Verrica Pharmaceuticals Inc.
Annual Report 2018

Plain-text annual report

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, DC 20549 FORM 10-K (Mark One)☒☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2018OR☐☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934Commission File Number: 001-38529 Verrica Pharmaceuticals Inc.(Exact Name of Registrant as Specified in its Charter) Delaware46-3137900(State or other jurisdiction ofincorporation or organization)(I.R.S. EmployerIdentification No.)10 North High Street, Suite 200West Chester, PA19380(Address of principal executive offices)(Zip Code) Registrant’s telephone number, including area code: (484) 453-3300Securities registered pursuant to Section 12(b) of the Act: Title of Each ClassName of Each Exchange on which RegisteredCommon Stock, $0.0001 par valueThe Nasdaq Stock Market, LLC Securities registered pursuant to Section 12(g) of the Act: NoneIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒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 suchshorter 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐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 ☒ Small 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 standardsprovided 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 ☒The aggregate market value of Verrica Pharmaceuticals Inc. voting and non-voting common equity held by non-affiliates as of June 29, 2018 (the last business day of the registrant's most recentlycompleted second fiscal quarter) based on the closing sale price of $19.73 as reported on the Nasdaq Global Market on that date was approximately $244.6 million.As of March 4, 2019, the registrant had 25,707,256 shares of common stock, $0.0001 par value per share, outstanding.DOCUMENTS INCORPORATED BY REFERENCEPortions of the Company’s definitive proxy statement, to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, for its 2019 Annual Meeting of Stockholders are incorporatedby reference in Part III of the Form 10-K.  SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTSThis Annual Report on Form 10-K (this “Annual Report”) contains forward-looking statements within the meaning of Section 27A of the SecuritiesAct of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, that involve substantial risks anduncertainties. The forward-looking statements are contained principally in Part I, Item 1. “Business,” Part I, Item 1A. “Risk Factors,” and Part II, Item 7.“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” but are also contained elsewhere in this Annual Report. In somecases, you can identify forward-looking statements by the words “may,” “might,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “objective,”“anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue” and “ongoing,” or the negative of these terms, or other comparableterminology intended to identify statements about the future. These statements involve known and unknown risks, uncertainties and other factors that maycause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Although we believe that we have a reasonable basis for each forward-looking statement contained in this Annual Report, we cautionyou that these statements are based on a combination of facts and factors currently known by us and our expectations of the future, about which we cannot becertain. Forward-looking statements include statements about: •our plans to develop and commercialize our product candidates; •the timing of our planned clinical trials for VP-102 and our other product candidates; •the timing of our NDA submission for VP-102 for the treatment of molluscum; •the timing of and our ability to obtain and maintain regulatory approvals for VP-102 and our other product candidates; •the clinical utility of our product candidates; •our commercialization, marketing and manufacturing capabilities and strategy; •our expectations about the willingness of healthcare professionals to use VP-102; •our intellectual property position; •our plans to in-license, acquire, develop and commercialize additional product candidates for other dermatological conditions to build afully integrated dermatology company; •our competitive position and the development of and projections relating to our competitors or our industry; •our ability to identify, recruit and retain key personnel; •the impact of laws and regulations; •our expectations regarding the time during which we will be an emerging growth company under the JOBS Act; •our plans to identify additional product candidates with significant commercial potential that are consistent with our commercial objectives;and •our estimates regarding future revenue, expenses and needs for additional financing.You should refer to Item 1A. “Risk Factors” in this Annual Report for a discussion of important factors that may cause our actual results to differmaterially from those expressed or implied by our forward‑looking statements. As a result of these factors, we cannot assure you that the forward‑lookingstatements in this Annual Report will prove to be accurate. Furthermore, if our forward‑looking statements prove to be inaccurate, the inaccuracy may bematerial. In light of the significant uncertainties in these forward‑looking statements, you should not regard these statements as a representation or warrantyby us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. The forward-looking statements in this AnnualReport represent our views as of the date of this Annual Report. We anticipate that subsequent events and developments may cause our views to change.However, while we may elect to update these forward-looking statements at some point in the future, we undertake no obligation to publicly update anyforward‑looking statements, whether as a result of new information, future events or otherwise, except as required by law. You should, therefore, not rely onthese forward-looking statements as representing our views as of any date subsequent to the date of this Annual Report.1 Table of Contents Page PART I Item 1.Business3Item 1A.Risk Factors25Item 1B.Unresolved Staff Comments67Item 2.Properties67Item 3.Legal Proceedings67Item 4.Mine Safety Disclosures67 PART II Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities68Item 6.Selected Financial Data68Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations69Item 7A.Quantitative and Qualitative Disclosures About Market Risk77Item 8.Financial Statements and Supplementary Data78Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure100Item 9A.Controls and Procedures100Item 9B.Other Information100 PART III Item 10.Directors, Executive Officers and Corporate Governance101Item 11.Executive Compensation101Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters101Item 13.Certain Relationships and Related Transactions, and Director Independence101Item 14.Principal Accountant Fees and Services101 PART IV Item 15.Exhibits and Financial Statement Schedules102Item 16.Form 10-K Summary104Signatures105 2 PART IITEM 1. BUSINESSOverviewWe are a medical dermatology company committed to the development and commercialization of novel treatments that provide meaningful benefitfor people living with skin diseases. Our lead product candidate, VP-102, is a proprietary drug-device combination of our novel topical solution ofcantharidin, a widely recognized, naturally sourced agent to treat topical dermatological conditions, administered through our single-use precisionapplicator. We are initially developing VP-102 for the treatment of molluscum contagiosum, or molluscum, a highly contagious and primarily pediatric viralskin disease, and common warts. There are currently no products approved by the U.S. Food and Drug Administration, or FDA, nor is there an establishedstandard of care for either of these diseases, resulting in significant undertreated populations in two of the largest unmet needs in dermatology. In addition topatent protection we are seeking, VP-102 has the potential to be the first FDA-approved product for molluscum and for its active pharmaceutical ingredient,or API, to be characterized as a new chemical entity, or NCE, with the five years of non-patent regulatory exclusivity associated with that designation. Wealso believe VP-102 has the potential to qualify for pediatric exclusivity, which would provide for an additional six months of non-patent exclusivity.In January 2019, we reported positive top-line results from our Phase 3 CAMP-1 and CAMP-2 pivotal trials with VP-102 for the treatment ofmolluscum. Both clinical trials evaluated the safety and efficacy of VP-102 compared to placebo. In each trial, we observed that a clinically and statisticallysignificant proportion of subjects treated with VP-102 achieved complete clearance of all treatable molluscum lesions compared to subjects treated withplacebo. VP-102 was well-tolerated in both trials, with no serious adverse events reported in VP-102 treated subjects. We plan to submit a new drugapplication, or NDA, to the FDA for VP-102 for the treatment of molluscum in the second half of 2019. CAMP-1 was conducted under a special protocolassessment, or SPA, agreement with the FDA. We also have an ongoing Phase 2 clinical trial of VP-102 for the treatment of common warts (COVE-1). Weexpect to report top-line results from this trial in the second quarter of 2019. In addition, we plan to initiate a Phase 2 trial with VP-102 in external genitalwarts in the first half of 2019. We also expect to submit an investigational new drug application, or IND, for VP-103 in plantar warts in the second half of2019. We retain exclusive, royalty-free rights to our product candidates across all indications.Molluscum is a highly contagious common skin disease caused by a pox virus that produces multiple raised flesh-colored papules, or skin lesions.Molluscum typically presents with 10 to 30 lesions and can present with over 100 lesions. If left untreated, molluscum lesions persist for an average of 13months, with some cases remaining unresolved for more than two years. The symptoms of molluscum tend to cause considerable anxiety, and parentsfrequently seek treatment due to its highly contagious nature and physical appearance.We estimate approximately 6 million people in the United States have molluscum. Of the 6 million people with molluscum, we estimate thatapproximately 1 million are diagnosed annually. Molluscum has a 5% to 11% prevalence rate in children with the greatest incidence in individuals agedone to 14 years old. Accordingly, we estimate this represents a total addressable U.S. market of over $1 billion. We believe that the molluscum prevalencerate in the European Union is at least as high as in the United States.Compounded cantharidin has been used for many years by dermatologists to treat molluscum, but it has many limitations. Those limitations includethat it is not FDA approved, could have highly variable purity, is not readily available and is often not produced in accordance with good manufacturingpractices, or GMP. In addition, the formulation and administration of compounded cantharidin is not standardized and is poorly controlled. Other existingtherapies, such as cryotherapy, curettage and laser surgery are also used, but are often painful and may lead to scarring. The potential for scarring and painmakes many of these treatments particularly unsuitable for children. As a result, a significant need exists for a clinically proven and FDA-approved treatmentfor molluscum.3 We have designed VP-102 to address the significant limitations of current compounded cantharidin formulations for the treatment of molluscum,including with respect to safety, purity, efficacy, stability and ease of administration. VP-102 contains the first GMP-controlled formulation of cantharidinwith a defined pharmaceutical batch process and an API that is greater than 99% pure. We believe VP-102 addresses the shortcomings associated with currenttherapies, including pain and discomfort, potential scarring and inconsistent outcomes, and has the potential to be the first FDA-approved product for thetreatment of molluscum.We are also developing VP-102 for the treatment of common warts. Common warts typically result in two to five lesions. We estimate approximately22 million people in the United States have common warts and the total addressable U.S. market to be over $1 billion with an estimated 2 million patientvisits for common warts each year. In the United States, approximately 50% of the patients who seek treatment for common warts are children, andapproximately 25% of common warts patients are treated by pediatricians. We believe that the common wart patient opportunity in the European Union is atleast as large as that in the United States. There are currently no FDA-approved products indicated for the treatment of common warts. While common wartscan be treated with slow acting, over-the-counter products, the warts tend to be highly refractory and a cause for multiple consultations. We believe thatcantharidin’s role as a widely recognized and effective blistering agent for the treatment of skin lesions, coupled with VP-102’s safety and efficacy data inclinical trials for the treatment of molluscum and convenient ease of administration, will allow VP-102 to address many of the shortcomings associated withcurrent therapies. We have an ongoing Phase 2 clinical trial of VP-102 for the treatment of common warts. We expect to report top-line results from this trialin the second quarter of 2019.We also intend to develop our second cantharidin-based product candidate, VP-103, for the treatment of plantar warts. An estimated one-third of theapproximately 4.1 million annual patient visits for all types of warts are for the treatment of plantar warts, which are warts located on the bottom of the foot.We expect to conduct IND-enabling studies for this product candidate and to submit an IND to the FDA in the second half of 2019. Pending final formulationand IND clearance, we expect that we will be able to substantially leverage our experience with VP-102 to initiate Phase 2 trials directly in target subjectswith plantar warts. We also believe we have the opportunity to expand our proprietary cantharidin formulations for the treatment of additionaldermatological conditions with high unmet needs.We believe the current medical dermatology landscape provides an opportunity to establish ourselves as a leader in the space. With a moreconcentrated prescribing base of dermatologists versus other medical specialties, our management’s proven track record and experience in new productlaunches, and the significant clinical benefits described above, we believe a targeted sales and marketing organization of approximately 50 to 60 salesrepresentatives should enable us to capture market share swiftly in the United States, particularly in our current indications of focus.4 Our PipelineThe following table summarizes our product candidates. We retain exclusive, royalty-free rights for all our product candidates. (1)Phase 2 ready subject to FDA agreement.VP-102 for the Treatment of MolluscumWe are developing VP-102 as a proprietary drug-device combination of a novel 0.7% w/v topical solution of cantharidin administered through oursingle-use precision applicator. VP-102 has the potential to be a first-in-class treatment for molluscum that we believe will address many of the shortcomingsassociated with current therapies, including pain and discomfort, scarring and lack of effectiveness.We have designed VP-102 to address the significant limitations of current compounded cantharidin formulations for the treatment of molluscum,with respect to safety, purity, efficacy, stability and ease of administration. VP-102 contains the first GMP-controlled formulation of cantharidin with adefined pharmaceutical batch process and an API that is greater than 99% pure.Our proprietary single-use applicator allows for precise application to each lesion. Our applicator contains a sealed glass ampule providing long-termroom temperature stability without the changes in concentration due to evaporation seen in compounded formulations.Clinical Development for MolluscumIn January 2019, we announced positive topline results from our Phase 3 CAMP-1 and CAMP-2 pivotal trials with VP-102 for the treatment ofmolluscum. Based on the results from these trials, we plan to submit an NDA to the FDA for VP-102 for the treatment of molluscum in the second half of2019. 5 Below is a summary of our clinical development for the indication of molluscum. Trial and StatusFormulation andApplication Method Trial Design Trial ObjectivesPhase 3 Clinical Trials (CAMP-1 andCAMP-2) (n=266 and 262,respectively) Top-line results reported in January2019VP-102• Randomized, double-blinded,multicenter, placebo-controlled • Safety and efficacy evaluatedevery 21 days for up to 4applications• To evaluate the efficacy ofdermal application ofVP-102 relative to placebo forcomplete clearance at Day 84 • To assess the safety andtolerability of VP-102Phase 2 Innovate Trial(n=32) Results reported in September 2018VP-102• Open-label, single- center • 24-hour treatment • Blood draws in subjects withmore than 21 lesions forevaluating PK • Safety and efficacy evaluatedevery 21 days for up to fourapplications • Impact of quality of life assessedvia the CDLQI • Duration: 12 weeks• To determine any possiblesystemic exposure from a single24-hour application ofVP-102 • To confirm safety and efficacywith applicator • To assess impact on quality oflife Phase 2 Pilot Trial(n=30) Completed in September2017 Our proprietary formulation ofcantharidin used inVP-102, applied with the woodenstick part of a cotton-tipped swab • Open-label, single- center • Six hour and 24- hour treatmentcohorts • Safety and efficacy evaluatedevery 21 days for up to fourapplications • Impact of quality of life assessedvia the CDLQI • Duration: 12 weeks • To evaluate safety and efficacyand determine optimaltreatment duration • To assess impact on quality oflife 6 Phase 3 Clinical Trials—CAMP-1 and CAMP-2In January 2019, we announced positive topline results from our Phase 3 CAMP-1 and CAMP-2 pivotal trials with VP-102 for the treatment ofmolluscum. The two trials, identical in design, were randomized, double-blind, multicenter, placebo-controlled trials of VP-102 for the treatment ofmolluscum. CAMP-1 was conducted under a SPA with the FDA. The primary objective of the trials was to evaluate the efficacy of dermal application of VP-102 relative to placebo in subjects 2 years of age and older with molluscum, when treated once every 21 days for up to four applications, by assessing theproportion of subjects achieving complete clearance of all treatable molluscum lesions at Day 84 (Week 12/End of Study visit). Secondary endpointsincluded the proportion of subjects with complete clearance at study visits on Days 21 (Week 3), 42 (Week 6) and 63 (Week 9).CAMP-1 and CAMP-2 enrolled 528 subjects in total and were conducted at 31 centers in the United States. Results from CAMP-1 and CAMP-2showed 46% and 54% of subjects treated with VP-102, respectively, achieved complete clearance of all treatable molluscum lesions at Day 84 versus 18%and 13% of subjects in the placebo groups (p<0.0001). By Day 84, VP-102 treated subjects had a 69% and 83% mean reduction in the number of molluscumlesions, a pre-specified endpoint, in CAMP-1 and CAMP-2, respectively, compared to a 20% increase and a 19% reduction for subjects on placebo.Consistent with the results from the Phase 2 clinical trials, VP-102 was also well-tolerated in the Phase 3 trials, with side effects that were primarilymild to moderate. The most frequently reported adverse events were application site reactions that are well-known, reversible side effects related to themechanism of action of cantharidin, a blistering agent, which is the active ingredient in VP-102. There were no treatment-related serious adverse eventsreported in CAMP-1 or CAMP-2.Based on the results of these trials, we intend to submit an NDA for VP-102 for the treatment of molluscum to the FDA in the second half of 2019.Phase 2 Clinical Trial—Innovate TrialIn September 2018, we announced results from an open-label Phase 2 clinical trial, which we refer to as the Innovate trial. The primary objective ofthe Innovate trial was to determine any potential systemic exposure from a single 24-hour dermal application of VP-102 when applied to molluscum lesionson pediatric subjects 2 years of age and older. The trial enrolled 33 subjects at a single center into either an exposure group (n=17) or a standard group (n=16)with 32 subjects completing the trial. Following an initial treatment of all subjects with VP-102 and a 21-day evaluation period, treatment continued onceevery 21 days for three additional applications allowing further evaluation of safety, efficacy and impact on quality of life.Systemic exposure was negligible, as indicated by plasma drug levels that were below the limits of quantification in 65 of 66 samples which weretaken either pre-dose or post-dose at timepoints of 2, 6 and 24 hours after treatment with VP-102. One sample was above the limit of quantification at 2 hoursafter VP-102 treatment, but systemic exposure was not detectable at the 6-hour and 24-hour timepoints in this subject. At the end of trial visit (Week 12),there was a mean reduction in molluscum lesions of 90% compared to baseline across all subjects enrolled in the Innovate trial and 50% of subjects whocompleted the trial experienced complete clearance of their treatable molluscum lesions. VP-102 was well-tolerated and no serious adverse events werereported.Phase 2 Clinical Trial—Pilot TrialIn 2016, we conducted an open-label, Phase 2 clinical trial, which we refer to as the Pilot Trial, to evaluate the safety and efficacy of our proprietarycantharidin formulation and to determine the optimal treatment regimen and estimate power for the pivotal trials. The trial enrolled 30 subjects at a singlecenter and was completed in September 2017. The trial utilized a single-use screw-top vial of our proprietary 0.7% cantharidin formulation, with applicationvia the wooden part of a cotton-tipped swab, which is the method of application historically used with compounded cantharidin. The subjects were dividedinto two cohorts, with the first cohort instructed to wash off the treatment after a six-hour exposure and the second cohort washing off the product after 24-hour exposure. Subjects were treated every three weeks for up to four treatments. Safety and efficacy measures were evaluated every three weeks. Primaryefficacy measures were the percentage of subjects who achieved complete clearance by Day 427 (visit 3) and Day 84 (visit 5). Secondary efficacy measures included a quality of life assessment, as measured by the Children’s Dermatology Life QualityIndex, or CDLQI, score, and the percentage of subjects who achieved clearance of at least 90% of their lesions with comparison to the efficacy data obtainedwith compounded cantharidin. The CDLQI scale is a validated tool for measuring the impact of skin disease on quality of life for subjects five to sixteenyears of age and ranges from a score of 0 to 30. Lower CDLQI scores indicate lower impairment of a patient’s quality of life.In the Pilot Trial, our proprietary cantharidin formulation was applied to over 1,700 molluscum lesions in 30 subjects, and was observed to be welltolerated, with no serious adverse events or unexpected treatment related adverse events recorded. The trial’s first cohort investigated a six-hour treatmentduration. Fourteen subjects were enrolled in this cohort and 13 subjects completed the trial. Of these 13 subjects, six showed complete clearance on or beforeDay 84 (visit 5) (46% complete clearance rate). The second cohort investigated a 24-hour treatment duration. Sixteen subjects were enrolled in this cohortand 12 completed the trial. Of these 12 subjects, five showed complete clearance on or before Day 84 (visit 5) (42% complete clearance rate).Other efficacy measures included lesion count and the CDLQI score. In the per-protocol group, the combined mean baseline lesion count was 23.0and the combined mean lesion count at the end of trial was 6.8. The CDLQI score went from a combined average burden of 3.9 at baseline to 0.38 at the endof trial. While the majority of subjects went to a CDLQI score of 0 when completely clear of their disease, subjects felt an improvement in quality of life evenif only partially cleared, supporting the idea that even lesion reduction is meaningful to patients.VP-102 for the Treatment of Common WartsWe are also developing VP-102 for the treatment of common warts. Published studies and clinical use provide support for cantharidin as a safe andeffective treatment for common warts. We believe that VP-102 has the potential to address many of the shortcomings associated with current therapies,including pain and discomfort, scarring, and lack of effectiveness. In addition, we believe VP-102’s convenient ease of administration will differentiate itfrom existing alternative unapproved therapies.We have an ongoing Phase 2 open-label clinical trial of VP-102 for the treatment of common warts, COVE-1, which has two cohorts enrolledsuccessively and is assessing both safety and efficacy endpoints. We believe the results of this trial will inform the clinical design and statistical powering offuture clinical trials.8 We have enrolled 21 subjects into the first cohort of the trial which is evaluating VP-102 applied once every 14 days for up to four applications tocommon warts on subjects two years and older. Following the initiation of the trial, we decided to amend the trial protocol to permit subjects in the firstcohort to receive treatment with an interval of no less than every 14 days at the discretion of the investigator. A second cohort was added to the trial byamendment in November 2018 and completed enrollment of 33 patients on February 15, 2019. The second cohort is evaluating a treatment regimen of VP-102 application once every 21 days for up to four applications in subjects 12 years and older. Trial and StatusFormulation andApplication Method Trial Design Trial ObjectivesPhase 2 COVE-1 Trial OngoingVP-102• Open-label, multi- center• 2 cohorts• Dosing regimens of 14 and 21days evaluated for up to 4applications• 24-hour treatment underocclusive tape• Wart paring allowed in thesecond cohort• To evaluate safety and efficacyover four treatments We expect to report top-line results from this trial in the second quarter of 2019. If the results of our Phase 2 clinical trial are favorable, we intend torequest an end of Phase 2 meeting in the second half of 2019.VP-102 for the Treatment of External Genital WartsWe plan to initiate a Phase 2 trial with VP-102 in external genital warts in the first half of 2019. External genital warts are a viral skin disease causedby the human papilloma virus, or HPV, which forms lesions on the surface of the skin. An estimated 17% of the approximately 4.1 million patient visits for alltypes of warts are for the treatment of external genital warts. We believe VP-102 may have the potential to offer a safe and effective treatment for externalgenital warts because of the shared characteristics with molluscum.VP-103 for the Treatment of Plantar WartsWe also intend to develop our second cantharidin-based product candidate, VP-103, for the treatment of plantar warts, which are warts located on thebottom of the foot. An estimated one-third of the approximately 4.1 million patient visits for all types of warts are for the treatment of plantar warts. To date,plantar warts have been difficult to treat, as they are refractory and available treatments often lead to both pain and scarring. We expect to conduct IND-enabling pre-clinical activities for VP-103 and to submit an IND to the FDA in the second half of 2019.ManufacturingWe do not have any manufacturing facilities. We have been relying on third parties for the manufacture of the products for preclinical studies andclinical trials and will likely continue to rely on these third parties in the near term for the commercial manufacture of the drug products if they are approvedduring the initial commercial phase. Manufacturing of the API for our product candidates requires a raw material that is derived from a natural source.9 To date, we have obtained naturally-sourced cantharidin directly or indirectly from suppliers based in the People’s Republic of China. On July 16,2018, we entered into a Supply Agreement, or the Supply Agreement, with Funing County Development Brucea Javanica Professional Cooperatives, or theSupplier, pursuant to which the Supplier has agreed to supply naturally-sourced cantharidin to us for a specified fixed price. Pursuant to the SupplyAgreement, the Supplier has agreed that it will not supply cantharidin, any beetles or other raw material from which cantharidin is derived to any othercustomer in North America, subject to specified minimum annual purchase orders and forecasts.Pursuant to the Supply Agreement, we have provided the Supplier with an initial purchase order and may submit additional purchase orders fromtime to time, so long as the purchase orders are at least six months prior to the proposed delivery date.The term of the Supply Agreement is five years and thereafter will be renewed automatically for 12-month periods, unless terminated by either partyat least 12 months prior to the end of the applicable term. In addition, either party has the right to terminate the Supply Agreement under certaincircumstances, including (i) upon a material breach of the Supply Agreement if the breaching party has failed to remedy the breach within 45 days or if thebreach is not capable of remedy within 45 days or (ii) the other party becomes insolvent or goes into liquidation.Our contract manufacturers and primary packaging vendor are FDA-registered establishments and have a history of supplying products to thepharmaceutical industry.We have manufactured both the API as well as the drug product at batch sizes that should be indicative of commercial scale processing capability.We are confident of the ability to scale both processes to commercial size as they employ equipment that is routinely used in the pharmaceutical industry andthe processes are well understood. Given the nature of both the API as well as several of the excipients, special handling will be required to minimize risks topersonnel during processing. Analytical testing methods for both the API as well as the finished drug product have been developed and satisfactorilyqualified to enable release of clinical materials for human use. It is expected that these methods will prove appropriate for release of commercial product withminimal additional effort.Our proprietary individual applicator and its parts are fabricated using common methods and materials and we currently plan to have our applicatorsbuilt using semi-custom equipment performing well established automated assembly techniques.CommercializationWe intend to commercialize VP-102, or any other product candidates that we may successfully develop, in the United States by building aspecialized sales organization focused on pediatric dermatologists, dermatologists and select pediatricians. We believe a scientifically oriented, customer-focused team of approximately 50 to 60 sales representatives would allow us to reach the approximately 400 pediatric dermatologists and 9,000dermatologists in the United States with the highest potential for using VP-102. In the future, we may develop and commercialize VP-102 for additionalgeographic regions, independently or with a strategic partner. We intend to seek drug product reimbursement for VP-102. Based on a survey of 40 physiciansthat we commissioned, 87% of physicians reported they would use VP-102 if the cost of the drug were covered. Furthermore, in April 2018, we commissioneda market research study, which surveyed 15 payor organizations representing over 105 million lives. The surveyed payors recognized that there is asignificant unmet need for molluscum and a current lack of an effective treatment. Given the unmet need and the results of clinical trials of VP-102 to date,the surveyed payors anticipate the majority of patients would have access to VP-102, if approved, with minimal to no restrictions. We believe dermatologiststend to be particularly focused on the safety of pharmaceutical products because, while skin diseases can have profound effects on patients’ quality of life,few are life-threatening. As a result, we believe that dermatologists, as well as their patients, often prefer to use topical treatments when possible to limit therisk of systemic side effects. Dermatologists also tend to place a high level of emphasis on products that are easy to use because they often manage highvolumes of patients. We believe this also contributes to a general preference for topical treatments. Finally, in our experience, dermatologists tend to engagewith sales and medical affairs personnel from the pharmaceutical industry regarding the scientific evidence supporting dermatology products and thechallenges experienced by physicians and patients in the use of these products. Dermatologists often rely on trusted relationships with scientifically oriented,customer-focused sales representatives who can provide them with the necessary information to support their use of appropriate treatments.10 CompetitionThe pharmaceutical industry is subject to rapidly advancing technologies, intense competition and a strong emphasis on proprietary products. Weface potential competition from many different sources, including major pharmaceutical, specialty pharmaceutical and biotechnology companies,compounding facilities, academic institutions, governmental agencies and public and private research institutions. Any product candidates that wesuccessfully develop and commercialize will compete with existing treatments and new treatments that may become available in the future.The key competitive factors affecting the success of VP-102, if approved, are likely to be its efficacy, safety, convenience, pricing and stability. Withrespect to VP-102 for the treatment of molluscum, we will be primarily competing with therapies such as other topical products, curettage, cryotherapy, lasersurgery, natural oils, off-label drugs, natural remedies and compounded unstandardized cantharidin. Under Section 503A of the FDCA, if VP-102 is approved,compounded topical cantharidin products with the same, similar or an easily substitutable dosage strength would be considered essentially copies of VP-102and may not be compounded regularly or in inordinate amounts, subject to certain limited individual exceptions. These exceptions include if there is adifference between the compounded product and VP-102 that is made for an individual patient, and a prescribing practitioner determines produces asignificant difference for that patient. In addition, pursuant to Section 503B of the FDCA, once VP-102 is approved, compounding facilities registered asoutsourcing facilities would not be able to compound cantharidin products, unless there is a difference from VP-102 that produces a clinical difference for anindividual patient, as determined by a prescribing practitioner. With respect to VP-102 for common warts and VP-103 for plantar warts, we will primarily becompeting with over-the-counter products, cryotherapy, curettage, laser surgery, or other off-label therapies. There are currently no FDA-approvedprescription pharmaceutical therapies for the treatment of molluscum, common warts, or plantar warts. With respect to VP-102 for external genital warts, wewill be competing with cryosurgery, laser surgery, and topical destructive therapies such as trichloroacetic acid. There are also several FDA-approvedprescription pharmaceutical therapies for external genital warts including imiquimod, podofilox, and sinecatechins. In addition, external genital warts arecaused by HPV and may be prevented or treated by HPV vaccines that are FDA-approved.We are aware of several other product candidates in earlier stages of development as potential treatments for the indications we intend to target.Veloce Biopharma, Leo Pharma and Novan have initiated clinical trials with different programs in molluscum. There are a number of companies conductinglate-stage clinical trials for common warts, including Aclaris Therapeutics and Cutanea Life Sciences. In addition, other drugs have been used off label astreatments for molluscum and common warts.Intellectual PropertyOur commercial success depends in part on our ability to obtain and maintain proprietary protection for VP-102 and our proprietary applicator andany of our future product candidates, medical devices, synthetic methodologies, novel discoveries, drug development technologies and know-how; tooperate without infringing on or otherwise violating the proprietary rights of others; and to prevent others from infringing or otherwise violating ourproprietary rights. Our policy is to seek to protect our proprietary position by, among other methods, filing U.S. and foreign patent applications related to ourproduct candidate and other proprietary technologies, inventions, and improvements that are important to the development and implementation of ourbusiness. We also rely on trademarks, trade secrets, know-how, continuing technological innovation, and potential in-licensing opportunities to develop andmaintain our proprietary position.While we seek broad coverage under our pending patent applications, our patent applications do not include any claims drawn to the activepharmaceutical agent cantharidin per se or for the broad use of our API alone for the treatment of warts or molluscum, although we have filed patentapplications on our cantharidin preparations, cantharidin formulations, dosing regimens, methods of preparation including methods of synthesis, andmethods of use. Despite these patent filings, there is always a risk that modification of the specific formulation, manufacturing process, method ofapplication, and/or specific method of use may allow a competitor to avoid infringement claims. In addition, patents, if granted, will expire, and we cannotprovide any assurance that any patents will be issued from our pending or any future applications.11 As of December 31, 2018, we have nationalized three international patent applications for utility patents, two of which have been nationalized in theUnited States, Australia, Brazil, Canada, China, Europe, Israel, India, Japan, South Korea, and Mexico, and one of which has been nationalized in the UnitedStates, Europe, and Japan. Two of these European patent applications have been registered in Hong Kong. In addition, we have three pending internationalpatent applications and one patent application for a design patent. These patent applications relate to VP-102, our proprietary applicator, and otherinventions related to VP-102. Our patent applications related to VP-102 and our proprietary applicator include proposed claims relating to (i) methods for thesynthesis of cantharidin, (ii) our specific formulations and preparations of VP-102, (iii) methods for purifying cantharidin, (iv) methods for detectingimpurities in cantharidin, (v) the design of our proprietary applicator, including both the general design and specific design elements, (vi) claims related tosafety features included in the VP-102 formulation, including colorants and bittering agents, and (vii) the method of administration of VP-102 for thetreatment of skin lesions. Excluding any patent term adjustment and patent term extension, utility patents to issue from these patent applications areprojected to expire between 2034 and 2039. The design patent to issue from the design patent application will expire fifteen years from the date of issuance.We cannot provide any assurance as to whether any patents will be issued from these patent applications or, if any patents do issue, the scope of the claimsthat will be allowed.Individual patents extend for varying periods depending on the date of filing of the patent application or the date of patent issuance and the legalterm of patents in the countries, in which they are obtained. Generally, patents issued from regularly filed applications in the United States are granted a termof 20 years from the earliest effective non-provisional filing date. In addition, in certain instances, a patent term can be adjusted to recapture a portion of theUnited States Patent and Trademark Office, or the USPTO, delay in issuing the patent, and extended to recapture a portion of the patent term effectively lostas a result of the FDA regulatory review period of the drug covered by the patent. However, as to the FDA component, the restoration period cannot be longerthan five years, the total patent term including the restoration period must not exceed 14 years following FDA approval of the drug, and the extension mayonly apply to one patent that covers the approved drug (and to only those patent claims covering the approved drug or a method for using it). There can beno assurance that any such patent term adjustment or extension will be obtained. The duration of foreign patents varies in accordance with provisions ofapplicable local law, but typically is also 20 years from the earliest effective non-provisional filing date. However, the actual protection afforded by a patentvaries on a product-by-product basis, from country to country and depends upon many factors, including the type of patent, the scope of its coverage, theavailability of regulatory-related extensions, the availability of legal remedies in a particular country, and the validity and enforceability of the patent.Furthermore, we rely upon trade secrets, know-how, and continuing technological innovation to develop and maintain our competitive position. Weseek to protect our proprietary information, in part, using confidentiality agreements with our commercial partners, collaborators, employees, and consultantsand invention assignment agreements with our employees. We also have confidentiality agreements or invention assignment agreements with ourcommercial partners and selected consultants. These agreements are designed to protect our proprietary information and, in the case of the inventionassignment agreements, to grant us ownership of technologies that are developed through a relationship with a third party. These agreements may bebreached, and we may not have adequate remedies for any such breach. In addition, our trade secrets may otherwise become known or be independentlydiscovered by competitors. To the extent that our commercial partners, collaborators, employees, and consultants use intellectual property owned by othersin their work for us, disputes may arise as to the rights in related or resulting know-how and inventions.Government Regulation and Product ApprovalGovernment authorities in the United States, at the federal, state and local levels, and in other countries, extensively regulate, among other things, theresearch, development, testing, manufacture, packaging, storage, recordkeeping, labeling, advertising, promotion, distribution, marketing, import and exportof pharmaceutical products, such as those we are developing. We, along with third-party contractors, will be required to navigate the various preclinical,clinical and commercial approval requirements of the governing regulatory agencies of the countries in which we wish to conduct studies or seek approval ofour product candidates. The processes for obtaining regulatory approvals in the United States and in foreign countries, along with subsequent compliancewith applicable statutes and regulations, require the expenditure of substantial time and financial resources.12 United States Government RegulationIn the United States, the FDA regulates drugs under the FDCA and its implementing regulations. The process of obtaining regulatory approvals andthe subsequent compliance with appropriate federal, state, local and foreign statutes and regulations requires the expenditure of substantial time and financialresources. Failure to comply with the applicable United States requirements at any time during the drug development process, approval process or afterapproval, may subject an applicant to a variety of administrative or judicial sanctions, such as the FDA’s refusal to approve pending new drug applications,or NDAs, withdrawal of an approval, imposition of a clinical hold, issuance of warning or untitled letters, product recalls, product seizures, total or partialsuspension of production or distribution, injunctions, fines, refusals of government contracts, restitution, disgorgement or civil or criminal penalties.The process required by the FDA before a drug may be marketed in the United States generally involves: •completion of preclinical laboratory tests, animal studies and formulation studies in compliance with the FDA’s good laboratory practice, orGLP, regulations; •submission to the FDA of an IND, which must become effective before human clinical trials may begin; •approval by an independent institutional review board, or IRB, at each clinical site before each trial may be initiated; •performance of adequate and well-controlled clinical trials in accordance with good clinical practice, or GCP, requirements to establish thesafety and efficacy of the proposed drug for each indication; •submission to the FDA of an NDA; •satisfactory completion of an FDA advisory committee review, if applicable; •satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the product is produced to assess compliancewith cGMP requirements, and to assure that the facilities, methods and controls are adequate to preserve the drug’s identity, strength, qualityand purity; •satisfactory completion of an FDA inspection of selected clinical sites to assure compliance with GCPs and the integrity of the clinical data; •payment of user fees; and •FDA review and approval of the NDA.VP-102 is designed to be delivered to patients via a proprietary applicator. In the United States, products composed of components that wouldnormally be regulated by different centers at the FDA are known as combination products. Typically, the FDA’s Office of Combination Products assigns acombination product to a specific Agency center as the lead reviewer. The FDA determines which center will lead a product’s review based upon theproduct’s primary mode of action. Depending on the type of combination product, its approval, clearance or licensure may usually be obtained through thesubmission of a single marketing application. We anticipate that VP-102 will be regulated as a drug, and that the FDA will permit a single regulatorysubmission seeking approval of VP-102 with the applicator. However, the FDA sometimes will require separate marketing applications for individualconstituent parts of the combination product which may require additional time, effort, and information, and we cannot be certain that the FDA would notrequire independent clearance or approval for the proprietary applicator. Even when a single marketing application is required for a combination product,such as an NDA for a combination pharmaceutical and device product, both the FDA’s Center for Drug Evaluation and Research and the FDA’s Center forDevices and Radiological Health may participate in the review. An applicant will also need to discuss with the Agency how to apply certain premarketrequirements and post-marketing regulatory requirements, including conduct of clinical trials, adverse event reporting and good manufacturing practices, totheir combination product.13 Preclinical StudiesPreclinical studies include laboratory evaluation of product chemistry, toxicity and formulation, as well as animal studies to assess potential safetyand efficacy. An IND sponsor must submit the results of the nonclinical tests, together with manufacturing information, analytical data and any availableclinical data or literature, among other things, to the FDA as part of an IND. Some nonclinical testing may continue even after the IND is submitted. An INDautomatically becomes effective and a clinical trial proposed in the IND may begin 30 days after receipt by the FDA, unless before that time the FDA raisesconcerns or questions related to one or more proposed clinical trials and places the clinical trial on a clinical hold. In such a case, the IND sponsor and theFDA must resolve any outstanding concerns before the clinical trial can begin. As a result, submission of an IND may not result in the FDA allowing clinicaltrials to commence.Clinical TrialsClinical trials involve the administration of the investigational new drug to human subjects under the supervision of qualified investigators inaccordance with GCP requirements, which include the requirement that all research subjects provide their informed consent in writing for their participationin any clinical trial. Clinical trials are conducted under protocols detailing, among other things, the objectives of the trial, the parameters to be used inmonitoring safety and the effectiveness criteria to be evaluated. A protocol for each clinical trial and any subsequent protocol amendments must be submittedto the FDA as part of the IND. In addition, an IRB at each institution participating in the clinical trial must review and approve the plan for any clinical trialbefore it commences at that institution, and the IRB must continue to oversee the clinical trial while it is being conducted. Information about certain clinicaltrials must be submitted within specific timeframes to the National Institutes of Health, or NIH, for public dissemination on their ClinicalTrials.gov website.Human clinical trials are typically conducted in three sequential phases, which may overlap or be combined. In Phase 1, the drug is initiallyintroduced into healthy human subjects or patients with the target disease or condition and tested for safety, dosage tolerance, absorption, metabolism,distribution, excretion and, if possible, to gain an initial indication of its effectiveness. In Phase 2, the drug typically is administered to a limited patientpopulation to identify possible adverse effects and safety risks, to preliminarily evaluate the efficacy of the product for specific targeted diseases and todetermine dosage tolerance and optimal dosage. In Phase 3, the drug is administered to an expanded patient population, generally at geographicallydispersed clinical trial sites, in well-controlled clinical trials to generate enough data to statistically evaluate the safety and efficacy of the product forapproval, to establish the overall risk-benefit profile of the product and to provide adequate information for the labeling of the product.In some cases, the FDA may condition approval of an NDA for a product candidate on the sponsor’s agreement to conduct additional clinical trialsafter NDA approval. In other cases, a sponsor may voluntarily conduct additional clinical trials post approval to gain more information about the drug. Suchpost approval trials are typically referred to as Phase 4 clinical trials.Progress reports detailing the results of the clinical trials must be submitted, at least annually, to the FDA, and more frequently if serious adverseevents occur. Phase 1, Phase 2 and Phase 3 clinical trials may not be completed successfully within any specified period, or at all. Furthermore, the FDA or thesponsor may suspend or terminate a clinical trial at any time on various grounds, including a finding that the research subjects are being exposed to anunacceptable health risk. Similarly, an IRB can suspend or terminate approval of a clinical trial at its institution if the clinical trial is not being conducted inaccordance with the IRB’s requirements, or if the drug has been associated with unexpected serious harm to patients.Concurrent with clinical trials, companies usually complete additional animal studies and must also develop additional information about thechemistry and physical characteristics of the product and finalize a process for manufacturing the product in commercial quantities in accordance with cGMPrequirements. The manufacturing process must be capable of consistently producing quality batches of the product candidate and, among other things, themanufacturer must develop methods for testing the identity, strength, quality and purity of the final product. Additionally, appropriate packaging must beselected and tested, and stability studies must be conducted to demonstrate that the product candidate does not undergo unacceptable deterioration over itsshelf life.14 Marketing ApprovalAssuming successful completion of the required clinical testing, the results of the preclinical studies and clinical trials, together with detailedinformation relating to the product’s chemistry, manufacture, controls and proposed labeling, among other things, are submitted to the FDA as part of an NDArequesting approval to market the product for one or more indications. In most cases, the submission of an NDA is subject to a substantial application userfee. Under the Prescription Drug User Fee Act, or PDUFA, guidelines that are currently in effect, the FDA has a goal of ten months from the date of “filing” ofa standard NDA for a new molecular entity to review and act on the submission. This review typically takes twelve months from the date the NDA issubmitted to the FDA because the FDA has sixty days from receipt to make a decision as to whether the application has been accepted for filing.In addition, under the Pediatric Research Equity Act of 2003 as amended and reauthored, certain NDAs or supplements to an NDA must contain datathat are adequate to assess the safety and effectiveness of the drug for the claimed indications in all relevant pediatric subpopulations, and to support dosingand administration for each pediatric subpopulation for which the product is safe and effective. The FDA may, on its own initiative or at the request of theapplicant, grant deferrals for submission of some or all pediatric data until after approval of the product for use in adults, or full or partial waivers from thepediatric data requirements.The FDA also may require submission of a risk evaluation and mitigation strategy, or REMS, plan to ensure that the benefits of the drug outweigh itsrisks. The REMS plan could include medication guides, physician communication plans, assessment plans, and/or elements to assure safe use, such asrestricted distribution methods, patient registries or other risk minimization tools.The FDA conducts a preliminary review of all NDAs within the first 60 days after submission, before accepting them for filing, to determine whetherthey are sufficiently complete to permit substantive review. The FDA may request additional information rather than accept an NDA for filing. In this event,the application must be resubmitted with the additional information. The resubmitted application is also subject to review before the FDA accepts it forfiling. Once the submission is accepted for filing, the FDA begins an in-depth substantive review. The FDA reviews an NDA to determine, among otherthings, whether the drug is safe and effective and whether the facility in which it is manufactured, processed, packaged or held meets standards designed toassure the product’s continued safety, quality and purity.The FDA may refer an application for a novel drug to an advisory committee. An advisory committee is a panel of independent experts, includingclinicians and other scientific experts, that reviews, evaluates and provides a recommendation as to whether the application should be approved and underwhat conditions. The FDA is not bound by the recommendations of an advisory committee, but it considers such recommendations carefully when makingdecisions.Before approving an NDA, the FDA typically will inspect the facility or facilities where the product is manufactured. The FDA will not approve anapplication unless it determines that the manufacturing processes and facilities are in compliance with cGMP requirements and adequate to assure consistentproduction of the product within required specifications. Additionally, before approving an NDA, the FDA will typically inspect one or more clinical trialsites to assure compliance with GCP requirements.The testing and approval process for an NDA requires substantial time, effort and financial resources, and each may take several years to complete.Data obtained from preclinical and clinical testing are not always conclusive and may be susceptible to varying interpretations, which could delay, limit orprevent regulatory approval. The FDA may not grant approval of an NDA on a timely basis, or at all.After evaluating the NDA and all related information, including the advisory committee recommendation, if any, and inspection reports regarding themanufacturing facilities and clinical trial sites, the FDA may issue an approval letter, or, in some cases, a complete response letter. A complete response lettergenerally contains a statement of specific conditions that must be met in order to secure final approval of the NDA and may require additional clinical orpreclinical testing in order for the FDA to reconsider the application. Even with submission of this additional information, the FDA ultimately may decidethat the application does not satisfy the regulatory criteria for approval. If and when those conditions have been met to the FDA’s satisfaction, the FDA willtypically issue an approval letter. An approval letter authorizes commercial marketing of the drug with specific prescribing information for specificindications.15 Even if the FDA approves a product, it may limit the approved indications for use of the product, require that contraindications, warnings orprecautions be included in the product labeling, require that post-approval studies, including Phase 4 clinical trials, be conducted to further assess a drug’ssafety after approval, require testing and surveillance programs to monitor the product after commercialization, or impose other conditions, includingdistribution and use restrictions or other risk management mechanisms under a REMS, which can materially affect the potential market and profitability ofthe product. The FDA may prevent or limit further marketing of a product based on the results of post-marketing studies or surveillance programs. Afterapproval, some types of changes to the approved product, such as adding new indications, manufacturing changes, and additional labeling claims, are subjectto further testing requirements and FDA review and approval.Special Protocol AssessmentA sponsor may request a SPA, the purpose of which is to reach agreement with the FDA on the Phase 3 clinical trial protocol design and analysis thatwill form the primary basis of an efficacy claim. A SPA request must be made before the proposed trial begins, and all open issues must be resolved before thetrial begins for a SPA to be approved. If a written agreement is reached, it will be documented in a SPA letter or the minutes of a meeting between the sponsorand the FDA and made part of the administrative record.Even if the FDA agrees to the design, execution and analyses proposed in protocols reviewed under the SPA process, the FDA may revoke or alter itsagreement under the following circumstances: •public health concerns emerge that were unrecognized at the time of the protocol assessment, or the director of the review divisiondetermines that a substantial scientific issue essential to determining safety or efficacy has been identified after testing has begun; •a sponsor fails to follow a protocol that was agreed upon with the FDA; or •the relevant data, assumptions, or information provided by the sponsor in a request for SPA change, are found to be false statements ormisstatements, or are found to omit relevant facts.A documented SPA may be modified, and such modification will be deemed binding on the FDA review division, except under the circumstancesdescribed above, if the FDA and the sponsor agree in writing to modify the protocol and such modification is intended to improve the study. A SPA, however,does not guarantee that a trial will be successful.Orange Book ListingIn seeking approval for a drug through an NDA, applicants are required to list with the FDA certain patents whose claims cover the applicant’sproduct. Upon approval of an NDA, each of the patents listed in the application for the drug is then published in the FDA’s Approved Drug Products withTherapeutic Equivalence Evaluations, known as the Orange Book. Any applicant who files an Abbreviated New Drug Application, or ANDA, seekingapproval of a generic equivalent version of a drug listed in the Orange Book or a 505(b)(2) NDA referencing a drug listed in the Orange Book must certify, foreach patent listed in the Orange Book for the referenced drug, to the FDA that (1) no patent information on the drug product that is the subject of theapplication has been submitted to the FDA, (2) such patent has expired, (3) the date on which such patent expires or (4) such patent is invalid or will not beinfringed upon by the manufacture, use or sale of the drug product for which the application is submitted. The fourth certification described above is knownas a paragraph IV certification. A notice of the paragraph IV certification must be provided to each owner of the patent that is the subject of the certificationand to the holder of the approved NDA to which the ANDA refers. The applicant may also elect to submit a “section viii” statement certifying that itsproposed label does not contain (or carves out) any language regarding the patented method-of-use rather than certify to a listed method-of-use patent. Thissection viii statement does not require notice to the patent holder or NDA owner. There might also be no relevant patent certification.If the reference NDA holder and patent owners assert a patent challenge directed to one of the Orange Book listed patents within 45 days of thereceipt of the paragraph IV certification notice, the FDA is prohibited from approving the application until the earlier of 30 months from the receipt of theparagraph IV certification expiration of the patent, settlement of the lawsuit, or a decision in the infringement case that is favorable to the applicant. Even ifthe 45 days expire, a patent infringement lawsuit can be brought and could delay market entry, but it would not extend the FDA-related 30-month stay ofapproval.16 The ANDA or 505(b)(2) application also will not be approved until any applicable non-patent exclusivity listed in the Orange Book for the brandedreference drug has expired. Specifically, the holder of the NDA for the listed drug may be entitled to a period of non-patent exclusivity, during which theFDA cannot approve an ANDA or 505(b)(2) application that relies on the listed drug. For example, a pharmaceutical manufacturer may obtain five years ofnon-patent exclusivity upon NDA approval of an NCE, which is a drug that contains an active moiety that has not been approved by FDA in any other NDA.An “active moiety” is defined as the molecule or ion responsible for the drug substance’s physiological or pharmacologic action. During the five-yearexclusivity period, the FDA cannot accept for filing any ANDA seeking approval of a generic version of that drug or any 505(b)(2) NDA for the same activemoiety and that relies on the FDA’s findings regarding that drug, except that FDA may accept an application for filing after four years if the follow-onapplicant makes a paragraph IV certification. This exclusivity period may be extended by an additional six months if certain requirements are met to qualifythe product for pediatric exclusivity, including the receipt of a written request from the FDA that we conduct certain pediatric studies, the submission ofstudy reports from such studies to the FDA after receipt of the written request and satisfaction of the conditions specified in the written request.Post-Approval RequirementsDrugs manufactured or distributed pursuant to FDA approvals are subject to pervasive and continuing regulation by the FDA, including, among otherthings, requirements relating to recordkeeping, periodic reporting, product sampling and distribution, advertising and promotion and reporting of adverseexperiences with the product. After approval, most changes to the approved product, such as adding new indications, manufacturing changes or otherlabeling claims, are subject to further testing requirements and prior FDA review and approval. There also are continuing annual program fee requirements forany marketed products.Even if the FDA approves a product, it may limit the approved indications for use of the product, require that contraindications, warnings orprecautions be included in the product labeling, including a boxed warning, require that post-approval studies, including Phase 4 clinical trials, beconducted to further assess a drug’s safety after approval, require testing and surveillance programs to monitor the product after commercialization, or imposeother conditions, including distribution restrictions or other risk management mechanisms under a REMS, which can materially affect the potential marketand profitability of the product. The FDA may prevent or limit further marketing of a product based on the results of post-marketing studies or surveillanceprograms.In addition, drug manufacturers and other entities involved in the manufacture and distribution of approved drugs are required to register theirestablishments with the FDA and state agencies and are subject to periodic unannounced inspections by the FDA and these state agencies for compliancewith cGMP requirements. Changes to the manufacturing process are strictly regulated and often require prior FDA approval before being implemented. FDAregulations also require investigation and correction of any deviations from cGMP and impose reporting and documentation requirements upon the sponsorand any third-party manufacturers that the sponsor may decide to use. Accordingly, manufacturers must continue to expend time, money and effort in the areaof production and quality control to maintain cGMP compliance.Once an approval is granted, the FDA may withdraw the approval if compliance with regulatory requirements and standards is not maintained or ifproblems occur after the product reaches the market. Later discovery of previously unknown problems with a product, including adverse events ofunanticipated severity or frequency, or with manufacturing processes, or failure to comply with regulatory requirements, may result in mandatory revisions tothe approved labeling to add new safety information; imposition of post-market studies or clinical trials to assess new safety risks; or imposition ofdistribution or other restrictions under a REMS program. Other potential consequences include, among other things: •restrictions on the marketing or manufacturing of the product, complete withdrawal of the product from the market or product recalls; •fines, warning letters or holds on post-approval clinical trials; •refusal of the FDA to approve pending NDAs or supplements to approved NDAs, or suspension or revocation of product approvals; •product seizure or detention, or refusal to permit the import or export of products; or •injunctions or the imposition of civil or criminal penalties.17 The FDA strictly regulates marketing, labeling, advertising and promotion of products. Drugs may be promoted only for the approved indicationsand in accordance with the provisions of the approved label, although physicians, in the practice of medicine, may prescribe approved drugs for unapprovedindications. Companies may also share truthful and not misleading information that is otherwise consistent with the labeling. The FDA and other agenciesactively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label usesmay be subject to significant liability.In addition, the distribution of prescription pharmaceutical products is subject to the Prescription Drug Marketing Act, or PDMA, which regulates thedistribution of drugs and drug samples at the federal level and sets minimum standards for the registration and regulation of drug distributors by the states.Both the PDMA and state laws limit the distribution of prescription pharmaceutical product samples and impose requirements to ensure accountability indistribution.Regulation of Compounding PharmaciesCompounding is a practice in which a licensed pharmacist, a licensed physician, or in the case of an outsourcing facility, a person under thesupervision of a licensed pharmacist, combines, mixes, or alters ingredients of a drug to create a medication tailored to the needs of an individual patient.Although we are not engaged in compounding, the active pharmaceutical ingredient in our product candidate VP-102 has historically been used in thecompounding of topical pharmaceutical products, and we could be subject to competition by compounders upon approval of VP-102, subject to therequirements set forth in Sections 503A and 503B of the FDCA.Section 503A of the FDCA exempts licensed pharmacists or licensed physicians who compound products for identified, individual patients, based onthe receipt of a valid prescription order, from the FDCA’s new drug approval requirements, cGMP requirements, and the requirement to label products withadequate directions for use, provided certain conditions are met. These conditions include that the pharmacist or physician does not compound regularly orin inordinate amounts any drug product that is essentially a copy of a commercially available drug product, unless there is a difference between thecompounded product and the commercially available product that is made for an individual patient, and which the prescribing practitioner determinesproduces a significant difference for that patient. The FDA has interpreted this prohibition to mean that the compounding of a product with the same activepharmaceutical ingredient as a commercially available drug, that has the same, similar, or an easily substitutable dosage strength as the commerciallyavailable drug, and that can be used by the same route of administration as the commercially available drug, cannot be conducted under Section 503Ausually, very often, or at regular times or intervals, or more frequently or in larger quantities than needed to address unanticipated emergency circumstance,unless the limited exception described above applies.In addition, compounding under Section 503A may only use bulk drug substances that appear on a list issued by FDA through regulations, and/orthat comply with certain other conditions specified in the statute.Unlike Section 503A, Section 503B of the FDCA allows certain entities to compound drugs that are not necessarily prepared in response toprescriptions for identified, individual patients. Such facilities must register with the FDA as outsourcing facilities, and once registered (including payment ofa fee), the outsourcing facility must meet certain conditions in order to be exempt from the FDCA’s approval requirements and the requirement to labelproducts with adequate directions for use. Under Section 503B, a drug must be compounded in compliance with cGMP, by or under the direct supervision ofa licensed pharmacist in order to be so exempt. The outsourcing facility must also report specific information about the products that it compounds,including a list of all of the products it compounded during the previous six months, and information about the compounded products, such as the source ofthe active ingredients used to compound pursuant to Section 503B(b)(2). If the outsourcing facility compounds using bulk drug substances, the bulk drugsubstances must either appear on a list established by the FDA of bulk drug substances for which there is a clinical need or be used to compound drugs thatappear on a list established by the FDA of drugs for which there is a shortage. Although the FDA has not yet established a list of bulk drug substances forwhich there is a clinical need, the FDA has announced an interim policy pursuant to which bulk drug substances may be nominated for inclusion on such listand, provided certain conditions are met, outsourcing facilities may compound with such bulk drug substances pending evaluation of the substances forinclusion on the FDA’s list of bulk drug substances for which there is a clinical need. Cantharidin is currently listed among those nominated substances forwhich bulk drug substance may be used in compounding by outsourcing facilities pending18 FDA’s evaluation. In March 2019, the FDA issued Guidance for Industry addressing the criteria by which the FDA intends to evaluate whether there exists aclinical need for compounding with a bulk drug substance, including, in the case of a bulk drug substance that is a component of an FDA-approved drug, anevaluation of whether there exists an attribute of the approved drug that makes it medically unsuitable to treat certain patients; whether the drug productproposed to be compounded is intended to address that attribute; and whether the drug product proposed to be compounded must be compounded from abulk drug substance rather than from the finished, FDA-approved drug product. If FDA implements these criteria as in the Guidance for Industry, and if VP-102 is approved, an outsourcing facility would need to satisfy these criteria before being permitted to compound a cantharidin product using bulkcantharidin.In addition, an outsourcing facility must meet other conditions described in Section 503B, including reporting adverse events and labelingcompounded products with certain information. Registered outsourcing facilities are prohibited from selling compounded drugs through a wholesaledistributor, or from compounding drugs that are essentially copies of FDA-approved drugs. A drug is “essentially a copy of an approved drug” if it is identicalor nearly identical to an approved drug, which the FDA has interpreted to mean that it has the same active ingredient(s), route of administration, dosage form,dosage strength and excipients as the approved drug, or if it has the same active ingredient as an approved drug and there is not a change from the approveddrug that produces a clinical difference for an individual patient, as determined by the prescribing practitioner. Registered outsourcing facilities are subjectto FDA inspection, and FDA conducts inspections on a risk-based frequency under Section 503B(b)(4) of the FDCA.Federal and State Fraud and Abuse, Data Privacy and Security, and Transparency Laws and RegulationsIn addition to FDA restrictions on marketing of pharmaceutical products, federal and state healthcare laws and regulations restrict business practicesin the biopharmaceutical industry. These laws may impact, among other things, our current and future business operations, including our clinical researchactivities, and proposed sales, marketing and education programs and constrain the business or financial arrangements and relationships with healthcareproviders and other parties through which we market, sell and distribute our products for which we obtain marketing approval. These laws include anti-kickback and false claims laws and regulations, data privacy and security, and transparency laws and regulations, including, without limitation, those lawsdescribed below.The federal Anti-Kickback Statute prohibits, among other things, individuals or entities from knowingly and willfully offering, paying, soliciting orreceiving remuneration, directly or indirectly, overtly or covertly, in cash or in kind to induce or in return for purchasing, leasing, ordering or arranging for orrecommending the purchase, lease or order of any item or service reimbursable under Medicare, Medicaid or other federal healthcare programs. The term“remuneration” has been broadly interpreted to include anything of value. The federal Anti-Kickback Statute has been interpreted to apply to arrangementsbetween pharmaceutical manufacturers on one hand and prescribers, purchasers, formulary managers, and other individuals and entities on the other hand.Although there are a number of statutory exceptions and regulatory safe harbors protecting some common activities from prosecution, the exceptions and safeharbors are drawn narrowly and require strict compliance to offer protection. Practices that involve remuneration that may be alleged to be intended to induceprescribing, purchases or recommendations may be subject to scrutiny if they do not qualify for an exception or safe harbor.In addition, a person or entity does not need to have actual knowledge of this statute or specific intent to violate it in order to have committed aviolation. Further, the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statuteconstitutes a false or fraudulent claim for purposes of the False Claims Act and the civil monetary penalties statute.The federal civil and criminal false claims laws, including the False Claims Act, which prohibit, among other things, any individual or entity fromknowingly presenting, or causing to be presented, a false claim for payment to the federal government or knowingly making, using or causing to be made orused a false record or statement material to a false or fraudulent claim to the federal government. A claim includes “any request or demand” for money orproperty presented to the U.S. government. Several pharmaceutical and other healthcare companies have been prosecuted under these laws for allegedlyproviding free product to customers with the expectation that the customers would bill federal programs for the product. Other companies have beenprosecuted for causing false claims to be submitted because of the companies’ marketing of products for unapproved, and thus non-reimbursable, uses.19 The federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, created additional federal criminal statutes that prohibit, amongother things, knowingly and willfully executing a scheme to defraud any healthcare benefit program, including private third-party payors and knowingly andwillfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with thedelivery of or payment for healthcare benefits, items or services. Similar to the federal Anti-Kickback Statute, a person or entity does not need to have actualknowledge of the statute or specific intent to violate it in order to have committed a violation.HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, and their respective implementingregulations, impose certain requirements relating to the privacy, security and transmission of individually identifiable health information without appropriateauthorization on certain health plans, healthcare clearinghouses and certain healthcare providers, known as covered entities, and their respective businessassociates, independent contractors that perform certain services involving the use or disclosure of individually identifiable health information. HITECH alsocreated new tiers of civil monetary penalties, amended HIPAA to make civil and criminal penalties directly applicable to business associates, and gave stateattorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce HIPAA and seek attorneys’ fees and costsassociated with pursuing federal civil actions.The federal Physician Payments Sunshine Act requires certain manufacturers of drugs, devices, biologics and medical supplies for which payment isavailable under Medicare, Medicaid or the Children’s Health Insurance Program, with specific exceptions, to report annually to the Centers for Medicare &Medicaid Services, or CMS, information related to payments or other transfers of value made to physicians and teaching hospitals, and applicablemanufacturers and applicable group purchasing organizations to report annually to CMS ownership and investment interests held by physicians and theirimmediate family members.We may also be subject to state and foreign law equivalents of each of the above federal laws; state laws that require manufacturers to reportinformation related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures; state laws that requirepharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidancepromulgated by the federal government, or that otherwise restrict payments that may be made to healthcare providers; state laws that require reporting ofinformation related to drug pricing; state and local laws that require the registration of pharmaceutical sales representatives; as well as state and foreign lawsthat govern the privacy and security of health information in some circumstances, many of which differ from each other in significant ways and often are notpreempted by HIPAA, thus complicating compliance efforts.Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involvesubstantial costs. Because of the breadth of these laws and the narrowness of the statutory exceptions and regulatory safe harbors available, it is possible thatsome of our business activities could be subject to challenge under one or more of such laws. It is possible that governmental authorities will conclude thatour business practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare lawsand regulations. If our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may besubject to significant civil, criminal and administrative penalties, damages, fines, disgorgement, imprisonment, exclusion from participating in governmentfunded healthcare programs, such as Medicare and Medicaid, additional reporting requirements and oversight if we become subject to a corporate integrityagreement or similar agreement to resolve allegations of non-compliance with these laws, contractual damages, reputational harm and the curtailment orrestructuring of our operations. To the extent that any of our products are sold in a foreign country, we may be subject to similar foreign laws and regulations,which may include, for instance, applicable post-marketing requirements, including safety surveillance, anti-fraud and abuse laws and implementation ofcorporate compliance programs and reporting of payments or transfers of value to healthcare professionals.20 Coverage and ReimbursementMarket acceptance and sales of any drug products depend in part on coverage and the extent to which adequate reimbursement for drug products willbe available from third-party payors, including government health administration authorities, managed care organizations and other private health insurers.Coverage and reimbursement for our product also depends on coverage and adequate reimbursement for the procedures using VP-102 for the treatment ofmolluscum and/or common warts. Obtaining coverage and adequate reimbursement for our products may be particularly difficult because of the higher pricesoften associated with drugs administered under the supervision of a physician. Separate reimbursement for the product itself or the treatment or procedure inwhich our product is used may not be available. Even if the procedure using our product is covered, third-party payors may package the cost of the drug intothe procedure payment and not separately reimburse the physician for the costs associated with our product. A decision by a third-party payor not to cover orseparately reimburse for our products could reduce physician utilization of our products once approved. Additionally, in the United States, there is nouniform policy of coverage and reimbursement among third-party payors. Third-party payors often rely upon Medicare coverage policy and paymentlimitations in setting their own coverage and reimbursement policies. However, decisions regarding the extent of coverage and amount of reimbursement tobe provided is made on a payor-by-payor basis. One payor’s determination to provide coverage for a drug product does not assure that other payors will alsoprovide coverage, and adequate reimbursement.Third-party payors determine which medical procedures they will cover and establish reimbursement levels. Even if a third-party payor covers aparticular procedure, the resulting reimbursement payment rates may not be adequate. Patients who are treated in-office for a medical condition generally relyon third-party payors to reimburse all or part of the costs associated with the procedure and may be unwilling to undergo such procedures for the treatment ofmolluscum and/or common warts in the absence of such coverage and adequate reimbursement.Reimbursement by a third-party payor may depend upon a number of factors, including the third-party payor’s determination that a procedure is safe,effective, and medically necessary; appropriate for the specific patient; cost-effective; supported by peer-reviewed medical journals; included in clinicalpractice guidelines; and neither cosmetic, experimental, nor investigational.Further, from time to time, typically on an annual basis, payment rates are updated and revised by third-party payors. Such updates could impact thedemand for our product candidates, to the extent that customers who are prescribed our product candidates, if approved, are not separately reimbursed for thecost of the product candidates. An example of payment updates is the Medicare program updates to physician payments, which is done on an annual basis. Inthe past, when the application of the formula resulted in lower payment, Congress has passed interim legislation to prevent the reductions. The MedicareAccess and CHIP Reauthorization Act of 2015, or MACRA, ended the use of the statutory formula and provided for a 0.5% annual increase in payment ratesunder the Medicare Physician Fee Schedule through 2019, but no annual update from 2020 through 2025. MACRA also introduced a merit-based incentivebonus program for Medicare physicians beginning in 2019. At this time, it is unclear how the introduction of the merit-based incentive program will impactoverall physician reimbursement under the Medicare program.Impact of Healthcare Reform on our BusinessIn the United States and some foreign jurisdictions, there have been, and continue to be, several legislative and regulatory changes and proposedchanges regarding the healthcare system that could prevent or delay marketing approval of drug product candidates, restrict or regulate post-approvalactivities, and affect the profitable sale of drug product candidates.21 Among policy makers and payors in the United States and elsewhere, there is significant interest in promoting changes in healthcare systems with thestated goals of containing healthcare costs, improving quality and/or expanding access. In the United States, the pharmaceutical industry has been aparticular focus of these efforts and has been significantly affected by major legislative initiatives. In March 2010, the Patient Protection and Affordable CareAct, as amended by the Health Care and Education Reconciliation Act, or collectively, the ACA, was passed, which substantially changed the way healthcareis financed by both the government and private insurers, and significantly impacts the U.S. pharmaceutical industry. The ACA, among other things: (i)increased the minimum Medicaid rebates owed by manufacturers under the Medicaid Drug Rebate Program and extends the rebate program to individualsenrolled in Medicaid managed care organizations; (ii) established an annual, nondeductible fee on any entity that manufactures or imports certain specifiedbranded prescription drugs and biologic agents apportioned among these entities according to their market share in some government healthcare programs;(iii) expanded the availability of lower pricing under the 340B drug pricing program by adding new entities to the program; (iv) increased the statutoryminimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program, to 23.1% and 13% of the average manufacturer price for most brandedand generic drugs, respectively and capped the total rebate amount for innovator drugs at 100% of the Average Manufacturer Price, or AMP; (v) expanded theeligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to additional individuals, thereby potentiallyincreasing manufacturers’ Medicaid rebate liability; (vi) created a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, andconduct comparative clinical effectiveness research, along with funding for such research; and (vii) established a Center for Medicare and MedicaidInnovation at CMS to test innovative payment and service delivery models to lower Medicare and Medicaid spending, potentially including prescriptiondrug.Some of the provisions of the ACA have yet to be implemented, and there have been judicial and Congressional challenges to certain aspects of theACA, as well as recent efforts by the Trump administration to repeal or replace certain aspects of the ACA. While Congress has not passed comprehensiverepeal legislation, bills affecting the implementation of certain taxes under the ACA have been signed into law. The Tax Cuts and Jobs Act of 2017, or TaxAct, includes a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment imposed by the ACA on certain individuals whofail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate”. On January 22, 2018, PresidentTrump signed a continuing resolution on appropriations for fiscal year 2018 that delayed the implementation of certain ACA-mandated fees, including theso-called “Cadillac” tax on certain high cost employer-sponsored insurance plans, the annual fee imposed on certain health insurance providers based onmarket share, and the medical device excise tax on non-exempt medical devices. Further, the Bipartisan Budget Act of 2018, or the BBA, among other things,amends the ACA, effective January 1, 2019, to close the coverage gap in most Medicare drug plans, commonly referred to as the “donut hole.” In July 2018,CMS published a final rule permitting further collections and payments to and from certain ACA qualified health plans and health insurance issuers under theACA risk adjustment program in response to the outcome of federal district court litigation regarding the method CMS uses to determine this risk adjustment.On December 14, 2018, a Texas U.S. District Court Judge ruled that the ACA is unconstitutional in its entirety because the “individual mandate” wasrepealed by Congress as part of the Tax Act. While the Texas U.S. District Court Judge, as well as the Trump administration and CMS, have stated that theruling will have no immediate effect pending appeal of the decision, it is unclear how this decision, subsequent appeals, and other efforts to repeal andreplace the ACA will impact the ACA.Other legislative changes have been proposed and adopted since the ACA was enacted. These changes include aggregate reductions to Medicarepayments to providers of 2% per fiscal year pursuant to the Budget Control Act of 2011, which began in 2013, and due to subsequent legislative amendmentsto the statute, including the BBA, will remain in effect through 2027 unless additional Congressional action is taken. The American Taxpayer Relief Act of2012, among other things, further reduced Medicare payments to several providers, including hospitals and cancer treatment centers, and increased thestatute of limitations period for the government to recover overpayments to providers from three to five years. These new laws may result in additionalreductions in Medicare and other healthcare funding, which could have an adverse effect on customers for our product candidates, if approved, and,accordingly, our financial operations.22 Additionally, there has been heightened governmental scrutiny in the United States of pharmaceutical pricing practices in light of the rising cost ofprescription drugs and biologics. Such scrutiny has resulted in several recent congressional inquiries and proposed and enacted federal and state legislationdesigned to, among other things, bring more transparency to product pricing, review the relationship between pricing and manufacturer patient programs, andreform government program reimbursement methodologies for products. At the federal level, the Trump administration’s budget proposal for fiscal year 2019contains further drug price control measures that could be enacted during the 2019 budget process or in other future legislation, including, for example,measures to permit Medicare Part D plans to negotiate the price of certain drugs under Medicare Part B, to allow some states to negotiate drug prices underMedicaid, and to eliminate cost sharing for generic drugs for low-income patients. Additionally, the Trump administration released a “Blueprint” to lowerdrug prices and reduce out of pocket costs of drugs that contains additional proposals to increase manufacturer competition, increase the negotiating powerof certain federal healthcare programs, incentivize manufacturers to lower the list price of their products and reduce the out of pocket costs of drug productspaid by consumers. The Department of Health and Human Services, or HHS, has already started the process of soliciting feedback on some of these measuresand, at the same, is immediately implementing others under its existing authority. For example, in September 2018, CMS announced that it will allowMedicare Advantage Plans the option to use step therapy for Part B drugs beginning January 1, 2019, and in October 2018, CMS proposed a new rule thatwould require direct-to-consumer television advertisements of prescription drugs and biological products, for which payment is available through or underMedicare or Medicaid, to include in the advertisement the Wholesale Acquisition Cost, or list price, of that drug or biological product. On January 31, 2019,the HHS Office of Inspector General proposed modifications to federal Anti-Kickback Statute safe harbors which, among other things, may affect rebates paidby manufacturers to Medicare Part D plans, the purpose of which is to further reduce the cost of drug products to consumers. While a number of these andother proposed measures will require authorization through additional legislation to become effective, Congress and the Trump administration have eachindicated that it will continue to seek new legislative and/or administrative measures to control drug costs. At the state level, legislatures are increasinglypassing legislation and implementing regulations designed to control pharmaceutical and biological product pricing, including price or patientreimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases,designed to encourage importation from other countries and bulk purchasing.Further, on May 30, 2018, the Trickett Wendler, Frank Mongiello, Jordan McLinn, and Matthew Bellina Right to Try Act of 2017, or the Right toTry Act, was signed into law. The law, among other things, provides a federal framework for certain patients to access certain investigational new drugproducts that have completed a Phase I clinical trial and that are undergoing investigation for FDA approval. Under certain circumstances, eligible patientscan seek treatment without enrolling in clinical trials and without obtaining FDA permission under the FDA expanded access program. There is no obligationfor a pharmaceutical manufacturer to make its drug products available to eligible patients as a result of the Right to Try Act.EmployeesAs of December 31, 2018, we had 16 full-time employees. All of our employees are located in the United States. None of our employees is representedby a labor union or covered by a collective bargaining agreement. We consider our relationship with our employees to be good.InsuranceWe currently maintain product liability insurance coverage for our products and clinical trials in amounts consistent with industry standards.However, insurance coverage is becoming increasingly expensive, and we may not be able to obtain or maintain insurance coverage at a reasonable cost or insufficient amounts to protect us against losses due to liability.23 Corporate InformationWe were incorporated under the laws of the State of Delaware on July 3, 2013. Our principal executive offices are located at 10 North High Street,Suite 200, West Chester, PA 19380 and our telephone number is (484) 453-3300.Available InformationOur internet website address is www.verrica.com. In addition to the information about us and our subsidiaries contained in this Annual Report,information about us can be found on our website. Our website and information included in or linked to our website are not part of this Annual Report.Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnishedpursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge through our website as soon as reasonablypracticable after they are electronically filed with or furnished to the Securities and Exchange Commission, or SEC. Additionally the SEC maintains aninternet site that contains reports, proxy and information statements and other information. The address of the SEC's website is www.sec.gov. 24 ITEM 1A. RISK FACTORSYou should carefully consider the risks described below, as well as general economic and business risks and the other information in this AnnualReport on Form 10-K. The occurrence of any of the events or circumstances described below or other adverse events could have a material adverse effect onour business, results of operations and financial condition and could cause the trading price of our common stock to decline. Additional risks oruncertainties not presently known to us or that we currently deem immaterial may also harm our business.Risks Related to Our Financial Position and Capital NeedsWe have incurred significant losses since our inception. We expect to incur losses over the next several years and may never achieve or maintainprofitability.We are a clinical-stage medical dermatology company with limited operating history. Since inception, we have incurred significant net losses. Weincurred net losses of $20.6 million and $4.5 million for the years ended December 31, 2018 and 2017, respectively. As of December 31, 2018, we had anaccumulated deficit of $33.1 million. Since inception, we have financed our operations with $123.2 million in gross proceeds raised in our initial publicoffering and private placements of convertible debt and convertible preferred stock. We have no products approved for commercialization and have nevergenerated any revenue.We have devoted substantially all of our financial resources and efforts to the development of our novel topical solution of cantharidin and our leadproduct candidate, VP-102, for the treatment of molluscum, including preclinical studies and clinical trials. We have completed one Phase 2 clinical trial andtwo Phase 3 clinical trials with VP-102 for the treatment of molluscum. We also completed one Phase 2 clinical trials in molluscum with our proprietarycantharidin formulation, which we use in VP-102, administered with the wooden stick part of a cotton-tipped swab. In addition to developing VP-102 for thetreatment of molluscum, we are also developing VP-102 as a treatment for common warts and have an ongoing Phase 2 clinical trial for this indication. Wealso intend to develop VP-102 as a treatment for external genital warts and our second cantharidin-based product candidate, VP-103, for the treatment ofplantar warts. Therefore, we expect to continue to incur significant expenses and operating losses over the next several years. Our net losses may fluctuatesignificantly from quarter to quarter and year to year. We anticipate that our expenses will increase substantially as we: •continue our ongoing clinical programs evaluating VP-102 for the treatment of molluscum and common warts as well as initiate andcomplete additional clinical trials, as needed; •initiate clinical trials evaluating VP-102 for the treatment of external genital warts; •pursue an IND and initiate clinical trials evaluating VP-103 for the treatment of plantar warts; •pursue regulatory approvals for VP-102 for the treatment of molluscum, and eventually for the treatment of common warts, external genitalwarts or any other indications we may pursue for VP-102, as well as for VP-103; •seek to discover and develop additional product candidates; •ultimately establish a commercialization infrastructure and scale up external manufacturing and distribution capabilities to commercializeany product candidates for which we may obtain regulatory approval, including VP-102 and VP-103; •seek to in-license or acquire additional product candidates for other dermatological conditions; •adapt our regulatory compliance efforts to incorporate requirements applicable to marketed products; •maintain, expand and protect our intellectual property portfolio; •hire additional clinical, manufacturing and scientific personnel; •add operational, financial and management information systems and personnel, including personnel to support our product development andplanned future commercialization efforts; and •incur additional legal, accounting and other expenses in operating as a newly public company.25 To become and remain profitable, we must succeed in developing and eventually commercializing product candidates that generate significantrevenue. This will require us to be successful in a range of challenging activities, including completing preclinical testing and clinical trials of our productcandidates, obtaining regulatory approval, and manufacturing, marketing and selling any product candidates for which we may obtain regulatory approval,as well as discovering and developing additional product candidates. We are only in the preliminary stages of most of these activities. We may never succeedin these activities and, even if we do, may never generate revenue that is significant enough to achieve profitability.In cases where we are successful in obtaining regulatory approval to market one or more of our product candidates, our revenue will be dependent, inpart, upon the size of the markets in the territories for which we gain regulatory approval, the accepted price for the product, the ability to obtain coverageand reimbursement, and whether we own the commercial rights for that territory. If the number of our addressable patients is not as significant as we estimate,the indication approved by regulatory authorities is narrower than we expect, or the treatment population is narrowed by competition, physician choice ortreatment guidelines, we may not generate significant revenue from sales of such products, even if approved.Because of the numerous risks and uncertainties associated with product development, we are unable to accurately predict the timing or amount ofexpenses or when, or if, we will be able to achieve profitability. If we are required by regulatory authorities to perform studies in addition to those expected,or if there are any delays in the initiation and completion of our clinical trials or the development of any of our product candidates, our expenses couldincrease.Even if we achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become andremain profitable would depress the value of our company and could impair our ability to raise capital, expand our business, maintain our developmentefforts, obtain product approvals, diversify our offerings or continue our operations.We may need substantial additional funding to meet our financial obligations and to pursue our business objectives. If we are unable to raise capital whenneeded, we could be forced to curtail our planned operations and the pursuit of our growth strategy.Identifying potential product candidates and conducting preclinical testing and clinical trials is a time-consuming, expensive and uncertain processthat takes years to complete, and we may never generate the necessary data or results required to obtain regulatory approval and achieve product sales. Weexpect to continue to incur significant expenses and operating losses over the next several years as we seek marketing approval for VP-102 for the treatmentof molluscum, pursue clinical trials and marketing approval for VP-102 for the treatment of common warts, external genital warts and other indications,pursue clinical trials and marketing approval for VP-103 for the treatment of plantar warts and advance any of our other product candidates we may developor otherwise acquire. In addition, our product candidates, if approved, may not achieve commercial success. Our revenue, if any, will be derived from sales ofproducts that we do not expect to be commercially available for a number of years, if at all. If we obtain marketing approval for VP-102 for the treatment ofmolluscum or common warts or any other product candidates that we develop, we expect to incur significant commercialization expenses related to productsales, marketing, distribution and manufacturing. We also expect an increase in our expenses associated with creating additional infrastructure to supportoperations as a newly public company.26 As of December 31, 2018, we had cash, cash equivalents and marketable securities of $89.8 million. We believe that our existing cash, cashequivalents and marketable securities, will enable us to fund our operating expenses and capital expenditure requirements at least through the end of 2020.This estimate is based on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we expect. Changes mayoccur beyond our control that would cause us to consume our available capital before that time, including changes in and progress of our developmentactivities, acquisitions of additional product candidates, and changes in regulation. Our future capital requirements will depend on many factors, including: •the progress and results of our Phase 2 clinical trial and any other additional clinical trials evaluating VP-102 as a potential treatment forcommon warts; •the scope, progress, results and costs of the development program evaluating VP-102 as a potential treatment for external genital warts; •the scope, progress, results and costs of preclinical development, laboratory testing and clinical trials for VP-103 and any other indications ofVP-102 we may decide to pursue; •the extent to which we develop, in-license or acquire other product candidates and technologies; •the number and development requirements of other product candidates that we may pursue; •the costs, timing and outcome of regulatory review of our product candidates; •the costs and timing of future commercialization activities, including product manufacturing, marketing, sales and distribution, for any ofour product candidates for which we receive marketing approval; •the revenue, if any, received from commercial sales of our product candidates for which we receive marketing approval; •our ability to establish collaborations to commercialize VP-102 or any of our other product candidates outside the United States; and •the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights anddefending any intellectual property-related claims.We may require additional capital to commercialize VP-102 for the treatment of molluscum, common warts and/or external genital warts, and/or VP-103 for the treatment of plantar warts. If we receive regulatory approval for VP-102 and/or VP-103 for these indications, we expect to incur significantcommercialization expenses related to product manufacturing, sales, marketing and distribution, depending on where we choose to commercialize.Additional funds may not be available on a timely basis, on favorable terms, or at all, and such funds, if raised, may not be sufficient to enable us to continueto implement our long-term business strategy. If we are unable to raise sufficient additional capital, we could be forced to curtail our planned operations andthe pursuit of our growth strategy.Raising additional capital may cause dilution to our stockholders, restrict our operations or require us to relinquish rights to our technologies or productcandidates.Until such time, if ever, as we can generate substantial revenue, we may finance our cash needs through a combination of equity offerings, debtfinancings and license and collaboration agreements. We do not currently have any committed external source of funds. To the extent that we raise additionalcapital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms of these securities may includeliquidation or other preferences that adversely affect your rights as a common stockholder. Debt financing and preferred equity financing, if available, mayinvolve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capitalexpenditures or declaring dividends.If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we maybe required to relinquish valuable rights to our technologies, future revenue streams or product candidates or grant licenses on terms that may not befavorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce orterminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwiseprefer to develop and market ourselves.27 We have a limited operating history and no history of commercializing products, which may make it difficult for you to evaluate the success of our businessto date and to assess our future viability.We commenced operations in 2013, and our operations to date have been largely focused on raising capital and developing our novel topicalsolution of cantharidin and our lead product candidate, VP-102, for the treatment of molluscum and common warts, including undertaking preclinical studiesand conducting clinical trials. VP-102 is our only product candidate for which we have conducted clinical trials. To date, we have completed one Phase 2clinical trial and two Phase 3 clinical trials with VP-102 for the treatment of molluscum. We also completed one Phase 2 clinical trial in molluscum with ourproprietary cantharidin formulation, which we use in VP-102, administered with the wooden stick part of a cotton-tipped swab. In addition to developing VP-102 for the treatment of molluscum, we are also developing VP-102 as a treatment for common warts and have an ongoing Phase 2 clinical trial for thisindication. We have not yet demonstrated our ability to successfully obtain regulatory approvals, manufacture a product on a commercial scale, or arrange fora third party to do so on our behalf, or conduct sales and marketing activities necessary for successful commercialization. Consequently, any predictions youmake about our future success or viability may not be as accurate as they could be if we had a longer operating history or a history of successfully developingand commercializing products.We may encounter unforeseen expenses, difficulties, complications, delays and other known or unknown factors in achieving our businessobjectives. We will need to transition at some point from a company with a development focus to a company capable of supporting commercial activities. Wemay not be successful in such a transition.Risks Related to the Development of Our Product CandidatesWe have only one product candidate, VP-102, for the treatment of molluscum and common warts, for which we are currently conducting clinical trials. Ifwe are unable to successfully develop, receive regulatory approval for and commercialize VP-102 for the treatment of molluscum and/or common warts orany other indications, or successfully develop any other product candidates, or experience significant delays in doing so, our business will be harmed.We currently have no products that are approved for commercial sale. We have only one product candidate, VP-102, for which we have conductedclinical trials. To date, we have completed one Phase 2 clinical trial and two Phase 3 clinical trials with VP-102 for the treatment of molluscum. We alsocompleted one Phase 2 clinical trial in molluscum with our proprietary cantharidin formulation, which we use in VP-102, administered with the wooden stickpart of a cotton-tipped swab. In addition to developing VP-102 for the treatment of molluscum, we are also developing VP-102 as a treatment for commonwarts and have an ongoing Phase 2 clinical trial for this indication. We also intend to develop VP-102 as a treatment for external genital warts and our secondcantharidin-based product candidate, VP-103, for the treatment of plantar warts. We have not completed the development and regulatory approval process ofany product candidates and we may never be able to develop marketable products. We have invested substantially all of our efforts and financial resources inthe development of our cantharidin formula and VP-102 for the treatment of molluscum and common warts. Our ability to generate revenue from our productcandidates, which we do not expect will occur for a number of years, if ever, will depend heavily on their successful development, regulatory approval andeventual commercialization of these product candidates. The success of VP-102, VP-103 or any other product candidates that we develop or otherwise mayacquire will depend on several factors, including: •timely and successful completion of preclinical studies and our clinical trials; •successful development of, or making arrangements with third-party manufacturers for, our commercial manufacturing processes for any ofour product candidates that receive regulatory approval; •receipt of timely marketing approvals from applicable regulatory authorities; •launching commercial sales of products, if approved; •acceptance of our products, if approved, by patients, the medical community and third-party payors, for their approved indications;28 •our success in educating physicians and patients about the benefits, administration and use of VP-102 or any other product candidates, ifapproved; •the prevalence and severity of adverse events experienced with VP-102 or our other product candidates; •the availability, perceived advantages, cost, safety and efficacy of alternative treatments for molluscum and/or common warts or any otherindications which we may pursue for VP-102 or any other product candidates; •our ability to produce VP-102 or any other product candidates on a commercial scale; •obtaining and maintaining patent, trademark and trade secret protection and regulatory exclusivity for our product candidates and otherwiseprotecting our rights in our intellectual property portfolio; •maintaining compliance with regulatory requirements, including current good manufacturing practices, or cGMPs; •competing effectively with other procedures; and •maintaining a continued acceptable safety, tolerability and efficacy profile of the products following approval.Whether regulatory approval will be granted is unpredictable and depends upon numerous factors, including the substantial discretion of theregulatory authorities. Our product candidates’ success in clinical trials is not guaranteed, and even if clinical trials are successful, it will not guaranteeregulatory approval. Following submission of our NDA for VP-102 for the treatment of molluscum or common warts or any other product candidate, the NDAmay not be accepted for substantive review, or even if it is accepted for substantive review, the FDA or other comparable foreign regulatory authorities mayrequire that we conduct additional studies or clinical trials, provide additional data, take additional manufacturing steps, or require other conditions beforethey will reconsider or approve our application. If the FDA or other comparable foreign regulatory authorities require additional studies, clinical trials or data,we would incur increased costs and delays in the marketing approval process, which may require us to expend more resources than we have available. Inaddition, the FDA or other comparable foreign regulatory authorities may not consider sufficient any additional required studies, clinical trials, data orinformation that we perform and complete or generate, or we may decide to abandon the program.It is possible that VP-102 or any of our other product candidates we may develop or otherwise acquire will never obtain regulatory approval, even ifwe expend substantial time and resources seeking such approval. If we do not achieve one or more of these factors in a timely manner or at all, we couldexperience significant delays or an inability to successfully commercialize our product candidates, which would harm our business.Clinical product development involves a lengthy and expensive process, with an uncertain outcome. We may incur additional costs or experience delays incompleting, or ultimately be unable to complete, the development and commercialization of our product candidates.The risk of failure for product candidates is high. It is impossible to predict when or if any of our product candidates will prove effective or safe inhumans or will receive regulatory approval. Before obtaining marketing approval from regulatory authorities for the sale of any product candidate, we mustcomplete preclinical development and then conduct extensive clinical trials to demonstrate the safety and efficacy of our product candidates in humans.Clinical testing is expensive, difficult to design and implement, can take many years to complete and is inherently uncertain as to outcome. A failure of oneor more clinical trials can occur at any stage of testing or at any time during the trial process. The outcome of preclinical testing and early clinical trials maynot be predictive of the results of later clinical trials, and interim results of a clinical trial do not necessarily predict final results. Moreover, preclinical andclinical data are often susceptible to varying interpretations and analyses, and many companies that have believed their product candidates performedsatisfactorily in preclinical studies and clinical trials have nonetheless failed to obtain marketing approval of their products.29 In January 2019, we reported positive top-line results from our Phase 3 CAMP-1 and CAMP-2 pivotal trials with VP-102 for the treatment ofmolluscum. Both clinical trials evaluated the safety and efficacy of VP-102 compared to placebo. In each trial, VP-102 exhibited a clinically and statisticallysignificant proportion of subjects demonstrating complete clearance of all treatable molluscum lesions versus placebo. VP-102 was well-tolerated in bothtrials, with no serious adverse events reported in VP-102 treated subjects. We plan to submit an NDA to the FDA for VP-102 for the treatment of molluscum inthe second half of 2019. CAMP-1 was conducted under a SPA with the FDA. We also have an ongoing Phase 2 clinical trial of VP-102 for the treatment ofcommon warts. We cannot assure you that any clinical trial that we have conducted, are currently conducting, or may conduct in the future, will demonstrateconsistent or adequate efficacy and safety to obtain regulatory approval to market our product candidates.We may experience delays in ongoing clinical trials for our product candidates, and we do not know whether future clinical trials, if any, will beginon time, need to be redesigned, enroll an adequate number of patients on time or be completed on schedule, if at all. For example, following the initiation ofour Phase 2 trial of VP-102 for the treatment of common warts, we discovered the need to amend the treatment regimen of the protocol in order to introducegreater flexibility of the treatment interval. We amended the trial protocol in order to add a second cohort to the trial with the desired treatment frequency.We may experience numerous unforeseen events during or as a result of clinical trials that could delay or prevent our ability to receive marketing approval orcommercialize our product candidates, including: •regulators or institutional review boards may not authorize us or our investigators to commence a clinical trial or conduct a clinical trial at aprospective trial site; •we may experience delays in reaching, or fail to reach, agreement on acceptable clinical trial contracts or clinical trial protocols withprospective trial sites or prospective contract research organizations, or CROs, the terms of which can be subject to extensive negotiation andmay vary significantly among different CROs and trial sites; •clinical trials of our product candidates may produce negative or inconclusive results, including failure to demonstrate statisticalsignificance, and we may decide, or regulators may require us, to conduct additional clinical trials or abandon product developmentprograms; •the number of patients required for clinical trials of our product candidates may be larger than we anticipate, enrollment in these clinicaltrials may be slower than we anticipate, or participants may drop out of these clinical trials or fail to return for post-treatment follow-up at ahigher rate than we anticipate; •our product candidates may have undesirable side effects or other unexpected characteristics, causing us or our investigators, regulators orinstitutional review boards to suspend or terminate the trials; •our third-party contractors may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner, orat all; •regulators or institutional review boards may require that we or our investigators suspend or terminate clinical development for variousreasons, including noncompliance with regulatory requirements or a finding that the participants are being exposed to unacceptable healthrisks; •the cost of clinical trials of our product candidates may be greater than we anticipate; and •the supply or quality of our product candidates or other materials necessary to conduct clinical trials of our product candidates may beinsufficient or inadequate.We could also encounter delays if a clinical trial is suspended or terminated by us, by the institutional review boards of the institutions in which suchtrials are being conducted, by the data safety monitoring board for such trial or by the FDA or other regulatory authorities. Such authorities may impose sucha suspension or termination due to a number of factors, including failure to conduct the clinical trial in accordance with regulatory requirements or ourclinical protocols, inspection of the clinical trial operations or trial site by the FDA or other regulatory authorities resulting in the imposition of a clinicalhold, unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using a product, changes in governmental regulations oradministrative actions or lack of adequate funding to continue the clinical trial. If we experience delays in the completion of, or termination of, any clinical30 trial of our product candidates, the commercial prospects of our product candidates will be harmed, and our ability to generate product revenues from any ofthese product candidates will be delayed. In addition, any delays in completing our clinical trials will increase our costs, slow down our product candidatedevelopment and approval process and jeopardize our ability to commence product sales and generate revenues. Any of these occurrences may harm ourbusiness, financial condition and prospects significantly. In addition, many of the factors that cause, or lead to, a delay in the commencement or completionof clinical trials may also ultimately lead to the denial of regulatory approval of our product candidates. If we are required to conduct additional clinical trialsor other testing of our product candidates beyond those that we currently contemplate, if we are unable to successfully complete clinical trials of our productcandidates or other testing, if the results of these trials or tests are not favorable or if there are safety concerns, we may: •be delayed in obtaining marketing approval for our product candidates; •not obtain marketing approval at all; •obtain approval for indications or patient populations that are not as broad as intended or desired; •obtain approval with labeling that includes significant use or distribution restrictions or safety warnings; •be subject to additional post-marketing testing requirements; or •have the product removed from the market after obtaining marketing approval.Our product development costs will also increase if we experience delays in testing or marketing approvals. We do not know whether any of ourpreclinical studies or clinical trials will begin as planned, will need to be restructured or will be completed on schedule, or at all. Significant preclinical studyor clinical trial delays also could shorten any periods during which we may have the exclusive right to commercialize our product candidates or allow ourcompetitors to bring products to market before we do and impair our ability to successfully commercialize, or receive approval for, our product candidates.For example, if a competitor obtained FDA approval for a product containing cantharidin before we are able to obtain approval for our product, this couldresult in the approval of our product being delayed until the expiration of any NCE exclusivity or other regulatory exclusivity received by such competitor.If we experience delays or difficulties in the enrollment and/or maintenance of patients in clinical trials, our receipt of necessary regulatory approvalscould be delayed or prevented.Successful and timely completion of clinical trials will require that we enroll a sufficient number of patients. Patient enrollment, a significant factorin the timing of clinical trials, is affected by many factors including the size and nature of the patient population. Trials may be subject to delays as a result ofpatient enrollment taking longer than anticipated or patient withdrawal. We may not be able to initiate or continue clinical trials for our product candidates ifwe are unable to locate and enroll a sufficient number of eligible patients to participate in these trials as required by the FDA or similar regulatory authoritiesoutside the United States. We cannot predict how successful we will be at enrolling subjects in future clinical trials. Subject enrollment is affected by otherfactors including: •the eligibility criteria for the trial in question; •the perceived risks and benefits of the product candidate in the trial; •the availability of products and other treatments to treat the skin disease in the trial; •the willingness of patients to be enrolled in our clinical trials; •the efforts to facilitate timely enrollment in clinical trials; •the patient referral practices of physicians; •the ability to monitor patients adequately during and after treatment; and •the proximity and availability of clinical trial sites for prospective patients.31 Our inability to enroll a sufficient number of patients for clinical trials would result in significant delays and could require us or them to abandon oneor more clinical trials altogether. For example, parents may be reluctant to enroll their children in our clinical trials that have a relatively high risk of theirchild being assigned to placebo when in the alternative, they could decline participation, and receive compounded cantharidin outside of the clinical trial, ifavailable, or pursue other alternative therapies. Enrollment delays in these clinical trials may result in increased development costs for our productcandidates, which would cause the value of our company to decline and limit our ability to obtain additional financing. Furthermore, we rely on and expectto continue to rely on CROs and clinical trial sites to ensure the proper and timely conduct of our clinical trials and we will have limited influence over theirperformance.Furthermore, even if we are able to enroll a sufficient number of patients for our clinical trials, we may have difficulty maintaining patients in ourclinical trials.Success in preclinical studies or earlier clinical trials may not be indicative of results in future clinical trials.Success in preclinical testing and early clinical trials does not ensure that later clinical trials will generate the same results or otherwise provideadequate data to demonstrate the efficacy and safety of a product candidate. Preclinical tests and Phase 1 and Phase 2 clinical trials are primarily designed totest safety, to study pharmacokinetics and pharmacodynamics and to understand the side effects of product candidates at various doses and schedules.Success in preclinical or animal studies and early clinical trials does not ensure that later large-scale efficacy trials will be successful, nor does it predict finalresults. Our product candidates may fail to show the desired safety and efficacy in clinical development despite positive results in preclinical studies orhaving successfully advanced through initial clinical trials.In addition, the design of a clinical trial can determine whether its results will support approval of a product and flaws in the design of a clinical trialmay not become apparent until the clinical trial is well advanced. As an organization, we have limited experience designing clinical trials and may be unableto design and execute a clinical trial to support regulatory approval. Many companies in the pharmaceutical and biotechnology industries have sufferedsignificant setbacks in late-stage clinical trials even after achieving promising results in preclinical testing and earlier-stage clinical trials. Data obtained frompreclinical and clinical activities are subject to varying interpretations, which may delay, limit or prevent regulatory approval. In addition, we mayexperience regulatory delays or rejections as a result of many factors, including changes in regulatory policy during the period of our product candidatedevelopment. Any such delays could negatively impact our business, financial condition, results of operations and prospects.Interim “top-line” and preliminary results from our clinical trials that we announce or publish from time to time may change as more patient data becomeavailable and are subject to audit and verification procedures that could result in material changes in the final data.From time to time, we may publish interim top-line or preliminary results from our clinical trials. Interim results from clinical trials that we maycomplete are subject to the risk that one or more of the clinical outcomes may materially change as patient enrollment continues and more patient databecome available. Preliminary or top-line results also remain subject to audit and verification procedures that may result in the final data being materiallydifferent from the preliminary data we previously published. As a result, interim and preliminary data should be viewed with caution until the final data areavailable. Differences between preliminary or interim data and final data could significantly harm our business prospects and may cause the trading price ofour common stock to fluctuate significantly.Our clinical trials may fail to demonstrate the safety and efficacy of our product candidates, or serious adverse or unacceptable side effects may beidentified during the development of our product candidates, which could prevent or delay regulatory approval and commercialization, increase our costsor necessitate the abandonment or limitation of the development of some of our product candidates.Before obtaining regulatory approvals for the commercial sale of our product candidates, we must demonstrate through lengthy, complex andexpensive preclinical testing and clinical trials that our product candidates are both safe and effective for use in each target indication, and failures can occurat any stage of testing. Clinical trials often fail to demonstrate safety and efficacy of the product candidate studied for the target indication.32 If our product candidates are associated with side effects in clinical trials or have characteristics that are unexpected, we may need to abandon theirdevelopment or limit development to more narrow uses in which the side effects or other characteristics are less prevalent, less severe or more acceptable froma risk-benefit perspective. The FDA or an institutional review board may also require that we suspend, discontinue, or limit our clinical trials based on safetyinformation, or that we conduct additional animal or human studies regarding the safety and efficacy of our product candidates which we have not planned oranticipated. Such findings could further result in regulatory authorities failing to provide marketing authorization for our product candidates or limiting thescope of the approved indication, if approved. Many product candidates that initially showed promise in early stage testing have later been found to causeside effects that prevented further development of the product candidate.Additionally, if one or more of our product candidates receives marketing approval, and we or others identify undesirable side effects caused by suchproducts, a number of potentially significant negative consequences could result, including: •regulatory authorities may withdraw approvals of such product; •regulatory authorities may require additional warnings on the labels; •we may be required to create a medication guide outlining the risks of such side effects for distribution to patients; •we could be sued and held liable for harm caused to patients; and •our reputation and physician or patient acceptance of our products may suffer.There can be no assurance that we will resolve any issues related to any product-related adverse events to the satisfaction of the FDA or anyregulatory agency in a timely manner or at all. Moreover, any of these events could prevent us from achieving or maintaining market acceptance of theparticular product candidate, if approved, and could significantly harm our business, results of operations and prospects.While we have negotiated a SPA agreement with the FDA relating to one of our Phase 3 clinical trials for VP-102, this agreement does not guaranteeapproval of VP-102 or any other particular outcome with respect to regulatory review of the study or the product candidate.We have completed two Phase 3 clinical trials of VP-102 for the treatment of molluscum, one of which was conducted under a SPA with the FDA. TheFDA’s SPA process is designed to facilitate the FDA’s review and approval of drugs by allowing the FDA to evaluate the proposed design and size of Phase 3clinical trials that are intended to form the primary basis for determining a drug product’s efficacy. Upon specific request by a clinical trial sponsor, the FDAwill evaluate the protocol and respond to a sponsor’s questions regarding, among other things, primary efficacy endpoints, trial conduct and data analysis,within 45 days of receipt of the request. The FDA ultimately assesses whether the protocol design and planned analysis of the trial are acceptable to supportregulatory submission for the product candidate with respect to the indication studied. All agreements and disagreements between the FDA and the sponsorregarding a SPA must be clearly documented in a SPA letter or the minutes of a meeting between the sponsor and the FDA.However, a SPA agreement does not guarantee approval of a product candidate, and even if the FDA agrees to the design, execution, and analysisproposed in protocols reviewed under the SPA process, the FDA may revoke or alter its agreement in certain circumstances. In particular, a SPA agreement isnot binding on the FDA if public health concerns emerge that were unrecognized at the time of the SPA agreement, other new scientific concerns regardingproduct safety or efficacy arise, the sponsor fails to comply with the agreed upon trial protocols, or the relevant data, assumptions or information provided bythe sponsor in a request for the SPA change or are found to be false or omit relevant facts. After a SPA agreement is finalized, the SPA agreement may bemodified, and such modification will be deemed binding on the FDA review division, except under the circumstances described above, if the FDA and thesponsor agree in writing to modify the protocol and such modification is intended to improve the study. The FDA retains significant latitude and discretionin interpreting the terms of the SPA agreement and the data and results from any study that is the subject of the SPA agreement.33 We cannot assure you that our Phase 3 clinical trial conducted under the SPA will be deemed acceptable to the FDA under our SPA agreement or willresult in any FDA approval for VP-102. If the FDA revokes or alters its agreement under the SPA, believes that the manner in which the study was conductedwas not consistent with the terms of our SPA, or interprets the data collected from the clinical trial differently than we do, the FDA may not deem the datasufficient to support an application for marketing approval, which could materially adversely affect our business, financial condition and results ofoperations.VP-102 is a drug-device combination involving a proprietary applicator, which may result in additional regulatory and other risks.VP-102 is a drug-device combination for administration of our cantharidin formulation through our proprietary applicator. We may experiencedelays in obtaining regulatory approval of VP-102 given the increased complexity of the review process when approval of a drug and a delivery device issought under a single marketing application. VP-102 will be regulated as a drug-device combination product, which requires coordination within the FDAand similar foreign regulatory agencies for review of the product candidate’s device and drug components. The determination whether a combination productrequires a single marketing application or two separate marketing applications for each component is made by the FDA on a case-by-case basis. Although asingle marketing application may be sufficient for the approval of a combination product, the FDA may determine that separate marketing applications arenecessary. This determination could significantly increase the resources and time required to bring a particular combination product to market. Although theFDA and similar foreign regulatory agencies have systems in place for the review and approval of combination products such as ours, we may experiencedelays in the development and commercialization of our product candidate due to regulatory timing constraints and uncertainties in the productdevelopment and approval process, as well as coordination between two different centers within FDA responsible for review of the different components ofthe combination product.Failure to successfully develop or supply the device, delays in or failure of the studies conducted by us, our collaborators, or third-party providers, orfailure of our company, our collaborators, or third-party providers to obtain or maintain regulatory approval or clearance of the device component of VP-102could result in increased development costs, delays in or failure to obtain regulatory approval, and associated delays in VP-102 reaching the market. Further,failure to successfully develop or supply the device, or to gain or maintain its approval, could adversely affect sales of VP-102.Changes in methods of product candidate manufacturing or formulation may result in additional costs or delay.As product candidates proceed through preclinical studies to late-stage clinical trials towards potential approval and commercialization, it iscommon that various aspects of the development program, such as manufacturing methods and formulation, are altered along the way in an effort to optimizeprocesses and results. Such changes carry the risk that they will not achieve these intended objectives. Any of these changes could cause our productcandidates to perform differently and affect the results of planned clinical trials or other future clinical trials conducted with the altered materials. Suchchanges may also require additional testing, FDA notification or FDA approval. This could delay completion of clinical trials, require the conduct ofbridging clinical trials or the repetition of one or more clinical trials, increase clinical trial costs, delay approval of our product candidates and jeopardize ourability to commence sales and generate revenue.We may not be successful in our efforts to increase our pipeline of product candidates, including by pursuing additional indications for our currentproduct candidate or in-licensing or acquiring additional product candidates for other dermatological conditions.A key element of our strategy is to build and expand our pipeline of product candidates, including by developing VP-102 for the treatment ofexternal genital warts and potentially other dermatological conditions and VP-103 for the treatment of plantar warts. In addition, we intend to in-license oracquire additional product candidates for other dermatological conditions to build a fully integrated dermatology company. We may not be able to identifyor develop product candidates that are safe, tolerable and effective. Even if we are successful in continuing to build our pipeline, the potential productcandidates that we identify, in-license or acquire may not be suitable for clinical development, including as a result of being shown to have harmful sideeffects or other characteristics that indicate that they are unlikely to be products that will receive marketing approval and achieve market acceptance.34 We may expend our limited resources to pursue a particular product candidate or indication and fail to capitalize on product candidates or indicationsthat may be more profitable or for which there is a greater likelihood of success.Because we have limited financial and management resources, we focus on development programs and product candidates that we identify forspecific indications. As such, we are currently primarily focused on the development of VP-102 for the treatment of molluscum, common warts and externalgenital warts, as well as VP-103 for the treatment of plantar warts. As a result, we may forego or delay pursuit of opportunities with other product candidatesor for other indications for VP-102 and VP-103 that later prove to have greater commercial potential. Our resource allocation decisions may cause us to fail tocapitalize on viable commercial products or profitable market opportunities. Our spending on current and future development programs and productcandidates for specific indications may not yield any commercially viable products. If we do not accurately evaluate the commercial potential or targetmarket for a particular product candidate, we may relinquish valuable rights to that product candidate through collaboration, licensing or other royaltyarrangements in cases in which it would have been more advantageous for us to retain sole development and commercialization rights to such productcandidate.The regulatory approval processes of the FDA and comparable foreign authorities are lengthy, time consuming and inherently unpredictable. If we are notable to obtain required regulatory approval for our product candidates, our business will be substantially harmed.The time required to obtain approval or other marketing authorizations by the FDA and comparable foreign authorities is unpredictable but typicallytakes many years following the commencement of clinical trials and depends upon numerous factors, including the substantial discretion of the regulatoryauthorities. In addition, approval policies, regulations, or the type and amount of clinical data necessary to gain approval may change during the course of aproduct candidate’s clinical development and may vary among jurisdictions. VP-102 is currently our only product candidate. We have not obtainedregulatory approval for VP-102 or any product candidate and it is possible that neither VP-102 nor any product candidates we may seek to develop in thefuture will ever obtain regulatory approval. Neither we nor any future collaborator is permitted to market VP-102 or any future drug product candidates in theUnited States until we receive regulatory approval of an NDA from the FDA. To date, we have not met or discussed with the European Medicines Agency orany other comparable foreign authority regarding regulatory approval for VP-102 or any other product candidate outside of the United States.Prior to obtaining approval to commercialize VP-102 and any other drug product candidate in the United States or abroad, we must demonstrate withsubstantial evidence from well-controlled clinical trials, and to the satisfaction of the FDA or foreign regulatory agencies, that such product candidates aresafe and effective for their intended uses. Results from nonclinical studies and clinical trials can be interpreted in different ways. Even if we believe thenonclinical or clinical data for our product candidates are promising, such data may not be sufficient to support approval by the FDA and other regulatoryauthorities. The FDA may also require us to conduct additional nonclinical studies or clinical trials for our product candidates either prior to or afterapproval, or it may object to elements of our clinical development program.Of the large number of products in development, only a small percentage successfully complete the FDA or foreign regulatory approval processes andare commercialized. The lengthy approval or marketing authorization process as well as the unpredictability of future clinical trial results may result in ourfailing to obtain regulatory approval or marketing authorization to market our product candidates, which would significantly harm our business, financialcondition, results of operations and prospects.We have invested a significant portion of our time and financial resources in the development of VP-102. Our business is dependent on our ability tosuccessfully complete preclinical and clinical development of, obtain regulatory approval for, and, if approved, successfully commercialize VP-102 and anyfuture product candidates in a timely manner.35 Even if we eventually complete clinical testing and receive approval of an NDA or foreign marketing application for VP-102 or any future productcandidates, the FDA or the applicable foreign regulatory agency may grant approval or other marketing authorization contingent on the performance ofcostly additional clinical trials, including post-market clinical trials. The FDA or the applicable foreign regulatory agency also may approve or authorize formarketing a product candidate for a more limited indication or patient population that we originally request, and the FDA or applicable foreign regulatoryagency may not approve or authorize the labeling that we believe is necessary or desirable for the successful commercialization of a product candidate. Anydelay in obtaining, or inability to obtain, applicable regulatory approval or other marketing authorization would delay or prevent commercialization of thatproduct candidate and would materially adversely impact our business and prospects.In addition, the FDA and other regulatory authorities may change their policies, issue additional regulations or revise existing regulations, or takeother actions, which may prevent or delay approval of our future products under development on a timely basis. Such policy or regulatory changes couldimpose additional requirements upon us that could delay our ability to obtain approvals, increase the costs of compliance or restrict our ability to maintainany marketing authorizations we may have obtained.Furthermore, even if we obtain regulatory approval for VP-102 and any future product candidates, we will still need to develop a commercialorganization, establish a commercially viable pricing structure and obtain approval for adequate reimbursement from third-party and government payors. Ifwe are unable to successfully commercialize VP-102 and any future product candidates, we may not be able to generate sufficient revenue to continue ourbusiness.Risks Related to the Commercialization of Our Product CandidatesEven if any of our product candidates receives marketing approval, it may fail to achieve the degree of market acceptance by physicians, patients, third-party payors and others in the medical community necessary for commercial success.If any of our product candidates receives marketing approval, it may nonetheless fail to gain sufficient market acceptance by physicians, patients,third-party payors and others in the medical community. If our product candidates do not achieve an adequate level of acceptance, we may not generatesignificant revenue and we may not become profitable. The degree of market acceptance of our product candidates, if approved for commercial sale, willdepend on a number of factors, including: •the efficacy, safety and potential advantages compared to alternative treatments, including for VP-102, compared to compoundedcantharidin; •our ability to offer our products for sale at competitive prices; •the convenience and ease of administration compared to alternative treatments, including compounded cantharidin; •the willingness of the target patient population to try new treatments and of physicians to prescribe these treatments; •our ability to hire and retain a sales force in the United States; •the strength of marketing and distribution support; •the availability of third-party coverage and adequate reimbursement for VP-102 and any other potential product candidates; •the prevalence and severity of any side effects; and •any restrictions on the use of our products together with other medications.In the case of VP-102, the failure of healthcare professionals or patients to perceive the benefits of using VP-102 instead of compounded cantharidinor other alternative therapies, such as curettage or cryotherapy, would adversely affect the commercial success of VP-102, if approved.36 If we are unable to establish sales, marketing and distribution capabilities for VP-102 or any other product candidate that may receive regulatoryapproval, we may not be successful in commercializing those product candidates if and when they are approved.We do not have sales or marketing infrastructure. To achieve commercial success for VP-102 and any other product candidate for which we mayobtain marketing approval, we will need to establish a sales and marketing organization. In the future, we expect to build a focused sales and marketinginfrastructure to market or co-promote some of our product candidates in the United States, if and when they are approved. There are risks involved withestablishing our own sales, marketing and distribution capabilities. For example, recruiting and training a sales force is expensive and time consuming andcould delay any product launch. If the commercial launch of a product candidate for which we recruit a sales force and establish marketing capabilities isdelayed or does not occur for any reason, we would have prematurely or unnecessarily incurred these commercialization expenses. This may be costly, andour investment would be lost if we cannot retain or reposition our sales and marketing personnel.Factors that may inhibit our efforts to commercialize our products on our own include: •our inability to recruit, train and retain adequate numbers of effective sales and marketing personnel; •the inability of sales personnel to obtain access to physicians or persuade adequate numbers of physicians to prescribe any future products; •the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative to companieswith more extensive product lines; and •unforeseen costs and expenses associated with creating an independent sales and marketing organization.If we are unable to establish our own sales, marketing and distribution capabilities and are forced to enter into arrangements with, and rely on, thirdparties to perform these services, our revenue and our profitability, if any, are likely to be lower than if we had developed such capabilities ourselves. Inaddition, we may not be successful in entering into arrangements with third parties to sell, market and distribute our product candidates or may be unable todo so on terms that are favorable to us. We likely will have little control over such third parties, and any of them may fail to devote the necessary resourcesand attention to sell and market our products effectively. If we do not establish sales, marketing and distribution capabilities successfully, either on our ownor in collaboration with third parties, we will not be successful in commercializing our product candidates.We face substantial competition, including from compounded cantharidin products that may compete with VP-102 and any other product candidates,which may result in a smaller than expected commercial opportunity and/or others discovering, developing or commercializing products before or moresuccessfully than we do.The development and commercialization of new products is highly competitive. We face competition with respect to our current product candidatesand will face competition with respect to any product candidates that we may seek to develop or commercialize in the future, from many different sources,including major pharmaceutical and specialty pharmaceutical companies, compounding facilities, academic institutions and governmental agencies andpublic and private research institutions.We are aware of several other product candidates in earlier stages of development as potential treatments for the indications we intend to target.Veloce Biopharma, Leo Pharma, and Novan have initiated clinical trials with different programs in molluscum. There are a number of companies conductinglate-stage clinical trials for common warts, including Aclaris Therapeutics and Cutanea Life Sciences. In addition, other drugs have been and may continue tobe used off label as treatment for molluscum, common warts, external genital warts, and plantar warts, and there are other existing alternative therapies such ascurettage or cryotherapy.37 In addition, some of the market demand for cantharidin may be satisfied by compounding pharmacies and registered outsourcing facilities regulatedunder Sections 503A and 503B of the FDCA. If we receive approval for VP-102, any compounding by licensed pharmacists or licensed physicians underSection 503A would not be legally permitted to include, regularly or in inordinate amounts, the compounding of any drug that is essentially a copy of VP-102. The FDA has announced that it intends to consider a compounded drug product to be essentially a copy of a commercially available drug underSection 503A if it has the same API, has the same, similar, or an easily substitutable dosage strength, and can be used by the same route of administration.However, a compounded product would not be considered essentially a copy of VP-102, and could be compounded under Section 503A, if there were adifference between the compounded product and VP-102 that was made for an individual patient, and which the prescribing practitioner determines producesa significant difference for that patient. Similarly, any compounding by outsourcing facilities under Section 503B would not be legally permitted to includethe compounding of a drug that is essentially a copy of VP-102, if approved, where the compounded drug would be considered essentially a copy if it wereidentical or nearly identical to VP-102 (which the FDA has interpreted to mean that it has the same active ingredient(s), route of administration, dosage form,dosage strength and excipients as the approved drug), or if it contains the active ingredient in VP-102 (cantharidin), unless there is a change from theapproved drug that produces a clinical difference for an individual patient as determined by the prescribing practitioner.Compounding pharmacies and registered outsourcing facilities may therefore be permitted to compound cantharidin drug products, even if wereceive approval for VP-102, if a prescribing practitioner determines that a compounded product prescribed for a specific patient features a change from VP-102 that produces a significant difference for the patient (under Section 503A), or if a prescribing practitioner determines that a compounded cantharidinproduct features a change from VP-102 that produces a clinical difference for the patient (under Section 503B). Physicians may determine that suchdifferences exist for some or all of their patients and may choose to prescribe compounded cantharidin products for such patients. Moreover, underSection 503B, outsourcing facilities are not limited to compounding in response to prescriptions for identified, individual patients, and could compoundusing bulk cantharidin provided cantharidin appears on a list established by the FDA of bulk drug substances for which there is a clinical need or satisfiescertain other limited conditions. Although the FDA has not yet established a list of bulk drug substances for which there is a clinical need, the FDA hasannounced an interim policy pursuant to which bulk drug substances may be nominated for inclusion on such list and, provided certain conditions are met,outsourcing facilities may compound with such bulk drug substances pending evaluation of the substances for inclusion on the FDA’s list of bulk drugsubstances for which there is a clinical need. Cantharidin is currently listed among those nominated substances for which bulk drug substance may be used incompounding by outsourcing facilities pending FDA’s evaluation.In March 2019, the FDA issued Guidance for Industry addressing the criteria by which the FDA intends to evaluate whether there exists a clinicalneed for compounding with a bulk drug substance, including, in the case of a bulk drug substance that is a component of an FDA-approved drug, anevaluation of whether there exists an attribute of the approved drug that makes it medically unsuitable to treat certain patients; whether the drug productproposed to be compounded is intended to address that attribute; and whether the drug product proposed to be compounded must be compounded from abulk drug substance rather than from the finished, FDA-approved drug product. If the FDA implements these criteria as in the Guidance for Industry, and ifVP-102 is approved, an outsourcing facility may be permitted to compound a cantharidin product using bulk cantharidin notwithstanding our approvalprovided it satisfies these and other criteria set forth in the FDA’s guidance.In addition, the FDA may, in its enforcement discretion, not prioritize enforcement of the restrictions under Sections 503A and 503B oncompounding drugs that are essentially copies of VP-102, if approved, in which case compounded drug product that is essentially a copy of VP-102 could bemade available to physicians and their patients. In the event compounders are authorized to continue to compound cantharidin products following approvalof VP-102, if approved, we could be subject to significant competition.38 In addition, our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize products that are safer, moreeffective, have fewer or less severe side effects, are more convenient or are less expensive than VP-102 or any other product that we may develop. Ourcompetitors also may obtain FDA or other regulatory approval for their products more rapidly than we may obtain approval for our product, which couldresult in our competitors establishing a strong market position before we are able to enter the market or, if a competitor obtained FDA approval for a productcontaining cantharidin before we are able to obtain approval for our product, could result in the approval of our product being delayed until the expiration ofany NCE exclusivity or other regulatory exclusivity received by such competitor.Many of the companies against which we are competing, or against which we may compete in the future, have significantly greater financialresources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals andmarketing approved products than we do. Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resourcesbeing concentrated among a smaller number of our competitors. Smaller or early-stage companies may also prove to be significant competitors, particularlythrough collaborative arrangements with large and established companies. These competitors also compete with us in recruiting and retaining qualifiedscientific and management personnel and establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologiescomplementary to, or that may be necessary for, our programs.We intend to seek NCE exclusivity and/or pediatric exclusivity for VP-102 and future product candidates, and we may be unsuccessful.As part of our business strategy, we intend to seek NCE exclusivity for VP-102 or future product candidates. In the United States, a pharmaceuticalmanufacturer may obtain five years of non-patent exclusivity upon NDA approval of an NCE which is a drug that contains an active moiety that has not beenapproved by the FDA in any other NDA. An “active moiety” is defined as the molecule or ion responsible for the drug substance’s physiological orpharmacologic action. During the five-year exclusivity period, the FDA cannot accept for filing any ANDA seeking approval of a generic version of that drugor any 505(b)(2) NDA for the same active moiety and that relies on the FDA’s findings regarding that drug, except that FDA may accept an application forfiling after four years if the follow-on applicant makes a paragraph IV certification. This exclusivity period may be extended by an additional six months ifcertain requirements are met to qualify the product for pediatric exclusivity, including the receipt of a written request from the FDA that we conduct certainpediatric studies, the submission of study reports from such studies to the FDA after receipt of the written request and satisfaction of the conditions specifiedin the written request. We believe that cantharidin constitutes an NCE, such that VP-102 should, if approved, be eligible for NCE exclusivity and that ourplanned clinical trials will qualify VP-102 for pediatric exclusivity if a written request from the FDA is received. However, there can be no guarantee that wewill successfully obtain such exclusivity, and if any of our competitors obtains FDA approval of an NDA for a cantharidin drug product before we do, they,and not us, may be eligible for NCE exclusivity. If we do not obtain NCE exclusivity for VP-102, or if a competitor obtains NCE exclusivity for a cantharidinproduct before we submit and receive approval of an NDA for VP-102, our ability to commence sales and generate revenue would be adversely affected.Moreover, even if we obtain NCE exclusivity and/or pediatric exclusivity for VP-102, such exclusivity would not block the sale of compoundedcantharidin products in those situations where compounding would be permitted under Sections 503A or 503B of the FDCA.The success of VP-102 for the treatment of molluscum and common warts will depend significantly on coverage and adequate reimbursement or thewillingness of patients to pay for these procedures.We believe our success depends on continued coverage and adequate reimbursement for procedures using VP-102 for the treatment of molluscumand/or common warts or, in the absence of coverage and adequate reimbursement, on the extent to which patients will be willing to pay out of pocket for suchprocedures. Obtaining coverage and adequate reimbursement for our products may be particularly difficult because of the higher prices often associated withdrugs administered under the supervision of a physician. Separate reimbursement for the product itself or the treatment or procedure in which our product isused may not be available. Even if the procedure using our product is covered, third-party payors may package the cost of the drug into the procedurepayment and not separately reimburse the physician for the costs associated with our product. A decision by a third-party payor39 not to cover or separately reimburse for our products could reduce physician utilization of our products once approved. Additionally, in the United States,there is no uniform policy of coverage and reimbursement among third-party payors. Third-party payors often rely upon Medicare coverage policy andpayment limitations in setting their own coverage and reimbursement policies. However, decisions regarding the extent of coverage and amount ofreimbursement to be provided is made on a payor-by-payor basis. One payor’s determination to provide coverage for a drug product does not assure that otherpayors will also provide coverage, and adequate reimbursement.Third-party payors determine which medical procedures they will cover and establish reimbursement levels. Even if a third-party payor covers aparticular procedure, the resulting reimbursement payment rates may not be adequate. Patients who are treated in-office for a medical condition generally relyon third-party payors to reimburse all or part of the costs associated with the procedure and may be unwilling to undergo such procedures for the treatment ofmolluscum and/or common warts in the absence of such coverage and adequate reimbursement. Physicians may be unlikely to offer procedures for suchtreatment if they are not covered by insurance and may be unlikely to purchase and use our product candidates, if approved, for molluscum and/or commonwarts unless coverage is provided, and reimbursement is adequate.Reimbursement by a third-party payor may depend upon a number of factors, including the third-party payor’s determination that a procedure is safe,effective and medically necessary; appropriate for the specific patient; cost-effective; supported by peer-reviewed medical journals; included in clinicalpractice guidelines; and neither cosmetic, experimental, nor investigational.Further, from time to time, typically on an annual basis, payment rates are updated and revised by third-party payors. Such updates could impact thedemand for our product candidates, to the extent that patients who are prescribed our product candidates, if approved, are not separately reimbursed for thecost of the product candidates. An example of payment updates is the Medicare program updates to physician payments, which is done on an annual basis. Inthe past, when the application of the formula resulted in lower payment, Congress has passed interim legislation to prevent the reductions. The MedicareAccess and CHIP Reauthorization Act of 2015, or MACRA, ended the use of the statutory formula and provided for a 0.5% annual increase in payment ratesunder the Medicare Physician Fee Schedule through 2019, but no annual update from 2020 through 2025. MACRA also introduced a merit-based incentivebonus program for Medicare physicians beginning in 2019. At this time, it is unclear how the introduction of the merit-based incentive program will impactoverall physician reimbursement under the Medicare program. Any resulting decrease in payment under the merit-based reimbursement system may adverselyaffect our revenue and results of operations. In addition, the Medicare physician fee schedule has been adapted by some private payors into their plan-specific physician payment schedule. We cannot predict how pending and future healthcare legislation will impact our business, and any changes incoverage and reimbursement that further restricts coverage of our product candidates or lowers reimbursement for procedures using our products could harmour business.Foreign governments also have their own healthcare reimbursement systems, which vary significantly by country and region, and we cannot be surethat coverage and adequate reimbursement will be made available with respect to the treatments in which our products are used under any foreignreimbursement system.There can be no assurance that VP-102 for the treatment of molluscum and/or common warts, if approved for sale in the United States or in othercountries, will be considered medically reasonable and necessary, that they will be considered cost-effective by third-party payors, that coverage or anadequate level of reimbursement will be available, or that reimbursement policies and practices in the United States and in foreign countries where ourproducts are sold will not adversely affect our ability to sell our product candidates profitably, if they are approved for sale.40 The market for VP-102 and any other product candidates may not be as large as we expect.Our lead indications for VP-102 are for molluscum and common warts, both of which are skin diseases that are currently undertreated with nostandard of care. If VP-102 is approved for either indication, individuals may continue to decline treatment for molluscum and/or common warts as, if leftuntreated, these skin diseases will eventually be resolved by the body’s immune system.In addition, our estimates of the potential market opportunity for VP-102 and any other product candidates include several key assumptions based onour industry knowledge, industry publications, third-party research reports and surveys of dermatologists commissioned by us. These assumptions includethe prevalence of molluscum, common warts and other skin diseases as well as the estimated reimbursement levels for VP-102, if approved. However, therecan be no assurance that any of these assumptions are, or will remain, accurate. Furthermore, even if our estimates relating to the prevalence of molluscum,common warts and other skin diseases as well as the estimated reimbursement levels for VP-102, if approved, are accurate, the degree of market acceptance bythe medical community and those infected by such skin diseases following regulatory approval, if any, could impact our assumptions and reduce the marketsize for VP-102 in molluscum, common warts or any other indication. For example, if VP-102 is approved for either molluscum or common warts, there can beno assurance that the medical community will prescribe VP-102 for patients over current forms of available alternative therapies. Furthermore, the marketresearch study we commissioned surveying payor organizations has no bearing on the payors, and any assumptions or interpretations based on the results ofthis study, may ultimately be inaccurate. If the actual market for VP-102 in molluscum, common warts or any other indication we may pursue for VP-102 orfor any other product candidate we may develop is smaller than we expect, our revenues, if any, may be limited and it may be more difficult for us to achieveor maintain profitability.Product liability lawsuits against us could cause us to incur substantial liabilities and to limit commercialization of any products that we may develop.We face an inherent risk of product liability exposure related to the testing of our product candidates in human clinical trials and will face an evengreater risk if we commercially sell any products that we may develop. If we cannot successfully defend ourselves against claims that our product candidatesor drugs caused injuries, we will incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in: •decreased demand for any product candidates or drugs that we may develop; •injury to our reputation and significant negative media attention; •withdrawal of clinical trial participants; •significant costs to defend the related litigation; •substantial monetary awards paid to trial participants or patients; •loss of revenue; •reduced resources of our management to pursue our business strategy; and •the inability to commercialize any products that we may develop.We currently hold $10 million in product liability insurance coverage in the aggregate, with a per incident limit of $10 million, which may not beadequate to cover all liabilities that we may incur. We may need to increase our insurance coverage as we expand our clinical trials or if we commencecommercialization of our product candidates. Insurance coverage is increasingly expensive. We may not be able to maintain insurance coverage at areasonable cost or in an amount adequate to satisfy any liability that may arise.41 Our business activities involve the use of hazardous materials, which require compliance with environmental and occupational safety laws regulating theuse of such materials. If we or our vendors violate these laws, we could be subject to significant fines, liabilities or other adverse consequences.Our business activities involve the controlled use of hazardous materials, including corrosive, explosive and flammable chemicals and otherhazardous compounds in addition to certain biological hazardous waste. Ultimately, the activities of our third-party product manufacturers when a productcandidate reaches commercialization will also require the use of hazardous materials. Accordingly, we are subject to federal, state and local laws governingthe use, handling and disposal of these materials. For example, cantharidin is classified as an extremely hazardous substance in the United States and issubject to strict reporting requirements. Furthermore, the excipients in our product candidate are combustible and flammable. If not handled properly, there isa risk of explosion which could carry liability risk and affect the availability or capacity of the affected vendor. Although we believe that our and ourvendors’ safety procedures for handling and disposing of these materials comply in all material respects with the standards prescribed by local, state andfederal regulations, we cannot completely eliminate the risk of accidental contamination or injury from these materials. In addition, our collaborators may notcomply with these laws. In the event of an accident or failure to comply with environmental laws, we could be held liable for damages that result, and anysuch liability could exceed our assets and resources, or we could be subject to limitations or stoppages related to our use of these materials which may lead toan interruption of our business operations or those of our third-party contractors. While we believe that our existing insurance coverage is generally adequatefor our normal handling of these hazardous materials, it may not be sufficient to cover pollution conditions or other extraordinary or unanticipated events.Furthermore, an accident could damage or force us to shut down our operations or one of our vendors. Changes in environmental laws may impose costlycompliance requirements on us or otherwise subject us to future liabilities and additional laws relating to the management, handling, generation,manufacture, transportation, storage, use and disposal of materials used in or generated by the manufacture of our products or related to our clinical trials. Inaddition, we cannot predict the effect that these potential requirements may have on us, our suppliers and contractors or our customers.Our business and operations would suffer in the event of computer system failures, cyber-attacks or a deficiency in our cyber-security.Despite the implementation of security measures, our internal computer systems, and those of third parties on which we rely, are vulnerable todamage from computer viruses, malware, natural disasters, terrorism, war, telecommunication and electrical failures, cyber-attacks or cyber-intrusions over theInternet, attachments to emails, persons inside our organization, or persons with access to systems inside our organization. The risk of a security breach ordisruption, particularly through cyber-attacks or cyber intrusion, including by computer hackers, foreign governments, and cyber terrorists, has generallyincreased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. If such an event were to occurand cause interruptions in our operations, it could result in a material disruption of our product development programs. For example, the loss of clinical trialdata from completed or ongoing or planned clinical trials could result in delays in our regulatory approval efforts and significantly increase our costs torecover or reproduce the data. To the extent that any disruption or security breach was to result in a loss of or damage to our data or applications, orinappropriate disclosure of confidential or proprietary information, we could incur material legal claims and liability, damage to our reputation, and thefurther development of our product candidates could be delayed.Risks Related to Our Dependence on Third PartiesWe will rely on third parties to conduct our future clinical trials for product candidates, and those third parties may not perform satisfactorily, includingfailing to meet deadlines for the completion of such trials.We have engaged a CRO historically to conduct our clinical trials and expect to engage a CRO for future clinical trials for VP-102 or other productcandidates that we may progress to clinical development. We expect to continue to rely on third parties, such as clinical data management organizations,medical institutions and clinical investigators, to conduct those clinical trials. If any of our relationships with these third parties terminate, we may not beable to timely enter into arrangements with alternative third parties or to do so on commercially reasonable terms, if at all. In addition, any third partiesconducting our clinical trials will not be our employees, and except for remedies available to us under our agreements with such third parties, we cannotcontrol whether or not they devote sufficient time and resources to our clinical programs. If these third parties do not successfully carry out their contractualduties or obligations or meet expected deadlines, if they need to be replaced or if the quality or accuracy42 of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols, regulatory requirements or for other reasons, our clinicaltrials may be extended, delayed or terminated and we may not be able to obtain regulatory approval for or successfully commercialize our productcandidates. Consequently, our results of operations and the commercial prospects for our product candidates would be harmed, our costs could increasesubstantially and our ability to generate revenue could be delayed significantly.Switching or adding CROs involves substantial cost and requires management time and focus. In addition, there is a natural transition period when anew CRO commences work. As a result, delays occur, which can materially impact our ability to meet our desired clinical development timelines. Though weintend to carefully manage our relationships with our CROs, there can be no assurance that we will not encounter challenges or delays in the future or thatthese delays or challenges will not have a material adverse impact on our business, financial condition and prospects.We rely on these parties for execution of our preclinical studies and clinical trials, and generally do not control their activities. Our reliance on thesethird parties for research and development activities will reduce our control over these activities but will not relieve us of our responsibilities. For example,we will remain responsible for ensuring that each of our clinical trials is conducted in accordance with the general investigational plan and protocols for thetrial. Moreover, the FDA requires us to comply with standards, commonly referred to as good clinical practices, or GCPs, for conducting, recording andreporting the results of clinical trials to assure that data and reported results are credible and accurate and that the rights, integrity and confidentiality of trialparticipants are protected. We also are required to register ongoing clinical trials and post the results of completed clinical trials on a government-sponsoreddatabase, ClinicalTrials.gov, within specified timeframes. Failure to do so can result in fines, adverse publicity and civil and criminal sanctions. If we or anyof our CROs or other third parties, including trial sites, fails to comply with applicable GCPs, the clinical data generated in our clinical trials may be deemedunreliable and the FDA, EMA or comparable foreign regulatory authorities may require us to perform additional clinical trials before approving ourmarketing applications. We cannot assure you that upon inspection by a given regulatory authority, such regulatory authority will determine that any of ourclinical trials complies with GCP regulations. In addition, our clinical trials must be conducted with product produced under cGMP conditions. Our failure tocomply with these regulations may require us to repeat clinical trials, which would delay the regulatory approval process.In addition, principal investigators for our clinical trials may serve as scientific advisors or consultants to us from time to time and receivecompensation in connection with such services. Under certain circumstances, we may be required to report some of these relationships to the FDA. The FDAmay conclude that a financial relationship between us and a principal investigator has created a conflict of interest or otherwise affected interpretation of thetrial. The FDA may therefore question the integrity of the data generated at the applicable clinical trial site and the utility of the clinical trial itself may bejeopardized. This could result in a delay in approval, or rejection, of our marketing applications by the FDA and may ultimately lead to the denial ofmarketing approval of VP-102 and any other product candidates.We also expect to rely on other third parties to store and distribute product supplies for our clinical trials. Any performance failure on the part of ourdistributors could delay clinical development or marketing approval of our product candidates or commercialization of our products, producing additionallosses and depriving us of potential revenue.43 We currently rely on a third party to supply our raw material used in VP-102, and if we encounter any difficulties in procuring, or creating an alternativefor, our raw material in VP-102 or any of our other product candidates we may develop, our business operations would be impaired.To date, we have obtained naturally-sourced cantharidin, which is the raw material used to manufacture the API for VP-102 and is obtained fromblister beetles, directly or indirectly from suppliers based in the People’s Republic of China, or the PRC. We are exposed to a number of environmental risks,including: •risk of contamination being introduced in the beetle population through environmental factors that we cannot control, which would result inunexpected anomalies or new impurities in the cantharidin; •loss of the beetle’s habitat and other similar environmental risks to the beetle population whether due to climate change, over-development,or otherwise; and •risk of disease in the beetles.In addition, any business or economic challenges our existing supplier faces, whether in the ordinary course or not, could impair its ability to meetour cantharidin supply needs. Accordingly, there is a risk that supplies of our product may be significantly delayed by or may become unavailable as a resultof any issues affecting our supplier’s supply and production of naturally-sourced cantharidin.Furthermore, our supplier’s operations may be curtailed or delayed in the event the regulators in the PRC determine that our supplier is not acting inaccordance with laws or under appropriate permits or licenses. We may also face additional supply chain risks due to the regulatory and political structure ofthe PRC, or as a result of the international relationship between the PRC and the United States or any of the other countries in which our products aremarketed. For example, any deterioration in the trade relationship between the U.S. and China, which imposes any restrictions, tariffs or limitations on theexport of cantharidin from China would impact our ability to meet our raw material needs. We are also exposed to foreign exchange risks, and fluctuations inexchange rates between the U.S. dollar and the Renminbi could negatively impact the commercial viability of importing cantharidin from the PRC.While we are working to develop a process for manufacturing cantharidin synthetically, there is risk that we will be unable to do so or that we will beunable to produce a sufficient quantity of synthetically derived cantharidin to meet our needs and, even if we are ultimately able to produce syntheticallyderived cantharidin in quantities that are sufficient to meet our needs, we cannot predict when we will be able to do so. If we are unable to develop a processfor manufacturing cantharidin synthetically and on a commercial scale, we will be forced to continue to rely on naturally sourced cantharidin.Any difficulties we face in maintaining our supply of cantharidin, or limitations we face in increasing our supply to meet commercial needs for VP-102 or any of our other product candidates, whether such cantharidin is naturally sourced or synthetically derived, would impair our business operations.We contract with third parties for the manufacture of VP-102 for preclinical and clinical testing and expect to continue to do so for commercialization.This reliance on third parties increases the risk that we will not have sufficient quantities of VP-102 or such quantities at an acceptable cost, which coulddelay, prevent or impair our development or commercialization efforts.We do not have any manufacturing facilities or personnel. We currently rely, and expect to continue to rely, on third parties for the manufacture ofVP-102, or any other product candidates which we may pursue, for preclinical and clinical testing as well as for commercial manufacture if VP-102 or anyother product candidate which we may pursue receives marketing approval. This reliance on third parties increases the risk that we will not have sufficientquantities of VP-102 or be able to obtain quantities at an acceptable cost or quality, which could delay, prevent or impair our ability to timely conduct ourclinical trials or our other development or commercialization efforts.44 We also expect to rely on third-party manufacturers or third-party collaborators for the manufacture of commercial supply of VP-102 or any otherproduct candidates for which we obtain marketing approval. The facilities used by our contract manufacturers to manufacture our product candidates must beapproved by the FDA or other regulatory authorities pursuant to inspections that will be conducted after we submit our NDA or comparable marketingapplication to the FDA or other regulatory authority. We do not have control over a supplier’s or manufacturer’s compliance with laws, regulations andapplicable cGMP standards and other laws and regulations, such as those related to environmental health and safety matters. If our contract manufacturerscannot successfully manufacture material that conforms to our specifications and the strict regulatory requirements of the FDA or others, they will not be ableto secure and maintain regulatory approval for their manufacturing facilities. In addition, we have no control over the ability of our contract manufacturers tomaintain adequate quality control, quality assurance and qualified personnel. If the FDA or a comparable foreign regulatory authority does not approve thesefacilities for the manufacture of our product candidates or if it withdraws any such approval in the future, we may need to find alternative manufacturingfacilities, which would significantly impact our ability to develop, obtain regulatory approval for or market our product candidates, if approved.We may be unable to establish any agreements with future third-party manufacturers or to do so on acceptable terms. Even if we are able to establishagreements with third-party manufacturers, qualifying and validating such manufacturers may take a significant period of time and reliance on third-partymanufacturers entails additional risks, including: •reliance on the third party for regulatory compliance and quality assurance; •the possible breach of the manufacturing agreement by the third party; •the possible misappropriation of our proprietary information, including our trade secrets and know-how; •the possible increase in costs for the applicator components, raw materials or API in VP-102; and •the possible termination or nonrenewal of any agreement by any third party at a time that is costly or inconvenient for us.Third-party manufacturers may not be able to comply with cGMP regulations or similar regulatory requirements outside the United States. Ourfailure, or the failure of our third-party manufacturers, to comply with applicable regulations could result in sanctions being imposed on us, including clinicalholds, fines, injunctions, civil penalties, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of product candidates or drugs,operating restrictions and criminal prosecutions, any of which could significantly and adversely affect supplies of our products.Our product candidates and any drugs that we may develop may compete with other product candidates and drugs for access to manufacturingfacilities. There are no assurances we would be able to enter into similar commercial arrangements with other manufacturers that operate under cGMPregulations and that might be capable of manufacturing for us. Any performance failure on the part of our existing or future manufacturers could delayclinical development or marketing approval.To date, all manufacturing and assembly of our single-use precision applicator has been done using a manual process. In order to manufacture ourapplicator on a commercial scale, we will need to develop an automated process successfully and on a timely basis. If our current contract manufacturerscannot perform as agreed, we may be required to replace such manufacturers. We may incur added costs and delays in identifying and qualifying any suchreplacement. We expect to continue to depend on third-party contract manufacturers for the foreseeable future. Our current and anticipated future dependenceupon others for the manufacture of our product candidates or drugs may adversely affect our future profit margins and our ability to commercialize any drugsthat receive marketing approval on a timely and competitive basis. If there is any disruption in our supply chain, it could take a significant period of time toqualify and validate a replacement on terms acceptable to us, if we are able to at all.45 We may seek collaborations with third parties for the development or commercialization of our product candidates. If those collaborations are notsuccessful, we may not be able to capitalize on the market potential of these product candidates.We may seek third-party collaborators for the development and commercialization of our product candidates, including for the commercialization ofany of our product candidates that are approved for marketing outside the United States. Our likely collaborators for any collaboration arrangements includelarge and mid-size pharmaceutical companies, regional and national pharmaceutical companies and biotechnology companies. If we do enter into any sucharrangements with any third parties, we will likely have limited control over the amount and timing of resources that our collaborators dedicate to thedevelopment or commercialization of our product candidates. Our ability to generate revenue from these arrangements will depend on our collaborators’abilities to successfully perform the functions assigned to them in these arrangements.Collaborations involving our product candidates would pose the following risks to us: •collaborators have significant discretion in determining the efforts and resources that they will apply to these collaborations; •collaborators may not perform their obligations as expected; •collaborators may not pursue development and commercialization of any product candidates that achieve regulatory approval or may electnot to continue or renew development or commercialization programs based on clinical trial results, changes in the collaborators’ strategicfocus or available funding, or external factors, such as an acquisition, that divert resources or create competing priorities; •collaborators may delay clinical trials, provide insufficient funding for a clinical trial program, stop a clinical trial or abandon a productcandidate, repeat or conduct new clinical trials or require a new formulation of a product candidate for clinical testing; •collaborators could independently develop, or develop with third parties, products that compete directly or indirectly with our productcandidates if the collaborators believe that competitive products are more likely to be successfully developed or can be commercializedunder terms that are more economically attractive than ours; •product candidates discovered in collaboration with us may be viewed by our collaborators as competitive with their own product candidatesor drugs, which may cause collaborators to cease to devote resources to the commercialization of our product candidates; •a collaborator with marketing and distribution rights to one or more of our product candidates that achieve regulatory approval may notcommit sufficient resources to the marketing and distribution of such products; •disagreements with collaborators, including disagreements over proprietary rights, contract interpretation or the preferred course ofdevelopment, might cause delays or termination of the research, development or commercialization of product candidates, might lead toadditional responsibilities for us with respect to product candidates, or might result in litigation or arbitration, any of which would be time-consuming and expensive; •collaborators may not properly maintain or defend our or their intellectual property rights or may use our or their proprietary information insuch a way as to invite litigation that could jeopardize or invalidate such intellectual property or proprietary information or expose us topotential litigation; •collaborators may infringe the intellectual property rights of third parties, which may expose us to litigation and potential liability; and •collaborations may be terminated for the convenience of the collaborator and, if terminated, we could be required to raise additional capitalto pursue further development or commercialization of the applicable product candidates.46 Collaboration agreements may not lead to development or commercialization of product candidates in the most efficient manner or at all. If a presentor future collaborator of ours were to be involved in a business combination, the continued pursuit and emphasis on our product development orcommercialization program could be delayed, diminished or terminated.If we are not able to establish collaborations, we may have to alter our development and commercialization plans.Our product development programs and the potential commercialization of our product candidates will require substantial additional capital. Forsome of our product candidates, we may decide to collaborate with pharmaceutical and biotechnology companies for the development and potentialcommercialization of those product candidates.We face significant competition in seeking appropriate collaborators. Whether we reach a definitive agreement for a collaboration will depend,among other things, upon our assessment of the collaborator’s resources and expertise, the terms and conditions of the proposed collaboration and theproposed collaborator’s evaluation of a number of factors. Those factors may include the design or results of clinical trials, the likelihood of approval by theFDA or similar regulatory authorities outside the United States, the potential market for the subject product candidate, the costs and complexities ofmanufacturing and delivering such product candidate to patients, the potential of competing products, the existence of uncertainty with respect to ourownership of technology, which can exist if there is a challenge to such ownership without regard to the merits of the challenge and industry and marketconditions generally. The collaborator may also consider alternative product candidates or technologies for similar indications that may be available tocollaborate on and whether such a collaboration could be more attractive than the one with us for our product candidate. Collaborations are complex andtime- consuming to negotiate and document. In addition, there have been a significant number of recent business combinations among large pharmaceuticalcompanies that have resulted in a reduced number of potential future collaborators.We may not be able to negotiate collaborations on a timely basis, on acceptable terms, or at all. If we are unable to do so, we may have to curtail thedevelopment of such product candidate, reduce or delay its development program or one or more of our other development programs, delay its potentialcommercialization or reduce the scope of any sales or marketing activities, or increase our expenditures and undertake development or commercializationactivities at our own expense. If we elect to increase our expenditures to fund development or commercialization activities on our own, we may need toobtain additional capital, which may not be available to us on acceptable terms or at all. If we do not have sufficient funds, we may not be able to furtherdevelop our product candidates or bring them to market and generate revenue.Risks Related to Our Intellectual PropertyIf we are unable to obtain or protect intellectual property rights related to any of our product candidates, we may not be able to compete effectively in ourmarket.We plan to rely upon a combination of patents, trade secret protection, and confidentiality agreements to protect the intellectual property related toour product candidates. The issuance, scope, validity, enforceability, strength, and commercial value of patents in the pharmaceutical field involves complexlegal and scientific questions and can be uncertain. We currently do not own any issued patents, and the patent applications that we own may fail to result inissued patents with claims that cover the product candidates in the United States or in foreign jurisdictions. If this were to occur, early generic competitioncould be expected against our product candidates in development. There may be relevant prior art relating to our future patents and patent applicationswhich could invalidate a patent or prevent a patent from issuing based on a pending patent application. In particular, because the API in many of our productcandidates has been available and used for many years, it is possible that these products have previously been used in such a manner that such prior usagewould affect our ability to obtain patents based on our patent applications. Moreover, because numerous parties have developed and/or commercialized, orare developing, a wide variety of applicator devices for use with topical dermatological medications, it is possible that prior art related to applicator devicescould affect our ability to obtain patent protection for our planned product applicator device or that disputes may arise related to whether third-partyapplicator devices infringe patents we have applied for.47 The patent prosecution process is expensive and time-consuming. We may not be able to prepare, file, and prosecute all necessary or desirable patentapplications for a commercially reasonable cost or in a timely manner or in all jurisdictions. It is also possible that we may fail to identify patentable aspectsof inventions made in the course of development and commercialization activities before it is too late to obtain patent protection on them. Moreover,depending on the terms of any future in-licenses to which we may become a party, we may not have the right to control the preparation, filing, andprosecution of patent applications, or to maintain the patents, covering technology in-licensed from third parties. Therefore, these patents and patentapplications may not be prosecuted and enforced in a manner consistent with the best interests of our business.In addition to the protection we hope to receive from patents we have applied for, we rely on trade secret protection and confidentiality agreements toprotect proprietary know-how that is not patentable, processes for which patents are difficult to enforce and any other elements of our drug development andreformulation processes that involve proprietary know-how, information, or technology that is not covered by patents. Although we generally require all ofour employees to assign their inventions to us, and all of our employees, consultants, advisors, and any third parties who have access to our proprietary know-how, information, or technology to enter into confidentiality agreements, we cannot provide any assurances that all such agreements have been dulyexecuted, or that our trade secrets and other confidential proprietary information will not be disclosed. Moreover, our competitors may independentlydevelop knowledge, methods and know-how equivalent to our trade secrets. Competitors could purchase our products and replicate some or all of thecompetitive advantages we derive from our development efforts for technologies on which we do not have patent protection. If any of our trade secrets wereto be lawfully obtained or independently developed by a competitor, we would have no right to prevent them, or those to whom they communicate it, fromusing that technology or information to compete with us. If any of our trade secrets were to be disclosed to or independently developed by a competitor, ourcompetitive position would be harmed.We also seek to preserve the integrity and confidentiality of our data and trade secrets by maintaining physical security of our premises and physicaland electronic security of our information technology systems. While we have confidence in these individuals, organizations and systems, agreements orsecurity measures may be breached, and we may not have adequate remedies for any breach. Also, if the steps taken to maintain our trade secrets are deemedinadequate, we may have insufficient recourse against third parties for misappropriating the trade secret. In addition, others may independently discover ourtrade secrets and proprietary information. For example, the FDA is considering whether to make additional information publicly available on a routine basis,including information that we may consider to be trade secrets or other proprietary information, and it is not clear at the present time how the FDA’sdisclosure policies may change in the future. If we are unable to prevent material disclosure of the non-patented intellectual property related to ourtechnologies to third parties, and there is no guarantee that we will have any such enforceable trade secret protection, we may not be able to establish ormaintain a competitive advantage in our market, which could materially adversely affect our business, results of operations and financial condition.We may enjoy only limited geographical protection with respect to certain patents and we may not be able to protect our intellectual property rightsthroughout the world.Filing and prosecuting patent applications and defending patents covering our product candidates in all countries throughout the world would beprohibitively expensive. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own productsand, further, may export otherwise infringing products to territories where we have patent protection, but enforcement rights are not as strong as that in theUnited States or Europe. These products may compete with our product candidates, and our future patents or other intellectual property rights may not beeffective or sufficient to prevent them from competing.In addition, we may decide to abandon national and regional patent applications before grant. The examination of each national or regional patentapplication is an independent proceeding. As a result, patent applications in the same family may issue as patents in some jurisdictions, such as in the UnitedStates, but may issue as patents with claims of different scope or may even be refused in other jurisdictions. It is also quite common that depending on thecountry, the scope of patent protection may vary for the same product candidate or technology.48 While we intend to protect our intellectual property rights in our expected significant markets, we cannot ensure that we will be able to initiate ormaintain similar efforts in all jurisdictions in which we may wish to market our product candidates. Accordingly, our efforts to protect our intellectualproperty rights in such countries may be inadequate, which may have an adverse effect on our ability to successfully commercialize our product candidates inall of our expected significant foreign markets. If we encounter difficulties in protecting, or are otherwise precluded from effectively protecting, theintellectual property rights important for our business in such jurisdictions, the value of these rights may be diminished, and we may face additionalcompetition from others in those jurisdictions.The laws of some jurisdictions do not protect intellectual property rights to the same extent as the laws or rules and regulations in the United Statesand Europe, and many companies have encountered significant difficulties in protecting and defending such rights in such jurisdictions. The legal systems ofcertain countries, particularly certain developing countries, do not favor the enforcement of patents, trade secrets, and other intellectual property rights,which could make it difficult for us to stop the infringement of our future patents or marketing of competing products in violation of our proprietary rightsgenerally. Proceedings to enforce our patent rights in other jurisdictions, whether or not successful, could result in substantial costs and divert our efforts andattention from other aspects of our business, could put our future patents at risk of being invalidated or interpreted narrowly and our patent applications atrisk of not issuing as patents, and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damagesor other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the worldmay be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.Some countries also have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties. In addition,some countries limit the enforceability of patents against government agencies or government contractors. In those countries, the patent owner may havelimited remedies, which could materially diminish the value of such patents. If we are forced to grant a license to third parties with respect to any patentsrelevant to our business, our competitive position may be impaired.Recent patent reform legislation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement ordefense of our future patents.Our ability to obtain patents is highly uncertain because, to date, some legal principles remain unresolved, there has not been a consistent policyregarding the breadth or interpretation of claims allowed in patents in the United States and the specific content of patents and patent applications that arenecessary to support and interpret patent claims is highly uncertain due to the complex nature of the relevant legal, scientific, and factual issues. Changes ineither patent laws or interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property or narrow thescope of our patent protection.For example, on September 16, 2011, the Leahy-Smith America Invents Act, or the Leahy-Smith Act, was signed into law. The Leahy-Smith Actincludes a number of significant changes to United States patent law. These include provisions that affect the way patent applications will be prosecuted andmay also affect patent litigation. The United States Patent and Trademark Office, or USPTO, has developed new and untested regulations and procedures togovern the full implementation of the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act, and inparticular, the first to file provisions, only became effective in March 2013. The Leahy-Smith Act has also introduced procedures making it easier for thirdparties to challenge issued patents, as well as to intervene in the prosecution of patent applications. Finally, the Leahy-Smith Act contains new statutoryprovisions that require the USPTO to issue new regulations for their implementation, and it may take the courts years to interpret the provisions of the newstatute. It is too early to tell what, if any, impact the Leahy-Smith Act will have on the operation of our business and the protection and enforcement of ourintellectual property. However, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of ourpatent applications and the enforcement or defense of our future patents. Further, the U.S. Supreme Court has ruled on several patent cases in recent years,either narrowing the scope of patent protection available in certain circumstances or weakening the rights of patent owners in certain situations. In additionto increasing uncertainty with regard to our ability to obtain patents in the future, this combination of events has created uncertainty with respect to the valueof patents, once obtained. Depending on actions by the U.S. Congress, the federal courts, and the USPTO, the laws and regulations governing patents couldchange in unpredictable ways that would weaken our ability to obtain new patents or to enforce patents that we have owned or licensed or that we mightobtain in the future. An inability to obtain, enforce, and defend patents covering our proprietary technologies would materially and adversely affect ourbusiness prospects and financial condition.49 Similarly, changes in patent laws and regulations in other countries or jurisdictions or changes in the governmental bodies that enforce them orchanges in how the relevant governmental authority enforces patent laws or regulations may weaken our ability to obtain new patents or to enforce patentsthat we may obtain in the future. Further, the laws of some foreign countries do not protect proprietary rights to the same extent or in the same manner as thelaws of the United States. As a result, we may encounter significant problems in protecting and defending our intellectual property both in the United Statesand abroad. For example, if the issuance to us, in a given country, of a patent covering an invention is not followed by the issuance, in other countries, ofpatents covering the same invention, or if any judicial interpretation of the validity, enforceability, or scope of the claims, or the written description orenablement, in a patent issued in one country is not similar to the interpretation given to the corresponding patent issued in another country, our ability toprotect our intellectual property in those countries may be limited. Changes in either patent laws or in interpretations of patent laws in the United States andother countries may materially diminish the value of our intellectual property or narrow the scope of our patent protection.Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment, and otherrequirements imposed by government patent agencies, and our patent protection could be reduced or eliminated for non-compliance with theserequirements.Periodic maintenance fees, renewal fees, annuity fees, and various other government fees on patents and/or applications will be due to be paid to theUSPTO and various government patent agencies outside of the United States over the lifetime of our patents and/or applications and any patent rights wemay obtain in the future. We rely on our outside counsel to pay these fees. The USPTO and various non-U.S. government patent agencies require compliancewith several procedural, documentary, fee payment, and other similar provisions during the patent application process. We employ reputable law firms andother professionals to help us comply. In many cases, an inadvertent lapse can be cured by payment of a late fee or by other means in accordance with theapplicable rules. There are situations, however, in which non-compliance can result in abandonment or lapse of the patents or patent applications, resulting inpartial or complete loss of patent rights in the relevant jurisdiction. In such an event, potential competitors might be able to enter the market, and thiscircumstance could harm our business.The patent applications that we have covering our product candidates are limited to specific formulations, preparations and devices, and methods of useand manufacturing processes, and our market opportunity for our product candidates may be limited by the lack of patent protection for the activeingredient itself and by competition from other formulations and manufacturing processes, as well as administration methods that may be developed bycompetitors.Cantharidin is a naturally occurring compound found in many species of blister beetles and has been used since ancient times for medicinal purposes.Therefore, the composition of matter for the chemical structure of cantharidin itself, which is the API used in our product candidates, is not eligible for patentprotection. We seek to obtain patent protection for our manufacturing technology, drug administering technology and our product candidates, includingspecific formulations, preparations and devices, and methods of use and manufacturing processes. Although the protection afforded by our patentapplications may be significant with respect to VP-102, when looking at the ability of the patents we have applied for to block competition, the protectionoffered by the patents we have applied for may be, to some extent, more limited than the protection provided by a patent claiming the composition of matterof an entirely new chemical structure previously unknown. As a result, generic products that do not infringe the claims of our future patents coveringformulations, preparations, devices, methods of use, and manufacturing processes may be available while we are marketing our products. In general, methodof use patents are more difficult to enforce than composition of matter patents because, for example, of the risks that the FDA may approve alternative uses ofthe subject compound not covered by method of use patents, and others may engage in off-label sale or use of the subject compound. Physicians arepermitted to prescribe an approved product for uses that are not described in the product’s labeling. Although off-label prescriptions may infringe the methodof use patents we have applied for, the practice is common across medical specialties and such infringement is difficult to prevent or prosecute. In addition,competitors who obtain the requisite regulatory approval will be able to commercialize products with the same active ingredient as our product candidates solong as the competitors do not infringe any process, use, formulation, preparation or device patents that we have applied for to protect our productcandidates, subject to any regulatory exclusivity we may be able to obtain for our product candidates.50 The number of patents and patent applications covering products containing the same active ingredient as our product candidates indicates thatcompetitors have sought to develop and may seek to commercialize competing formulations that may not be covered by our patents and patent applications.The commercial opportunity for our product candidates could be significantly harmed if competitors are able to develop and commercialize alternativeformulations of our product candidates that are different from ours and do not infringe our issued patents covering our product candidates, our device, or usesof our product candidates.We may be involved in lawsuits to protect or enforce our patents, which could be expensive, time consuming and unsuccessful.Competitors may infringe the patents we have applied for. To counter infringement or unauthorized use, we may be required to file infringementclaims, which can be expensive and time-consuming. If we initiate legal proceedings against a third party to enforce a patent covering one of our productcandidates, the defendant could counterclaim that the patent covering our product or product candidate is invalid and/or unenforceable. In patent litigationin the United States, defendant counterclaims alleging invalidity and/or unenforceability are common, and there are numerous grounds upon which a thirdparty can assert invalidity or unenforceability of a patent. In an infringement proceeding, a court may decide that a patent of ours is not valid or isunenforceable or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technology inquestion. Third parties may also raise similar claims before administrative bodies in the United States or abroad, even outside the context of litigation. Suchmechanisms include re-examination, post grant review, inter partes review (IPR), and equivalent proceedings in foreign jurisdictions (e.g., oppositionproceedings). Such proceedings could result in revocation of or amendment to our patents in such a way that they no longer cover our product candidates.The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to the validity question, for example, we cannot becertain that there is no invalidating prior art, of which we, our patent counsel, and the patent examiner were unaware during prosecution. If a defendant wereto prevail on a legal assertion of invalidity and/or unenforceability, we would lose at least part, and perhaps all, of the patent protection on our productcandidates. An adverse result in any litigation or defense proceedings could put one or more of our patents at risk of being invalidated or interpretednarrowly, could put our patent applications at risk of not issuing and could have a material adverse impact on our business.Interference proceedings provoked by third parties or brought by us may be necessary to determine the priority of inventions with respect to ourpatent applications. An unfavorable outcome could require us to cease using the related technology or to attempt to license rights to it from the prevailingparty. Our business could be harmed if the prevailing party does not offer us a license on commercially reasonable terms. Our defense of litigation orinterference proceedings may fail and, even if successful, may result in substantial costs and distract our management and other employees. We may not beable to prevent misappropriation of our intellectual property rights, particularly in countries where the laws may not protect those rights as fully as in theUnited States.Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some ofour confidential information could be compromised by disclosure during this type of litigation. There could also be public announcements of the results ofhearings, motions, or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have amaterial adverse effect on the price of our common stock.Third parties may initiate legal proceedings alleging that we are infringing their intellectual property rights, the outcome of which would be uncertain.As our current and future product candidates progress toward commercialization, the possibility of a patent infringement claim against us increases.There can be no assurance that our current and future product candidates do not infringe other parties’ patents or other proprietary rights, and competitors orother parties may assert that we infringe their proprietary rights in any event. We may become party to, or threatened with, adversarial proceedings orlitigation regarding intellectual property rights with respect to our current and future product candidates, including interference or derivation proceedingsbefore the USPTO. Even if we believe such claims are without merit, a court of competent jurisdiction could hold that these third-party patents are valid,enforceable and infringed, which could have a negative impact on our ability to commercialize VP-102 and any future product candidates. In order tosuccessfully challenge the validity of any such U.S. patent in federal court, we would need to overcome a51 presumption of validity. As this burden is a high one requiring us to present clear and convincing evidence as to the invalidity of any such U.S. patent claim,there is no assurance that a court of competent jurisdiction would invalidate the claims of any such U.S. patent. Moreover, given the vast number of patents inour field of technology, we cannot be certain that we do not infringe existing patents or that we will not infringe patents that may be granted in the future.Because numerous parties have developed and/or commercialized, or are developing, a wide variety of applicator devices for use with topical dermatologicalmedications, it is possible that third parties may assert that our applicator device infringes patents they own or have applied for. While we may decide toinitiate proceedings to challenge the validity of these or other patents in the future, we may be unsuccessful, and courts or patent offices in the United Statesand abroad could uphold the validity of any such patent. Furthermore, because patent applications can take many years to issue and may be confidential for18 months or more after filing, and because pending patent claims can be revised before issuance, there may be applications now pending which may laterresult in issued patents that may be infringed by the manufacture, use or sale of our product candidates. Regardless of when filed, we may fail to identifyrelevant third-party patents or patent applications, or we may incorrectly conclude that a third-party patent is invalid or not infringed by our productcandidates or activities. If a patent holder believes our drug or product candidate infringes its patent, the patent holder may sue us even if we have receivedpatent protection for our technology. Moreover, we may face patent infringement claims from non-practicing entities that have no relevant drug revenue andagainst whom our own patent portfolio may thus have no deterrent effect. If a patent infringement suit were threatened or brought against us, we could beforced to stop or delay research, development, manufacturing or sales of the drug or product candidate that is the subject of the actual or threatened suit.If we are found to infringe a third party’s intellectual property rights, we could be required to obtain a license from such third party to continuecommercializing our product candidates. However, we may not be able to obtain any required license on commercially reasonable terms or at all. Even if alicense can be obtained on acceptable terms, the rights may be non-exclusive, which could give our competitors access to the same technology or intellectualproperty rights licensed to us. If we fail to obtain a required license, we may be unable to effectively market product candidates based on our technology,which could limit our ability to generate revenue or achieve profitability and possibly prevent us from generating revenue sufficient to sustain ouroperations. Alternatively, we may need to redesign our infringing products, which may be impossible or require substantial time and monetary expenditure.Under certain circumstances, we could be forced, including by court orders, to cease commercializing our product candidates. In addition, in any suchproceeding or litigation, we could be found liable for substantial monetary damages, potentially including treble damages and attorneys’ fees, if we are foundto have willfully infringed. A finding of infringement could prevent us from commercializing our product candidates or force us to cease some of our businessoperations, which could harm our business. Any claims by third parties that we have misappropriated their confidential information or trade secrets couldhave a similar negative impact on our business.The cost to us in defending or initiating any litigation or other proceeding relating to patent or other proprietary rights, even if resolved in our favor,could be substantial, and litigation would divert our management’s attention. Some of our competitors may be able to sustain the costs of complex patentlitigation more effectively than we can because they have substantially greater resources. Uncertainties resulting from the initiation and continuation ofpatent litigation or other proceedings could delay our research and development efforts and limit our ability to continue our operations.We may be subject to claims that our employees, consultants, or independent contractors have wrongfully used or disclosed confidential information ofthird parties.We employ individuals who were previously employed at other biotechnology or pharmaceutical companies. Although we try to ensure that ouremployees, consultants and advisors do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we orour employees, consultants, or independent contractors have inadvertently or otherwise used or disclosed confidential information of our employees’ formeremployers or other third parties. We may also be subject to claims that former employers or other third parties have an ownership interest in our future patents.Litigation may be necessary to defend against these claims. There is no guarantee of success in defending these claims, and even if we are successful,litigation could result in substantial cost and be a distraction to our management and other employees.52 We may be subject to claims challenging the inventorship or ownership of our future patents and other intellectual property.We may also be subject to claims that former employees, collaborators, or other third parties have an ownership interest in our patent applications,our future patents, or other intellectual property. We may be subject to ownership disputes in the future arising, for example, from conflicting obligations ofconsultants or others who are involved in developing our product candidates. Although it is our policy to require our employees and contractors who may beinvolved in the conception or development of intellectual property to execute agreements assigning such intellectual property to us, we may be unsuccessfulin executing such an agreement with each party who, in fact, conceives or develops intellectual property that we regard as our own, and we cannot be certainthat our agreements with such parties will be upheld in the face of a potential challenge, or that they will not be breached, for which we may not have anadequate remedy. The assignment of intellectual property rights may not be self-executing, or the assignment agreements may be breached, and litigationmay be necessary to defend against these and other claims challenging inventorship or ownership. If we fail in defending any such claims, in addition topaying monetary damages, we may lose valuable intellectual property rights, such as exclusive ownership of, or right to use, valuable intellectual property.Such an outcome could have a material adverse effect on our business. Even if we are successful in defending against such claims, litigation could result insubstantial costs and be a distraction to management and other employees.Reliance on third parties requires us to share our trade secrets, which increases the possibility that a competitor will discover them or that our trade secretswill be misappropriated or disclosed.If we rely on third parties to manufacture or commercialize VP-102 or any future product candidates, or if we collaborate with additional third partiesfor the development of VP-102 or any future product candidates, we must, at times, share trade secrets with them. We may also conduct joint research anddevelopment programs that may require us to share trade secrets under the terms of our research and development partnerships or similar agreements. We seekto protect our proprietary technology in part by entering into confidentiality agreements and, if applicable, material transfer agreements, consultingagreements or other similar agreements with our advisors, employees, third-party contractors and consultants prior to beginning research or disclosingproprietary information. These agreements typically limit the rights of the third parties to use or disclose our confidential information, including our tradesecrets. Despite the contractual provisions employed when working with third parties, the need to share trade secrets and other confidential informationincreases the risk that such trade secrets become known by our competitors, are inadvertently incorporated into the technology of others, or are disclosed orused in violation of these agreements. Given that our proprietary position is based, in part, on our know-how and trade secrets, a competitor’s discovery of ourtrade secrets or other unauthorized use or disclosure could have an adverse effect on our business and results of operations.In addition, these agreements typically restrict the ability of our advisors, employees, third-party contractors and consultants to publish datapotentially relating to our trade secrets. Despite our efforts to protect our trade secrets, we may not be able to prevent the unauthorized disclosure or use of ourtechnical know-how or other trade secrets by the parties to these agreements. Moreover, we cannot guarantee that we have entered into such agreements witheach party that may have or have had access to our confidential information or proprietary technology and processes. Monitoring unauthorized uses anddisclosures is difficult, and we do not know whether the steps we have taken to protect our proprietary technologies will be effective. If any of thecollaborators, scientific advisors, employees, contractors and consultants who are parties to these agreements breaches or violates the terms of any of theseagreements, we may not have adequate remedies for any such breach or violation, and we could lose our trade secrets as a result. Moreover, if confidentialinformation that is licensed or disclosed to us by our partners, collaborators, or others is inadvertently disclosed or subject to a breach or violation, we may beexposed to liability to the owner of that confidential information. Enforcing a claim that a third-party illegally obtained and is using our trade secrets, likepatent litigation, is expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the United States are sometimes less willingto protect trade secrets.53 Intellectual property rights do not necessarily address all potential threats to our competitive advantage.The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations and maynot adequately protect our business or permit us to maintain our competitive advantage. The following examples are illustrative: •others may be able to make products that are similar to our product candidates but that are not covered by the claims of our future patents; •we or future collaborators might not have been the first to make the inventions covered by our future issued patents or our pending patentapplications; •we or future collaborators might not have been the first to file patent applications covering certain of our inventions; •others may independently develop similar or alternative technologies or duplicate any of our technologies without infringing ourintellectual property rights; •it is possible that our pending patent applications will not lead to issued patents; •issued patents that we own may be held invalid or unenforceable as a result of legal challenges by our competitors; •issued patents that we own may not provide coverage for all aspects of our product candidates in all countries; •our competitors might conduct research and development activities in countries where we do not have patent rights and then use theinformation learned from such activities to develop competitive products for sale in our major commercial markets; •we may not develop additional proprietary technologies that are patentable; and •the patents of others may have an adverse effect on our business.Should any of these events occur, they could significantly harm our business, results of operations and prospects.Risks Related to Legal and Regulatory Compliance MattersOur relationships with customers, physicians, and third-party payors may be subject, directly or indirectly, to federal and state healthcare fraud and abuselaws, false claims laws, health information privacy and security laws, and other healthcare laws and regulations. If we are unable to comply, or have notfully complied, with such laws, we could face substantial penalties.Healthcare providers, physicians and third-party payors in the United States and elsewhere will play a primary role in the recommendation andprescription of any product candidates for which we obtain marketing approval. Our current and future arrangements with healthcare professionals, principalinvestigators, consultants, customers and third-party payors may subject us to various federal and state fraud and abuse laws and other healthcare laws,including, without limitation, the federal Anti-Kickback Statute, the federal civil and criminal false claims laws and the law commonly referred to as thePhysician Payments Sunshine Act and regulations. These laws will impact, among other things, our clinical research, proposed sales, marketing andeducational programs, and other interactions with healthcare professionals. In addition, we may be subject to patient privacy laws by both the federalgovernment and the states in which we conduct or may conduct our business. The laws that will affect our operations include, but are not limited to: •the federal Anti-Kickback Statute, which prohibits, among other things, individuals or entities from knowingly and willfully soliciting,receiving, offering or paying any remuneration, directly or indirectly, overtly or covertly, in cash or in kind, in return for the purchase,recommendation, leasing or furnishing of an item or service reimbursable under a federal healthcare program, such as the Medicare andMedicaid programs. The term “remuneration” has been broadly interpreted to include anything of value. Although there are a number ofstatutory exceptions and regulatory safe harbors protecting some common activities from prosecution, the exceptions and safe harbors aredrawn narrowly and require strict compliance in order to offer protection. Practices that involve remuneration that may be alleged to54 be intended to induce prescribing, purchases or recommendations may be subject to scrutiny if they do not qualify for an exception or safeharbor. A person does not need to have actual knowledge of this statute or specific intent to violate it in order to have committed a violation.In addition, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, orcollectively, the ACA, provides that the government may assert that a claim including items or services resulting from a violation of thefederal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act and the civil monetary penaltiesstatute; •the federal civil and criminal false claims laws, including, without limitation, the False Claims Act, and civil monetary penalty laws whichprohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment or approvalfrom Medicare, Medicaid or other government payors that are false or fraudulent or making a false statement to avoid, decrease or conceal anobligation to pay money to the federal government. A claim includes “any request or demand” for money or property presented to the U.S.government. Several pharmaceutical and other healthcare companies have been prosecuted under these laws for allegedly providing freeproduct to customers with the expectation that the customers would bill federal programs for the product. Other companies have beenprosecuted for causing false claims to be submitted because of the companies’ marketing of products for unapproved or off-label, and thusnon-reimbursable, uses; •the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, created additional federal criminal statutes whichprohibit, among other things, a person from knowingly and willfully executing a scheme to defraud any healthcare benefit program,including private third-party payors and knowingly and willfully falsifying, concealing or covering up a material fact or making anymaterially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services.Similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent toviolate it in order to have committed a violation; HIPAA, as amended by the Health Information Technology for Economic and ClinicalHealth Act, or HITECH, and their implementing regulations, which imposes certain requirements relating to the privacy, security andtransmission of individually identifiable health information without appropriate authorization on health plans, healthcare clearinghousesand certain healthcare providers, known as covered entities, and their respective business associates, independent contractors that performcertain services involving the use or disclosure of individually identifiable health information. HITECH also created new tiers of civilmonetary penalties, amended HIPAA to make civil and criminal penalties directly applicable to business associates, and gave state attorneysgeneral new authority to file civil actions for damages or injunctions in federal courts to enforce HIPAA and seek attorneys’ fees and costsassociated with pursuing federal civil actions; •the federal transparency laws, including the federal Physician Payments Sunshine Act, which requires certain manufacturers of drugs, devices,biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program, withspecific exceptions, to report annually to the Centers for Medicare & Medicaid Services, or CMS, information related to: (i) payments orother “transfers of value’’ made to physicians teaching hospitals and applicable manufacturers; and (ii) ownership and investment interestsheld by physicians and their immediate family members; and •state and foreign law equivalents of each of the above federal laws; state laws that require manufacturers to report information related topayments and other transfers of value to physicians and other healthcare providers or marketing expenditures; state laws that requirepharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant complianceguidance promulgated by the federal government, or that otherwise restrict payments that may be made to healthcare providers; state lawsthat require the reporting of information related to drug prices; state and local laws that require the registration of pharmaceutical salesrepresentatives; and state and foreign laws that govern the privacy and security of health information in some circumstances, many of whichdiffer from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.55 Because of the breadth of these laws and the narrowness of the statutory exceptions and regulatory safe harbors available, it is possible that some ofour business activities could be subject to challenge under one or more of such laws. It is possible that governmental authorities will conclude that ourbusiness practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws andregulations. If our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subjectto significant civil, criminal and administrative penalties, damages, fines, disgorgement, imprisonment, exclusion from participating in government fundedhealthcare programs, such as Medicare and Medicaid, additional reporting requirements and oversight if we become subject to a corporate integrityagreement or similar agreement to resolve allegations of non-compliance with these laws, contractual damages, reputational harm and the curtailment orrestructuring of our operations.The risk of our being found in violation of these laws is increased by the fact that many of them have not been fully interpreted by the regulatoryauthorities or the courts, and their provisions are open to a variety of interpretations. Efforts to ensure that our business arrangements with third parties willcomply with applicable healthcare laws and regulations will involve substantial costs. Any action against us for violation of these laws, even if wesuccessfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business.The shifting compliance environment and the need to build and maintain robust and expandable systems to comply with multiple jurisdictions with differentcompliance and/or reporting requirements increases the possibility that a healthcare company may run afoul of one or more of the requirements.The FDA and other regulatory agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses.If VP-102 or other product candidates that we may identify are approved and we are found to have improperly promoted off-label uses of thoseproducts, we may become subject to significant liability. The FDA and other regulatory agencies strictly regulate the promotional claims that may be madeabout prescription products, such as our product candidates, if approved. In particular, generally, a product may not be promoted for uses that are notapproved by the FDA or such other regulatory agencies as reflected in the product’s approved labeling. If we are found to have promoted such off-label uses,we may become subject to significant liability. The federal government has levied large civil and criminal fines against companies for alleged improperpromotion of off-label use and has enjoined several companies from engaging in off-label promotion. The FDA has also requested that companies enter intoconsent decrees or permanent injunctions under which specified promotional conduct is changed or curtailed. If we cannot successfully manage thepromotion of our product candidates, if approved, we could become subject to significant liability, which would materially adversely affect our business andfinancial condition.Even if we obtain regulatory approval for VP-102 or any future product candidates, they will remain subject to ongoing regulatory oversight.Even if we obtain any regulatory approval for VP-102 or any future product candidates, such product candidates, once approved, will be subject toongoing regulatory requirements for manufacturing, labeling, packaging, storage, advertising, promoting, sampling, record-keeping and submitting of safetyand other post-market information among other things. Any regulatory approvals that we receive for VP-102 or any future product candidates may also besubject to a REMS, limitations on the approved indicated uses for which the drug may be marketed or to the conditions of approval, or contain requirementsfor potentially costly post-marketing testing, including Phase 4 trials, and surveillance to monitor the quality, safety and efficacy of the drug. Anunsuccessful post-marketing study or failure to complete such a study could result in the withdrawal of marketing approval. We will further be required toimmediately report any serious and unexpected adverse events and certain quality or production problems with our products to regulatory authorities alongwith other periodic reports.56 Any new legislation addressing drug safety issues could result in delays in product development or commercialization, or increased costs to assurecompliance. We will also have to comply with requirements concerning advertising and promotion for our products. Promotional communications withrespect to prescription drug products are subject to a variety of legal and regulatory restrictions and must be consistent with the information in the product’sapproved label. As such, we will not be allowed to promote our products for indications or uses for which they do not have approval. The holder of anapproved NDA must submit new or supplemental applications and obtain prior approval for certain changes to the approved product, product labeling, ormanufacturing process.In addition, drug manufacturers and their facilities are subject to payment of user fees and continual review and periodic inspections by the FDA andother regulatory authorities for compliance with cGMP requirements and adherence to commitments made in the NDA or foreign marketing application. If we,or a regulatory authority, discover previously unknown problems with a drug, such as adverse events of unanticipated severity or frequency, or problems withthe facility where the drug is manufactured or if a regulatory authority disagrees with the promotion, marketing or labeling of that drug, a regulatory authoritymay impose restrictions relative to that drug, the manufacturing facility or us, including requesting a recall or requiring withdrawal of the drug from themarket or suspension of manufacturing.If we fail to comply with applicable regulatory requirements following approval of VP-102 or any future product candidates, a regulatory authoritymay: •issue an untitled letter or warning letter asserting that we are in violation of the law; •seek an injunction or impose administrative, civil or criminal penalties or monetary fines; •suspend or withdraw regulatory approval; •suspend any ongoing clinical trials; •refuse to approve a pending NDA or comparable foreign marketing application (or any supplements thereto) submitted by us or our strategicpartners; •restrict the marketing or manufacturing of the drug; •seize or detain the drug or otherwise require the withdrawal of the drug from the market; •refuse to permit the import or export of product candidates; or •refuse to allow us to enter into supply contracts, including government contracts.Any government investigation of alleged violations of law could require us to expend significant time and resources in response and could generatenegative publicity. The occurrence of any event or penalty described above may inhibit our ability to commercialize VP-102 or any future productcandidates and harm our business, financial condition, results of operations and prospects.Healthcare legislative or regulatory reform measures may have a negative impact on our business and results of operations.In the United States and some foreign jurisdictions, there have been, and continue to be, several legislative and regulatory changes and proposedchanges regarding the healthcare system that could prevent or delay marketing approval of product candidates, restrict or regulate post-approval activities,and affect our ability to profitably sell any product candidates for which we obtain marketing approval.Among policy makers and payors in the United States and elsewhere, there is significant interest in promoting changes in healthcare systems with thestated goals of containing healthcare costs, improving quality and/or expanding access. In the United States, the pharmaceutical industry has been aparticular focus of these efforts and has been significantly affected by major legislative initiatives. In March 2010, the ACA was passed, which substantiallychanged the way healthcare is financed by both the government and private insurers, and significantly impacts the U.S. pharmaceutical industry. The ACA,among other things: (i) increased the minimum Medicaid rebates owed by manufacturers under the Medicaid Drug Rebate Program and extends the rebateprogram to individuals enrolled in Medicaid managed care organizations; (ii) established an annual, nondeductible fee on any entity that manufactures orimports certain specified branded prescription drugs and biologic agents apportioned57 among these entities according to their market share in some government healthcare programs; (iii) expanded the availability of lower pricing under the340B drug pricing program by adding new entities to the program; (iv) increased the statutory minimum rebates a manufacturer must pay under the MedicaidDrug Rebate Program, to 23.1% and 13% of the average manufacturer price for most branded and generic drugs, respectively and capped the total rebateamount for innovator drugs at 100% of the Average Manufacturer Price, or AMP; (v) expanded the eligibility criteria for Medicaid programs by, among otherthings, allowing states to offer Medicaid coverage to additional individuals and by adding new mandatory eligibility categories for individuals with incomeat or below 133% of the federal poverty level, thereby potentially increasing manufacturers’ Medicaid rebate liability; (vi) created a new Patient-CenteredOutcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research;and (vii) established a Center for Medicare and Medicaid Innovation at CMS to test innovative payment and service delivery models to lower Medicare andMedicaid spending, potentially including prescription drug.Some of the provisions of the ACA have yet to be implemented, and there have been judicial and Congressional challenges to certain aspects of theACA, as well as recent efforts by the Trump administration to repeal or replace certain aspects of the ACA. While Congress has not passed comprehensiverepeal legislation, bills affecting the implementation of certain taxes under the ACA have been signed into law. The Tax Cuts and Jobs Act of 2017, or TaxAct includes a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment imposed by the ACA on certain individuals whofail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate”. On January 22, 2018, PresidentTrump signed a continuing resolution on appropriations for fiscal year 2018 that delayed the implementation of certain ACA-mandated fees, including theso-called “Cadillac” tax on certain high cost employer-sponsored insurance plans, the annual fee imposed on certain health insurance providers based onmarket share, and the medical device excise tax on non-exempt medical devices. The Bipartisan Budget Act of 2018, or the BBA, among other things,amended the ACA, effective January 1, 2019, to close the coverage gap in most Medicare drug plans, commonly referred to as the “donut hole.” In July 2018,CMS published a final rule permitting further collections and payments to and from certain ACA qualified health plans and health insurance issuers under theACA risk adjustment program in response to the outcome of federal district court litigation regarding the method CMS uses to determine this risk adjustment.On December 14, 2018, a Texas U.S. District Court Judge ruled that the ACA is unconstitutional in its entirety because the “individual mandate” wasrepealed by Congress as part of the Tax Act. While the Texas U.S. District Court Judge, as well as the Trump administration and CMS, have stated that theruling will have no immediate effect pending appeal of the decision, it is unclear how this decision, subsequent appeals, and other efforts to repeal andreplace the ACA will impact the ACA and our business.Other legislative changes have been proposed and adopted since the ACA was enacted. These changes include aggregate reductions to Medicarepayments to providers of 2% per fiscal year pursuant to the Budget Control Act of 2011, which began in 2013, and due to subsequent legislative amendmentsto the statute, including the BBA, will remain in effect through 2027 unless additional Congressional action is taken. The American Taxpayer Relief Act of2012, among other things, further reduced Medicare payments to several providers, including hospitals and cancer treatment centers, and increased thestatute of limitations period for the government to recover overpayments to providers from three to five years. These new laws may result in additionalreductions in Medicare and other healthcare funding, which could have an adverse effect on customers for our product candidates, if approved, and,accordingly, our financial operations.Additionally, there has been heightened governmental scrutiny in the United States of pharmaceutical pricing practices in light of the rising cost ofprescription drugs and biologics. Such scrutiny has resulted in several recent congressional inquiries and proposed and enacted federal and state legislationdesigned to, among other things, bring more transparency to product pricing, review the relationship between pricing and manufacturer patient programs, andreform government program reimbursement methodologies for products. At the federal level, the Trump administration’s budget proposal for fiscal year 2019contains further drug price control measures that could be enacted during the 2019 budget process or in other future legislation, including, for example,measures to permit Medicare Part D plans to negotiate the price of certain drugs under Medicare Part B, to allow some states to negotiate drug prices underMedicaid, and to eliminate cost sharing for generic drugs for low-income patients. Additionally, the Trump administration released a “Blueprint” to lowerdrug prices and reduce out of pocket costs of drugs that contains additional proposals to increase manufacturer competition, increase the negotiating powerof certain federal healthcare programs, incentivize manufacturers to lower the list price of their products and reduce the out of pocket costs of drug productspaid by consumers. The Department of Health and Human Services, or HHS, has already started the process of soliciting feedback on some of these measuresand, at the same, is immediately implementing others under its existing authority. For example, in September 2018, CMS announced that it will58 allow Medicare Advantage Plans the option to use step therapy for Part B drugs beginning January 1, 2019, and in October 2018, CMS proposed a new rulethat would require direct-to-consumer television advertisements of prescription drugs and biological products, for which payment is available through orunder Medicare or Medicaid, to include in the advertisement the Wholesale Acquisition Cost, or list price, of that drug or biological product. On January 31,2019, the HHS Office of Inspector General proposed modifications to federal Anti-Kickback Statute safe harbors which, among other things, may affectrebates paid by manufacturers to Medicare Part D plans, the purpose of which is to further reduce the cost of drug products to consumers. While a number ofthese and other proposed measures will require authorization through additional legislation to become effective, Congress and the Trump administrationhave each indicated that it will continue to seek new legislative and/or administrative measures to control drug costs. At the state level, legislatures areincreasingly passing legislation and implementing regulations designed to control pharmaceutical and biological product pricing, including price or patientreimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases,designed to encourage importation from other countries and bulk purchasing.We expect that these and other healthcare reform measures that may be adopted in the future, may result in more rigorous coverage criteria and inadditional downward pressure on the price that we receive for any approved drug. Any reduction in reimbursement from Medicare or other governmentprograms may result in a similar reduction in payments from private payors. The implementation of cost containment measures or other healthcare reformsmay prevent us from being able to generate revenue, attain profitability, or commercialize our drugs.In addition, FDA regulations and guidance may be revised or reinterpreted by the FDA in ways that may significantly affect our business and ourproducts. The Trump administration has also taken several executive actions, including the issuance of a number of Executive Orders, that could imposesignificant burdens on, or otherwise materially delay, the FDA’s ability to engage in routine oversight activities such as implementing statutes throughrulemaking, issuance of guidance, and review and approval of marketing applications. It is difficult to predict how these requirements will be interpreted andimplemented and the extent to which they will impact the FDA’s ability to exercise its regulatory authority. If these executive actions impose restrictions onthe FDA’s ability to engage in oversight and implementation activities in the normal course, our business may be negatively impacted. Any new regulationsor guidance, including implementation of or new guidance regarding the frameworks for compounding under Sections 503A and 503B of the FDCA, orrevisions or reinterpretations of existing regulations or guidance, may impose additional costs or lengthen FDA review times for VP-102 or any future productcandidates. We cannot determine how changes in regulations, statutes, policies, or interpretations when and if issued, enacted or adopted, may affect ourbusiness in the future. Such changes could, among other things, require: •additional clinical trials to be conducted prior to obtaining approval; •changes to manufacturing methods; •recalls, replacements, or discontinuance of one or more of our products; and •additional recordkeeping.Such changes would likely require substantial time and impose significant costs, or could reduce the potential commercial value of VP-102 or otherproduct candidates by authorizing competition in the form of compounded cantharidin products, and could materially harm our business and our financialresults. In addition, delays in receipt of or failure to receive regulatory clearances or approvals for any other products would harm our business, financialcondition, and results of operations.59 Our business activities may be subject to the Foreign Corrupt Practices Act, or FCPA, and similar anti-bribery and anti-corruption laws.Our business activities may be subject to the FCPA and similar anti-bribery or anti-corruption laws, regulations or rules of other countries in whichwe operate. The FCPA generally prohibits offering, promising, giving, or authorizing others to give anything of value, either directly or indirectly, to a non-U.S. government official in order to influence official action, or otherwise obtain or retain business. The FCPA also requires public companies to make andkeep books and records that accurately and fairly reflect the transactions of the corporation and to devise and maintain an adequate system of internalaccounting controls. Our business is heavily regulated and therefore involves significant interaction with public officials, including officials of non-U.S.governments. Additionally, in many other countries, the health care providers who prescribe pharmaceuticals are employed by their government, and thepurchasers of pharmaceuticals are government entities; therefore, our dealings with these prescribers and purchasers are subject to regulation under the FCPA.Recently the SEC and Department of Justice have increased their FCPA enforcement activities with respect to biotechnology and pharmaceutical companies.There is no certainty that all of our employees, agents, suppliers, manufacturers, contractors, or collaborators, or those of our affiliates, will comply with allapplicable laws and regulations, particularly given the high level of complexity of these laws. Violations of these laws and regulations could result in fines,criminal sanctions against us, our officers, or our employees, the closing down of facilities, including those of our suppliers and manufacturers, requirementsto obtain export licenses, cessation of business activities in sanctioned countries, implementation of compliance programs, and prohibitions on the conductof our business. Any such violations could include prohibitions on our ability to offer our products in one or more countries as well as difficulties inmanufacturing or continuing to develop our products, and could materially damage our reputation, our brand, our international expansion efforts, our abilityto attract and retain employees, and our business, prospects, operating results, and financial condition.Risks Related to Employee Matters and Managing Our GrowthOur future success depends on our ability to retain key executives and to attract, retain and motivate qualified personnel.We are highly dependent on the management, development, clinical, financial and business development expertise of Ted White, our President andChief Executive Officer, Linda Palczuk, our Chief Operating Officer, Joe Bonaccorso, our Chief Commercial Officer, Chris Degnan, our Chief FinancialOfficer, Patrick Burnett, our Chief Medical Officer, and the other members of our scientific and clinical teams. While we have entered into employmentagreements with our executive officers, each of them may currently terminate their employment with us at any time. We do not maintain “key person”insurance for any of our executives or employees.Recruiting and retaining qualified scientific and clinical personnel and, if we progress the development of our product pipeline toward scaling up forcommercialization, manufacturing and sales and marketing personnel, will also be critical to our success. The loss of the services of our executive officers orother key employees could impede the achievement of our development and commercialization objectives and seriously harm our ability to successfullyimplement our business strategy. Furthermore, replacing executive officers and key employees may be difficult and may take an extended period of timebecause of the limited number of individuals in our industry with the breadth of skills and experience required to successfully develop, gain regulatoryapproval of and commercialize products. Competition to hire from this limited pool is intense, and we may be unable to hire, train, retain or motivate thesekey personnel on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies for similar personnel. We alsoexperience competition for the hiring of scientific and clinical personnel from universities and research institutions. In addition, we rely on consultants andadvisors, including scientific and clinical advisors, to assist us in formulating our development and commercialization strategy. Our consultants and advisorsmay be employed by employers other than us and may have commitments under consulting or advisory contracts with other entities that may limit theiravailability to us. If we are unable to continue to attract and retain high quality personnel, our ability to pursue our growth strategy will be limited.60 We expect to expand our development and regulatory capabilities and potentially implement sales, marketing and distribution capabilities, and as aresult, we may encounter difficulties in managing our growth, which could disrupt our operations.As of December 31, 2018, we had 16 full-time employees. As our development progresses, we expect to experience significant growth in the numberof our employees and the scope of our operations, particularly in the areas of product development, regulatory affairs and, if any of our product candidatesreceives marketing approval, sales, marketing and distribution. To manage our anticipated future growth, we must continue to implement and improve ourmanagerial, operational and financial systems, expand our facilities and continue to recruit and train additional qualified personnel. Due to our limitedfinancial resources and the limited experience of our management team in managing a company with such anticipated growth, we may not be able toeffectively manage the expansion of our operations or recruit and train additional qualified personnel. The expansion of our operations may lead tosignificant costs and may divert our management and business development resources. Any inability to manage growth could delay the execution of ourbusiness plans or disrupt our operations.Our employees, independent contractors, consultants, commercial collaborators, principal investigators, CROs, suppliers and vendors may engage inmisconduct or other improper activities, including non-compliance with regulatory standards and requirements.We are exposed to the risk that our employees, independent contractors, consultants, commercial collaborators, principal investigators, CROs,suppliers and vendors may engage in fraudulent conduct or other illegal activity. Misconduct by these parties could include intentional, reckless and/ornegligent conduct or disclosure of unauthorized activities to us that violates FDA regulations, including those laws requiring the reporting of true, completeand accurate information to the FDA, manufacturing standards, federal and state healthcare laws and regulations, and laws that require the true, complete andaccurate reporting of financial information or data. In particular, sales, marketing and business arrangements in the healthcare industry are subject toextensive laws and regulations intended to prevent fraud, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict orprohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements.Misconduct by these parties could also involve the improper use of individually identifiable information, including, without limitation, informationobtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our reputation. We have adopted a code of businessconduct and ethics, but it is not always possible to identify and deter misconduct, and the precautions we take to detect and prevent this activity may not beeffective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemmingfrom a failure to be in compliance with such laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselvesor asserting our rights, those actions could have a significant impact on our business, including the imposition of significant civil, criminal andadministrative penalties, including, without limitation, damages, fines, disgorgement, imprisonment, exclusion from participation in government healthcareprograms, such as Medicare and Medicaid, additional reporting requirements and oversight if we become subject to a corporate integrity agreement or similaragreement to resolve allegations of non-compliance with these laws, and the curtailment or restructuring of our operations.Risks Related to Ownership of Our Common Stock and Our Status as a Public CompanyAn active trading market for our common stock may not continue to develop or be sustained.Prior to our initial public offering, there was no public market for our common stock, and we cannot assure you that an active trading market for ourshares will continue to develop or be sustained. As a result, it may be difficult for you to sell shares at an attractive price or at all.61 The trading price of the shares of our common stock may be volatile, and purchasers of our common stock could incur substantial losses.Our stock price may be volatile. The stock market in general and the market for biopharmaceutical companies in particular have experienced extremevolatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, investors may not be able to selltheir common stock at or above the price paid for the shares. The market price for our common stock may be influenced by many factors, including: •the commencement, enrollment or results of our clinical trials of VP-102 for the treatment of molluscum and common warts and any futureclinical trials we may conduct, or changes in the development status of our product candidates; •any delay in our regulatory filings for VP-102 for the treatment of molluscum and common warts or any other product candidate we maydevelop, including VP-103, and any adverse development or perceived adverse development with respect to the applicable regulatoryauthority’s review of such filings, including without limitation the FDA’s issuance of a “refusal to file” letter or a request for additionalinformation; •adverse results from, delays in or termination of clinical trials; •adverse regulatory decisions, including failure to receive regulatory approval of our product candidates; •unanticipated serious safety concerns related to the use of VP-102 or any other product candidate; •changes in financial estimates by us or by any securities analysts who might cover our stock; •conditions or trends in our industry; •changes in the market valuations of similar companies; •stock market price and volume fluctuations of comparable companies and, in particular, those that operate in the biopharmaceutical industry; •publication of research reports about us or our industry or positive or negative recommendations or withdrawal of research coverage bysecurities analysts; •announcements by us or our competitors of significant acquisitions, strategic partnerships or divestitures; •announcements of investigations or regulatory scrutiny of our operations or lawsuits filed against us; •investors’ general perception of our company and our business; •recruitment or departure of key personnel; •overall performance of the equity markets; •trading volume of our common stock; •disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protectionfor our technologies; •significant lawsuits, including patent or stockholder litigation; •general political and economic conditions; and •other events or factors, many of which are beyond our control.In addition, in the past, stockholders have initiated class action lawsuits against pharmaceutical and biotechnology companies following periods ofvolatility in the market prices of these companies’ stock. Such litigation, if instituted against us, could cause us to incur substantial costs and divertmanagement’s attention and resources from our business.62 If equity research analysts do not publish research or reports, or publish unfavorable research or reports, about us, our business or our market, our stockprice and trading volume could decline.The trading market for our common stock will be influenced by the research and reports that equity research analysts publish about us and ourbusiness. As a newly public company, we have only limited research coverage by equity research analysts. Equity research analysts may elect not to initiateor continue to provide research coverage of our common stock, and such lack of research coverage may adversely affect the market price of our commonstock. Even if we continue to have equity research analyst coverage, we will not have any control over the analysts or the content and opinions included intheir reports. The price of our stock could decline if one or more equity research analysts downgrade our stock or issue other unfavorable commentary orresearch. If one or more equity research analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our stock coulddecrease, which in turn could cause our stock price or trading volume to decline.Sales of a substantial number of shares of our common stock in the public market could cause the market price of our common stock to drop significantly,even if our business is doing well.Sales of a substantial number of shares of our common stock in the public market could occur at any time, subject to the restrictions and limitationsdescribed below. If our stockholders sell, or the market perceives that our stockholders intend to sell, substantial amounts of our common stock in the publicmarket, the market price of our common stock could decline significantly. All of our outstanding shares of common stock are available for sale in the publicmarket, subject only to the restrictions of Rule 144 under the Securities Act in the case of our affiliates.In addition, we have filed a registration statement on Form S-8 under the Securities Act registering the issuance of 4,981,761 shares of common stocksubject to options or other equity awards issued or reserved for future issuance under our equity incentive plans. Shares registered under this registrationstatement on Form S-8 are available for sale in the public market subject to vesting arrangements and exercise of options, the lock-up agreements describedabove and the restrictions of Rule 144 in the case of our affiliates. Provisions in our corporate charter documents and under Delaware law may prevent or frustrate attempts by our stockholders to change our managementand hinder efforts to acquire a controlling interest in us, and the market price of our common stock may be lower as a result.There are provisions in our certificate of incorporation and bylaws that may make it difficult for a third party to acquire, or attempt to acquire, controlof our company, even if a change of control was considered favorable by you and other stockholders. For example, our board of directors has the authority toissue up to 10,000,000 shares of preferred stock. The board of directors can fix the price, rights, preferences, privileges, and restrictions of the preferred stockwithout any further vote or action by our stockholders. The issuance of shares of preferred stock may delay or prevent a change of control transaction. As aresult, the market price of our common stock and the voting and other rights of our stockholders may be adversely affected. An issuance of shares of preferredstock may result in the loss of voting control to other stockholders.Our charter documents contain other provisions that could have an anti-takeover effect, including: •only one of our three classes of directors are elected each year; •stockholders are not entitled to remove directors other than by a 66 ⅔% vote and only for cause; •stockholders are not permitted to take actions by written consent; •stockholders cannot call a special meeting of stockholders; and •stockholders must give advance notice to nominate directors or submit proposals for consideration at stockholder meetings.63 In addition, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which regulates corporateacquisitions by prohibiting Delaware corporations from engaging in specified business combinations with particular stockholders of those companies. Theseprovisions could discourage potential acquisition proposals and could delay or prevent a change of control transaction. They could also have the effect ofdiscouraging others from making tender offers for our common stock, including transactions that may be in your best interests. These provisions may alsoprevent changes in our management or limit the price that investors are willing to pay for our stock.Concentration of ownership of our common stock among our existing executive officers, directors and principal stockholders may prevent our otherstockholders from influencing significant corporate decisions.Our executive officers, directors and current beneficial owners of 5% or more of our common stock and their respective affiliates, including entitiesaffiliated with Paul B. Manning, in the aggregate, beneficially own a majority of our outstanding common stock. As a result, these persons, acting together,can significantly influence all matters requiring stockholder approval, including the election and removal of directors, any merger, consolidation, sale of allor substantially all of our assets, or other significant corporate transactions.Some of these persons or entities may have interests different than yours. For example, because many of these stockholders purchased their shares atprices substantially below the current market price of our common stock and have held their shares for a longer period, they may be more interested in sellingour company to an acquirer than other investors, or they may want us to pursue strategies that deviate from the interests of other stockholders.We are an “emerging growth company” and, as a result of the reduced disclosure and governance requirements applicable to emerging growth companies,our common stock may be less attractive to investors.We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and we intend to takeadvantage of some of the exemptions from reporting requirements that are applicable to other public companies that are not emerging growth companies,including: •being permitted to provide only two years of audited financial statements, in addition to any required unaudited interim financial statements,with correspondingly reduced “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure; •not being required to comply with the auditor attestation requirements in the assessment of our internal control over financial reporting; •not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regardingmandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financialstatements; •reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements; and •not being required to hold a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachutepayments not previously approved.We cannot predict if investors will find our common stock less attractive because we will rely on these exemptions. If some investors find ourcommon stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile. We maytake advantage of these reporting exemptions until we are no longer an emerging growth company. We will remain an emerging growth company until theearlier of (1) the last day of the fiscal year (a) ending December 31, 2023, which is the end of the fiscal year following the fifth anniversary of the closing ofour initial public offering, (b) in which we have total annual gross revenue of at least $1.07 billion, or (c) in which we are deemed to be a large acceleratedfiler, which means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the prior June 30th, and (2) the date onwhich we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.64 Under Section 107(b) of the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as thosestandards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and,therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.If we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements on a timely basis could be impaired.We are subject to the reporting requirements of the Securities Exchange Act of 1934, the Sarbanes-Oxley Act and the rules and regulations of thestock market on which our common stock is listed. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls andprocedures and internal control over financial reporting.Commencing with our fiscal year ending December 31, 2019, we must perform system and process evaluation and testing of our internal control overfinancial reporting to allow management to report on the effectiveness of our internal control over financial reporting in our Form 10-K filing for that year, asrequired by Section 404 of the Sarbanes-Oxley Act. This will require that we incur substantial additional professional fees and internal costs to expand ouraccounting and finance functions and that we expend significant management efforts. Prior to our initial public offering, we were not required to test ourinternal control within a specified period, and, as a result, we may experience difficulty in meeting these reporting requirements in a timely manner.We may identify weaknesses in our system of internal financial and accounting controls and procedures that could result in a material misstatementof our financial statements. Our internal control over financial reporting will not prevent or detect all errors and all fraud. A control system, no matter howwell designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the inherentlimitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that allcontrol issues and instances of fraud will be detected.If we are not able to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner, or if we are unable to maintainproper and effective internal controls, we may not be able to produce timely and accurate financial statements. If that were to happen, the market price of ourstock could decline and we could be subject to sanctions or investigations by the stock exchange on which our common stock is listed, the Securities andExchange Commission, or SEC, or other regulatory authorities.The 2017 comprehensive tax reform bill could adversely affect our business and financial condition.On December 22, 2017, President Trump signed into law legislation, known as the Tax Cuts and Jobs Act of 2017, or Tax Act that significantlyrevised the Internal Revenue Code of 1986, as amended. The federal income tax legislation, among other things, contained significant changes to corporatetaxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for interestexpense to 30% of adjusted earnings (except for certain small businesses), effective for net operating losses incurred in taxable years beginning afterDecember 31, 2017, limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating losscarrybacks, one time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, elimination of U.S. tax on foreign earnings(subject to certain important exceptions), immediate deductions for certain new investments instead of deductions for depreciation expense over time, andmodifying or repealing many business deductions and credits. Notwithstanding the reduction in the corporate income tax rate, the overall impact of thechanges to the federal tax law is uncertain and our business and financial condition could be adversely affected. In addition, it is uncertain how various stateswill respond to the changes in the federal tax law. The impact of this tax reform on holders of our common stock is also uncertain and could be adverse. Weurge you to consult with your legal and tax advisors with respect to this legislation and the potential tax consequences of investing in or holding ourcommon stock.65 Our effective tax rate may fluctuate, and we may incur obligations in tax jurisdictions in excess of accrued amounts.We are subject to taxation in more than one tax jurisdiction. As a result, our effective tax rate is derived from a combination of applicable tax rates inthe various places that we operate. In preparing our financial statements, we estimate the amount of tax that will become payable in each of such places.Nevertheless, our effective tax rate may be different than experienced in the past due to numerous factors, including passage of the newly enacted federalincome tax law, changes in the mix of our profitability from jurisdiction to jurisdiction, the results of examinations and audits of our tax filings, our inabilityto secure or sustain acceptable agreements with tax authorities, changes in accounting for income taxes and changes in tax laws. Any of these factors couldcause us to experience an effective tax rate significantly different from previous periods or our current expectations and may result in tax obligations inexcess of amounts accrued in our financial statements.We might not be able to utilize a significant portion of our net operating loss carryforwards.As of December 31, 2018, we had federal and state net operating loss carryforwards of approximately $24.1 million and $24.1 million, respectively.The federal and state net operating loss carryforwards included in the foregoing totals that were generated prior to 2018 will begin to expire, if not utilized,by 2033. These net operating loss carryforwards could expire unused and be unavailable to offset future income tax liabilities. Under the 2017 federal incometax law changes, federal net operating losses incurred in 2018 and in future years may be carried forward indefinitely, but the deductibility of such federal netoperating losses is limited. It is uncertain how various states will respond to the 2017 federal tax law changes. In addition, under Section 382 of the InternalRevenue Code of 1986, as amended, and corresponding provisions of state law, if a corporation undergoes an “ownership change,” which is generallydefined 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 operatingloss carryforwards and other pre-change tax attributes to offset its post-change income or taxes may be limited. We may experience ownership changes in thefuture as a result of subsequent shifts in our stock ownership, some of which may be outside of our control. If an ownership change occurs and our ability touse our net operating loss carryforwards is materially limited, it would harm our future operating results by effectively increasing our future tax obligations.We do not anticipate paying any cash dividends on our common stock in the foreseeable future.You should not rely on an investment in our common stock to provide dividend income. We have not declared or paid cash dividends on ourcommon stock to date. We currently intend to retain our future earnings, if any, to fund the development and growth of our business. In addition, the terms ofany existing or future debt agreements may preclude us from paying dividends. As a result, capital appreciation, if any, of our common stock will be your solesource of gain for the foreseeable future. Investors seeking cash dividends should not purchase our common stock.We have begun to incur increased costs and demands upon management as a result of being a public company.As a newly public company listed in the United States, we have begun to incur significant additional legal, accounting and other costs. Theseadditional costs could negatively affect our financial results. In addition, changing laws, regulations and standards relating to corporate governance andpublic disclosure, including regulations implemented by the SEC and the Nasdaq Stock Market, may increase legal and financial compliance costs and makesome activities more time-consuming. These laws, regulations and standards are subject to varying interpretations and, as a result, their application inpractice may evolve over time as new guidance is provided by regulatory and governing bodies. We intend to invest resources to comply with evolving laws,regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time andattention from revenue-generating activities to compliance activities. If notwithstanding our efforts to comply with new laws, regulations and standards, wefail to comply, regulatory authorities may initiate legal proceedings against us and our business may be harmed.Failure to comply with these rules might also make it more difficult for us to obtain some types of insurance, including director and officer liabilityinsurance, and we might be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. Theimpact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, on committees of ourboard of directors or as members of senior management.66 Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware and, to the extent enforceable, thefederal district courts of the United States of America will be the exclusive forums for substantially all disputes between us and our stockholders, whichcould limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for (i) anyderivative action or proceeding brought on our behalf, (ii) any action asserting a claim for breach of a fiduciary duty owed by any of our directors, officers orother employees to us or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, ouramended and restated certificate of incorporation or our amended and restated bylaws or (iv) any action asserting a claim governed by the internal affairsdoctrine. Our amended and restated certificate of incorporation further provides that the federal district courts of the United States of America will be theexclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act, subject to and contingent upon a final adjudicationin the State of Delaware of the enforceability of such exclusive forum provision. These exclusive forum provisions may limit a stockholder’s ability to bring aclaim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits againstus and our directors, officers and other employees. For example, stockholders who do bring a claim in the Court of Chancery could face additional litigationcosts in pursuing any such claim, particularly if they do not reside in or near the State of Delaware. The Court of Chancery and federal district courts may alsoreach different judgments or results than would other courts, including courts where a stockholder considering an action may be located or would otherwisechoose to bring the action, and such judgments or results may be more favorable to us than to our stockholders. Some companies that adopted a similarfederal district court forum selection provision are currently subject to a suit in the Chancery Court of Delaware by stockholders who assert that the provisionis not enforceable. If a court were to find either choice of forum provision contained in our amended and restated certificate of incorporation to beinapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could adverselyaffect our business and financial condition. For example, the Court of Chancery of the State of Delaware recently determined that the exclusive forumprovision of federal district courts of the United States of America for resolving any complaint asserting a cause of action arising under the Securities Act isnot enforceable. However, this decision has been appealed and may be reviewed and ultimately overturned by the Delaware Supreme Court. If this ultimateadjudication were to occur, we would enforce the federal district court exclusive forum provision in our amended and restated certificate of incorporation.ITEM 1B. UNRESOLVED STAFF COMMENTSNone.ITEM 2. PROPERTIESWe operate in a 4,962 square foot facility in West Chester, Pennsylvania pursuant to a sublease agreement that expires in May 2021. We believe thatour existing facilities are suitable and adequate to meet our current needs. We intend to add new facilities or expand existing facilities as we add employees,and we believe that suitable additional or substitute space will be available as needed to accommodate any such expansion of our operations.ITEM 3. LEGAL PROCEEDINGSWe are not currently a party to any material legal proceedings and we are not aware of any pending or threatened legal proceeding against us that webelieve could have a material adverse effect on our business, operating results or financial condition.ITEM 4. MINE SAFETY DISCLOSURESNone.67 PART IIITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASE OF EQUITYSECURITIESDividend PolicyWe have never declared or paid, and do not anticipate declaring or paying, in the foreseeable future, any cash dividends on our capital stock. Wecurrently intend to retain all available funds and any future earnings to support our operations and finance the growth and development of our business. Anyfuture determination related to our dividend policy will be made at the discretion of our board of directors and will depend upon, among other factors, ourresults of operations, financial condition, capital requirements, contractual restrictions, business prospects and other factors our board of directors may deemrelevant.StockholdersOur common stock is listed on the Nasdaq Global Select Market under the symbol “VRCA”. As of March 4, 2019, we had 25,707,256 shares ofcommon stock outstanding held by 62 holders of record. The actual number of stockholders is greater than this number of record holders and includesstockholders who are beneficial owners but whose shares are held in street name by brokers and other nominees. This number of holders of record also doesnot include stockholders whose shares may be held in trust by other entities.Use of Proceeds from Initial Public Offering of Common StockOn June 14, 2018, our Registration Statement on Form S-1, as amended (File No. 333-225104) was declared effective in connection with our initialpublic offering, or IPO, pursuant to which we sold 5,750,000 shares of our common stock, including the full exercise of the underwriters’ option to purchaseadditional shares, at a price to the public of $15.00 per share. The IPO closed on June 19, 2018. We received net proceeds from the IPO of $78.4 million (afterdeducting underwriters’ discounts and commissions and additional offering related costs of $7.9 million). The joint book-running underwriters of the offeringwere Merrill Lynch, Pierce, Fenner & Smith Incorporated, Jefferies LLC and Cowen and Company, LLC.No expenses incurred by us in connection with our IPO were paid directly or indirectly to (i) any of our officers or directors or their associates, (ii) anypersons owning 10% or more of any class of our equity securities, or (iii) any of our affiliates, other than payments in the ordinary course of business toofficers for salaries and to non-employee directors as compensation for board or board committee service.There has been no material change in the planned use of proceeds from our IPO from those disclosed in the final prospectus for our IPO dated as ofJune 14, 2018 and filed with the SEC on June 15, 2018 pursuant to Rule 424(b)(4).Recent Sales of Unregistered SecuritiesNone.Purchases of Equity Securities by the Issuer and Affiliated PartiesNone.ITEM 6. SELECTED FINANCIAL DATANot applicable.68 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSYou should read the following discussion and analysis of our financial condition and results of operations in conjunction with the financialstatements and the related notes to those statements included later in this Annual Report. In addition to historical financial information, the followingdiscussion contains forward‑looking statements that reflect our plans, estimates, beliefs and expectations that involve risks and uncertainties. Our actualresults and the timing of events could differ materially from those discussed in these forward‑looking statements. Factors that could cause or contribute tothese differences include those discussed below and elsewhere in this Annual Report, particularly in Item 1A. “Risk Factors” and “Special Note RegardingForward‑Looking Statements.”OverviewWe are a medical dermatology company committed to the development and commercialization of novel treatments that provide meaningful benefitfor people living with skin diseases. Our lead product candidate, VP-102, is a proprietary drug-device combination of our novel topical solution ofcantharidin, a widely recognized, naturally sourced agent to treat topical dermatological conditions, administered through our single-use precisionapplicator. We are initially developing VP-102 for the treatment of molluscum contagiosum, or molluscum, a highly contagious and primarily pediatric viralskin disease, and common warts. There are currently no products approved by the U.S. Food and Drug Administration, or FDA, nor is there an establishedstandard of care for either of these diseases, resulting in significant undertreated populations in two of the largest unmet needs in dermatology. In addition topatent protection we are seeking, VP-102 has the potential to be the first FDA-approved product for molluscum and for its active pharmaceutical ingredient,or API, to be characterized as a new chemical entity, or NCE, with the five years of non-patent regulatory exclusivity associated with that designation. Wealso believe VP-102 has the potential to qualify for pediatric exclusivity, which would provide for an additional six months of non-patent exclusivity.In January 2019, we reported positive top-line results from our Phase 3 CAMP-1 and CAMP-2 pivotal trials with VP-102 for the treatment ofmolluscum. Both clinical trials evaluated the safety and efficacy of VP-102 compared to placebo. In each trial, we observed that a clinically and statisticallysignificant proportion of subjects treated with VP-102 achieved complete clearance of all treatable molluscum lesions compared to subjects treated withplacebo. VP-102 was well-tolerated in both trials, with no serious adverse events reported in VP-102 treated subjects. We plan to submit a new drugapplication, or NDA, to the FDA for VP-102 for the treatment of molluscum in the second half of 2019. CAMP-1 was conducted under a special protocolassessment, or SPA, agreement with the FDA. We also have an ongoing Phase 2 clinical trial of VP-102 for the treatment of common warts (COVE-1). Weexpect to report top-line results from this trial in the second quarter of 2019. In addition, we plan to initiate a Phase 2 trial with VP-102 in external genitalwarts in the first half of 2019. We also expect to submit an investigational new drug application, or IND, for VP-103 in plantar warts in the second half of2019. We retain exclusive, royalty-free rights to our product candidates across all indications.Our strategy is to advance VP-102 through regulatory approval and self-commercialize in the United States for the treatment of several skin diseases.We intend to build a specialized sales organization in the United States focused on pediatric dermatologists, dermatologists, and select pediatricians. In thefuture, we also intend to develop VP-102 for commercialization in additional geographic regions, either alone or together with a strategic partner.We have a limited operating history. Since our inception in 2013, our operations have focused on developing VP-102, organizing and staffing ourcompany, business planning, raising capital, establishing our intellectual property portfolio and conducting clinical trials. We do not have any productcandidates approved for sale and have not generated any revenue from product sales. We have funded our operations primarily through the sale of equity andequity-linked securities. On June 19, 2018, we completed an IPO of common stock, which resulted in the issuance and sale of 5,750,000 shares of commonstock at a public offering price of $15.00 per share, generating net proceeds of $78.4 million after deducting underwriting discounts and other offering costs.We believe that the net proceeds from the IPO, together with our existing cash, cash equivalents and marketable securities, will enable us to fund ouroperations in the normal course of business at least through the end of 2020.69 Since inception, we have incurred significant operating losses. For the years ended December 31, 2018 and 2017, our net loss was $20.6 million and$4.5 million, respectively. As of December 31, 2018, we had an accumulated deficit of $33.1 million. We expect to continue to incur significant expensesand operating losses for the foreseeable future. We anticipate that our expenses will increase significantly in connection with our ongoing activities, as we: •continue our ongoing clinical programs evaluating VP-102 for the treatment of molluscum and common warts as well as initiate andcomplete additional clinical trials, as needed; •initiate clinical trials evaluating VP-102 for the treatment of external genital warts; •pursue an IND and initiate clinical trials evaluating VP-103 for the treatment of plantar warts; •pursue regulatory approvals for VP-102 for the treatment of molluscum, and eventually for the treatment of common warts, external genitalwarts or any other indications we may pursue for VP-102, as well as for VP-103; •seek to discover and develop additional product candidates; •ultimately establish a commercialization infrastructure and scale up external manufacturing and distribution capabilities to commercializeany product candidates for which we may obtain regulatory approval, including VP-102 and VP-103; •seek to in-license or acquire additional product candidates for other dermatological conditions; •adapt our regulatory compliance efforts to incorporate requirements applicable to marketed products; •maintain, expand and protect our intellectual property portfolio; •hire additional clinical, manufacturing and scientific personnel; •add operational, financial and management information systems and personnel, including personnel to support our product development andplanned future commercialization efforts; and •incur additional legal, accounting and other expenses in operating as a newly public company.Services Agreement with PBM Capital Group, LLCIn December 2015, we entered into a services agreement, or SA, with PBM Capital Group, LLC, or PBM, an affiliate of PBM Capital Investments,LLC, to engage PBM for certain business development, operations, technical, contract, accounting and back office support services. We agreed to pay PBM afee of $2,500 per month for these services. The SA had an initial term of 12 months and automatically renewed monthly thereafter.In March 2018, we entered into an amendment to the SA with PBM effective as of April 1, 2018, which extended the term of the SA until March 31,2019 and increased the management fee we are obligated to pay to PBM to $50,000 per month. The SA as amended, provides for termination by us with 30days advance notice or a mutually agreed upon effective date for transition as individual services are cancelled with a corresponding reduction in themonthly management fee. On January 1, 2019, the SA was amended to reduce the monthly management fee to $26,333 as a result of a reduction in servicesprovided by PBM.Critical Accounting Policies and Significant Judgments and EstimatesThe preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilitiesand the disclosure of contingent assets and liabilities at the date of our financial statements, as well as the reported revenues and expenses during the reportedperiods. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results ofwhich form the basis for making judgments about the carrying value of assets and liabilities that are not apparent from other sources. Actual results may differfrom these estimates under different assumptions or conditions.70 A summary of our significant accounting policies appears in the notes to our audited financial statements for the year ended December 31, 2018included in this Annual Report on Form 10-K. However, we believe that the following accounting policies are important to understanding and evaluating ourreported financial results, and we have accordingly included them in this discussion.Research and Development CostsOur research and development expenses consist primarily of costs associated with our clinical trials, salaries, payroll taxes, employee benefits, andequity-based compensation charges for those individuals involved in ongoing research and development efforts. Research and development costs areexpensed as incurred. Advance payments for goods and services that will be used in future research and development activities are expensed when theactivity has been performed or when the goods have been received rather than when the payment is made.Stock-Based CompensationWe account for stock-based compensation awards in accordance with ASC 718, Compensation –Stock Compensation. We use the Black-Scholesoption-pricing model to value our stock option awards. For stock-based awards granted to employees and to members of the board of directors for theirservices, we estimate the grant date fair value of each option award and recognizes employee compensation expense on a straight-line basis over the vestingperiod of the award. See Change in Accounting Principle – Stock-Based Compensation. Non-employee options are remeasured to fair value each period andwe recognize compensation expense on a straight-line basis over the vesting period of each separate vesting tranche of the award.The use of the Black‑Scholes option-pricing model requires us to make assumptions with respect to the expected term of the option, the expectedvolatility of the common stock consistent with the expected life of the option, risk‑free interest rates, and, for grants prior to our initial public offering, thevalue of the common stock. The expected life of stock options was estimated using the “simplified method,” as we have limited historical information todevelop reasonable expectations about future exercise patterns and post-vesting employment termination behavior for its stock options grants. Thesimplified method is based on the average of the vesting tranches and the contractual life of each grant. We have historically been a private company andlack company-specific historical and implied volatility information. Therefore, we estimate expected stock volatility based on the historical volatility of apublicly 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 we have never paid cash dividends and do not expect to pay any cash dividends in the foreseeablefuture.Change in Accounting Principle - Stock-Based CompensationIn the fourth quarter of 2018, we changed our policy for recognizing stock-based compensation expense for graded-vesting awards with serviceconditions only from the graded attribution method to the straight-line attribution method. We view these awards as single awards and believe that thestraight-line attribution method more accurately reflects the pattern of service provided by our employees versus the graded attribution method whichsignificantly front loads the stock-based compensation expense and does not appropriately match the expense with the services provided. In addition, basedon research and analysis, we believe the straight-line attribution method for stock-based compensation expense for service condition-only awards is thepredominant method used in our industry. See Note 2 to our financial statements for the effect of the change in accounting policy and its impact on keycomponents of our financial statements.Stock-based compensation for non-employee stock options is recorded over the vesting period and remeasured at fair value until they vest.Recent Accounting PronouncementsSee Note 2 to our financial statements for a discussion of recent accounting pronouncements and their effect on us.71 JOBS ActIn April 2012, the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, was enacted. Section 107 of the JOBS Act provides that an“emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying withnew or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards wouldotherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we will adopt newor revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies.Subject to certain conditions, as an emerging growth company, we may rely on certain exemptions, including exemptions from (i) providing anauditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act and(ii) complying with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or asupplement to the auditor’s report providing additional information about the audit and the financial statements, known as the auditor discussion andanalysis. We will remain an emerging growth company until the earlier to occur of (1) (a) December 31, 2023, which is the end of the fiscal year followingthe fifth anniversary of the completion of our initial public offering, (b) the last day of the fiscal year in which we have total annual gross revenues of at least$1.07 billion or (c) the last day of the fiscal year in which we are deemed to be a “large accelerated filer” under the rules of the U.S. Securities and ExchangeCommission, which means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the prior June 30th, and (2) thedate on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.Components of Operating ResultsRevenueWe have not generated any revenue since inception and do not expect to generate any revenue from the sale of products in the near future.Operating ExpensesResearch and Development ExpensesResearch and development expenses consist of expenses incurred in connection with the discovery and development of our product candidates. Weexpense research and development costs as incurred. These expenses include: •expenses incurred under agreements with contract research organizations, or CROs, as well as investigative sites and consultants that conductour clinical trials and preclinical studies; •manufacturing and supply scale-up expenses and the cost of acquiring and manufacturing preclinical and clinical trial supply andcommercial supply, including manufacturing validation batches; •outsourced professional scientific development services; •employee-related expenses, which include salaries, benefits and stock-based compensation; •expenses relating to regulatory activities; and •laboratory materials and supplies used to support our research activities.Research and development activities are central to our business model. Product candidates in later stages of clinical development generally havehigher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials.We expect our research and development expenses to increase over the next several years as we increase personnel costs, including stock-basedcompensation, pursue regulatory approval for VP-102 for the treatment of molluscum, conduct our ongoing Phase 2 clinical trial of VP-102 in patients withcommon warts, initiate a Phase 2 trial with VP-102 in external genital warts, submit an IND for VP-103 in plantar warts and conduct other clinical trials andprepare regulatory filings for our product candidates.72 The successful development of our product candidates is highly uncertain. At this time, we cannot reasonably estimate or know the nature, timingand costs of the efforts that will be necessary to complete the remainder of the development of, or when, if ever, material net cash inflows may commence fromour product candidates. This uncertainty is due to the numerous risks and uncertainties associated with the duration and cost of clinical trials, which varysignificantly over the life of a project as a result of many factors, including: •the number of clinical sites included in the trials; •the length of time required to enroll suitable patients; •the number of patients that ultimately participate in the trials; •the number of doses patients receive; •the duration of patient follow-up; and •the results of our clinical trials.Our expenditures are subject to additional uncertainties, including the manufacturing process for our product candidates, the terms and timing ofregulatory approvals, and the expense of filing, prosecuting, defending and enforcing any patent claims or other intellectual property rights. We may neversucceed in achieving regulatory approval for our product candidates. We may obtain unexpected results from our clinical trials. We may elect to discontinue,delay or modify clinical trials of our product candidates. A change in the outcome of any of these variables with respect to the development of a productcandidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the FDA orother regulatory authorities were to require us to conduct clinical trials beyond those that we currently anticipate, or if we experience significant delays inenrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinicaldevelopment. Product commercialization will take several years and millions of dollars in development costs.General and Administrative ExpensesGeneral and administrative expenses consist principally of salaries and related costs for personnel in executive and administrative functions,including stock-based compensation, travel expenses and recruiting expenses. Other general and administrative expenses include market research costs,professional fees for legal, accounting and tax-related services, insurance costs, as well as payments made under our services agreement with PBM CapitalGroup, LLC.We anticipate that our general and administrative expenses will increase as a result of increased payroll, expanded infrastructure and higherconsulting, legal and tax-related services associated with maintaining compliance with stock exchange listing and SEC requirements, accounting andinvestor relations costs, and director and officer insurance premiums associated with being a public company. In addition, we expect to incur, at an increasedrate compared to prior periods, significantly higher expenses associated with building a sales and marketing team in connection with the potential regulatoryfiling and approval of VP-102 for the treatment of molluscum. As a result, we expect to report significantly higher general and administrative expenses in2019.Income TaxesSince our inception in 2013, we have not recorded any U.S. federal or state income tax benefits for the net losses we have incurred in each year due toour uncertainty of realizing a benefit from those items. As of December 31, 2018, we had federal and state net operating loss carryforwards of approximately$24.1 million and $24.1 million, respectively. The federal and state net operating loss carryforwards included in the foregoing totals that were generated priorto 2018 will begin to expire, if not utilized, by 2033. These net operating loss carryforwards could expire unused and be unavailable to offset future incometax liabilities. Under the 2017 federal income tax law changes, federal net operating losses incurred in 2018 and in future years may be carried forwardindefinitely, but the deductibility of such federal net operating losses is limited. Utilization of the net operating loss carryforwards may be subject to anannual limitation according to Section 382 of the Internal Revenue Code of 1986, as amended, and similar provisions.73 Results of Operations for the Years Ended December 31, 2018 and 2017The following table summarizes our results of operations for the years ended December 31, 2018 and 2017 (in thousands): For the Year Ended December 31, 2018 2017 Change Operating expenses: Research and development $12,826 $3,730 $9,096 General and administrative 9,052 727 8,325 Total operating expenses 21,878 4,457 17,421 Loss from operations (21,878) (4,457) (17,421)Other income (expense): Interest income 1,231 — 1,231 Other expense (1) — (1)Interest expense - related party — (2) 2 Total other income (expense) 1,230 (2) 1,232 Net loss $(20,648) $(4,459) $(16,189) Research and Development ExpensesResearch and development expenses were $12.8 million for the year ended December 31, 2018, compared to $3.7 million for the year endedDecember 31, 2017. The increase of $9.1 million was primarily attributable to costs associated with Phase 2 and Phase 3 clinical activities for VP-102, anincrease in costs associated with increased headcount and associated salary, bonus and stock-based compensation expense, and a charge related to aconsulting agreement with our former Chief Scientific Officer.General and Administrative ExpensesGeneral and administrative expenses were $9.1 million for the year ended December 31, 2018, compared to $0.7 million for the year ended December31, 2017. The increase of $8.3 million was primarily a result of increased headcount and associated salary, bonus and stock-based compensation expenses,and increased insurance, professional fees and other operating costs as a result of becoming a public company.Other Income (Expense)Other income for the year ended December 31, 2018 consisted of interest earned on our cash, cash equivalents and marketable securities. Otherexpense for the year ended December 31, 2017 was insignificant.Liquidity and Capital ResourcesSince our inception, we have not generated any revenue and have incurred net losses and negative cash flows from our operations. We have financedour operations since inception through sales of our convertible preferred stock and the sale of our common stock in our IPO, receiving aggregate grossproceeds of $123.2 million.As of December 31, 2018, we had cash, cash equivalents and marketable securities of $89.8 million. Cash in excess of immediate requirements isinvested in accordance with our investment policy, primarily with a view to liquidity and capital preservation.We currently have no ongoing material financing commitments, such as lines of credit or guarantees, that are expected to affect our liquidity over thenext five years.74 Cash FlowsThe following table summarizes our cash flows for the years ended December 31, 2018 and 2017 (in thousands): For the Year EndedDecember 31, 2018 2017 Net cash used in operating activities $(17,874) $(4,583)Net cash used in investing activities (79,894) — Net cash provided by financing activities 99,376 12,719 Net increase in cash and cash equivalents $1,608 $8,136 Operating ActivitiesDuring the year ended December 31, 2018, operating activities used $17.9 million of cash, primarily resulting from a net loss of $20.6 million andnon-cash stock-based compensation of $2.3 million. Net cash provided by changes in operating assets and liabilities of $0.4 million consisted primarily ofincreases in accounts payable and accrued expenses of $1.8 million, partially offset by increases in prepaid expenses and other assets of $0.9 million. Theincrease in accounts payable and accrued expenses was primarily due to clinical trial and product development activities, and accruals for expenses related toa consulting agreement with our former Chief Scientific Officer, and discretionary annual employee bonuses. The increase in prepaid expenses and otherassets was primarily due to prepayments for clinical development and product development activities and annual insurance policy payments. During the year ended December 31, 2017, operating activities used $4.6 million of cash, primarily resulting from a net loss of $4.5 million and fromcash used in changes in operating assets and liabilities of $0.2 million, partially reduced for non-cash stock-based compensation of $0.1 million. Net cashused in changes in operating assets and liabilities consisted primarily of increases in prepaid expenses and other assets of $0.4 million partially offset byincreases in accounts payable and accrued expenses of $0.2 million. The increase in prepaid expenses and other assets was primarily due to prepayments forclinical development activities.Investing ActivitiesDuring the year ended December 31, 2018, net cash used in investing activities was primarily related to the purchase of marketable securities as aresult of investing proceeds received from the IPO. In addition, $0.8 million was used for the purchase and construction of property and equipment. Duringthe year ended December 31, 2017, no cash was used in investing activities.Financing ActivitiesDuring the year ended December 31, 2018, net cash provided by financing activities was $99.4 million consisting of the net proceeds from theissuance of common stock in connection with the IPO and from the issuance of shares of Series C preferred stock in February and March 2018.During the year ended December 31, 2017, net cash provided by financing activities was $12.7 million as a result of net proceeds of $7.7 millionreceived from a stock subscription receivable associated with the issuance of Series A preferred shares in December 2015 and net proceeds of $5.0 millionreceived from the issuance of Series B preferred shares in December 2017.75 Funding RequirementsWe expect our expenses to increase in connection with our ongoing activities, particularly as we continue the research and development of, continueor initiate clinical trials of, and seek marketing approval for, our product candidates. In addition, if we obtain marketing approval for any of our productcandidates, we expect to incur significant commercialization expenses related to sales, marketing, manufacturing and distribution. Furthermore, we expect toincur additional costs associated with operating as a public company. Accordingly, we may need to obtain additional funding in connection with ourcontinuing operations. If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce or eliminate our research anddevelopment programs or future commercialization efforts.We expect our existing cash, cash equivalents and marketable securities, will enable us to fund our operating expenses and capital expenditurerequirements at least through the end of 2020. Our future capital requirements will depend on many factors, including: •the scope, progress, results and costs of our clinical trials; •the scope, prioritization and number of our research and development programs; •the costs, timing and outcome of regulatory review of our product candidates; •the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defendingintellectual property-related claims; •the extent to which we acquire or in-license other product candidates and technologies; •the costs to scale up and secure manufacturing arrangements for commercial production; and •the costs of establishing or contracting for sales and marketing capabilities if we obtain regulatory approvals to market our productcandidates.Identifying potential product candidates and conducting preclinical studies and clinical trials is a time-consuming, expensive and uncertain processthat takes many years to complete, and we may never generate the necessary data or results required to obtain marketing approval and achieve product sales.In addition, our product candidates, if approved, may not achieve commercial success. Our commercial revenues, if any, will be derived from sales of aproduct candidate that we do not expect to be commercially available in the near term, if at all. We may not achieve significant revenue from product salesprior to the use of the net proceeds from our IPO. Accordingly, we may need to continue to rely on additional financing to achieve our business objectives.Adequate additional financing may not be available to us on acceptable terms, or at all.Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equityofferings, debt financings, collaborations, strategic alliances and licensing arrangements. To the extent that we raise additional capital through the sale ofequity or convertible debt securities, ownership interests of existing stockholders may be diluted, and the terms of these securities may include liquidation orother preferences that adversely affect our existing stockholders’ rights. Debt financing, if available, may involve agreements that include covenants limitingor restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.If we raise funds through additional collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquishvaluable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable tous. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate ourproduct development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to developand market ourselves.76 Contractual Obligations and Commitments On March 22, 2018, we executed a purchase order, denominated in Chinese yuan, with a supplier, pursuant to which we agreed to purchaseapproximately $2.3 million of crude cantharidin material related to clinical and commercial supply. As of December 31, 2018, we purchased approximately$1.5 million of crude cantharidin material and have a remaining purchase order for approximately another $0.8 million. On July 16, 2018, we entered into asupply agreement with the supplier. The executed purchase order is covered under the terms of the supply agreement.On April 9, 2018, we entered into an agreement to sublease 4,962 square feet of office space in West Chester, Pennsylvania. The agreement requiresannual rental payments of approximately $0.1 million and is scheduled to expire on May 31, 2021.Off-Balance Sheet ArrangementsWe did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under SEC rules. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKOur primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates, particularlybecause our investments, including cash equivalents and marketable securities, are in the form of U.S. Treasury securities, asset-backed securities, andcommercial paper. Our marketable securities are subject to interest rate risk and will fall in value if market interest rates increase. However, due to the short-term nature and low-risk profile of our investment portfolio, we do not expect that an immediate 100 basis point change in market interest rates would have amaterial effect on the fair market value of our investment portfolio. We have the ability to hold our marketable securities until maturity, and therefore wewould not expect our operating results or cash flows to be affected to any significant degree by the effect of a change in market interest rates on ourinvestments. We are also exposed to market risk related to changes in foreign currency exchange rates. We contract with vendors that are located outside of theUnited States, including in China, and certain invoices are denominated in foreign currencies. We are subject to fluctuations in foreign currency rates inconnection with these arrangements. We do not currently hedge our foreign currency exchange rate risk. As of December 31, 2018, we had minimal or noliabilities denominated in foreign currencies, but our purchase order with a supplier, pursuant to which we agreed to purchase approximately $2.3 million ofcrude cantharidin material, is denominated in Chinese yuan. As of December 31, 2018, we had purchased approximately $1.5 million of crude cantharidinmaterial under this purchase order.Inflation generally affects us by increasing our cost of labor and clinical trial costs. We do not believe that inflation had a material effect on ourbusiness, financial condition or results of operations during the year ended December 31, 2018. 77 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAIndex to Financial Statements Report of Independent Registered Public Accounting Firm79 Balance Sheets as of December 31, 2018 and 201780 Statements of Operations and Comprehensive Loss for the years ended December 31, 2018 and 201781 Statements of Convertible Preferred Stock and Stockholders' Equity (Deficit) for the years ended December 31, 2018 and 201782 Statements of Cash Flows for the years ended December 31, 2018 and 201783 Notes to Financial Statements84 78 Report of Independent Registered Public Accounting FirmTo the Shareholders and the Board of DirectorsVerrica Pharmaceuticals Inc.:Opinion on the Financial StatementsWe have audited the accompanying balance sheets of Verrica Pharmaceuticals Inc. (the Company) as of December 31, 2018 and 2017, the relatedstatements of operations and comprehensive loss, convertible preferred stock and stockholders’ equity (deficit), and cash flows for the years then ended, andthe related notes (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial positionof the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for the years then ended, in conformity with U.S.generally accepted accounting principles.Change in Accounting PrincipleAs discussed in Note 2 to the financial statements, the Company has elected to change its method of accounting for graded vesting share-basedpayment awards with a service condition only in 2018.Basis for OpinionThese financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements 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 ofthe 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 obtainreasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performingprocedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond tothose risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits alsoincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of thefinancial statements. We believe that our audits provide a reasonable basis for our opinion./s/ KPMG LLPWe have served as the Company’s auditor since 2017.Philadelphia, PennsylvaniaMarch 7, 201979 VERRICA PHARMACEUTICALS INC.BALANCE SHEETS(in thousands, except share and per share amounts) December 31, 2018 2017 ASSETS Current assets: Cash and cash equivalents $10,271 $8,663 Marketable securities 79,538 — Prepaid expenses and other assets 1,343 420 Total current assets 91,152 9,083 Property and equipment, net 255 — Deposits 499 — Total assets $91,906 $9,083 LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT) Current liabilities: Accounts payable $922 $153 Accrued expenses 1,517 449 Accounts payable and accrued expenses - related party 38 14 Total current liabilities 2,477 616 Total liabilities 2,477 616 Commitments and Contingencies (Note 6) Convertible preferred stock - Series A - 0 and 21,302,972 shares authorized, issued and outstanding as of December 31, 2018 and December 31, 2017, respectively — 10,508 Convertible preferred stock - Series B - 0 and 1,937,984 shares authorized, issued and outstanding as of December 31, 2018 and December 31, 2017, respectively — 5,000 Total convertible preferred stock — 15,508 Stockholders’ equity (deficit): Preferred stock, $0.0001 par value; 10,000,000 shares authorized; no shares issued and outstanding as of December 31, 2018 and December 31, 2017 — — Common stock, $0.0001 par value; 200,000,000 and 33,236,900 shares authorized as of December 31, 2018 and December 31, 2017, respectively; 25,809,900 shares issued and 25,704,756 shares outstanding as of December 31, 2018 and 3,804,643 shares issued and 3,699,499 shares outstanding as of December 31, 2017, respectively 3 — Treasury stock, at cost, 105,144 shares as of December 31, 2018 and December 31, 2017 — — Additional paid-in capital 122,526 5,394 Accumulated deficit (33,083) (12,435)Accumulated other comprehensive loss (17) — Total stockholders’ equity (deficit) 89,429 (7,041)Total liabilities, convertible preferred stock and stockholders’ equity (deficit) $91,906 $9,083 The accompanying notes are an integral part of these financial statements.80 VERRICA PHARMACEUTICALS INC.STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS(in thousands, except share and per share amounts) For the Year Ended December 31, 2018 2017 Operating expenses: Research and development $12,826 $3,730 General and administrative 9,052 727 Total operating expenses 21,878 4,457 Loss from operations (21,878) (4,457)Other income (expense): Interest income 1,231 — Other expense (1) — Interest expense - related party — (2)Total other income (expense) 1,230 (2)Net loss (20,648) (4,459)Deemed dividend on Series A preferred stock — (5,300)Net loss attributable to common stockholders $(20,648) $(9,759)Net loss per share, basic and diluted $(1.41) $(1.56)Deemed dividend on Series A preferred stock — (1.86)Net loss attributable to common stockholders $(1.41) $(3.42) Weighted average common shares outstanding, basic and diluted 14,662,751 2,850,269 Net loss $(20,648) $(4,459)Other comprehensive loss: Unrealized loss on marketable securities (17) — Comprehensive loss $(20,665) $(4,459) The accompanying notes are an integral part of these financial statements. 81 VERRICA PHARMACEUTICALS INC.STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)(in thousands, except share amounts) Accumulated Total Series A Convertible Series B Convertible Series C Convertible Additional Other Stockholders’ Preferred Stock Preferred Stock Preferred Stock Common Stock PaidIn Accumulated Treasury Stock Comprehensive Equity Shares Amount Shares Amount Shares Amount Shares Issued Amount Capital Deficit Shares Cost Loss (Deficit) Balance as ofDecember 31, 2016 21,302,972 $2,789 — $— — $— 3,804,643 $— $12 $(2,676) 105,144 $— $— $(2,664)Stock-basedcompensation — — — — — — — — 82 — — — — 82 Series Aconvertiblepreferred stock receivable — 8,000 — — — — — — — — — — — — Issuance cost forSeries A preferred stock — (281) — — — — — — — — — — — — Beneficialconversion feature for Series Apreferred stock — (5,300) — — — — — — 5,300 — — — — 5,300 Deemed dividendfor Series A preferred stock — 5,300 — — — — — — — (5,300) — — — (5,300)Series Bconvertiblepreferred stock — — 1,937,984 5,000 — — — — — — — — — — Net Loss — — — — — — — — — (4,459) — — — (4,459)Balance as ofDecember 31, 2017 21,302,972 10,508 1,937,984 5,000 — — 3,804,643 — 5,394 (12,435) 105,144 — — (7,041)Stock-basedcompensation — — — — — — — — 2,251 — — — — 2,251 Exercise of stockoptions — — — — — — 8,385 — 7 — — — — 7 Series Cconvertiblepreferred stock — — — — 4,606,267 21,000 — — — — — — — — Issuance costs forSeries C preferred — — — — — (7) — — — — — — — — Conversion ofpreferred stock intocommon stock (21,302,972) (10,508) (1,937,984) (5,000) (4,606,267) (20,993) 16,246,872 2 36,499 — — — — 36,501 Issuance ofcommon stock in connectionwith IPO, net of offeringcosts — — — — — — 5,750,000 1 78,375 — — — — 78,376 Net loss — — — — — — — — — (20,648) — — — (20,648)Unrealized loss onmarketable securities — — — — — — — — — — — — (17) (17)Balance as ofDecember 31, 2018 — $— — $— — $— 25,809,900 $3 $122,526 $(33,083) 105,144 $— $(17) $89,429 The accompanying notes are an integral part of these financial statements. 82 VERRICA PHARMACEUTICALS INC.STATEMENTS OF CASH FLOWS(in thousands) For the Year EndedDecember 31, 2018 2017 Cash flows from operating activities Net loss $(20,648) $(4,459)Adjustments to reconcile net loss to net cash used in operating activities: Stock-based compensation 2,251 82 Accretion of discounts on marketable securities (435) — Depreciation expense 20 — Changes in operating assets and liabilities: Prepaid expenses and other assets (923) (403)Accounts payable 769 86 Accrued expenses 1,068 133 Accounts payable and accrued expenses - related party 24 (22)Net cash used in operating activities (17,874) (4,583)Cash flows from investing activities Purchases of marketable securities (79,120) — Purchases of property, plant and equipment (275) — Deposit for construction of equipment (499) — Net cash used in investing activities (79,894) — Cash flows from financing activities Proceeds from the issuance of common stock in connection with IPO 86,250 — Proceeds from exercise of stock options 7 — Payment of offering cost in connection with issuance of common stock in connection with IPO (7,874) — Proceeds received from Series A preferred stock subscription receivable — 8,000 Stock issuance costs related to Series A preferred stock — (281)Proceeds received from issuance of Series C preferred stock 21,000 5,000 Stock issuance costs related to Series C preferred stock (7) — Net cash provided by financing activities 99,376 12,719 Net increase in cash and cash equivalents 1,608 8,136 Cash and cash equivalents at the beginning of the year 8,663 527 Cash and cash equivalents at the end of the year $10,271 $8,663 Supplemental disclosure of cash flow information: Cash paid for interest $— $1 Supplemental disclosure of noncash investing and financing activities: Change in unrealized loss on marketable securities $(17) $— Conversion of preferred stock into common stock $36,501 $— The accompanying notes are an integral part of these financial statements. 83 VERRICA PHARMACEUTICALS INC.Notes to Financial StatementsNote 1—Organization and Description of Business OperationsVerrica Pharmaceuticals Inc. (the “Company”) was formed on July 3, 2013 and is incorporated in the State of Delaware. The Company is a medicaldermatology company committed to the development and commercialization of novel treatments that provide meaningful benefit for people living with skindiseases.Reverse Stock SplitOn June 4, 2018, the Company effected a 1.714-for-one reverse stock split of Company’s common stock. No fractional shares were issued inconnection with the stock split. The par value and other terms of the common stock were not affected by the stock split.All share and per share amounts, including stock options, have been retroactively adjusted in these financial statements for all periods presented toreflect the 1.714-for-one reverse stock split. Further, exercise prices of stock options have been retroactively adjusted in these financial statements for allperiods presented to reflect the 1.714-for-one reverse stock split. The number of shares of the Company’s preferred stock were not affected by the reversestock split; however, the conversion ratios were adjusted to reflect the reverse stock split.Liquidity and Capital ResourcesThe Company has incurred substantial operating losses since inception and expects to continue to incur significant operating losses for theforeseeable future and may never become profitable. As of December 31, 2018, the Company had an accumulated deficit of $33.1 million.On February 20, 2018 and March 7, 2018, the Company issued an aggregate of 4,606,267 shares of Series C convertible preferred stock, at anissuance price of $4.559 per share, for gross proceeds of $21.0 million.On June 19, 2018, the Company completed an initial public offering (“IPO”) of its common stock, which resulted in the issuance and sale of5,750,000 shares of its common stock at a public offering price of $15.00 per share, generating net proceeds of $78.4 million after deducting underwritingdiscounts and other offering costs. Upon the closing of the IPO, all outstanding shares of the Company’s Series A, Series B and Series C convertible preferredstock were automatically converted into 16,246,872 shares of the Company’s common stock. In addition, upon the closing of the IPO, the Company’samended and restated certificate of incorporation authorized the Company to issue up to 200,000,000 shares of common stock, $0.0001 par value per share,and 10,000,000 shares of preferred stock, $0.0001 par value per share, all of which shares of preferred stock are undesignated. Note 2—Significant Accounting PoliciesBasis of PresentationThe accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States ofAmerica (“GAAP”). Any reference in these notes to applicable guidance is meant to refer to the authoritative United States generally accepted accountingprinciples as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Update (“ASU”) of the Financial Accounting StandardsBoard (“FASB”). The Company’s functional currency is the U.S. dollar.84 Use of EstimatesThe preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts ofexpenses during the reporting period. The most significant estimates in the Company’s financial statements relate to the valuation of common stock andstock options. These estimates and assumptions are based on current facts, historical experience and various other factors believed to be reasonable under thecircumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of expenses thatare not readily apparent from other sources. Actual results may differ materially and adversely from these estimates. To the extent there are materialdifferences between the estimates and actual results, the Company’s future results of operations will be affected.SegmentsOperating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation bythe chief operating decision-maker in making decisions regarding resource allocation and assessing performance. The Company views its operations andmanages its business in one operating segment.Cash, Cash Equivalents and Marketable SecuritiesThe 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 themat 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 asof December 31, 2018. Unrealized gains and losses on marketable debt securities are recorded as a separate component of accumulated other comprehensiveloss included in stockholders’ equity (deficit).The following table presents the Company’s marketable securities as of December 31, 2018 (in thousands): December 31, 2018 Amortized GrossUnrealized GrossUnrealized Fair Cost Gains Losses Value Commercial paper $48,623 $5 $(4) $48,624 U.S. treasury securities 17,028 — (2) 17,026 Asset-backed securities 13,904 — (16) 13,888 Total marketable securities $79,555 $5 $(22) $79,538 Concentrations of Credit Risk and Off-Balance Sheet RiskCash, cash equivalents and marketable securities are financial instruments that are potentially subject to concentrations of credit risk. TheCompany’s deposits are in accounts at large financial institutions, and amounts may exceed federally insured limits. The Company believes it is not exposedto significant credit risk due to the financial strength of the depository institutions in which the funds are held. The Company has no financial instrumentswith off-balance sheet risk of loss.85 Property and EquipmentProperty and equipment is recorded at cost less accumulated depreciation. Depreciation and amortization is calculated using the straight line methodover the expected useful life of the asset, after the asset is placed in service. The Company generally uses the following depreciable lives for its majorclassifications of property and equipment: Description Useful LivesEquipment 5 yearsLeasehold Improvements Lease termOffice Furniture and Fixtures 3 years Expenditures associated with upgrades and enhancements that improve, add functionality, or otherwise extend the life of property and equipment arecapitalized, 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 circumstancesindicate 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 ofthe 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 itsfair value. Fair value is generally determined using discounted cash flows. No impairment losses have been recorded since inception.Research and Development CostsThe 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 anddevelopment costs are expensed as incurred. Advance payments for goods and services that will be used in future research and development activities areexpensed when the activity has been performed or when the goods have been received rather than when the payment is made.Fair Value MeasurementASC 820, Fair Value Measurements, provides guidance on the development and disclosure of fair value measurements. Under this accountingguidance, 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 orderlytransaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based onassumptions 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, discountedcash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significantjudgment or estimation. 86 The following table presents fair value of the Company’s marketable securities as of December 31, 2018 (in thousands): Fair Value Measurement as of December 31, 2018 Level 1 Level 2 Level 3 Total Commercial paper $— $48,624 $— $48,624 U.S. treasury securities 17,026 — — 17,026 Asset-backed securities — 13,888 — 13,888 Total $17,026 $62,512 $— $79,538 Comprehensive Loss Comprehensive loss is defined as the change in equity of a business enterprise during a period from transactions, and other events and circumstancesfrom non-owner sources. For the year ended December 31, 2018, comprehensive loss includes net loss and unrealized loss on marketable securities.Stock-Based CompensationThe Company accounts for stock-based compensation awards in accordance with ASC 718, Compensation –Stock Compensation. The Company usesthe Black-Scholes option-pricing model to value its stock option awards. For stock-based awards granted to employees and to members of the board ofdirectors for their services, the Company estimates the grant date fair value of each option award and recognizes employee compensation expense on astraight-line basis over the vesting period of the award. See Change in Accounting Principle – Stock-based Compensation. Non-employee options areremeasured to fair value each period and the Company recognizes compensation expense on a straight-line basis over the vesting period of each separatevesting tranche 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, theexpected 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, thevalue of the common stock. The expected life of stock options was estimated using the “simplified method,” as the Company has limited historicalinformation 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 privatecompany and lacks company-specific historical and implied volatility information. Therefore, it estimates its expected stock volatility based on the historicalvolatility 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 ofthe option. Expected dividend yield is zero based on the fact that the Company has never paid cash dividends and does not expect to pay any cash dividendsin the foreseeable future. Change in Accounting Principle - Stock-Based Compensation In the fourth quarter of 2018, the Company changed its policy for recognizing stock-based compensation expense for graded-vesting awards withservice conditions only from the graded attribution method to the straight-line attribution method. The Company views these awards as single awards andbelieves that the straight-line attribution method more accurately reflects the pattern of service provided by the employees versus the graded attributionmethod which significantly front loads the stock-based compensation expense and does not appropriately match the expense with the services provided. Inaddition, based on research and analysis, the Company believes the straight-line attribution method for stock-based compensation expense for servicecondition-only awards is the predominant method used in its industry. The Company has concluded that the straight-line attribution method for stock-basedcompensation is a preferable accounting policy in accordance with ASC 250, Accounting Changes and Error Corrections and has applied this changeretrospectively. The impact from the change in accounting policy for periods prior to January 1, 2018 was immaterial. 87 The following tables present the effect of the change in accounting policy and its impact on key components of the Company’s 2018 financialstatements (in thousands, except share and per share amounts): Year ended December 31, 2018 As ComputedUnder GradedAttributionMethod As ReportedUnderStraight-lineAttributionMethod Effect ofChange Operating expenses: Research and development $12,939 $12,826 $(113)General and administrative 10,441 9,052 (1,389)Total operating expenses 23,380 21,878 (1,502)Loss from operations (23,380) (21,878) 1,502 Other income (expense): Interest income 1,231 1,231 — Other expense (1) (1) — Total other income 1,230 1,230 — Net loss $(22,150) $(20,648) $1,502 Net loss per common share, basic and diluted $(1.51) $(1.41) $0.10 Weighted average common shares outstanding, basic and diluted 14,662,751 14,662,751 Stock-based compensation expense included above: Research and development $472 $359 $(113)General and administrative 3,281 1,892 (1,389) Net loss $(22,150) $(20,648) $1,502 Other comprehensive loss: Unrealized loss on marketable securities (17) (17) — Comprehensive loss $(22,167) $(20,665) $1,502 As of December 31, 2018 AsComputedUnderGradedAttributionMethod As ReportedUnderStraight-lineAttributionMethod Effect ofChange Stockholders’ equity: Preferred stock, $0.0001 par value; 10,000,000 shares authorized; no shares issued and outstanding as of December 31, 2018 $— $— $— Common stock, $0.0001 par value; 200,000,000 shares authorized as of December 31, 2018; 25,809,900 shares issued and 25,704,756 shares outstanding as of December 31, 2018 3 3 — Treasury stock, at cost, 105,144 shares as of December 31, 2018 — — — Additional paid-in capital 124,028 122,526 (1,502)Accumulated deficit (34,585) (33,083) 1,502 Accumulated other comprehensive loss (17) (17) — Total stockholders’ equity $89,429 $89,429 $—88 Year ended December 31, 2018 AsComputedUnderGradedAttributionMethod As ReportedUnderStraight-lineAttributionMethod Effect ofChange Cash flows from operating activities: Net loss $(22,150) $(20,648) $1,502 Adjustments to reconcile net loss to net cash used in operating activities: Stock-based compensation 3,753 2,251 (1,502)Accretion of discounts on marketable securities (435) (435) — Depreciation expense 20 20 — Changes in operating assets and liabilities: Prepaid expenses and other assets (923) (923) — Accounts payable 769 769 — Accrued expenses 1,068 1,068 — Accounts payable and accrued expenses – related party 24 24 — Net cash used in operating activities $(17,874) $(17,874) $— Income TaxesIncome taxes are recorded in accordance with ASC 740, Income Taxes, which provides for deferred taxes using an asset and liability approach. TheCompany recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statementsor tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilitiesusing 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 ofavailable 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 Companyrecognizes 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 asconsideration of the available facts and circumstances.Net Loss Per ShareNet loss per share of common stock is computed by dividing net loss attributable to common stockholders by the weighted average number of sharesof common stock outstanding for the period. Diluted net loss per share excludes the potential impact of Series A, Series B and Series C Preferred Stock,common stock options and unvested shares of restricted stock because their effect would be anti-dilutive due to the Company’s net loss. Since the Companyhad a net loss in each of the periods presented, basic and diluted net loss per common share are the same.89 The table below provides potential shares outstanding that were not included in the computation of diluted net loss per common share, as theinclusion of these securities would have been anti-dilutive: As of December 31, 2018 2017 Shares issuable upon conversion of Series A Preferred — 12,428,773 Shares issuable upon conversion of Series B Preferred — 1,130,679 Shares issuable upon exercise of stock options 1,529,883 90,429 Non-vested shares under restricted stock grants 848,859 848,859 Recently Adopted Accounting PronouncementsIn August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern thatrequires management to evaluate whether there are conditions and events that raise substantial doubt about the Company’s ability to continue as a goingconcern within one year after the financial statements are issued on both an interim and annual basis. Management is required to provide certain footnotedisclosures if it concludes that substantial doubt exists or when its plans alleviate substantial doubt about the Company’s ability to continue as a goingconcern. The Company adopted ASU No. 2014-15 on January 1, 2017 and its adoption did not have a material impact on the Company’s financial statementsand related disclosures. In April 2016, the FASB issued ASU No. 2016-09, Share-Based Payment: Simplifying the Accounting for Share-Based Payments. The standardaddresses several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures andstatutory tax withholding requirements, as well as classification in the statement of cash flows. The Company adopted ASU 2016-09 during the first quarter of2017 and elected to account for forfeitures as they occur. Other provisions of ASU 2016-09 had no impact on the Company’s financial statements and relateddisclosures.In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting, whichclarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modificationaccounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the changein terms or conditions. The Company adopted this guidance effective January 1, 2018 and the adoption of the guidance had no impact on the Company’sfinancial statements and related disclosures.Recently Issued Accounting Pronouncements Not Yet AdoptedIn February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). Under the new guidance, lessees will be required to recognizeall leases (with the exception of short-term leases) on the balance sheet as a lease liability, which is a lessee’s obligation to make lease payments arising froma lease, measured on a discounted basis and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specifiedasset for the lease term. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which creates a new, optional transitionmethod for implementing ASU 2016-02 and a lessor practical expedient for separating lease and non-lease components. The new standard is effective forfiscal years beginning after December 15, 2018, including interim periods within those fiscal years. After assessing the provisions of the guidance, theCompany has estimated that a right-of-use asset and corresponding lease liability in the amount of $0.3 million will be recorded upon adoption as of January1, 2019. The adoption of this standard is not expected to have a significant impact on the Company’s statements of operations and comprehensive loss andstatements of cash flows.90 In June 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, which simplifies the accountingfor share-based payments granted to nonemployees for goods and services. Under the ASU, most of the guidance on such payments to nonemployees wouldbe aligned with the requirements for share-based payments granted to employees. The changes take effect for public companies for fiscal years starting afterDecember 15, 2018, including interim periods within that fiscal year. Early adoption is permitted, but no earlier than an entity’s adoption date of ASC 606,Revenue from Contracts with Customers. The Company will adopt this standard as of January 1, 2019 but does not expect it to have a material impact on itsfinancial statements and related disclosures.In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework–Changes to the DisclosureRequirements for Fair Value Measurement, which makes a number of changes meant to add, modify or remove certain disclosure requirements associatedwith the movement amongst or hierarchy associated with Level 1, Level 2 and Level 3 fair value measurements. This guidance is effective for fiscal years, andinterim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted upon issuance of the update. The Company willadopt this standard as of January 1, 2019 but does not expect the adoption of this guidance to have a material impact on its financial statements and relateddisclosures.In August 2018, the FASB issued ASU 2018-15, Intangibles–Goodwill and Other–Internal-Use Software (Subtopic 350-40): Customer’s Accountingfor Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract, which aligns the requirements for capitalizingimplementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred todevelop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The guidance also requires the entity toexpense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement, which includesreasonably certain renewals. The guidance becomes effective for the Company in the year ending December 31, 2020 and early adoption is permitted. TheCompany is currently assessing the impact that this guidance will have on its financial statements.Note 3—Property and EquipmentProperty and equipment, net consisted of (in thousands): As ofDecember 31,2018 Leasehold improvements $68 Office furniture and fixtures 48 Office equipment 28 Construction in process 131 275 Accumulated depreciation (20)Total property and equipment, net $255 Depreciation expense for the years ended December 31, 2018 was $20,294. Prior to 2018, the Company did not hold any property or equipment.The Company has recorded an asset classified as construction in process associated with the construction of a product packaging line that would beplaced into service for commercial manufacturing upon future regulatory product approval.Note 4—Related Party TransactionsPrior to the IPO, 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 certainentities affiliated with Mr. Manning, continue to be the Company’s largest shareholder on a collective basis.91 On December 2, 2015, the Company entered into a Services Agreement (a “SA”) with PBM. Pursuant to the terms of the SA, which had an initial termof 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. Inconsideration for these services, the Company was obligated to pay PBM a monthly management fee of $2,500. On March 29, 2018, the Company amendedthe SA with PBM, effective as of April 1, 2018, increasing the monthly fee to $50,000. On January 1, 2019, the SA was amended to reduce the monthlymanagement fee to $26,333 as a result of a reduction in services provided by PBM.For the years ended December 31, 2018 and 2017, the Company incurred expenses under the SA of $457,500 and $30,000, respectively, which wereprimarily included in general and administrative expenses.As of December 31, 2018 and 2017, the Company had payables due to PBM and its affiliates of $38,000 and $14,000, respectively. These balancesinclude amounts due for other miscellaneous expenses incurred by PBM and its affiliates.Note 5—Accrued ExpensesAccrued expenses consisted of the following (in thousands): As of December 31, 2018 2017 Compensation and related costs $1,261 $49 Clinical trials and drug development — 233 Consulting - former Chief Scientific Officer 190 — Professional fees 56 129 Other 10 38 Total accrued expenses $1,517 $449 Note 6—Commitments and ContingenciesLitigationAs of December 31, 2018 and 2017, there was no litigation against the Company.Supply Agreement and Purchase OrderOn March 22, 2018, the Company executed a purchase order with a supplier, denominated in Chinese yuan, pursuant to which the Company agreedto purchase approximately $2.3 million of crude cantharidin material. As of December 31, 2018, the Company purchased approximately $1.5 million ofcrude cantharidin material under this purchase order.On July 16, 2018, the Company entered into a supply agreement with the supplier. The executed purchase order is covered under the terms of thesupply agreement. Pursuant to the supply agreement, the supplier has agreed that it will not supply cantharidin, any beetles or other raw material from whichcantharidin is derived to any other customer in North America, subject to specified minimum annual purchase orders and forecasts. The supply agreement hasan initial five-year term, which is subject to automatic renewal absent termination by either party in accordance with the terms of the supply agreement. Eachparty also has the right to terminate the supply agreement for other customary reasons such as material breach or bankruptcy.92 Agreements with Former Chief Scientific OfficerOn May 31, 2018, the Company and the former Chief Scientific Officer (“CSO”) executed a transition agreement related to his resignation fromemployment as well as a Consulting Agreement (the “Consulting Agreement”) that began upon the closing of the IPO.The Consulting Agreement provides for cash payments to the former CSO of $29,375 per month for the first 12 months of the agreement. After thefirst 12 months, the former CSO will receive $300 per hour for each hour of consulting services provided. As of December 31, 2018, $0.2 million remainedaccrued under this Consulting Agreement. Facility Lease The Company has operations in a facility in West Chester, Pennsylvania pursuant to a sublease agreement that expires in May 2021. Rent expense under this sublease was $97,503 in 2018 and future minimum lease payments are as follows (in thousands): 2019 $136 2020 139 2021 58 Total minimum lease payments $333 Note 7—Stockholders’ EquityCommon StockThe Company had authorized 200,000,000 and 33,236,900 shares of common stock, $0.0001 par value per share, as of December 31, 2018 and 2017,respectively. Each share of common stock is entitled to one voting right. Common stock owners are entitled to dividends when funds are legally availableand declared by the Board.On June 19, 2018, the Company completed an IPO of its common stock, which resulted in the issuance and sale of 5,750,000 shares of its commonstock at a public offering price of $15.00 per share, generating net proceeds of $78.4 million after deducting underwriting discounts and other offeringcosts. The shares commenced trading on the Nasdaq Global Market on June 15, 2018 under the ticker symbol “VRCA.”Restricted StockPursuant to an Amended and Restated Stock Purchase Agreement (the “Amended and Restated Agreement”) between the Company and the formerCSO, 848,859 shares held by the former CSO are subject to repurchase by the Company at $0.0001 per share in the event the CSO ceases to be a consultant.These shares will be released from the repurchase option on the earliest to occur of (i) a change in control, (ii) regulatory approval of the Company’s new drugapplication for cantharidin, (iii) commercial sale of products and (iv) a covered termination, as defined in the Amended and Restated Agreement. Nocompensation expense has been recognized for these nonvested shares as these shares are performance-based and the triggering event was not determined tobe probable as of December 31, 2018. See Note 8.93 Convertible Preferred StockOn December 2, 2015, the Company issued an aggregate of 21,302,972 shares of Series A Preferred Stock to fourteen investors for cash considerationof $1.9 million, conversion of previously outstanding notes payable and accrued interest of $0.5 million and a stock subscription receivable of $8.5 million.The Company incurred aggregate issuance costs of $0.4 million, related to the issuance of the Series A Preferred Stock and subsequent settlement of the stocksubscription receivable. PBM VP Holdings paid the Company $0.5 million during the year ended December 31, 2016, and $8.0 million during the yearended December 31, 2017 to settle the stock subscription receivable. Upon the closing of the IPO on June 19, 2018, all outstanding shares of the Company’sSeries A Preferred Stock were automatically converted into 12,428,773 shares of the Company’s common stock.On December 15, 2017, the Company issued and sold an aggregate of 1,937,984 shares of Series B Preferred Stock, at an issuance price of $2.58 pershare, for gross proceeds of $5.0 million. The Company did not incur any issuance costs for the Series B Preferred Stock. Upon the closing of the IPO onJune 19, 2018, all outstanding shares of the Company’s Series B Preferred Stock were automatically converted into 1,130,679 shares of the Company’scommon stock.On February 20, 2018 and March 7, 2018, the Company issued and sold an aggregate of 4,606,267 shares of Series C Preferred Stock, at an issuanceprice of $4.559 per share, for aggregate gross proceeds of $21.0 million. Upon the closing of the IPO on June 19, 2018, all outstanding shares of theCompany’s Series C Preferred Stock were automatically converted into 2,687,420 shares of the Company’s common stock.The Company classified its Convertible Preferred Stock outside of stockholders’ deficit because redemption of the Convertible Preferred Stock, upona deemed liquidation event, was not solely within the Company’s control.Note 8—Stock-Based CompensationIn June 2018, the Board adopted and approved the 2018 Equity Incentive Plan (the “IPO Plan”), which amended and restated the Company’s prior2013 Equity Incentive Plan (the “2013 Plan”) and became effective in connection with the IPO pricing on June 19, 2018. Prior to the effectiveness of the IPOPlan, 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 ofthe IPO Plan, no further grants may be made under the 2013 Plan.The IPO Plan provides for the grant of incentive stock options to employees, and for the grant of nonstatutory stock options, stock appreciationrights, restricted stock awards, restricted stock unit awards, performance-based stock awards and other forms of stock awards to employees, including officers,consultants and directors. The IPO Plan also provides for the grant of performance-based cash awards to employees, including officers, consultants anddirectors. The Company has initially reserved 3,738,199 shares of common stock for issuance under the IPO Plan, which is the sum of (1) 2,198,198 newshares, plus (2) the number of shares reserved for issuance under the 2013 Plan at the time the IPO Plan became effective, plus (3) any shares subject tooutstanding stock options or other stock awards that would have otherwise returned to the 2013 Plan (such as upon the expiration or termination of a stockaward prior to exercise). The number of shares of common stock reserved for issuance under the IPO Plan will automatically increase on January 1 each year,for a period of ten years, from January 1, 2019 through January 1, 2028, by 4% of the total number of shares of the Company’s common stock outstanding onDecember 31 of the preceding calendar year, or a lesser number of shares as may be determined by the Board. As of December 31, 2018, 1,958,033 shares wereavailable for grant under the IPO Plan.Stock OptionsThe Company’s employee stock options generally vest as follows: 25% after 12 months of continuous services and the remaining 75% on a ratablebasis over a 36-month period from 12 months after the grant date. Stock options granted during the year ended December 31, 2018 have a maximumcontractual term of 10 years. The stock options are subject to time vesting requirements through 2022, are nontransferable, and have term expiration dates setto expire through 2028.94 The grant date fair value of employee stock option awards is determined using the Black-Scholes option-pricing model. The following assumptionswere used during the years ended December 31, 2018 and 2017 to estimate the fair value of employee stock option awards: For the Year Ended December 31, 2018 2017Exercise price $6.52 - $16.32 $0.90Risk-free rate of interest 2.58% - 3.13% 1.92% - 2.23%Expected term (years) 6.15 6.25Expected stock price volatility 58.26% - 83.67% 79.02% - 79.12%Dividend yield — —Weighted average grant date fair value $6.95 $0.12 Non-employee options are remeasured to fair value each period through operations using a Black-Scholes option-pricing model until the optionsvest. There were no stock options granted to non-employees during the years ended December 31, 2018 and 2017. Key assumptions used to estimate the fairvalue of the non-employee stock options remeasured during the years ended December 31, 2018 and 2017 are as follows: For the Year Ended December 31, 2018 2017 Exercise price $0.90 $0.90 Risk-free rate of interest 2.33% - 3.06% 2.16% - 2.48% Expected term (years) 7.53 8.43 Expected stock price volatility 58.26% - 83.81% 77.59% - 79.12% Dividend yield — — Weighted average fair value $9.22 $3.37 The following table summarizes the Company’s employee stock option activity under the 2013 Plan and the IPO Plan for the year ended December31, 2018: Weighted average Aggregate Weighted average remaining contractual Intrinsic Number of shares exercise price life (in years) value Outstanding as of December 31, 2017 17,502 $0.90 9.0 Options granted 1,451,839 8.34 Exercised (8,385) 0.90 Forfeited/Cancelled (4,000) 16.32 Outstanding as of December 31, 2018 1,456,956 $8.27 9.2 $1,739,581 Options vested and exercisable as of December 31, 2018 192,018 $6.52 9.1 $312,995 95 The following table summarizes the Company’s non-employee stock option activity under the 2013 Plan and the IPO Plan for the year endedDecember 31, 2018: Weighted average Aggregate Weighted average remaining contractual intrinsic Number of shares exercise price life (in years) value Outstanding as of December 31, 2017 72,927 $0.90 8.3 Granted — — Outstanding as of December 31, 2018 72,927 $0.90 7.3 $528,721 Options vested and exercisable as of December 31, 2018 55,910 $0.90 7.3 $405,348 The aggregate intrinsic value in the above table is calculated as the difference between fair value of the Company’s common stock price and theexercise price of the stock options. The weighted average grant date fair value per share for the employee stock option granted during the years endedDecember 31, 2018 and 2017 was $6.95 and $0.12, respectively. As of December 31, 2018, the total unrecognized compensation related to unvestedemployee and non-employee stock option awards granted was $8.1 million, which the Company expects to recognize over a weighted-average period of 3.1years.Restricted StockThe following table summarizes restricted stock award activities for the year ended December 31, 2018: Weighted Average Grant Date Fair Number of Shares Value Nonvested at December 31, 2017 848,859 $0.33 Granted — — Nonvested at December 31, 2018 848,859 $0.33 As of December 31, 2018, the total unrecognized compensation expense related to the nonvested shares was $0.3 million. No compensation expensehas been recognized for these nonvested shares as these shares are performance-based and the triggering event was not determined to be probable as ofDecember 31, 2018.Stock-based compensation expense, which includes expense for both employees and non-employees, has been reported in the Company’s statementsof operations for the years ended December 31, 2018 and 2017 as follows (in thousands): For the Year Ended December 31, 2018 2017 Research and development $359 $82 General and administrative 1,892 — Total stock-based compensation $2,251 $82 Note 9–Income TaxesThere is no provision for income taxes as the Company has historically incurred operating losses and maintains a full valuation allowance against itsdeferred tax assets. Differences between the provision (benefit) for income taxes and income taxes at the statutory federal income tax rate are as follows (in thousands):96 For the Year EndedDecember 31, 2018 2017 Tax computed at statutory federal income tax rate1 $(4,336) $(1,560)State taxes, net of federal benefit (1,478) (255)Rate change — 898 Permanent items 409 — Other (5) — Change in valuation allowance 5,410 917 Income tax provision (benefit) $— $— 1.Statutory U.S. federal income tax rate of 21% in 2018 and 35% in 2017.Significant components of the Company’s deferred tax assets and liabilities are as follows (in thousands): As ofDecember 31, 2018 2017 Deferred tax assets: Net operating loss carryovers $6,909 $1,946 Accrued expenses and other 510 27 Total deferred tax assets 7,419 1,973 Less valuation allowance (7,383) (1,973)Deferred tax asset, net of valuation allowance 36 — Deferred tax liabilities: Fixed assets (36) — Total deferred tax liabilities (36) — 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 realizedand, accordingly, has provided a full valuation allowance against its net deferred tax asset.As of December 31, 2018, the Company had federal and state net operating loss carryforwards of approximately $24.1 million and $24.1 million,respectively. The federal and state net operating loss carryforwards that were generated prior to 2018 will begin to expire, if not utilized, by 2033. Under the2017 federal income tax law changes, federal net operating losses incurred in 2018 and in future years may be carried forward indefinitely, but thedeductibility of such federal net operating losses is limited. Utilization of the net operating loss carryforwards may be subject to an annual limitationaccording to Section 382 of the Internal Revenue Code of 1986 as amended, and similar provisions.As of December 31, 2018, the Company has uncertain tax positions related to federal and state income credits for its research and developmentactivities. The total amount of unrecognized tax benefits was $0.1 million as of December 31, 2018 and 2017. The Company will recognize interest andpenalties, if any, related to uncertain tax positions in income tax expense. As of December 31, 2018, the Company had no accrued interest or penalties relatedto uncertain tax positions and no amounts have been recognized in the Company’s statement of operations. The Company does not anticipate a materialchange to unrecognized tax benefits in the next twelve months. The 2015 and subsequent federal and state tax years for the Company remain open for the assessment of income taxes. 97 Note 10–Selected Quarterly Financial Data (Unaudited)In the fourth quarter of 2018, the Company changed its policy for recognizing stock-based compensation expense for awards with service conditionsonly from the graded attribution method to the straight-line attribution method. See Note 2 - Change in Accounting Principle - Stock-Based Compensation.The impact from the change in accounting policy for periods prior to January 1, 2108 was immaterial. As a result, the quarterly periods in 2017 have not beenadjusted for the change in accounting policy. The following tables present the effect of the change in accounting policy and its impact on the Company’sresults of operations as previously reported for the 2018 quarters ended March 31, June 30, and September 30, as compared to the results of operations afterthe retrospective application of the change in accounting policy (in thousands, except share and per share amounts): For the Quarter Ended As Computed Under Straight-line Attribution Method: March 31,2018 June 30,2018 September 30,2018 December 31,2018 Operating expenses: Research and development $927 $3,515 $3,467 $4,917 General and administrative 961 1,955 2,865 3,271 Total operating expenses 1,888 5,470 6,332 8,188 Loss from operations (1,888) (5,470) (6,332) (8,188)Total other income 41 153 426 610 Net loss $(1,847) $(5,317) $(5,906) $(7,578)Net loss per share, basic and diluted $(0.65) $(0.92) $(0.24) $(0.30)Weighted average common shares outstanding, basic and diluted 2,850,460 5,751,326 24,847,512 24,847,877 For the Quarter Ended As Previously Reported Under Graded Attribution Method: March 31,2018 June 30,2018 September 30,2018 Operating expenses: Research and development $929 $3,609 $3,484 General and administrative 986 2,503 3,681 Total operating expenses 1,915 6,112 7,165 Loss from operations (1,915) (6,112) (7,165) Total other income 41 153 426 Net loss $(1,874) $(5,959) $(6,739) Net loss per share, basic and diluted $(0.66) $(1.04) $(0.27) Weighted average common shares outstanding, basic and diluted 2,850,640 5,751,326 24,847,512 98 The following table presents the quarterly results of operations for 2017 (in thousands, except share and per share amounts): For the Quarter Ended March 31,2017 June 30,2017 September 30,2017 December 31,2017 Operating expenses: Research and development $515 $977 $1,120 $1,118 General and administrative 55 118 238 316 Total operating expenses 570 1,095 1,358 1,434 Loss from operations (570) (1,095) (1,358) (1,434)Total other income (expense) — — (1) (1)Net loss $(570) $(1,095) $(1,359) $(1,435)Net loss per share, basic and diluted $(0.20) $(0.38) $(0.48) $(0.50)Weighted average common shares outstanding, basic and diluted 2,849,305 2,850,471 2,850,640 2,850,640 99 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENone.ITEM 9A. CONTROLS AND PROCEDURESDisclosure Controls and ProceduresThe term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended(the “Exchange Act”), refers to controls and procedures that are designed to ensure that information required to be disclosed by a company in the reports thatit files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated andcommunicated to a company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisionsregarding required disclosure.In designing and evaluating our disclosure controls and procedures, management recognizes that disclosure controls and procedures, no matter howwell conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met.Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefitrelationship of possible disclosure controls and procedures. The design of any system of controls also is based in part upon certain assumptions about thelikelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; overtime, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because ofthe inherent limitations in a control system, misstatements due to error or fraud may occur and not be detected.Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosurecontrols and procedures as of December 31, 2018. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that ourdisclosure controls and procedures were effective as of the end of the period covered by this report at the reasonable assurance level.Changes in Internal Control over Financial Reporting:There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) thatoccurred during the quarter ended December 31, 2018 which have materially affected, or are reasonably likely to materially affect, our internal control overfinancial reporting.Management’s Report on Internal Control over Financial Reporting and Attestation Report of the Registered Public Accounting FirmThis Annual Report does not include a report of management’s assessment regarding internal control over financial reporting or an attestation reportof our independent registered public accounting firm due to a transition period established by the rules of the SEC for newly public companies.ITEM 9B. OTHER INFORMATIONNot applicable.100 PART IIIWe will file a definitive Proxy Statement for our 2019 Annual Meeting of Stockholders (the “2019 Proxy Statement”) with the SEC, pursuant toRegulation 14A, not later than 120 days after the end of our fiscal year. Accordingly, certain information required by Part III has been omitted under GeneralInstruction G(3) to Form 10-K. Only those sections of the 2019 Proxy Statement that specifically address the items set forth herein are incorporated byreference.ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEThe information required by Item 10 is hereby incorporated by reference to the sections of the 2019 Proxy Statement under the captions "InformationRegarding the Board of Directors and Corporate Governance," "Election of Directors," "Executive Officers" and "Section 16(a) Beneficial OwnershipReporting Compliance."ITEM 11. EXECUTIVE COMPENSATIONThe information required by Item 11 is hereby incorporated by reference to the sections of the 2019 Proxy Statement under the captions "ExecutiveCompensation" and "Non-Employee Director Compensation."ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSThe information required by Item 12 is hereby incorporated by reference to the sections of the 2019 Proxy Statement under the captions "SecurityOwnership of Certain Beneficial Owners and Management" and "Securities Authorized for Issuance under Equity Compensation Plans."ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEThe information required by Item 13 is hereby incorporated by reference to the sections of the 2019 Proxy Statement under the captions"Transactions with Related Persons" and "Independence of the Board of Directors."ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICESThe information required by Item 14 is hereby incorporated by reference to the sections of the 2019 Proxy Statement under the caption "Ratificationof Selection of Independent Auditors."101 PART IVITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULESWe have filed the following documents as part of this Annual Report:(a)(1)Financial StatementsThe financial statements are included in Item 8. “Financial Statements and Supplementary Data.”(a)(2)Financial Statement SchedulesAll schedules are omitted as information required is inapplicable or the information is presented in the financial statements and the related notes.(a)(3)Exhibits ExhibitNumber Description of Exhibit 3.1 Amended and Restated Certificate of Incorporation of the Registrant (incorporated herein by reference to Exhibit 3.3 to the Registrant’sRegistration Statement on Form S-1 (File No. 333-225104), filed with the Securities and Exchange Commission on May 22, 2018) 3.2 Amended and Restated Bylaws of the Registrant (incorporated herein by reference to Exhibit 3.4 to the Registrant’s Registration Statement onForm S-1 (File No. 333-225104), filed with the Securities and Exchange Commission on May 22, 2018) 10.1 Amended and Restated Investors’ Rights Agreement by and among the Registrant and certain of its stockholders, dated February 20, 2018(incorporated herein by reference to Exhibit 10.1 to the Registrant’s Registration Statement on Form S-1 (File No. 333-225104), filed with theSecurities and Exchange Commission on May 22, 2018) 10.2+ 2013 Equity Incentive Plan, as amended (incorporated herein by reference to Exhibit 10.2 to the Registrant’s Registration Statement on FormS-1 (File No. 333-225104), filed with the Securities and Exchange Commission on May 22, 2018) 10.3+ Form of Stock Option Grant Notice and Stock Option Agreement under 2013 Equity Incentive Plan (incorporated herein by reference toExhibit 10.3 to the Registrant’s Registration Statement on Form S-1 (File No. 333-225104), filed with the Securities and ExchangeCommission on May 22, 2018) 10.4+ 2018 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.4 to Amendment No. 1 to the Registrant’s Registration Statementon Form S-1 (File No. 333-225104), filed with the Securities and Exchange Commission on June 5, 2018) 10.5+ Form of Stock Option Grant Notice, Stock Option Agreement, Restricted Stock Unit Grant Notice, and Restricted Stock Unit Award Agreementunder 2018 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.5 to Amendment No. 1 to the Registrant’s RegistrationStatement on Form S-1 (File No. 333-225104), filed with the Securities and Exchange Commission on June 5, 2018) 10.6+ Form of Indemnification Agreement with Executive Officers and Directors (incorporated herein by reference to Exhibit 10.6 to the Registrant’sRegistration Statement on Form S-1 (File No. 333-225104), filed with the Securities and Exchange Commission on May 22, 2018) 10.7+ Employment Agreement, by and between the Registrant and Ted White, dated as of December 11, 2017 (incorporated herein by reference toExhibit 10.7 to the Registrant’s Registration Statement on Form S-1 (File No. 333-225104), filed with the Securities and ExchangeCommission on May 22, 2018)102 10.8+ Employment Agreement, by and between the Registrant and Chris Degnan, dated as of February 7, 2018, as amended on February 14, 2018(incorporated herein by reference to Exhibit 10.8 to the Registrant’s Registration Statement on Form S-1 (File No. 333-225104), filed with theSecurities and Exchange Commission on May 22, 2018) 10.9+ Employment Agreement, by and between the Registrant and Linda Palczuk, dated as of January 30, 2018, as amended on February 13, 2018(incorporated herein by reference to Exhibit 10.9 to the Registrant’s Registration Statement on Form S-1 (File No. 333-225104), filed with theSecurities and Exchange Commission on May 22, 2018) 10.10+ Employment Agreement, by and between the Registrant and Joe Bonaccorso, dated as of January 6, 2018, as amended on January 29, 2018(incorporated herein by reference to Exhibit 10.10 to the Registrant’s Registration Statement on Form S-1 (File No. 333-225104), filed with theSecurities and Exchange Commission on May 22, 2018) 10.11 Services Agreement, by and between the Registrant and PBM Capital Group, LLC, dated as of December 2, 2015, as amended on March 29,2018 (incorporated herein by reference to Exhibit 10.12 to the Registrant’s Registration Statement on Form S-1 (File No. 333-225104), filedwith the Securities and Exchange Commission on May 22, 2018) 10.12+ Advisor Agreement, by and between the Registrant and Glenn Oclassen, dated as of August 7, 2014 (incorporated herein by reference toExhibit 10.13 to the Registrant’s Registration Statement on Form S-1 (File No. 333-225104), filed with the Securities and ExchangeCommission on May 22, 2018) 10.13+ Restricted Stock Purchase Agreement, by and between the Registrant and Glenn Oclassen, dated as of August 7, 2014, as amended on January31, 2018 (incorporated herein by reference to Exhibit 10.15 to the Registrant’s Registration Statement on Form S-1 (File No. 333-225104),filed with the Securities and Exchange Commission on May 22, 2018) 10.14+ Employment Agreement, by and between the Registrant and Patrick Burnett, dated as of March 7, 2018, as amended (incorporated herein byreference to Exhibit 10.16 to the Registrant’s Registration Statement on Form S-1 (File No. 333-225104), filed with the Securities andExchange Commission on May 22, 2018) 10.15 Sublease Agreement, by and between Therakos, Inc. and the Registrant, dated as of April 9, 2018 (incorporated herein by reference to Exhibit10.17 to the Registrant’s Registration Statement on Form S-1 (File No. 333-225104), filed with the Securities and Exchange Commission onMay 22, 2018) 10.16+ Non-Employee Director Compensation Policy (incorporated herein by reference to Exhibit 10.18 to Amendment No. 1 to the Registrant’sRegistration Statement on Form S-1 (File No. 333-225104), filed with the Securities and Exchange Commission on June 5, 2018) 10.17+ Transition Agreement, by and between the Registrant and Matt Davidson, effective as of May 31, 2018 (incorporated herein by reference toExhibit 10.19 to Amendment No. 1 the Registrant’s Registration Statement on Form S-1 (File No. 333-225104), filed with the Securities andExchange Commission on June 5, 2018) 10.18# Supply Agreement, by and between the Registrant and Funing County Development Brucea Javanica Professional Cooperatives, dated as ofJuly 16, 2018 (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-38529), filedwith the Securities and Exchange Commission on November 7, 2018) 10.19 Second Amendment to Services Agreement, by and between the Registrant and PBM Capital Group, LLC, dated as of January 1, 2019. 18.1 Preferability Letter Regarding Change in Accounting Principle dated March 7, 2019 from KPMG LLP 23.1 Consent of KPMG LLP, independent registered public accounting firm 24.1 Power of Attorney (included on signature page) 103 31.1 Certification of Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934,as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002. 32.1^ Certification of Principal Executive Officer and Principal Financial Officer pursuant to Rules 13a-14(b) and 15d-14(b) promulgated under theSecurities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to section 906 of The Sarbanes-Oxley Act of 2002. 101.INS XBRL Instance Document 101.SCH XBRL Taxonomy Extension Schema Document 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF XBRL Taxonomy Extension Definition Linkbase Document 101.LAB XBRL Taxonomy Extension Label Linkbase Document 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document +Indicates management contract or compensatory plan.#Confidential treatment has been granted with respect to portions of this exhibit (indicated by asterisks) and those portions have been separately filedwith the Securities and Exchange Commission.^These certifications are being furnished solely to accompany this Annual Report pursuant to 18 U.S.C. Section 1350, and are not being filed forpurposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into any filing of theRegistrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing.ITEM 16. FORM 10-K SUMMARYNot applicable.104 SIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed onits behalf by the undersigned, thereunto duly authorized. VERRICA PHARMCEUTICALS INC. By: /s/ Ted WhiteMarch 7, 2019 Ted WhitePresident and Chief Executive Officer KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Ted White and ChrisDegnan, jointly and severally, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in hisname, place and stead, in any and all capacities, to sign this Annual Report on Form 10-K of Verrica Pharmaceuticals Inc., and any or all amendments thereto,and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting untosaid attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about thepremises hereby ratifying and confirming all that said attorneys-in-fact and agents, or his, her or their substitute or substitutes, may lawfully do or cause to bedone by virtue hereof.Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons onbehalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Ted WhiteTed White President, Chief Executive Officer and Director (Principal Executive Officer) March 7, 2019 /s/ Chris DegnanChris Degnan Chief Financial Officer(Principal Financial Officer and Principal Accounting Officer) March 7, 2019 /s/ Paul B. ManningPaul B. Manning Chairman of the Board of Directors March 7, 2019 /s/ Sean StalfortSean Stalfort Director March 7, 2019 /s/ Glenn OclassenGlenn Oclassen Director March 7, 2019 /s/ Mark PrygockiMark Prygocki Director March 7, 2019 /s/ Gary GoldenbergGary Goldenberg Director March 7, 2019 105Exhibit 10.19SECOND AMENDMENT TO SERVICES AGREEMENTTHIS SECOND AMENDMENT TO SERVICES AGREEMENT (the “Second Amendment”), effective as of January 1,2019 (the “Effective Date”), is between Verrica Pharmaceuticals Inc., a Delaware Corporation (the “Company”) and PBM CapitalGroup, LLC, a Delaware limited liability company (“PBM”). Company and PBM are collectively the “Parties”.RECITALSWHEREAS, the Parties entered into a Services Agreement effective August 14, 2016 (the “Services Agreement”) where, inpertinent part, the Company retained PBM to provide certain accounting, back office support, and other services (the “Services”) to theCompany;WHEREAS, the Parties subsequently executed an Amendment to Services Agreement on March 29, 2018 (the “FirstAmendment”) to adjust the fee set forth in the Services Agreement to reflect the Company’s then current utilization of the Servicesunder the Services Agreement; andWHEREAS, the Company has reduced and/or eliminated its need for certain Services since the execution of the FirstAmendment and, accordingly, the Parties now desire to adjust the fee set forth in the Services Agreement to reflect the Company’scurrent utilization of such Services, as set forth below.AGREEMENTNOW, THEREFORE, in consideration of the foregoing, the mutual promises contained herein, and for other good andvaluable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties, intending to be legally bound,hereby agree to amend the Services Agreement as follows:1.Incorporation of Recitals by Reference. The above Recitals are hereby incorporated into this SecondAmendment.2.Effective Date. The Parties agree that the changes agreed upon in this Second Amendment shall be effective in allrespects as of the above-referenced Effective Date.3.Amendment of Fee. The Parties agree that, upon the Effective Date, Section 4 of the Services Agreement shall beamended to remove “$50,000 per month” in such Section and replace it with “$26,333 per month (the “Fee”).”4.Amendment of Termination Provisions. The Parties agree that, upon the Effective Date, Section 5(c) of theServices Agreement shall be amended to:a.Remove both the functional area and fee adjustment line item in its entirety for (i) AccountingManagement and (ii) Accounting Staff; and  b.Revise the fee adjustment in the functional area of Contract Administration and Legal Support byremoving the “11,500.00” number in such line item in such Section and replacing it with “$1,500.00.” 5.Effect of Amendment. Except as otherwise provided herein, all other provisions of the Services Agreement arehereby ratified and confirmed and all the terms, conditions, and provisions thereof remain in full force and effect.IN WITNESS WHEREOF, the Company and PBM have caused this Second Amendment to Services Agreement to beduly executed as of the Effective Date first above written. COMPANY: Verrica Pharmaceuticals Inc. By: /s/ Ted White Ted White, CEO PBM: PBM Capital Group, LLC By: /s/ Paul Manning Paul B. Manning, CEO 2  Exhibit 18.1 March 7, 2019 Verrica Pharmaceuticals Inc.10 North High Street, Suite 200West Chester, Pennsylvania 19380 Ladies and Gentlemen: We have audited the balance sheets of Verrica Pharmaceuticals Inc. and the related statements of operations and comprehensive loss,convertible preferred stock and stockholders’ equity (deficit) and cash flows for each of the years in the two-year period ended December 31, 2018,and have reported thereon under date of March 7, 2019. The aforementioned financial statements and our audit report thereon are included in inthe Company’s Annual Report on Form 10-K for the year ended December 31, 2018. As stated in Note 2 to those financial statements, theCompany changed its method of accounting for stock-based compensation awards with graded vesting and service conditions only from thegraded attribution method to the straight-line attribution method for recognizing stock-based compensation expense. The Company views theseawards as single awards and believes that the straight-line attribution method more accurately reflects the pattern of service provided by theemployees versus the graded attribution method which significantly front loads the stock-based compensation expense and does not appropriatelymatch the expense with the services provided. Note 2 also states that the Company believes that the newly adopted accounting principle is thepredominant method used in its industry. In accordance with your request, we have reviewed and discussed with Company officials thecircumstances and business judgment and planning upon which the decision to make this change in the method of accounting was based. With regard to the aforementioned accounting change, authoritative criteria have not been established for evaluating the preferability of oneacceptable method of accounting over another acceptable method. However, for purposes of the Company's compliance with the requirements ofthe Securities and Exchange Commission, we are furnishing this letter. Based on our review and discussion, with reliance on management’s business judgment and planning, we concur that the newly adopted method ofaccounting is preferable in the Company’s circumstances. Very truly yours, /S/ KPMG LLPPhiladelphia, Pennsylvania Exhibit 23.1Consent of Independent Registered Public Accounting Firm The Board of DirectorsVerrica Pharmaceuticals Inc.: We consent to the incorporation by reference in the registration statements on Form S-8 (No. 333-226153) of Verrica Pharmaceuticals Inc. of our reportdated March 7, 2019, with respect to the balance sheets of Verica Pharmaceuticals Inc. as of December 31, 2018 and 2017, and the related statements ofoperations and comprehensive loss, convertible preferred stock and stockholders’ equity (deficit) and cash flows for the years then ended, and the relatednotes (collectively, the financial statements), which report appears in the December 31, 2018 annual report on Form 10-K of Verrica Pharmaceuticals Inc.Our report refers to a change in the method of accounting for graded vesting share-based payment awards with a service condition only in 2018. /s/ KPMG LLP Philadelphia, PennsylvaniaMarch 7, 2019 Exhibit 31.1 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICERPURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Ted White, certify that: 1. I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2018 of Verrica Pharmaceuticals Inc. (the “registrant”); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likelyto materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, tothe registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting. Date: March 7, 2019 /s/ Ted White Ted White President and Chief Executive Officer (Principal Executive Officer) Exhibit 31.2 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICERPURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Chris Degnan, certify that: 1. I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2018 of Verrica Pharmaceuticals Inc. (the “registrant”); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likelyto materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, tothe registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting. Date: March 7, 2019 /s/ Chris Degnan Chris Degnan Chief Financial Officer (Principal Financial Officer) Exhibit 32.1 CERTIFICATIONS OFPRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICERPURSUANT TO 18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) and Section 1350of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350),Ted White, President and Chief Executive Officer of Verrica Pharmaceuticals Inc. (the“Company”), and Chris Degnan, Chief Financial Officer of the Company, each hereby certifies that, to the best of his knowledge: 1. The Company’s Annual Report on Form 10-K for the year ended December 31, 2018, to which this Certification is attached as Exhibit 32.1 (the“Annual Report”), fully complies with the requirements of Section 13(a) or Section 15(d) of the Exchange Act; and 2. The information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of theCompany. IN WITNESS WHEREOF, the undersigned have set their hands hereto as of the 7th day of March, 2019. /s/ Ted White /s/ Chris DegnanTed White Chris DegnanPresident and Chief Executive Officer (Principal Executive Officer) Chief Financial Officer (Principal Financial Officer) * This certification accompanies the Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to beincorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Exchange Act (whether made before orafter the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing. 

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