Verrica Pharmaceuticals Inc. Leases Disclosure

Note 10—Leases

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

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

The Company leased office space in West Chester, Pennsylvania under an agreement classified as an operating lease that expired in May 2021.

On July 1, 2019, the Company entered into a lease for 5,829 square feet of office space located in West Chester, Pennsylvania that serves as the Company’s headquarters. On March 12, 2020 the Company entered into an amendment to the lease agreement. The amendment expands the original premises to include 5,372 square feet of additional office space increasing the total rentable premise to 11,201 square feet of space. For the first six months following the commencement date of September 1, 2020, the base rent was based on the square footage of the original premises. The initial term will expire on September 1, 2027. Base rent over the initial term is approximately $2.4 million, and the Company is also responsible for its share of the landlord’s operating expense. At the commencement date of the new lease, the Company recorded a right-of-use asset of $1.9 million and a lease liability of $1.9 million on the balance sheet.

As of December 31, 2021, the Company had an operating lease liability of $1,694,000, of which $244,600 was classified as current, and an operating right-of-use asset of $1,608,000.

The Company leases a vehicle for the sales force under a financing lease that expires through 2025. The net basis of the vehicle lease of $22,000 is recorded as property and equipment on the condensed balance sheet.

The remaining term of the Company’s operating and finance leases were 5.7 and 3.3 years, respectively and the discount rate used to measure the present value of the Company’s operating and finance lease liability were 6.25% and 4.35%, respectively as of December 31, 2021.