vrca-20250930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

______________________________________________________

FORM 10-Q

______________________________________________________

(Mark One)


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

For the quarterly period ended September 30, 2025


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

For the transition period from ____ to _____

Commission File Number: 001-38529

______________________________________________________

Verrica Pharmaceuticals Inc.

(Exact Name of Registrant as Specified in its Charter)

______________________________________________________


Delaware			46-3137900
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)
44 West Gay Street, Suite 400 West Chester, PA			19380
(Address of principal executive offices)			(Zip Code)

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

N/A

(Former name, former address and former fiscal year, if changed since last report)

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

Title of Each Class

Trading
Symbol(s)

Name of Each Exchange on which Registered

Common Stock, $0.0001 par value

VRCA

The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

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 x No o

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	o	Accelerated filer	o

Non-accelerated filer	x	Smaller reporting company	x

Emerging growth company	o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of November 7, 2025, the registrant had 9,490,035 shares of common stock, $0.0001 par value per share, outstanding.

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VERRICA PHARMACEUTICALS INC.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)	1

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23

Item 3.	Quantitative and Qualitative Disclosures About Market Risks	34

Item 4.	Controls and Procedures	34

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	35

Item 1A.	Risk Factors	35

Item 5.	Other Information	36

Item 6.	Exhibits	36

Signatures		37

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PART I. FINANCIAL INFORMATION

Item 1. Unaudited Financial Statements

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VERRICA PHARMACEUTICALS INC.

BALANCE SHEETS

(in thousands, except share and per share amounts)

(Unaudited)


	September 30, 2025		December 31, 2024
ASSETS
Current assets:
Cash and cash equivalents	$	21,097	$	46,329
Accounts receivable	7,047		48
Collaboration receivable, billed and unbilled	282		29
Deferred R&D services, current portion (Note 11)	1,959		—
Inventory	2,304		2,463
Prepaid expenses and other current assets	3,586		2,310
Total current assets	36,275		51,179
Property and equipment, net	225		589
Operating lease right-of-use asset	616		836
Finance lease right-of-use asset	1,050		1,154
Deferred R&D services, non-current portion (Note 11)	2,354		—
Other non-current assets	376		376
Total assets	$	40,896	$	54,134
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	1,585	$	1,896
Accrued expenses and other current liabilities	12,600		13,511
Deferred revenue	1,564		—
Current portion of long-term debt	12,458		12,938
Operating lease liability	335		315
Finance lease liability	366		352
Total current liabilities	28,908		29,012
Operating lease liability	330		583
Finance lease liability	629		768
Derivative liability	1,762		2,648
R&D funding liability (Note 11)	4,688		—
Long term debt	21,619		30,983
Total liabilities	57,936		63,994
Commitments and Contingencies (Note 6)
Stockholders’ deficit:
Preferred stock, $0.0001 par value; 10,000,000 shares authorized; no shares issued and outstanding as of September 30, 2025 and December 31, 2024	—		—
Common stock, $0.0001 par value; 200,000,000 authorized; 9,500,549 shares issued and 9,490,035 shares outstanding as of September 30, 2025 and 9,188,513 shares issued and 9,177,999 shares outstanding as of December 31, 2024	1		1
Treasury stock, at cost, 10,514 shares as of September 30, 2025 and December 31, 2024	—		—
Additional paid-in capital	299,798		297,166
Accumulated deficit	(316,839)		(307,027)
Total stockholders’ deficit	(17,040)		(9,860)
Total liabilities and stockholders’ deficit	$	40,896	$	54,134

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

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VERRICA PHARMACEUTICALS INC.

STATEMENTS OF OPERATIONS

(in thousands, except share and per share amounts)

(Unaudited)


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2025		2024		2025		2024

Revenue:
Product revenue, net	$	3,607	$	(1,865)	$	11,563	$	6,259
License and collaboration revenue	10,737		84		18,922		963
Total revenue	14,344		(1,781)		30,485		7,222
Operating expenses:
Cost of product revenue	754		351		1,517		1,257
Cost of collaboration revenue	355		84		523		858
Selling, general and administrative	9,403		16,083		27,103		48,944
Research and development	2,205		2,405		6,335		10,672
Total operating expenses	12,717		18,923		35,478		61,731
Income (loss) from operations	1,627		(20,704)		(4,993)		(54,509)
Other income (expense):
Interest income	159		221		724		1,212
Interest expense	(2,094)		(2,376)		(6,428)		(7,063)
Change in fair value of derivative liability	34		—		886		—
Other expense	—		(1)		(1)		(17)
Total other expense, net	(1,901)		(2,156)		(4,819)		(5,868)
Net loss	$	(274)	$	(22,860)	$	(9,812)	$	(60,377)

Net loss per share, basic and diluted	$	(0.03)	$	(4.88)	$	(1.03)	$	(12.96)
Weighted-average common shares outstanding, basic and diluted	9,490,083		4,680,543		9,489,173		4,659,788

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

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VERRICA PHARMACEUTICALS INC.

STATEMENTS OF STOCKHOLDERS’ DEFICIT

(in thousands, except share amounts)

(Unaudited)


	Common Stock			Additional Paid-in Capital		Subscription Receivable		Accumulated Deficit		Treasury Stock	Total Stockholders’ (Deficit) Equity
	Shares Issued	Amount								Shares

January 1, 2025	9,188,513	$	1	$	297,166	$	—	$	(307,027)	10,514	$	(9,860)
Stock-based compensation	—	—		1,026		—		—		—	1,026
Vesting of restricted stock units	1,000	—		—		—		—		—	—
Net loss	—	—		—		—		(9,742)		—	(9,742)
March 31, 2025	9,189,513	$	1	$	298,192	$	—	$	(316,769)	10,514	$	(18,576)
Stock-based compensation	—	—		888		—		—		—	888
Exercise of pre-funded warrants	70,100	—		—		—		—		—	—
Vesting of restricted stock units	5,426	—		—		—		—		—	—
Net income	—	—		—		—		204		—	204
June 30, 2025	9,265,039	$	1	$	299,080	$	—	$	(316,565)	10,514	$	(17,484)
Stock-based compensation	—	—		718		—		—		—	718
Exercise of pre-funded warrants	235,548	—		—		—		—		—	—
Retired shares	(38)	—		—		—		—		—	—

Net loss	—	—		—		—		(274)		—	(274)
September 30, 2025	9,500,549	$	1	$	299,798	$	—	$	(316,839)	10,514	$	(17,040)


January 1, 2024	4,251,869	$	—	$	250,211	$	—	$	(230,448)	10,514	$	19,763
Stock-based compensation	—	—		2,072		—		—		—	2,072
Exercise of stock options	650	—		8		(4)		—		—	4
Net loss	—	—		—		—		(20,331)		—	(20,331)
March 31, 2024	4,252,519	$	—	$	252,291	$	(4)	$	(250,779)	10,514	$	1,508
Stock-based compensation	—	—		2,228		—		—		—	2,228
Exercise of stock options	3,600	—		146		4		—		—	150
Net loss	—	—		—		—		(17,186)		—	(17,186)
June 30, 2024	4,256,119	$	—	$	254,665	$	—	$	(267,965)	10,514	$	(13,300)
Stock-based compensation	—	—		2,108		—		—		—	2,108
Vesting of restricted stock units	56,150	—		—		—		—		—	—
Exercise of pre-funded warrants	258,324	1		—		—		—		—	1
Net loss	—	—		—		—		(22,860)		—	(22,860)
September 30, 2024	4,570,593	$	1	$	256,773	$	—	$	(290,825)	10,514	$	(34,051)

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

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VERRICA PHARMACEUTICALS INC.

STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)


	For the Nine Months Ended September 30,
	2025		2024
Cash flows from operating activities
Net loss	$	(9,812)	$	(60,377)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation	2,632		6,408
Depreciation expense	119		288
Non-cash interest expense	2,075		1,571
Loss on disposal of fixed assets	246		141
Loss on termination of financing lease	3		260
Amortization of operating lease right-of-use asset	220		246
Amortization of finance lease right-of-use asset	252		482
Non-cash accretion of R&D funding liability	375		—
Change in fair value of derivative liability	(886)		—
Changes in operating assets and liabilities:
Prepaid expenses and other assets	(1,276)		(1,499)
Collaboration receivable, billed and unbilled	(253)		84
Inventory	159		—
Accounts payable	(311)		(1,499)
Deferred revenue	1,564		—
Accounts receivable	(6,999)		4,401
Accrued expenses and other current liabilities	(911)		4,886
Operating lease liability	(233)		(255)
Net cash used in operating activities	(13,036)		(44,863)
Cash flows from investing activities
Purchases of property and equipment	—		(27)
Net cash used in investing activities	—		(27)
Cash flows from financing activities
Proceeds from exercise of stock options	—		154
Payment of debt amendment fees	—		(1,139)
Repayment of debt	(11,919)		—
Repayment of finance lease	(277)		(550)
Payment of equity issuance costs	—		(163)
Net cash used in financing activities	(12,196)		(1,698)
Net decrease in cash and cash equivalents	(25,232)		(46,588)
Cash and cash equivalents at the beginning of the period	46,329		69,547
Cash and cash equivalents at the end of the period	$	21,097	$	22,959

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VERRICA PHARMACEUTICALS INC.

STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)


	For the Nine Months Ended September 30,
	2025		2024
Supplemental disclosures
Cash paid for interest	$	4,353	$	5,492
Supplemental disclosure of noncash investing and financing activities:
Recognition of R&D funding liability and deferred R&D services	$	4,313	$	—
Finance lease liability extinguished as a result of lease termination	$	50	$	—
Right-of-use asset obtained in exchange for lease obligation	$	141	$	1,976

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

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VERRICA PHARMACEUTICALS INC.

Notes to Financial Statements

(Unaudited)

Note 1—Organization and Description of Business Operations

Verrica Pharmaceuticals Inc. (the "Company") was formed on July 3, 2013 and is incorporated in the State of Delaware. The Company is a dermatology therapeutics company developing and selling medications for skin diseases requiring medical intervention. On July 21, 2023, the U.S. Food and Drug Administration ("FDA") approved YCANTH (VP-102) topical solution for the treatment of molluscum contagiosum in adult and pediatric patients two years of age and older.

Reverse Stock Split

At the close of trading on July 24, 2025, the Company effected a reverse stock split at a ratio of 1-for-10 shares of its common stock. As a result, every ten shares of the Company’s issued and outstanding common stock were automatically combined into one share. The reverse stock split affected all stockholders uniformly and did not alter any stockholder’s percentage ownership interest in the Company.

No fractional shares were issued as a result of the reverse stock split and the split did not impact the par value of the Company's common stock. Any fractional shares that would otherwise have resulted from the reverse stock split were rounded down to the next whole share.

The accompanying financial statements and footnotes have been adjusted to reflect the impact of the reverse stock split as though it had occurred in all periods presented.

Liquidity and Capital Resources

The Company has incurred substantial operating losses since inception and expects to continue to incur significant losses for the foreseeable future and may never become profitable. As of September 30, 2025, the Company has an accumulated deficit of $316.8 million and had cash outflows from operations of $13.0 million for the nine months ended September 30, 2025. Based on the Company’s current business plan and current capital resources, consisting of cash and cash equivalents of $21.1 million as of September 30, 2025, combined with the uncertainty regarding the availability of additional funding and considering its debt obligations, including a requirement to maintain cash, cash equivalents and investments of at least $10.0 million at all times, the Company has concluded that substantial doubt exists regarding its ability to continue as a going concern within one year after the date these financial statements are issued. The Company plans to address the conditions that raise substantial doubt regarding its ability to continue as a going concern by, among other things, obtaining additional funding through equity offerings, debt financing and refinancings, collaborations, strategic alliances and/or licensing arrangements. The financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments to the carrying amounts and classification of recorded assets, liabilities and reported expenses that might result should the Company be unable to continue as a going concern.

There can be no assurance the Company will be able to obtain additional liquidity when needed or under acceptable terms, if at all. If the Company is unable to raise capital when needed or on attractive terms, the Company would be forced to delay, reduce or eliminate commercialization efforts and development programs.

On June 27, 2025, the Company entered into the Second Amendment to the Collaboration and License Agreement (the "Second Amendment") with Torii Pharmaceutical Co., Ltd. ("Torii"), amending the Collaboration and License Agreement dated as of March 17, 2021, between the Company and Torii, as amended on May 14, 2024 (as amended, the "Torii Agreement"). The Second Amendment provided for the acceleration of an $8.0 million milestone payment which was paid to the Company in July 2025, following Torii's approval of the study plan and execution of the CRO agreement. The milestone payment was initially conditioned upon the dosing of the first patient as part of the Company's global Phase 3 program of VP-102 (TO-208 in Japan) in common warts (the "Program"), which it is sponsoring with Torii. See Note 11 for further discussion of the Research and Development ("R&D") funding arrangement related to the Program. In September 2025, Torii paid the Company a $10.0 million milestone payment upon the approval of TO-208, referred to as YCANTH in the U.S., for molluscum contagiosum in Japan. In addition, the Company will initiate a manufacturing transfer to Torii, expected to take several years, for Torii to be able to produce YCANTH (TO-208) applicators to be sold in Japan. In the interim, the Company will continue to receive from Torii a transfer price for applicators manufactured by the Company's manufacturing partners. After the transfer of at least one component of the manufacturing process, the Company will begin receiving royalties related to net sales in Japan of applicators manufactured by Torii and/or its manufacturing partners in lieu of the transfer price for completed applicators.

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The Company plans to secure additional capital in the future through equity or debt financings, partnerships, or other sources to carry out the Company’s planned commercial and development activities. The amount of proceeds the Company may be able to raise pursuant to its currently effective shelf registration statement on Form S-3 is limited. The Company is subject to the general instructions of Form S-3 known as the "baby shelf rules." Under these rules, the amount of funds the Company can raise through primary public offerings of securities in any 12-month period using its registration statement on Form S-3 is limited to one-third of the aggregate market value of the shares of the Company's common stock held by its non-affiliates. Therefore, the Company will be limited in the amount of proceeds it is able to raise by selling its securities using its Form S-3 until such time as the Company's public float exceeds $75.0 million.

On July 26, 2023, the Company entered into a Credit Agreement, pursuant to which the Company borrowed $50.0 million under the Loan Facility (as defined in Note 10) resulting in net proceeds of approximately $44.1 million after payment of certain fees and transaction related expenses. Amounts borrowed under the Loan Facility will mature on July 26, 2028, and payments of principal were originally not required under the Credit Agreement. Based on the Company's net revenue attributable to YCANTH on a trailing 12-month basis not meeting a specified amount set forth in the Credit Agreement (as amended) as of December 31, 2024, the Company became obligated to start making principal payments starting in January 2025. The Company is obligated to repay the principal amount of the loan on the last day of each month in equal monthly installments through the maturity date, together with the applicable repayment premium, the exit fee and interest.

The Credit Agreement contains customary events of default, including, but not limited to, nonpayment of principal, interest, fees or other amounts; material inaccuracy of a representation or warranty; failure to perform or observe covenants; cross-defaults with certain other indebtedness; bankruptcy and insolvency events; material monetary judgment defaults; impairment of any material definitive loan documentation; other material adverse effects; key permit and other regulatory events; key person events; and change of control. In addition, the Credit Agreement contains a financial covenant that the Company must maintain a liquidity of at least $10.0 million and that the Company’s quarterly and annual financial statements not be subject to any qualification or statement which is of a "going concern" or similar nature. On June 10, 2025, the requirement to deliver financial statements that are not subject to a qualification of a "going concern" was waived for the financial statements for the quarters ending June 30, 2025, September 30, 2025 and the quarter and the year ending December 31, 2025. If the requirement to deliver financial statements that are not subject to a qualification of a "going concern" is not waived for additional future periods or if additional financing is not raised to meet the liquidity test, the Company may be in default of the Credit Agreement in the near-term. Upon the occurrence of an event of default (subject to notice and grace periods), additional interest of 4% per annum applies and obligations under the Credit Agreement could be accelerated. As of September 30, 2025, the Company is in compliance with all applicable covenants under the Credit Agreement.

Note 2—Significant Accounting Policies

Basis of Presentation

The accompanying unaudited interim financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP"). Any reference in these notes to applicable guidance is meant to refer to the authoritative United States generally accepted accounting principles as found in the Accounting Standards Codification ("ASC") and Accounting Standards Update ("ASU") of the Financial Accounting Standards Board ("FASB").

Unaudited Interim Financial Statements

The accompanying unaudited interim financial statements have been prepared by the Company in accordance with US GAAP for interim information and pursuant to the rules and regulations of the SEC. Accordingly, certain information and footnote disclosures normally included in audited financial statements prepared in accordance with US GAAP have been condensed or omitted pursuant to such rules and regulations. These unaudited interim financial statements should be read in conjunction with the audited financial statements and related notes for the year ended December 31, 2024, filed as part of the Company's Annual Report.

These unaudited interim financial statements have been prepared on the same basis as the audited financial statements and, in management’s opinion, include all adjustments, consisting of only normal recurring adjustments, necessary for the fair presentation of the financial information for the interim periods. However, the results of operations for any interim period are not necessarily indicative of the results to be expected for the full fiscal year.

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Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions are based on current facts, historical experience as well as other pertinent industry and regulatory authority information, results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of revenues and expenses that are not readily apparent from other sources. Actual results may differ materially and adversely from these estimates. To the extent there are material differences between the estimates and actual results, the Company’s future results of operations will be affected.

Segments

Operating segments are identified as components of an enterprise about which separate and discrete financial information is available for evaluation by the chief operating decision-maker ("CODM") in making decisions regarding resource allocation and assessing performance.

The Company views its operations and manages its business in one operating segment engaged in developing and selling medications for skin diseases requiring medical intervention. The Company’s Chief Executive Officer ("CEO"), as the CODM, regularly reviews the entity-wide financial and operational performance as a single unit. No financial information is disaggregated into separate lines of businesses and the Company does not differentiate the activities of its headquarters from the overall performance of the Company. The CEO makes resource allocation and business process decisions regarding the overall level of resources available and how to best deploy these resources.

The single segment’s principal measure of segment profit and loss is consolidated net loss. The CEO considers actual and forecasted consolidated revenues, significant expenses, and consolidated net loss when evaluating performance. Significant expenses are amounts regularly provided to the CEO and included in consolidated net loss and include selling, general and administrative expenses and research and development expenses.

The table below summarizes the significant revenue and expense categories regularly reviewed by the CEO for the three and nine months ended September 30, 2025 and 2024:


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2025		2024		2025		2024
Revenue:
Product revenue, net	$	3,607	$	(1,865)	$	11,563	$	6,259
License and collaboration revenue	10,737		84		18,922		963
Total revenue	14,344		(1,781)		30,485		7,222
Less:
Selling, general and administrative:
Commercial (including payroll)	4,976		10,169		13,604		28,561
General and administrative (including payroll)	3,996		4,411		11,695		15,543
Stock-based compensation	431		1,503		1,804		4,840
Total selling, general and administrative	9,403		16,083		27,103		48,944
Research and development:
YCANTH (VP-102)	304		417		1,015		1,635
VP-315	197		310		391		3,162
Common warts	16		211		(50)		371
Stock-based compensation	287		605		828		1,568
Other unallocated expenses	1,401		862		4,151		3,936
Research and development	2,205		2,405		6,335		10,672
Cost of revenue	1,109		435		2,040		2,115
Other segment items (a)	1,901		2,156		4,819		5,868
Net loss	$	(274)	$	(22,860)	$	(9,812)	$	(60,377)

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(a)Other segment items include interest income, interest expense, change in fair value of embedded derivative liability and other expenses.

Cash and Cash Equivalents

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

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

Cash and cash equivalents as of September 30, 2025, includes a cash deposit of $0.2 million with Bank of America as required under the Commercial Credit Card Program with a balance equal to the outstanding credit limit on commercial credit cards.

Fair Value of Financial Instruments and Credit Risk

As of September 30, 2025, the Company’s financial instruments included cash equivalents, accounts payable notes payable, and a derivative liability. The carrying amount of cash equivalents and accounts payable approximated fair value, given their short-term nature. The carrying value of the Company's long term note payable (Note 10) approximates fair value as the interest rate is reflective of current market rates on debt with similar terms and conditions.

Cash equivalents subject the Company to concentrations of credit risk. However, the Company invests its cash in accordance with a policy objective that seeks to ensure both liquidity and safety of principal. The policy limits investments to instruments issued by the U.S. government, certain SEC registered money market funds that invest only in U.S. government obligations and various other low-risk liquid investment options, and places restrictions on portfolio maturity terms.

The Company is subject to credit risk from accounts receivable. As of September 30, 2025, one customer represented approximately 90% of the Company's accounts receivable. Based on the Company's periodic credit evaluations, there have been no historical concerns with this customer.

Accounts Receivable

The Company had $7.0 million in accounts receivable as of September 30, 2025. As of September 30, 2025, the Company had no allowance for credit losses. An allowance for credit losses is determined based on the Company's assessment of the creditworthiness and financial condition of its customers, aging of receivables, as well as the general economic environment. Any allowance would reduce the net receivables to the amount that is expected to be collected. Current payment terms for YCANTH (VP-102) are generally 60 days from the shipment date.

Inventory

The Company values inventory at the lower of cost or net realizable value. Inventory cost is determined using the specific identification method. The Company regularly reviews its inventory quantities and, when appropriate, records a provision for obsolete and excess inventory to derive the new cost basis, which takes into account the Company’s sales forecast and corresponding expiry dates. The Company recognized $0.4 million of obsolete inventory costs as cost of product revenue for the three and nine months ended September 30, 2025, due to the expiration of Product (as defined below). The Company recognized obsolete inventory costs of $0.2 million and $0.6 million as cost of product revenue for the three and nine months ended September 30, 2024, respectively, due to the expiration of Product.

Financial Instruments – Derivatives

The Company evaluates its financial instruments to determine if the financial instrument itself or any embedded components of a financial instrument potentially qualify as derivatives required to be separately accounted for in accordance with ASC Topic 815 - Derivatives and Hedging.

The derivative liability relates to a bifurcated settlement feature of the Company’s OrbiMed Credit Agreement (Note 10). The derivative liability is subject to re-measurement at each reporting period, at each balance sheet date and any change in fair value is recognized as a component of change in fair value of derivative liability in the statements of operations. The Company will continue to adjust the liability for changes in fair value until the final repayment of the Term Loan.

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Revenue

Product Revenue, Net

The Company recognizes revenue from sales of a single product, YCANTH (VP-102) (the "Product") in accordance with ASC Topic 606 – Revenue from Contracts with Customers. YCANTH (VP-102) became available for commercial sale and shipment to patients with a prescription in the United States in the third quarter of 2023. The Company sells the Product to Customers who in turn sell the Product directly to clinics, hospitals, and federal healthcare programs. Revenue is recognized as the Product is physically delivered to the Customers.

Gross product sales are reduced by corresponding gross-to-net ("GTN") estimates using the expected value method, resulting in the Company’s reported “Product revenue, net” in the accompanying statements of operations. Product revenue, net reflects the amount the Company ultimately expects to realize in net cash proceeds, taking into account the current period gross sales and related cash receipts and the subsequent cash disbursements on these sales that the Company estimates for the various GTN categories discussed below. The GTN estimates are based upon information received from external sources, such as written or oral information obtained from our customers with respect to their period-end inventory levels and sales to end-users during the period, in combination with management’s informed judgments. Due to the inherent uncertainty of these estimates, the actual amount of product returns, government chargebacks, prompt pay discounts, commercial rebates, Medicaid rebates, co-pay assistance and distribution, data, and group purchasing organizations ("GPO") administrative fees may be materially above or below the amount estimated. Variance between actual amounts and estimated amounts may result in prospective adjustments to reported net product revenue.

Each of the GTN estimate categories are discussed below:

Product Returns Allowances: The Customers are contractually permitted to return purchased Product in certain circumstances. The Company records discrete reserves if Product held by customers, forecasted sales and expiration of Product warrant a reserve. As historical data for returns of the Product becomes available over time, the Company will utilize historical return rates of the Product in making its estimates. Returned Product is typically destroyed, since substantially all returns are due to expiry and cannot be resold.

Government Chargebacks: The Product is subject to pricing limits under certain federal government programs, including Medicare and the 340B drug pricing program. Qualifying entities (the "End-Users") purchase the Product from the Customers at their applicable qualifying discounted price. The chargeback amount the Company incurs represents the difference between the Company’s contractual sales price to the Customers and the end-user’s applicable discounted purchase price under the government program.

Medicaid Rebates: The Product is subject to state government-managed Medicaid programs, whereby rebates are issued to participating state governments. These rebates arise when a patient treated with the Product is covered under Medicaid, resulting in a discounted price for the Product under the applicable Medicaid program. The Medicaid rebate accrual calculations require the Company to project the magnitude of its sales, by state, that will be subject to these rebates.

Patient Assistance: The Company offers a voluntary co-pay patient assistance program intended to provide financial assistance to eligible patients with a prescription drug co-payment required by payors and coupon programs for cash payors. The calculation of the current liability for this assistance is based on an estimate of claims and the cost per claim that the Company expects to receive associated with YCANTH (VP-102) that has been recognized as revenue but remains in the distribution channel inventories at the end of each reporting period.

Distribution, Data, and GPO Administrative Fees: Distribution, data, and GPO administrative fees are paid to authorized wholesalers/distributors of the Company’s products for various commercial services including contract administration, inventory management, delivery of end-user sales data, and product returns processing. These fees are based on a contractually-determined percentage of the Company’s applicable sales.

Collaboration Revenues

The Company has generated collaboration revenue through its licensing and collaboration arrangements. The terms of the arrangements typically include payments to the Company of one or more of the following: nonrefundable, up-front license fees; regulatory and commercial milestone payments; payments for manufacturing supply of product and services; materials shipped to support development; and royalties on net sales of licensed products.

In determining the appropriate amount of revenue to be recognized as it fulfills its obligations under each of its agreements, the Company performs the following steps:

(i)identification of the promised goods or services in the contract;

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(ii)determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract;

(iii)measurement of the transaction price, including the constraint on variable consideration;

(iv)allocation of the transaction price to the performance obligations; and

(v)recognition of revenue when (or as) the Company satisfies each performance obligation. The Company’s revenue arrangements may include the following:

Up-front License Fees: If a license is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenues from non-refundable, up-front fees allocated to the license when the license is transferred to the licensee and the licensee is able to use and benefit from the license. For licenses that are bundled with other promises, the Company utilizes judgment to assess the nature of the comb

SEC Form 10-Q filed by Verrica Pharmaceuticals Inc.