant until the earlier of September 30, 2021 or the occurrence of an event of default. Under the terms of the Senior Loan Agreement, as amended, 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 Company’s obligations under the Senior Loan Agreement and the Mezzanine Loan Agreement, as amended, 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 monthl y 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 %. Under the terms of the Mezzanine Loan Agreement, as amended, the Company will be required to make a final payment fee of $ 3,750,000 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 debt. The Company may prepay all, or any portion 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) $ 1.5 million if prepaid on or before October 26, 2021, (ii) $ 1.0 million if prepaid between October 27, 2021 and October 26, 2022, and (iii) $ 0.5 million if prepaid between October 27, 2022 and October 26, 2023 and (iv) no prepayment fee if prepaid after October 26, 2023 (each, a “Prepayment Fee”). The Company may terminate the revolving credit line under the Senior Loan Agreement at any time upon three 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”). Under the Loan Agreements, as amended, the Company is subject to a number of affirmative and restrictive covenants, including covenants regarding maintaining a specified minimum liquidity ratio, 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, and, beginning as of March 31, 2022, achieving minimum levels of trailing six-month net product revenues, among other customary covenants. As of December 31, 2020 the Company is in compliance with all covenants. 104 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 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. Pursuant to the Loan Agreement Amendments, the Company is subject to a minimum liquidity covenant defined as the balance of the of the Company’s unrestricted cash, cash equivalents, and marketable securities in accounts maintained at Silicon Valley Bank being greater than one and one half times the Company’s aggregate outstanding obligations to the Mezzanine Lenders. The Company believes that, without additional financing, it is probable that it will not be in compliance with its minimum liquidity ratio covenant at some point in the next twelve months. In accordance with FASB ASC 470, since the Mezzanine Loan Agreement contains subjective acceleration clauses and the assessment that it is probable that the minimum liquidity ratio covenant will not be met, the Company has classified all outstanding principal and final payment fees as a current liability in the accompanying balance sheet as of December 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. The terms of the Loan Agreements as amended include a final payment fee of $ 3.8 million, classified as a contra-liability on the balance sheet as of December 31, 2020. 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 balance sheet as of December 31, 2020. These costs related to the revolving credit line are being amortized to interest expense over the life of the loans using the straight-line method. For the year ended December 31, 2020, the Company recognized interest expense of $ 3.0 million, of which $ 2.1 million was interest on the term loan and $ 0.9 million, was noncash interest expense related to the amortization of deferred debt issuance costs and accrual of the final payment fee. T he following table summarizes the composition of debt as reflected on the balance sheet as of December 31, 2020 (in thousands): Gross proceeds $ 35,000 Accrued final payment fee 3,750 Unamortized debt discount and issuance costs ( 3,435 ) Total short-term debt, net $ 35,315 In the event the Company maintains compliance with its minimum liquidity covenant to avoid an acceleration of payments, the aggregate maturities of debt as of December 31, 2020 are as follows (in thousands): 2021 $ — 2022 13,125 2023 17,500 2024 (1) 4,375 Total $ 35,000 (1) Excludes the final payment fee due at time of maturity. Note 12–Income Taxes There is no provision for income taxes as the Company has incurred operating losses since inception and maintains a full valuation allowance against its deferred tax assets. 105 Differences between the provision (benefit) for income taxes and income taxes at the statutory federal income tax rate are as follows (in thousands): For the Year Ended December 31, 2020 2019 Tax computed at statutory federal income tax rate $ ( 8,966 ) $ ( 5,923 ) State taxes, net of federal benefit ( 2,938 ) ( 2,312 ) Permanent items 1,283 70 R&D credits ( 2,405 ) — Other ( 2 ) ( 285 ) Change in valuation allowance 13,028 8,450 Income tax provision (benefit) $ — $ — Significant components of the Company’s deferred tax assets and liabilities are as follows (in thousands): As of December 31, 2020 2019 Deferred tax assets: Net operating loss carryovers $ 23,881 $ 14,370 Research and development credits 2,405 — Share-based compensation 2,170 1,128 Lease liabilities 549 54 Accrued compensation 388 321 Other 12 12 Total deferred tax assets 29,405 15,885 Less valuation allowance ( 28,863 ) ( 15,835 ) Deferred tax asset, net of valuation allowance 542 50 Deferred tax liabilities: Right-of-use assets ( 532 ) ( 32 ) Fixed assets ( 10 ) ( 18 ) Total deferred tax liabilities ( 542 ) ( 50 ) Net deferred tax assets $ — $ — The Company has determined, based upon all available evidence, that it is more likely than not that the net deferred tax asset will not be realized and, accordingly, has provided a full valuation allowance against its net deferred tax asset. As of December 31, 2020, the Company had federal and state net operating loss carryforwards of approximately $ 82.7 million and $ 84.1 million, respectively. The federal net operating loss carryforwards included in the foregoing totals that were generated prior to 2018 (federal of approximately $ 6.9 million) will begin to expire, if not utilized, by 2033 . Under the 2017 federal income tax law changes, federal net operating losses incurred in 2018 and in future years may be carried forward indefinitely, but the deductibility of such federal net operating losses is limited. As of December 31, 2020, the Company had federal and state research and development carryforwards of $ 2.4 million. In addition, under Section 382 of the Internal Revenue Code of 1986, as amended, and corresponding provisions of state law, if a corporation undergoes an “ownership change,” which is generally defined as a greater than 50 % change, by value, in its equity ownership over a three-year period, the corporation’s ability to use its pre-change net operating loss and tax credit carryforwards may be limited . The Company has not done an analysis to determine whether or not ownership changes have occurred since inception. As of December 31, 2019, the Company had uncertain tax positions related to federal income tax credits for its research and development activities. The total amount of unrecognized tax benefits was $ 1.5 million. The Company released the uncertain tax position in 2020 and as of December 31, 2020 has recognized a deferred tax benefit of $ 2.4 million of federal income tax credits for its research and development activities. The Company will recognize interest and penalties, if any, related to uncertain tax positions in income tax expense. As of December 31, 106 2020 and 2019, the Company had no accrued interest or penalties related to uncertain tax positions and no amounts have been recognized in the Company’s statement of operations. The Company does not anticipate a material change to unrecognized tax benefits in the next twelve months. The 2017 and subsequent federal and state tax years for the Company remain open for the assessment of income taxes. Note 13—License and Collaboration Agreements In August 2020, the Company entered into an option agreement with Torii Pharmaceutical Co., Ltd. (“Torii”) for the development and commercialization of the Company’s product candidates for the treatment of molluscum contagiosum and common warts in Japan, including VP-102 (the “Option Agreement”). Torii paid the Company $ 0.5 million to secure the exclusive option. The $ 0.5 million is included in deferred revenue as of December 31, 2020 in the balance sheet. On March 2, 2021, Torii exercised the exclusive option in the Option Agreement. On March 17, 2021, the Company entered into a collaboration and license agreement (the “Torii Agreement”) with Torii, pursuant to which the Company granted Torii an exclusive license to develop and commercialize the Company’s product candidates that contain a topical formulation of cantharidin for the treatment of molluscum contagiosum and common warts in Japan, including VP-102. Additionally, the Company granted Torii a right of first negotiation with respect to additional indications for the licensed products and certain additional products for use in the licensed field, in each case in Japan. Pursuant to the Torii Agreement, the Company is entitled to receive an up-front payment from Torii of $ 11.5 million. Additionally, the Company is entitled to receive from Torii an additional $ 58 million in aggregate payments contingent on achievement of specified development, regulatory, and sales milestones, in addition to tiered transfer price payments for supply of product in the percentage range of the mid- 30 ’s to the mid- 40 ’s of net sales. The transfer payments shall be payable, on a product-by-product basis, beginning on the first commercial sale of such product and ending on the latest of (a) expiration of the last-to-expire valid claim contained in certain licensed patents in Japan that cover such product, (b) expiration of regulatory exclusivity for the first indication for such product in Japan, and, (c) (i) with respect to the first product, ten years after first commercial sale of such product, and, (ii) with respect to any other product, the later of (x) ten years after first commercial sale of the first product and (y) five years after first commercial sale of such product. The Torii Agreement expires on a product-by-product basis upon expiration of Torii’s obligation under the agreement to make transfer price payments for such product. Torii has the right to terminate the agreement upon specified prior written notice to us. Additionally, either party may terminate the agreement in the event of an uncured material breach of the agreement by, or insolvency of, the other party. The Company may terminate the agreement in the event that Torii commences a legal action challenging the validity, enforceability or scope of any licensed patents. In August 2020, the Company entered into an exclusive license agreement with Lytix Biopharma AS (“Lytix”) for the use of licensed technology to research, develop, manufacture, have manufactured, use, sell, have sold, offer for sale, import, and otherwise commercialize products for use in all malignant and pre-malignant dermatological indications, other than metastatic melanoma and metastatic merkel cell carcinoma (the” Lytix Agreement”). As part of the Lytix Agreement, the Company paid Lytix a one-time up-front fee of $ 0.3 million in 2020. In addition, in February 2021, the Company paid Lytix a one-time $ 2.3 million payment upon the achievement by Lytix of a regulatory milestone. The $ 0.3 million was recognized in research and development expense in the statement of operations for the year ended December 31, 2020. The Company is also obligated to pay up to $ 111.0 million contingent on achievement of specified development, regulatory, and sales milestones, as well as tiered royalties based on worldwide annual net sales ranging in the low double digits to the mid-teens, subject to certain customary reductions. The Company’s obligation to pay royalties expires on a country-by-country and product-by-product basis on the later of the expiration or abandonment of the last to expire licensed patent covering LTX-315 anywhere in the world and expiration of regulatory exclusivity for LTX-315 in such country. Additionally, all upfront fees and milestone based payments received by the Company from a sublicensee will be treated as net sales and will be subject to the royalty payment obligations under the Lytix Agreement, and all royalties received by the Company from a sublicensee shall be shared with Lytix at a rate that is initially 50 % but decreases based on the stage of development of LTX-315 at the time such sublicense is granted. 107 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.