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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020

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: 001-39614
TARSUS PHARMACEUTICALS, INC.
(Exact name of Registrant as specified in its charter)
Delaware81-4717861
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
15440 Laguna Canyon Road, Suite 160
Irvine, California
92618
(Address of principal executive offices)(Zip Code)
(949) 409-9820
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Common Stock, $0.0001 par value per shareTARS
The Nasdaq Global Market LLC
(Nasdaq Global Select Market)

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 ☐ 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 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  Smaller 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 standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.  

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

20,320,426 shares of common stock, $0.0001 par value, outstanding as of November 23, 2020



Table of Contents
TABLE OF CONTENTS



Table of Contents
PART I—FINANCIAL INFORMATION
Item I. Financial Statements (Unaudited)
TARSUS PHARMACEUTICALS, INC.
INDEX TO THE FINANCIAL STATEMENTS
 Pages
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F-4
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Table of Contents
TARSUS PHARMACEUTICALS, INC.
CONDENSED BALANCE SHEETS
(In thousands, except share and par value amounts)
 
 
September 30, 2020December 31, 2019
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents$86,329 $57,952 
Restricted cash20 20 
Other receivables1 36 
Prepaid expenses and other current assets2,722 22 
Total current assets89,072 58,030 
Property and equipment, net of accumulated depreciation604 154 
Operating lease right-of-use asset759 126 
Other assets1,750 6 
Total assets$92,185 $58,316 
LIABILITIES, PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable and other accrued liabilities$5,624 $520 
Accrued payroll and benefits520 299 
Total current liabilities6,144 819 
Other long-term liabilities711 100 
Total liabilities6,855 919 
Commitments and contingencies (Note 9)
Series A Preferred Stock, $0.0001 par value; 1,575,030 shares authorized, issued and outstanding at September 30, 2020 (unaudited) and December 31, 2019; liquidation preference of $3,650 at September 30, 2020 (unaudited) and December 31, 2019
3,564 3,564 
Series B Preferred Stock, $0.0001 par value; 6,731,649 shares authorized and 6,674,909 shares issued and outstanding at September 30, 2020 (unaudited) and December 31, 2019; liquidation preference of $60,010 at September 30, 2020 (unaudited) and December 31, 2019
59,838 59,838 
Series C Preferred Stock, $0.0001 par value; 2,857,084 shares authorized and 2,857,079 shares issued and outstanding at September 30, 2020 (unaudited) and zero shares authorized, issued or outstanding at December 31, 2019; liquidation preference of $40,000 at September 30, 2020 (unaudited) and $0 at December 31, 2019
39,757  
Stockholders’ (deficit) equity:
Common stock, $0.0001 par value; 17,502,288 shares authorized; 3,067,363 shares issued and 2,887,988 outstanding, which excludes 179,375 shares subject to repurchase at September 30, 2020 (unaudited); 2,650,919 shares issued and 2,646,619 outstanding, which excludes 4,300 shares subject to repurchase at December 31, 2019
2 2 
Additional paid-in capital3,548 27 
Accumulated deficit(21,379)(6,034)
Total stockholders’ deficit(17,829)(6,005)
Total liabilities, preferred stock and stockholders’ deficit$92,185 $58,316 
See accompanying notes to these unaudited condensed financial statements.
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Table of Contents
TARSUS PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
(In thousands, except share and per share amounts)
 Three Months Ended
September 30,
Nine Months Ended
September 30,
 2020201920202019
Operating expenses:
Research and development$7,991 $399 $11,239 $2,465 
General and administrative2,150 234 4,282 749 
Total operating expenses10,141 633 15,521 3,214 
Loss from operations before other income (expense) and income taxes(10,141)(633)(15,521)(3,214)
Other income (expense):
Interest income (expense), net4 (21)178 (16)
Change in fair value of derivative liabilities (27) (27)
Total other income (expense)4 (48)178 (43)
Provision for income taxes(1) (1)(1)
Net loss and comprehensive loss$(10,138)$(681)$(15,344)$(3,258)
Net loss per share attributable to common stockholders, basic and diluted$(3.71)$(0.28)$(5.73)$(1.41)
Weighted-average common shares outstanding, basic and diluted2,729,685 2,471,237 2,677,315 2,311,788 

See accompanying notes to these unaudited condensed financial statements.
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Table of Contents
TARSUS PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT
(Unaudited)
(In thousands, except share data)
 Preferred StockCommon StockAdditional Paid-In CapitalAccumulated
Deficit
Total
Stockholders’
Deficit
 Shares    AmountSharesAmount
Balance as of December 31, 20198,249,939 $63,402 2,646,619 $2 $27 $(6,034)$(6,005)
Net loss— — — — — (1,957)(1,957)
Recognition of stock-based compensation expense — — — — 4 — 4 
Lapse of repurchase rights related to common stock issued pursuant to early exercises— — 4,300 — — — — 
Balance as of March 31, 20208,249,939 $63,402 2,650,919 $2 $31 $(7,991)$(7,958)
Net loss— — — — — (3,250)(3,250)
Recognition of stock-based compensation expense — — — — 173 — 173 
Exercise of vested stock options— — 1,077 — — — — 
Balance as of June 30, 20208,249,939 $63,402 2,651,996 $2 $204 $(11,241)$(11,035)
Net loss — — — — — (10,138)(10,138)
Recognition of stock-based compensation expense— — — — 223 — 223 
Exercise of vested stock options— — 13,532 — 6 — 6 
Shares issued as consideration for in-license rights (Note 9 (b))— — 222,460 — 3,115 — 3,115 
Issuance of Series C Preferred Stock in September 2020 at $14.0003 per share, net of issuance costs of $243
2,857,079 39,757 — — — — — 
Balance as of September 30, 202011,107,018 $103,159 2,887,988 $2 $3,548 $(21,379)$(17,829)


Preferred StockCommon StockAdditional Paid-In CapitalAccumulated
Deficit
Total
Stockholders’
Deficit
SharesAmountSharesAmount
Balance as of December 31, 20181,575,030 $3,564 2,078,918 $1 $9 $(1,364)$(1,354)
Net loss — — — — — (1,745)(1,745)
Recognition of stock-based compensation expense— — — — 4 — 4 
Vesting of founder shares subject to repurchase— — 134,632 — — — — 
Lapse of repurchase rights related to common stock issued pursuant to early exercises— — 25,243 — — — — 
Balance as of March 31, 20191,575,030 $3,564 2,238,793 $1 $13 $(3,109)$(3,095)
Net loss— — — — — (831)(831)
Recognition of stock-based compensation expense— — — — 5 — 5 
Vesting of founder shares subject to repurchase— — 134,632 1 — — 
Lapse of repurchase rights related to common stock issued pursuant to early exercises— — 25,243 — — — — 
Balance as of June 30, 20191,575,030 $3,564 2,398,668 $2 $18 $(3,940)$(3,920)
Net loss— — — — — (681)(681)
Recognition of stock-based compensation expense— — — — 5 — 5 
Vesting of founder shares subject to repurchase— — 134,632 — — — — 
Lapse of repurchase rights related to common stock issued pursuant to early exercises— — 11,779 — — — — 
Balance as of September 30, 20191,575,030 $3,564 2,545,079 $2 $23 $(4,621)$(4,596)

See accompanying notes to these unaudited condensed financial statements.
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TARSUS PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 Nine Months Ended
September 30,
 20202019
Cash Flows From Operating Activities:
Net loss$(15,344)$(3,258)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization56 18 
Stock-based compensation (Note 5)
401 13 
Amortization of operating lease right-of-use asset (Note 9(a))
94 26 
Change in fair value of derivative liabilities (Note 8)
 27 
Non-cash related party interest expense 27 
Issuance of common stock pursuant to in-license agreement (Note 9(b))
3,115  
Changes in operating assets and liabilities:
Other receivables34 4 
Prepaid expenses and other current assets(2,700)(1)
Other non-current assets(27)(6)
Accounts payable and other accrued liabilities3,025 256 
Accrued payroll and benefits221 27 
Net cash used in operating activities(11,125)(2,867)
Cash Flows From Investing Activities:
Purchases of property and equipment(506)(151)
Cash used in investing activities(506)(151)
Cash Flows From Financing Activities:
Proceeds from issuance of Series B Preferred Stock, net of issuance costs (Note 4)
(28) 
Proceeds from issuance of Series C Preferred Stock, net of issuance costs (Note 4)
40,000  
Proceeds from issuance of convertible notes, net of issuance costs (Note 8)
 1,000 
Issuance costs for initial public offering(330) 
Proceeds from exercise of vested stock options6  
Proceeds from early exercise of stock options360  
Net cash provided by financing activities40,008 1,000 
Net increase (decrease) in cash, cash equivalents and restricted cash28,377 (2,018)
Cash, cash equivalents, and restricted cash — beginning of year57,972 2,375 
Cash, cash equivalents, and restricted cash — end of period$86,349 $357 
Reconciliation of cash, cash equivalents and restricted cash
Cash and cash equivalents$86,329 $337 
Restricted cash20 20 
Cash, cash equivalents and restricted cash$86,349 $357 
Supplemental Disclosures Noncash Investing and Financing Activities:
Operating lease right-of-use asset obtained in exchange for operating lease liability$726 $163 
Additions of property and equipment in accounts payable and other accrued liabilities (Note 3(b))
$ $23 
Series C Preferred Stock issuance costs in accounts payable and other accrued liabilities$243 $ 
Convertible notes issuance costs included in accounts payable and accrued liabilities$ $6 
Deferred offering costs included in accounts payable and accrued liabilities$1,388 $ 
See accompanying notes to these unaudited condensed financial statements.
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TARSUS PHARMACEUTICALS, INC.
NOTES TO THE FINANCIAL STATEMENTS
(all tabular amounts presented in thousands, except share, per share, per unit, and number of years)
(Unaudited)

1. DESCRIPTION OF BUSINESS AND PRESENTATION OF FINANCIAL STATEMENTS
(a) Description of Business
Tarsus Pharmaceuticals, Inc. (“Tarsus” or the “Company”) is a late clinical-stage biopharmaceutical company focused on the development and commercialization of novel therapeutic candidates to address large market opportunities initially in ophthalmic conditions where there are limited treatment alternatives.
(b) Initial Public Offering and Reverse Stock Split

On October 20, 2020, the Company completed its initial public offering ("IPO") through an underwritten sale of 5,500,000 shares of its common stock at a price of $16.00 per share. The aggregate net proceeds from the offering, inclusive of an additional 825,000 common shares sold upon the full exercise of the underwriters’ purchase option, after deducting underwriting discounts and commissions and other offering expenses, were approximately $91.7 million.

Concurrent with the IPO, all then-outstanding shares of the Company's convertible preferred stock outstanding (see Note 4) were automatically converted into an aggregate of 11,107,018 issued common shares and were reclassified into permanent equity. Following the IPO, there were no shares of Preferred Stock outstanding.

In advance of the IPO, on October 8, 2020, the Tarsus Board of Directors approved a 1-for-7.4276 reverse stock split of the Company’s capital stock. The Company filed a certificate of amendment to its restated certificate of incorporation to reflect this reverse split, though the common stock par value was not affected by the reverse split. All share and per share information included in the accompanying financial statements has been adjusted to reflect this reverse stock split.

The condensed financial statements as of September 30, 2020, including share and per share amounts, do not give effect to the IPO, the conversion of the preferred stock into common stock and related reclassification into permanent equity, as the IPO and such conversions and reclassifications into permanent equity were completed subsequent to September 30, 2020.
(c) Liquidity Risks
The Company has no revenue, and since inception, has accumulated losses and negative cash flows from operations. This has resulted in the Company's accumulated deficit of $21.4 million as of September 30, 2020 and $6.0 million as of December 31, 2019. The Company’s cash and cash equivalents was $86.3 million and $58.0 million as of September 30, 2020 and December 31, 2019, respectively. The Company has financed its operations to date primarily through equity capital raises.
The Company believes that existing capital resources, including the net proceeds from the IPO in October 2020, will be sufficient to meet projected operating requirements for at least 12 months from the date of issuance of the accompanying condensed financial statements, though expects to continue to incur operating losses and negative cash flows. The Company will be required to raise additional capital to fund future operations, however, no assurance can be given as to whether additional needed financing will be available on terms acceptable to the Company, if at all. If sufficient funds on acceptable terms are not available when needed, the Company may be required to curtail planned activities to preserve cash resources. These factors may adversely impact the Company’s ability to achieve its business objectives and would likely have an adverse effect on its future business prospects, or even its ability to remain a going concern.
As such, the condensed 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 condensed financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty. Management expects to continue to incur additional substantial losses in the foreseeable future as a result of the Company’s research and development activities.
(d) Operating Segment
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TARSUS PHARMACEUTICALS, INC.
NOTES TO THE FINANCIAL STATEMENTS
(all tabular amounts presented in thousands, except share, per share, per unit, and number of years)
(Unaudited)
To date, the Company has operated and managed its business and financial information on an aggregate basis for the purposes of evaluating financial performance and the allocation of resources. Accordingly, the Company’s management determined that it operates in one reportable operating segment that is focused exclusively on developing pharmaceutical products for eventual commercialization.



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TARSUS PHARMACEUTICALS, INC.
NOTES TO THE FINANCIAL STATEMENTS
(all tabular amounts presented in thousands, except share, per share, per unit, and number of years)
(Unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND USE OF ESTIMATES
(i) Basis of Presentation
The Company’s condensed financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and pursuant to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (“SEC”). Accordingly, the accompanying condensed financial statements do not include all of the information and footnotes required by GAAP for complete financial statements.
The interim condensed balance sheet as of September 30, 2020, and the interim condensed statements of operations and comprehensive loss, changes in preferred stock and stockholders’ deficit and cash flows for the three and nine months ended September 30, 2020 and 2019 are unaudited. These unaudited interim financial statements have been prepared on the same basis as the Company’s annual financial statements and, in the opinion of management, reflect all adjustments, which consist of only normal and recurring adjustments, necessary for the fair statement of the Company’s financial information. The financial data and other information disclosed in these notes related to the three and nine-month periods are also unaudited. The condensed balance sheet as of December 31, 2019 has been derived from the audited financial statements at that date but does not include all information and footnotes required by GAAP for complete financial statements. The condensed interim operating results for the three and nine months ended September 30, 2020 are not necessarily indicative of results to be expected for the year ending December 31, 2020, any other interim periods or any future year or period.
The accompanying interim unaudited condensed financial statements should be read in conjunction with the audited financial statements and the related notes thereto for the year ended December 31, 2019, which are included in the Company’s prospectus related to the IPO, filed with the SEC on September 25, 2020 (the “Prospectus”), pursuant to Rule 424(b)(4) promulgated under the Securities Act of 1933, as amended (the “Securities Act”).
The preparation of financial statements in conformity with GAAP and with the rules and regulations of the Securities and Exchange Commission (“SEC”) requires management to make informed estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes. These amounts may materially differ from the amounts ultimately realized and reported due to the inherent uncertainty of any estimate or assumption. On an on-going basis, management evaluates its most critical estimates and assumptions, including those related to the (i) fair value of stock-based awards and periodic recognition of stock-based compensation, (ii) the realization of income tax assets and estimates of tax liabilities, (iii) expense accruals related to research and development activities, including clinical trials, and (iv) valuation of convertible notes, derivative instruments, and preferred stock.
Accounting policies and estimates that most significantly impact the presented amounts within the accompanying financial statements are further described below:
(ii) Cash and Cash Equivalents
Cash and cash equivalents consist of bank deposits and highly liquid investments, including money market fund accounts, with original maturities of three months or less from the purchase date.
(iii) Restricted Cash
Restricted cash represents cash held as collateral for the Company’s corporate credit card program. Any cash that is legally or contractually restricted from immediate use is classified as restricted cash.
(iv) Concentration of Credit Risk and Other Risks and Uncertainties
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents in deposits at financial institutions that exceed federally insured limits.
In March 2020, the World Health Organization declared a pandemic related to the global novel coronavirus disease 2019 (“COVID-19”) outbreak. To date, the Company’s operations have not been significantly impacted by the COVID-19
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TARSUS PHARMACEUTICALS, INC.
NOTES TO THE FINANCIAL STATEMENTS
(all tabular amounts presented in thousands, except share, per share, per unit, and number of years)
(Unaudited)
pandemic, though the Company has been carefully monitoring the potential impact COVID-19 may have on its ongoing and planned clinical trials. However, the Company cannot at this time predict the specific extent, duration, or full impact that the COVID-19 outbreak will have on these activities or its financial condition.
The Company’s results of operations involve numerous risks and uncertainties. Factors that could adversely impact the Company’s operating results and business objectives include, but are not limited to, (1) uncertainty of results of clinical trials, (2) uncertainty of regulatory approval of the Company’s potential product candidates, including TP-03 for ophthalmic conditions, TP-04 for treatment of skin conditions and TP-05 for prophylaxis of Lyme and community malaria reduction, (3) uncertainty of market acceptance of its product candidates, (4) competition from substitute products and larger companies, (5) securing and protecting proprietary technology and strategic relationships, and (6) and dependence on key individuals and sole source suppliers.
The Company’s product candidates require approvals from the U.S. Food and Drug Administration (“FDA”) and comparable foreign regulatory agencies prior to commercial sales in their respective jurisdictions. There can be no assurance that any product candidates will receive these necessary approvals. If the Company is denied approval, approval is delayed, or is unable to maintain approval for any product candidate, it could have a materially adverse impact on its business.
(v) Research and Development Costs
The Company's research and development costs are expensed as incurred or as certain milestone payments become contractually due to the Company's licensors, as triggered by the achievement of clinical or regulatory events.
(vi) Deferred Offering Costs
Costs directly related to the Company’s IPO were deferred for expense recognition. These deferred offering costs are temporarily capitalized and consist of legal fees, accounting fees, and other applicable professional services. As of September 30, 2020, $1.7 million of these deferred offering costs are reported on the accompanying condensed Balance Sheets within “other assets.” There were no deferred offering costs capitalized as of December 31, 2019. With the Company's IPO on October 20, 2020, these deferred offering costs were concurrently reclassified to additional paid in capital and will be reported as such as of December 31, 2020.
(vii) Stock-Based Compensation
Stock-based awards issued to employees, consultants, and members of the Company's Board of Directors are valued as of the grant date. Corresponding compensation expense is recognized over the applicable vesting period. For awards with a service condition for vesting, the related expense is recognized on a straight-line basis over each award’s actual or implied vesting period. For awards that are subject to a performance condition for vesting, the Company recognizes compensation cost if and when it concludes that it is probable that the performance condition will be achieved and the related expense is recognized on an accelerated attribution method. As applicable, the Company reverses previously recognized expense for forfeitures of unvested awards in the period of occurrence.
The Company uses the Black-Scholes option pricing model to estimate the fair value of stock-based awards as of the date of grant. This requires management assumptions that involve inherent uncertainties and the application of judgment, including (a) the fair value of the Company’s common stock on the date of the option grant, (b) the expected term of the stock option until its exercise by the recipient, (c) expected stock price volatility over the expected term, (d) the prevailing risk-free interest rate over the expected term, and (e) expected dividend payments over the expected term.
Management estimates the expected term of awarded stock options utilizing the “simplified method” as the Company does not yet have sufficient exercise history since its November 2016 formation. Further, through September 30, 2020 the Company remained privately-held and therefore lacked company-specific historical and implied volatility information of its stock. Accordingly, management estimates this expected volatility using that of its designated peer-group of publicly-traded companies for a look-back period, as of the date of grant, that corresponds with the expected term of the awarded stock option. The Company estimates the risk-free interest rate based upon the U.S. Department of the Treasury yield curve in effect
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TARSUS PHARMACEUTICALS, INC.
NOTES TO THE FINANCIAL STATEMENTS
(all tabular amounts presented in thousands, except share, per share, per unit, and number of years)
(Unaudited)
at award grant for time periods that correspond with the expected term of the awarded stock option. The Company’s expected dividend yield is zero because it has never paid cash dividends and does not expect to for the foreseeable future.
Prior to the IPO, given the absence of a public trading market, the Company’s Board of Directors, with input from management, considered numerous objective and subjective factors to determine the fair value of its common stock. The factors included: (1) third-party valuations of the Company’s common stock; (2) the Company’s stage of development; (3) the status of research and development efforts; (4) the rights, preferences and privileges of the Company’s preferred stock relative to common stock; (5) the Company’s operating results and financial condition, including the Company’s levels of available capital resources; (6) equity market conditions affecting comparable public companies; (7) general U.S. market conditions; and (8) the lack of current marketability of the Company’s common stock.
(viii) Preferred Stock
The Company classifies preferred stock outside of stockholders’ deficit on the accompanying condensed balance sheets. The requirements of a deemed liquidation event, as defined within its amended and restated certificate of incorporation filed in September 2020 (the “2020 Amended and Restated Certificate of Incorporation”) were not entirely within the Company’s control. In the event of such a deemed liquidation event, the proceeds from the event are distributed in accordance with the liquidation preferences, provided that the holders of preferred stock have not converted their shares into common stock. The Company recorded the issuance of preferred stock at the issuance price less related issuance costs. The Company has not adjusted the carrying value of outstanding preferred stock to its liquidation preference because a deemed liquidation event is not probable of occurring as of the end of the reporting period.
(ix) Net Loss per Share Attributable to Common Stockholders
Basic net loss per share attributable to common stockholders is calculated by dividing the net loss by the weighted-average number of shares of common stock outstanding for the period, without the consideration for potential dilutive shares of common stock. Diluted net loss per share is computed by dividing the net loss by the weighted-average number of common share equivalents outstanding for the period determined using the treasury-stock method and if-converted method, as applicable. Basic and diluted net loss per share attributable to common stockholders is presented in conformity with the two-class method required for participating securities. The Company’s participating securities include preferred stock, unvested common stock to founders, and unvested common stock awards issued upon early exercise of certain stock options. The Company’s participating securities do not have a contractual obligation to share in the Company’s losses. As such, the net loss was attributed entirely to common stockholders. Shares of common stock subject to repurchase by the Company are excluded from the weighted-average shares. Due to net losses in all periods presented, all otherwise potentially dilutive securities are antidilutive. Accordingly, basic net loss per share equals diluted net loss per share for all period presented in the accompanying financial statements.
(x) Fair Value Measurements
Assets and liabilities recorded at fair value on a recurring basis in the balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Fair value is defined as the exchange price that would be received for an asset or an exit price that would be paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The authoritative guidance on fair value measurements establishes a three-tier fair value hierarchy for disclosure of fair value measurements as follows:
Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that are publicly accessible at the measurement date.
Level 2: Observable prices that are based on inputs not quoted on active markets, but that are corroborated by market data. These inputs may include quoted prices for similar assets or liabilities or quoted market prices in markets that are not active to the general public.
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TARSUS PHARMACEUTICALS, INC.
NOTES TO THE FINANCIAL STATEMENTS
(all tabular amounts presented in thousands, except share, per share, per unit, and number of years)
(Unaudited)
Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The carrying amounts for financial instruments consisting of cash and cash equivalents, accounts payable and accrued liabilities approximate fair value due to their short maturities. Derivative instruments are carried at fair value based on unobservable market inputs.
(xi) Comprehensive Loss
Comprehensive loss represents all changes in stockholders’ deficit, except those resulting from distributions to stockholders. For all periods presented, comprehensive loss was the same as reported net loss.
(xii) Recently Issued or Effective Accounting Standards
Recently issued or effective accounting pronouncements that impact, or may have an impact, on the Company’s financial statements have been discussed within the footnote to which each relates. Other recent accounting pronouncements not disclosed in these condensed financial statements have been determined by the Company’s management to have no impact, or an immaterial impact, on its current and expected future financial position, results of operations, or cash flows.
3. BALANCE SHEET ACCOUNT DETAIL
The composition of selected financial statement captions that comprise the accompanying balance sheets are summarized below:
(a) Prepaid Expenses and Other Current Assets    
“Prepaid expenses and other current assets” consists of the following:
September 30, 2020December 31, 2019
Prepaid expenses$412 $22 
Clinical research organization service assets 2,310  
Prepaid expenses and other current assets$2,722 $22 
(b) Property and Equipment, net of Accumulated Depreciation
“Property and equipment, net of accumulated depreciation” consists of the following:
September 30, 2020December 31, 2019
Furniture and fixtures$295 $5 
Office equipment74 26 
Lab equipment138 92 
Leasehold improvements110 69 
Software licenses80  
Property and equipment, at cost697 192 
(Less): Accumulated depreciation93 38 
Property and equipment, net of accumulated depreciation$604 $154 
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TARSUS PHARMACEUTICALS, INC.
NOTES TO THE FINANCIAL STATEMENTS
(all tabular amounts presented in thousands, except share, per share, per unit, and number of years)
(Unaudited)
Depreciation expense (included within “total operating expenses” in the accompanying Statements of Operations and Comprehensive Loss) for the three and nine months ended September 30, 2020 and 2019 was $24 thousand, $9 thousand, $56 thousand, and $18 thousand, respectively.
(c) Accounts Payable and Other Accrued Liabilities 
“Accounts payable and other accrued liabilities” consists of the following:
September 30, 2020December 31, 2019
Trade accounts payable$4,706 $456 
Operating lease liability, current portion190 64 
Accrued clinical studies8  
Employee stock option early exercise liability, current portion273  
Other accrued liabilities447  
Accounts payable and other accrued liabilities$5,624 $520 
(d) Other Long-Term Liabilities
“Other long-term liabilities” consists of the following:
September 30, 2020December 31, 2019
Operating lease liability, non-current portion$625 $100 
Employee stock option early exercise liability, non-current portion86  
Other long-term liabilities$711 $100 
4. STOCKHOLDERS’ EQUITY
Authorized Stock
Under the September 2020 Amended and Restated Certificate of Incorporation, the Company is authorized to issue two classes of stock: common and preferred. The total number of shares authorized for issuance is 17.5 million of common shares and 11.2 million of preferred shares, of which 1.6 million shares are designated as Series A Preferred Stock, 6.7 million shares are designated as Series B Preferred Stock, and 2.9 million are designated as Series C Preferred Stock.
Preferred Stock Overview
Series A Preferred Stock Issuance
In March and May 2018, the Company executed a private placement Series A Stock Purchase Agreement and issued 1.6 million shares of Series A Preferred Stock at $2.3174 per share for net proceeds of $3.6 million, after issuance costs of $0.1 million.
Series B Preferred Stock Issuance
In December 2019, the Company executed a private placement Series B Stock Purchase Agreement of 6.7 million shares of Series B Preferred Stock at $8.9904 per share for net proceeds of $57.4 million, after issuance costs of $0.2 million. Concurrently, convertible notes issued in May, August, and October 2019 for aggregate proceeds of $2.0 million were converted into preferred stock based on principal and accrued interest, and the Company issued 0.3 million shares of Series B Preferred Stock at its contractual conversion price (see Note 8).
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TARSUS PHARMACEUTICALS, INC.
NOTES TO THE FINANCIAL STATEMENTS
(all tabular amounts presented in thousands, except share, per share, per unit, and number of years)
(Unaudited)
Series C Preferred Stock Issuance
In September 2020, the Company executed a private placement Series C Stock Purchase agreement of 2.9 million shares of Series C Preferred Stock at a purchase price of $14.0003 per share for net proceeds of $39.8 million, after issuance costs of $0.2 million.
The tables below include preferred stock details as of September 30, 2020 and December 31, 2019.
As of September 30, 2020AuthorizedOutstandingNet
Carrying
Value
Liquidation
Preference
Original
Issue
Price
Series A Preferred Stock1,575,030 1,575,030 $3,564 $3,650 $2.3174 
Series B Preferred Stock6,731,649 6,674,909 59,838 60,010 8.9904 
Series C Preferred Stock2,857,084 2,857,079 39,757 40,000 14.0003 
Total11,163,763 11,107,018 $103,159 $103,660 
As of December 31, 2019AuthorizedOutstandingNet
Carrying
Value
Liquidation
Preference
Original
Issue
Price
Series A Preferred Stock1,575,030 1,575,030 $3,564 $3,650 $2.3174 
Series B Preferred Stock6,731,649 6,674,909 59,838 60,010 8.9904 
Total8,306,679 8,249,939 $63,402 $63,660 
Upon the completion of the IPO, all outstanding shares of convertible preferred stock converted into an aggregate of 11,107,018 shares of the Company’s common stock.
Significant Provisions of Series A, Series B, and Series C Preferred Stock

Conversion Rights and Mandatory Conversion

Each share of Series A, Series B, and Series C Preferred Stock was convertible into common shares determined by dividing the original issuance price by the conversion price and at the sole option of the holder on a one-to-one basis. The conversion price will be adjusted for stock splits, distributions, dividends, noncash distributions, share purchase rights, and capital reorganizations. In addition, subject to customary exceptions, the conversion price for each series of preferred stock will be reduced upon the issuance or sale of common shares or instruments convertible or exercisable into common shares, for consideration or with an exercise price that is less than the conversion price applicable to such series. Such reduction may result in recognition of a deemed dividend to preferred stockholders if the resulting conversion price is less than the fair value per share of common stock as of the date preferred stock was issued.

Mandatory conversion into common shares will occur upon either (i) the closing of a Qualified Public Offering, which is defined in the September 2020 Amended and Restated Certificate of Incorporation to include the sale of common stock in a firm commitment underwritten public offering on Form S-1, with a pre-money valuation of at least $260 million and that results in at least $75 million of proceeds, or (ii) by vote or written consent or agreement of the holders of a majority of the then-outstanding shares of Series A, Series B, and Series C Preferred Stock, voting together as a single class on an as-converted basis.

Liquidation Preference

In the event of any Liquidation Event (as defined in the September 2020 Amended and Restated Certificate of Incorporation), the holders of Series A, Series B, and Series C Preferred Stock are first entitled to proceeds or assets available for distribution that are in preference of any distribution to common stockholders (the “Liquidation Preference”); provided, however, that if the holders of Series A, Series B, and Series C Preferred Stock would receive greater proceeds in a Liquidation Event as a result of their conversion to common stock such shares of Series A, Series B, and/or Series C Preferred Stock shall be deemed to have automatically thus converted. This Liquidation Preference is equal to the sum of (i) the original issue price of Series A, Series B and Series C Preferred Stock ($2.3174, $8.9904, and $14.0003 per share, respectively) for each outstanding
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TARSUS PHARMACEUTICALS, INC.
NOTES TO THE FINANCIAL STATEMENTS
(all tabular amounts presented in thousands, except share, per share, per unit, and number of years)
(Unaudited)
share of Series A, Series B, and Series C Preferred Stock and (ii) any declared but unpaid dividends for each outstanding share of Series A, Series B, and Series C Preferred Stock. If the proceeds from the Liquidation Event are less than the Liquidation Preference, then all available proceeds will be distributed ratably to the holders of Series A, Series B, and Series C Preferred Stock in proportion to the preferential amount each is otherwise entitled to receive. After the distributions described above have been paid in full, the remaining assets of the Company will be distributed among the holders of common stock pro rata based on the number of shares held by each holder.

Voting Rights

The holder of each share of preferred stock has the right to one vote for each share of common stock into which such preferred stock could then be converted, and with respect to such vote, such holder has full voting rights and powers equal to the voting rights and powers of the holders of common stock. So long as the majority of the Series A Preferred Stock originally issued remains outstanding, its holders are additionally entitled to elect one director (“Series A Director”). So long as at least 1.3 million shares of Series B or Series C Preferred Stock remain outstanding, the holders of the majority of such shares of Series B and Series C Preferred Stock (voting together as a single class) shall be entitled to elect two directors (each a “Series B/C Director”). The holders of outstanding common stock are entitled to elect three directors. The holders of preferred stock and common stock (voting together as a single class and on an as-converted basis) are entitled to elect any of the Company’s remaining directors.

Dividend Rights

The holders of Preferred Stock are entitled to receive dividends, when, as and if declared by the Board of Directors at the applicable dividend rate set forth in the September 2020 Amended and Restated Certificate of Incorporation ($0.19, $0.72, and $1.12 per annum for each share of Series A, Series B, and Series C Preferred Stock, respectively), prior and in preference to any declaration or payment of any cash dividend on the common stock. The Company cannot declare, pay, or set aside any dividends on shares of any class or series of capital stock unless the Series A, Series B, and Series C Preferred Stockholders first receive a dividend in an amount equal to the greater of (i) applicable dividend rate, or (ii) the dividend payable to such other class or series of capital stock. No cash dividends have been declared to date.

Redemption Rights

The Series A, Series B, and Series C Preferred Stock are not redeemable at the option of its holder under the terms of the September 2020 Amended and Restated Certificate of Incorporation. Upon certain change in control events that are outside of the Company’s control, including its liquidation, sale or transfer of control, the preferred stock is contingently redeemable.
Common Stock Overview and Reserve for Future Issuance
Common stockholders have one vote for each share of common stock held and are entitled to receive any dividends declared by the Company’s Board of Directors when legally available for distribution, then-subject to the dividend rights of the holders of Series A and Series B preferred stock discussed above. For the nine months ended September 30, 2020 and for the year ended December 31, 2019, no dividends were declared.
As of September 30, 2020 and December 31, 2019, the Company had 3.1 million and 2.7 million common shares issued, respectively. At September 30, 2020 and December 31, 2019, the Company had 2.9 million, and 2.6 million common shares outstanding, respectively. The following shares of common stock were reserved for issuance:
September 30, 2020December 31, 2019
Preferred Stock outstanding11,107,018 8,249,939 
Stock options issued and outstanding under the 2016 Plan1,842,627 297,142 
Stock options available for future grant under the 2016 Plan411,397 2,150,867 
Total shares of common stock reserved13,361,042 10,697,948 

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TARSUS PHARMACEUTICALS, INC.
NOTES TO THE FINANCIAL STATEMENTS
(all tabular amounts presented in thousands, except share, per share, per unit, and number of years)
(Unaudited)
5. STOCK-BASED COMPENSATION
2016 Stock Plan
Through September 30, 2020, the Company had one active stockholder-approved stock-based compensation plan (the “2016 Plan”) that was adopted in December 2016 (see Note 10(b) for discussion of the adoption of a new plan in October 2020). The 2016 Plan permits the grant of incentive stock options, nonqualified stock options, stock awards and certain other awards to its employees, members of its Board of Directors, and consultants.
The stated maximum availability of common stock under the 2016 Plan is 2.7 million shares. As of September 30, 2020 and December 31, 2019, the Company had 0.4 million and 2.2 million shares of common stock available for issuance under the 2016 Plan, respectively.
Stock-Based Compensation Summary
Stock-based compensation expense is recorded in the accompanying condensed statements of operations and comprehensive loss based on the assigned department of the award recipient. Stock-based compensation expense for the three and nine months ended September 30, 2020 and 2019 was as follows:
Three months ended September 30,Nine Months Ended September 30,
2020201920202019
Research and development$102 $2 $118 $4 
General and administrative121 3 283 9 
Total stock-based compensation$223 $5 $401 $13 
Early Exercise Feature of Certain Stock Options
The 2016 Plan permits certain option holders to exercise awarded options prior to vesting. Upon this early exercise, the options become subject to a restricted stock agreement and remain subject to the same vesting provisions in the corresponding stock option award. These unvested options are subject to repurchase by the Company upon termination — at the same price previously exercised. These unvested shares are reported as issued (but not outstanding) on our accompanying Balance Sheets while subject to repurchase by the Company. These shares are also excluded from the basic and diluted net loss per share calculation until the repurchase right lapses upon vesting.
The Company initially records a liability for these early exercises that is subsequently reclassified into stockholders’ equity on a pro rata basis as vesting occurs. There were no such repurchases during the nine months ended September 30, 2020 or 2019. As of September 30, 2020, the Company has recorded $0.4 million as a liability from these early exercise proceeds in the accompanying condensed Balance Sheets, reported within "accounts payable and other accrued liabilities" and "other long-term liabilities" (see Note 3(c) and (d)).

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TARSUS PHARMACEUTICALS, INC.
NOTES TO THE FINANCIAL STATEMENTS
(all tabular amounts presented in thousands, except share, per share, per unit, and number of years)
(Unaudited)
6. NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted net loss per share attributable to common stockholders (in thousands, except share and per share data):
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Net loss$(10,138)$(681)$(15,344)$(3,258)
Weighted-average shares—basic and diluted2,729,685 2,471,237 2,677,315 2,311,788 
Net loss per share attributable to common stockholders—basic and diluted$(3.71)$(0.28)$(5.73)$(1.41)
The following outstanding potentially dilutive securities were excluded from the calculation of diluted net loss per share attributable to common stockholders because their impact under the “treasury stock method” and “if-converted method” would have been anti-dilutive for the periods presented:
Three months ended September 30,Nine Months Ended September 30,
2020201920202019
Stock options, unexercised—vested and unvested1,842,627 297,142 1,842,627 297,142 
Series A, Series B, and Series C Preferred Stock, outstanding8,467,325 1,575,030 8,322,930 1,575,030 
Shares subject to repurchase from its founders 89,755  89,755 
Stock options early-exercised and unvested179,375 43,007 179,375 43,007 
Convertible promissory notes 124,857  55,958 
Total10,489,327 2,129,791 10,344,932 2,060,892 
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TARSUS PHARMACEUTICALS, INC.
NOTES TO THE FINANCIAL STATEMENTS
(all tabular amounts presented in thousands, except share, per share, per unit, and number of years)
(Unaudited)
7. FAIR VALUE MEASUREMENTS
The table below summarizes certain financial instruments measured at fair value that are included within the accompanying balance sheets, and their designation among the three fair value measurement categories (see Note 2(xiii)):
 September 30, 2020 Fair Value Measurements
 Level 1Level 2Level 3Total
Assets:
Money market funds$86,329 $ $ $86,329 
Total assets measured at fair value$86,329 $ $ $86,329 
 December 31, 2019 Fair Value Measurements
 Level 1Level 2Level 3Total
Assets:
Money market funds$57,952 $57,952 
Total assets measured at fair value$57,952 $57,952 
Money Market Funds
Money market fund holdings are included in cash and cash equivalents on the accompanying balance sheets and are classified within Level 1 of the fair value hierarchy because of its readily-available market prices in active markets that are publicly accessible at the measurement date. These money market funds are invested in U.S. Treasury, bills, notes, and other obligations issued or guaranteed as to principal and interest by the U.S. Government or its agencies.
Convertible Promissory Notes – Derivative Liabilities
The following table sets forth a summary of the changes in fair value of the bifurcated derivative liability associated with the convertible promissory notes issued and settled during 2019 to certain related parties (see Note 8). The measurement of the derivative liabilities represents a Level 3 financial instrument:
 Derivative
Liabilities
Fair value as of December 31, 2018$ 
Initial fair value of derivative liability upon issuance of May 2019 Notes28 
Initial fair value of derivative liability upon issuance of August 2019 Notes50 
Initial fair value of derivative liability upon issuance of October 2019 Notes209 
Revaluation of derivative liabilities included in other income (expense), net within the Statement of Operations for the year ended December 31, 201976 
Settlement of derivative liabilities through conversion of all Notes(363)
Fair value as of December 31, 2019$ 
Fair value as of September 30, 2020$ 
The fair values of the derivative liabilities presented above were estimated at the date of issuance and at subsequent balance sheet dates using a two-step approach to valuation. Management utilized a probability-weighted valuation method and then compared the instrument’s value with-and-without the derivative features in order to estimate their combined fair value, using unobservable inputs, which are classified as Level 3 within the fair value hierarchy. The significant inputs not included in the market and thus represents a Level 3 measurement in the valuation approach included the probability of achieving a settlement that provides the note holders the rights or the obligations to receive cash or a variable number of shares upon the completion of a then-future capital transaction. The convertible notes were issued and settled in full during the year ended December 31, 2019 (see Note 8).
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TARSUS PHARMACEUTICALS, INC.
NOTES TO THE FINANCIAL STATEMENTS
(all tabular amounts presented in thousands, except share, per share, per unit, and number of years)
(Unaudited)
8. CONVERTIBLE PROMISSORY NOTES PAYABLE
Overview of Notes and Conversion in December 2019
In May 2019, the Company entered into a Note Purchase Agreement (the “May 2019 Purchase Agreement”) with its co-founders and certain other related parties (the “Note Holders”). Under the terms of the May 2019 Purchase Agreement, the Company received cash proceeds of $0.5 million and issued $0.5 million of convertible promissory notes (the “May 2019 Notes”) with a stated maturity of December 2020. These notes bore interest at a rate of 8.0% per annum, compounded annually, and payable at maturity. In the event of a qualified equity financing, the outstanding principal of the May 2019 Notes plus all accrued and previously unpaid interest would, at the option of the holder, either (i) automatically convert into shares of stock issued in the qualified equity financing based on a conversion price equal to 90% of the issuance price paid by these new investors, or (ii) be repaid in full.
In August 2019, the Company amended and restated the May 2019 Purchase Agreement with the Note Holders and received an additional $0.5 million of proceeds and issued new $0.5 million convertible promissory notes to the same parties (the “August 2019 Notes”) with identical terms.
In October 2019, the Company entered into a new Note Purchase Agreement (the “October 2019 Purchase Agreement”) with the Note Holders. Under the terms of the October 2019 Purchase Agreement, the Company received proceeds of $1.0 million and issued $1.0 million of convertible promissory notes (the “October 2019 Notes,” collectively with the May 2019 Notes and the August 2019 Notes, the “Notes”) with a conversion price equal to 80% of the issuance price in a qualified equity financing.
In December 2019, the Company completed an issuance of Series B Preferred Stock (see Note 5). Upon this issuance, the $2.0 million of Note principal value, along with accrued interest, were converted into 0.3 million shares of Series B Preferred Stock under its contractual terms. The Company recorded “loss on extinguishment of convertible notes” (non-cash) of $0.3 million within “other income (expense)” in the accompanying Statements of Operations and Comprehensive Loss for the year ended December 31, 2019.
Embedded Derivative and its Accounting
These notes contained stock-settled redemption features that were required to be separately accounted for as a derivative liability until December 13, 2019, when the Company completed a "qualified equity financing" and these then-outstanding notes converted, at the option of the holder, into 2.0 million shares of Series B Preferred Stock. The fair value adjustments for this derivative liability consists of changes in the fair value of these stock-settled redemption features.
The Company accounted for this derivative feature as an implied discount in presenting the carrying value of these Notes. This discount was accreted over the term to maturity of the Notes using the effective interest method, resulting in aggregate interest expense recognition (non-cash) of $22 thousand and $27 thousand for the three and nine months ended September 30, 2019, respectively. As the Notes were converted in December 2019, no interest expense was recorded for the nine months ended September 30, 2020.
Changes in the embedded derivatives’ fair value at each reporting period were recognized in the accompanying statements of operations and comprehensive loss within “changes in fair value of derivative liabilities,” resulting in incremental “other expense” recognition (non-cash) of $27 thousand during the three and nine months ended September 30, 2019. As the Notes were converted in December 2019, no expense related to changes in fair value of derivative liabilities was recorded for the nine months ended September 30, 2020.
9. COMMITMENTS & CONTINGENCIES
(a) Facility Leases
Overview
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TARSUS PHARMACEUTICALS, INC.
NOTES TO THE FINANCIAL STATEMENTS
(all tabular amounts presented in thousands, except share, per share, per unit, and number of years)
(Unaudited)
In the ordinary course of business, the Company enters lease agreements with unaffiliated parties for the use of office and laboratory facilities and office equipment. As of December 31, 2019, the Company had one active facility lease in Irvine, California, that commenced on March 1, 2019 and expires April 30, 2022. This lease has a renewal option at the end of term, for which the Company was not reasonably certain to exercise at the lease commencement. As such, the renewal option was not included in the lease term used to calculate the right-of-use lease asset and lease liability. Prior to March 1, 2019, the Company did not have any material lease arrangements.
The Company entered into two additional facility leases that commenced on June 1, 2020 for adjacent administrative and laboratory suites in Irvine, California. These leases expire on January 31, 2024. One of these leases included a renewal option at the end of its term, for which the Company was not reasonably certain to exercise at the lease commencement. As such, the renewal option was not included in the lease term used to calculate the right-of-use lease asset and lease liability. In connection with these two leases the Company capitalized right-of-use assets along with an accompanying lease liability of $0.7 million.
All of the Company’s facility leases have minimum annual rent, payable monthly, and carry fixed annual rent increases. Under the arrangements, real estate taxes, certain operating expenses, and common area maintenance are reimbursable to the lessor. These amounts are expensed as incurred, as they are variable in nature and therefore excluded from the measurement of the reported right-of-use asset and liability discussed below. During the years ended December 31, 2019 and during the nine months ended September 30, 2020, the Company had no sublease arrangements with it as lessor.
Components of Lease Expense
The liability associated with each lease is amortized over the respective lease term using the effective interest rate method. The Company’s right-of-use asset is amortized over the lease term on a straight-line basis to lease expense, as reported on an allocated basis within “research and development” and “general and administrative” expenses on the accompanying Statements of Operations and Comprehensive Loss. For the three months ended September 30, 2020 and 2019, the Company recognized lease expense of $0.1 million and $16 thousand, respectively. For the nine months ended September 30, 2020 and 2019, the Company recognized lease expense of $0.1 million, and $36 thousand, respectively. There were no significant variable lease payments, including including non-lease components such as common area maintenance fees, recognized as lease expense for the three and nine months ended September 30, 2020 and 2019.
Weighted-Average Remaining Lease Term and Applied Discount Rate
The Company had one active lease for its Irvine office and laboratory facility, with a remaining lease term of 2 years, 4 months as of December 31, 2019 and a remaining lease term of 1 year, 7 months as of September 30, 2020. The Company had two additional facility leases commence on June 1, 2020, with remaining lease terms of 3 years, 4 months as of September 30, 2020. The estimated incremental borrowing rate of 10% is utilized to present value future minimum lease payments since an implicit interest rate is not readily determinable each lease. The weighted average remaining lease term for the Company’s leases as of September 30, 2020 is 3 years, 1 month.
Future Contractual Lease Payments as of September 30, 2020
The below table summarizes the (i) minimum lease payments over the next five years and thereafter, (ii) lease arrangement imputed interest, and (iii) present value of future lease payments:
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TARSUS PHARMACEUTICALS, INC.
NOTES TO THE FINANCIAL STATEMENTS
(all tabular amounts presented in thousands, except share, per share, per unit, and number of years)
(Unaudited)
Operating Leases - future paymentsSeptember 30, 2020
2020 (remaining three months)$5 
2021349 
2022298 
2023281 
202425 
Total future lease payments, undiscounted$958 
(Less): Imputed interest(143)
Present value of operating lease payments$815 

(b) In-License Agreement for Lotilaner
Skin and Eye Disease or Conditions in Humans
In January 2019, the Company entered into a license agreement with Elanco Tiergesundheit AG (“Elanco”), granting it a worldwide license to certain intellectual property for the development and commercialization of lotilaner for the treatment or cure of any eye or skin disease or condition in humans (the "January 2019 Agreement"). The Company has sole responsibility for related development, regulatory, and commercialization activities.
The Company made a $1.0 million upfront payment at execution of the January 2019 Agreement, which is reported within “research and development” expense within the accompanying unaudited Statements of Operations and Comprehensive Loss for the nine months ended September 30, 2019. The Company also made a required $1.0 million clinical milestone payment in the September 2020 as part of an achieved Phase 2b/3 clinical trial milestone for the treatment of Demodex blepharitis; this amount is reported within “research and development” expense within the accompanying Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2020.
The Company will make further payments to Elanco under the January 2019 Agreement upon achievement of various clinical milestones for an aggregate maximum of $5.0 million and various commercial and sales threshold milestones for an aggregate maximum of $79.0 million. In addition, the Company will be obligated to pay contractual royalties to Elanco in the single digits of its net sales. If the Company receives payments from any sublicensees, it will be obligated to pay Elanco a variable percentage in the low to mid double-digits of such proceeds, except for territories in which the Company achieved applicable regulatory approval prior to sublicense execution.
All Other Disease or Conditions in Humans

In September 2020, the Company executed an expanded license agreement with Elanco, granting it a worldwide license to certain intellectual property for the development and commercialization of lotilaner treatment or cure of all other diseases and conditions in humans – beyond that of the eye or skin (the “September 2020 Agreement”).

The Company issued Elanco 222,460 shares of its common stock at the execution of the September 2020 Agreement. The value of these shares was then-determined to equate to $3.1 million (at $14.0003 per share, approximating the Company's Series C preferred stock issuance price – see Note 4) and is reported within “research and development” expense within the accompanying Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2020. In addition, upon the 18-month anniversary of contract execution, if not terminated by the Company prior to the anniversary, it is obligated to grant Elanco additional shares that aggregate to $3.0 million (valued as of the Company’s IPO price of $16.00 per share - see Note 10(a)), amounting to a fixed 187,500 shares.

The Company accounted for the transaction as an asset acquisition as substantially all of the fair value of the gross assets acquired were concentrated in a group of similar identifiable assets thus satisfying the requirements of the screen test in ASU 2017-01. The assets acquired in the transaction were measured based on the upfront payment to Elanco and the fair value
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TARSUS PHARMACEUTICALS, INC.
NOTES TO THE FINANCIAL STATEMENTS
(all tabular amounts presented in thousands, except share, per share, per unit, and number of years)
(Unaudited)
of the common stock shares issued to Elanco, as the fair value of the consideration given was more readily determinable than the fair value of the assets received. Because the assets had not yet received regulatory approval and have no alternative future use, the fair value attributable to these assets were initially recorded as in process research and development expenses.

The Company will make further payments to Elanco under the September 2020 Agreement upon achievement of various clinical milestones for an aggregate maximum of $4.5 million, and various commercial and sales threshold milestones for an aggregate maximum of $77.0 million. In addition, the Company will be obligated to pay contractual royalties to Elanco in the single digits of its net sales. If the Company receives payments from any sublicensees, it will be obligated to pay Elanco a variable percentage in the low to mid double-digits of such proceeds, except for territories in which the Company achieved applicable regulatory approval prior to sublicense execution.

(c) Employment Agreements
The Company has entered into employment agreements with four of its named executive officers. These agreements provide for the payment of certain benefits upon separation of employment under specified circumstances, such as termination without cause, or termination in connection with a change in control event.
(d) Contingencies
From time to time, the Company may be subject to various litigation and related matters arising in the ordinary course of business. The Company is currently not aware of any such matters where there is at least a reasonable probability that a material loss has been or will be incurred for financial statement recognition.
(e) Indemnities and Guarantees
The Company has certain indemnity commitments, under which it may be required to make payments to its officers and directors in relation to certain transactions to the maximum extent permitted under applicable laws. The duration of these indemnities varies, and in certain cases, is indefinite and does not provide for any limitation of maximum payments. The Company has not been obligated to make any such payments to date and no liabilities have been recorded for this contingency in the accompanying condensed balance sheets.
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TARSUS PHARMACEUTICALS, INC.
NOTES TO THE FINANCIAL STATEMENTS
(all tabular amounts presented in thousands, except share, per share, per unit, and number of years)
(Unaudited)
10. SUBSEQUENT EVENTS
(a) Completion of Initial Public Offering
On October 20, 2020, the Company completed its IPO selling 5,500,000 shares of common stock at a price to the public of $16.00 per share. An incremental 825,000 common shares were also sold upon the full exercise of the underwriters’ purchase option. The aggregate net proceeds from the offering, after deducting underwriting discounts and commissions and other related expenses, were approximately $91.7 million. In addition, upon closing the IPO, all outstanding shares of convertible preferred stock outstanding (see Note 4) converted into an aggregate of 11,107,018 shares of the Company’s common stock.
(b) 2020 Equity Incentive Plan Adoption
The Company's Board of Directors and stockholders adopted and approved the Company's 2020 Equity Incentive Plan (“2020 Plan”) on October 8, 2020. The 2020 Plan replaces the 2016 Plan (see Note 5), however, awards outstanding under the 2016 Plan will continue to be governed by their existing terms. The number of shares of the Company's common stock available for issuance under the 2020 Plan will equal the sum of 9,000,000 shares plus up to 2,433,395 shares remaining available for issuance under the 2016 Plan, or issued pursuant to or subject to awards granted under the 2016 Plan. The 2020 Plan provides for the following types of awards: incentive and non-statutory stock options, stock appreciation rights, restricted shares, and restricted stock units.
The number of common shares reserved for issuance under the 2020 Plan will be increased automatically on the first business day of each fiscal year, commencing in 2021 and ending in 2030, by a number equal to the lesser of: (i) 4% of the shares of common stock outstanding on the last business day of the prior fiscal year; or (ii) the number of shares determined by the Company's Board of Directors. In general, to the extent that any awards under the 2020 Plan are forfeited, terminate, expire or lapse without the issuance of shares, or if the Company reacquires the shares subject to awards granted under the 2020 Plan, those shares will again become available for issuance under the 2020 Plan, as will shares applied to pay the exercise or purchase price of an award or to satisfy tax withholding obligations related to any award.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our “Selected Financial Data” and our financial statements and the related notes to those statements included elsewhere in this report. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including, but not limited to, those discussed under the section titled “Risk Factors” and elsewhere in this report. See the section titled “Special Note Regarding Forward-Looking Statements” elsewhere in this report..
Overview of our Business
We are a late clinical-stage biopharmaceutical company focused on the development and commercialization of therapeutic candidates to address large market opportunities initially in ophthalmic conditions where there are limited treatment alternatives. Our lead product candidate, TP-03, is a novel therapeutic in Phase 2b/3 that is being developed for the treatment of blepharitis caused by the infestation of Demodex mites, which is referred to as Demodex blepharitis. Blepharitis (“Blephar” is a reference to eyelid and “itis” is a reference to inflammation) is a condition characterized by inflammation of the eyelid margin, redness and ocular irritation, including a specific type of eyelash dandruff called collarettes in Demodex blepharitis. The healthy interaction of the eyelid and the surface of the eyeball is crucial to ocular health. Poorly controlled and progressive blepharitis can lead to worsening of corneal damage over time and, in extreme cases, blindness.
According to published studies, there are an estimated 20 million patients in the United States who suffer from blepharitis, with approximately 45%, or approximately nine million, of cases caused by Demodex infestation. Further, our estimates indicate the possibility that the number of Demodex blepharitis cases may be as high as approximately 25 million, based on our internal research indicating approximately 58% of patients presenting to eye care clinics have collarettes and a published study estimating that at least 45 million people annually visit an eye care clinic.
To date, we have completed four Phase 2 trials for TP-03 in Demodex blepharitis, all of which met their primary, secondary and/or exploratory endpoints, as applicable, and during which TP-03 was well tolerated. We have commenced our Phase 2b/3 trial, Saturn-1, in September 2020, and intend to commence our Phase 3 trial, Saturn-2, in 2021, both with primary and secondary endpoints consistent with those of our Europa and Io Phase 2 trials. If successful, we expect these trials to support the submission of a new drug application ("NDA") to the United States Food and Drug Administration ("FDA") for TP-03 for the treatment of Demodex blepharitis. Furthermore, we intend to pursue marketing authorizations in jurisdictions outside the United States, including Europe and Japan. We believe that, if approved, TP-03 has the potential to be the first FDA-approved therapeutic and become the standard of care for the treatment of Demodex blepharitis.

Our current therapeutic strategy is focused on the clinical development of, for the first time in human medicine, the novel drug, lotilaner, which is designed to paralyze and eradicate mites and other parasites through the inhibition of parasite-specific gamma-aminobutyric acid-gated chloride ("GABA-Cl") channels. We are advancing our pipeline to address a number of diseases across therapeutic categories including eye care, dermatology and other diseases with high, unmet needs. These diseases include Demodex blepharitis, Meibomian Gland Disease ("MGD"), rosacea, Lyme disease, and malaria.
Corporate and Financial Overview
We were incorporated as a Delaware corporation in November 2016, and our headquarters is located in Irvine, California. Since our inception in November 2016, we have devoted substantially all of our resources to organizing and staffing our company, acquiring intellectual property, clinical development of our product candidates, building our research and development capabilities, raising capital, and enhancing our corporate infrastructure.
To date we have financed our operations through private placements of preferred stock and convertible promissory notes. From inception through September 30, 2020, we have raised net proceeds of approximately $101.0 million through private placements of preferred stock.
On October 20, 2020, we completed our initial public offering ("IPO") through an underwritten sale of 5,500,000 shares of common stock at a price of $16.00 per share. The aggregate net proceeds from the offering, inclusive of an additional 825,000 shares sold upon the full exercise of the underwriters’ option to purchase additional shares of common stock, after deducting underwriting discounts and commissions and other offering expenses, were approximately $91.7 million. Concurrent with the IPO, all then-outstanding shares of our convertible preferred stock outstanding (see Note 4) automatically converted into an aggregate of 11,107,018 issued common shares.
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In advance of the IPO, on October 8, 2020, our board of directors approved a 1-for-7.4276 reverse stock split of our capital stock. All share and per share information included in the accompanying financial statements has been adjusted to reflect this reverse stock split.
We have incurred significant net operating losses in every year since our inception and expect to continue to incur significant operating expenses and increasing operating losses for the foreseeable future. Our net losses were $15.3 million and $3.3 million for the nine months ended September 30, 2020 and 2019, respectively. Our net losses may fluctuate significantly from quarter to quarter and year to year and could be substantial. As of September 30, 2020 and December 31, 2019, we had an accumulated deficit of $21.4 million and $6.0 million, respectively, from research and development and general and administrative activities since our inception. We anticipate that our operating expenses will increase significantly as we:
conduct additional clinical trials of our lead product candidate, TP-03, for the treatment of Demodex blepharitis including our Phase 2b/3 trial, Saturn-1, and our Phase 3 trial, Saturn-2;
advance the clinical development of TP-03 for the treatment of MGD, TP-04 for the potential treatment of rosacea and TP-05 for potential Lyme prophylaxis and community malaria reduction;
seek regulatory and marketing approvals for product candidates that successfully complete clinical development, if any;
establish our own salesforce in the United States to commercialize our products for which we obtain regulatory approval;
engage with contract manufacturers to ensure a sufficient supply chain capacity to provide commercial quantities of any products for which we may obtain marketing approval;
maintain, expand and protect our intellectual property portfolio;
hire additional staff, including clinical, scientific, technical, regulatory, marketing, operations, financial, and other support personnel, to execute our business plan; and
add information systems and personnel to support our product development and potential future commercialization efforts, and to enable us to operate as a public company.
We do not have any products approved for sale and we have not yet generated any revenue from product sales or other sources. We do not expect to generate revenues from product sales unless and until we successfully complete clinical development and obtain regulatory approval for a product candidate and commercially launch such product. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through private or public equity or debt financings, or collaborations, strategic alliances, or licensing arrangements with third parties. Adequate funding may not be available to us when needed on acceptable terms, or at all. If we raise additional funds through collaborations, strategic alliances, or licensing arrangements with third parties, we may have to relinquish valuable rights to our intellectual property, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional capital or enter into such agreements as and when needed, we could be forced to significantly delay, scale back, or discontinue our product development and/or commercialization plans, which would negatively and adversely affect our financial condition.
Because of the numerous risks and uncertainties associated with drug product development, we are unable to accurately predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate revenue from product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels.
As of September 30, 2020, our aggregate cash and cash equivalents was $86.3 million. We believe that our existing cash and cash equivalents and proceeds from our IPO will enable us to fund our operating expenses and capital expenditure requirements into the fourth quarter of 2022 – see “Liquidity and Capital Resources.”
Impact of the COVID-19 Pandemic on our Operations
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Efforts to contain the spread of COVID-19 in the United States (including in California where our corporate headquarters and laboratory facility are located) and other countries have included quarantines, shelter-in-place orders, and various other government restrictions in order to control the spread of this virus.
We have been carefully monitoring the COVID-19 pandemic as it continues to progress and its potential impact on our business. We have taken important steps to ensure the workplace safety of our employees when working within our laboratory and administrative offices, or when traveling to our clinical trial sites. We have also implemented an interim work-from-home policy and we may take further actions as may be required by federal, state or local authorities.

To date, we have been able to continue our key business activities and advance our clinical programs. However, in the future, it is possible that our clinical development timelines and business plans could be adversely affected. We maintain regular communication with our vendors and clinical sites to appropriately plan for, and mitigate, the impact of the COVID-19 pandemic on our operations. Specifically, for our Phase 2b/3 Saturn-1 trial, we have instituted various protocols for our sites, including increasing health screening of individuals and providing enhanced communication and training to staff regarding COVID-19. We have also over-enrolled trial participants and identified additional clinical sites in case there are site closures due to COVID-19. However, the ultimate effect from this pandemic on our development timelines for TP-03 and our other product candidates is inherently uncertain.
See the section titled “Risk Factors” in this report for a further discussion of the potential adverse impact of COVID-19 on our business, results of operations and financial condition.
Components of our Results of Operations
Operating Expenses
Our operating expenses since inception have consisted solely of research and development expenses and general and administrative expenses.
Research and Development Expenses
Our research and development expenses consist of expenses incurred in connection with the development of our product candidates, including:
fees paid to third parties to conduct certain research and development activities on our behalf, including under agreements with contract research organizations ("CROs");
payments under licensing agreements, such as our upfront in-license fee for lotilaner and subsequent clinical development milestone achievements;
consulting costs and certain allocated payroll and employee-related expenses (including stock-based compensation and salaries) for personnel engaged in research and development functions;
costs related to compliance with clinical regulatory requirements;
costs of procuring drug products for use in our preclinical studies and clinical trials; and
facilities expenses, which include direct and allocated expenses for rent of our laboratory.
We expense both internal and external research and development expenses as incurred or as certain upfront or milestone payments become contractually due to licensors upon achievement of clinical or regulatory events. We recognize external research and development costs based on an evaluation of the progress-to-completion of (i) specific tasks performed, or deliverables provided, by CROs or contract manufacturing organizations ("CMOs") and (ii) patient visits and dosing. To estimate period expense for recognition, we use information provided to us by our service providers and we then apply the corresponding fee schedule.
We track our external research and development expenses on a program-by-program basis, such as fees paid to CROs, CMOs and research laboratories in connection with our pre-clinical development, process development, manufacturing and clinical development activities. However, we do not currently track our internal research and development expenses on a program-by-program basis as they primarily relate to employee compensation and other costs which are deployed across
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multiple projects under development. For the nine months ended September 30, 2020 and 2019, substantially all of our research and development expenses are attributable to our TP-03 program for Demodex blepharitis.
Research and development activities are central to our business model. Product candidates in later stages of clinical development, such as TP-03, generally have higher 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 substantially and in the future, as we seek to initiate and progress additional clinical trials for our product candidates, including TP-03 for the potential treatment of MGD, TP-04 for the potential treatment of rosacea and TP-05 for potential Lyme prophylaxis and community malaria reduction, complete our clinical programs, pursue regulatory approval of our product candidates, and prepare for the possible commercialization of these product candidates. The successful development of our product candidates is highly uncertain. As this time, we cannot precisely estimate the aggregate costs required to complete significant portions of our clinical programs or additional costs associated with the validation of our contract manufacturers and suppliers as required by the FDA. See the section titled “Risk Factors” in this report for a discussion of risks and uncertainties associated with our research and development projects.
General and Administrative Expenses
Our general and administrative expenses consist of personnel-related costs including payroll, benefits, and stock-based compensation for our executive, finance, and other administrative functions. Other general and administrative expenses include consulting fees, legal services, rent and other facilities costs, and other general operating expenses not otherwise classified as research and development expenses.
We expect that our general and administrative expenses will increase substantially in the future as a result of expanding our operations, including hiring personal, preparing for potential commercialization of our product candidates, and additional facility occupancy costs, as well various incremental costs associated with being a public company (including increased legal and accounting fees, regulatory costs associated with maintaining compliance with the rules of the Nasdaq Stock Market and SEC regulations, investor relations activities, directors and officers liability insurance premiums, and other accompanying compliance and governance costs).
Other Income (Expense), Net
Other income (expense), net consists primarily of interest expense on our convertible promissory notes and other expense from the change in fair value of the derivative liabilities associated with these notes. Interest expense is comprised of coupon interest, amortization of debt issuance costs, and non-cash accretion of an estimated discount on the convertible promissory notes (as part of the separate recognition of an embedded derivative liability). Our recognized interest expense was partially offset by interest income earned on our cash and cash equivalents.
Income Tax Provision
Since our inception, we have not recorded any U.S. federal or state income tax benefits for the net operating losses we have incurred in each year, or for our earned research and development tax credits, due to our uncertainty of realizing a benefit from either. As a result of the Tax Cuts and Jobs Act of 2017, net operating losses (for U.S. income tax purposes) generated prior to December 31, 2018 can be carried forward for up to 20 years, while net operating losses generated after December 31, 2017 can be carried forward indefinitely, but are limited to 80% utilization against taxable income. Our California net operating losses will begin to expire in 2037. The federal research and development tax credits begin to expire in 2037 unless previously utilized, and the California credit carryforwards are available indefinitely.
Result of Operations
Comparison of the Three Months Ended September 30, 2020 and 2019
The following table summarizes our results of operations for the periods indicated:
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 Three Months Ended September 30,Change
 20202019
 (in thousands)
Operating expenses:
Research and development$7,991 $399 $7,592 
General and administrative2,150 234 1,916 
Total operating expenses10,141 633 9,508 
Loss from operations before other income (expense) and income taxes(10,141)(633)(9,508)
Other income (expense):