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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 June 30, 2022

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 13(a) of the Exchange Act.  

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

26,658,468 shares of common stock, $0.0001 par value, outstanding as of August 5, 2022.



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
F-2
F-3
F-4
F-5
F-6

F-1

Table of Contents
TARSUS PHARMACEUTICALS, INC.
CONDENSED BALANCE SHEETS
(In thousands, except share and par value amounts)
 
 
June 30, 2022December 31, 2021
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents$245,363 $171,332 
Marketable securities 483 
Accounts receivable17  
Other receivables603 92 
Prepaid expenses and other current assets4,300 4,045 
Total current assets250,283 175,952 
Property and equipment, net963 755 
Operating lease right-of-use assets813 1,074 
Long-term investments169  
Other assets600 1,126 
Total assets$252,828 $178,907 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued liabilities$8,938 $8,680 
Accrued payroll and benefits2,780 2,798 
Total current liabilities11,718 11,478 
Term loan, net19,262  
Other long-term liabilities343 699 
Total liabilities31,323 12,177 
Commitments and contingencies (Note 8)
Stockholders’ equity:
Preferred stock, $0.0001 par value; 10,000,000 authorized; no shares issued and outstanding
  
Common stock, $0.0001 par value; 200,000,000 shares authorized; 26,650,078 shares issued and 26,644,252 outstanding, which excludes 5,826 shares subject to repurchase at June 30, 2022 (unaudited); 20,726,580 shares issued and 20,698,737 outstanding, which excludes 27,840 shares subject to repurchase at December 31, 2021
5 4 
Additional paid-in capital294,153 213,398 
Accumulated deficit(72,653)(46,672)
Total stockholders’ equity221,505 166,730 
Total liabilities and stockholders’ equity$252,828 $178,907 
See accompanying notes to these unaudited condensed financial statements.
F-2

Table of Contents
TARSUS PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
(Unaudited)
(In thousands, except share and per share amounts)

 Three Months Ended
June 30,
Six Months Ended
June 30,
 2022202120222021
Revenues:
License fees$13,893 $19,048 $13,893 $52,359 
Collaboration revenue1,384 2,969 1,923 3,090 
Total revenues15,277 22,017 15,816 55,449 
Operating expenses:
Cost of license fees and collaboration revenue522 737 555 2,034 
Research and development9,603 7,204 21,684 23,465 
General and administrative10,376 6,794 18,322 11,954 
Total operating expenses20,501 14,735 40,561 37,453 
(Loss) income from operations before other (expense) income and income taxes(5,224)7,282 (24,745)17,996 
Other (expense) income:
Interest (expense) income, net (247)7 (563)16 
Other income (expense), net106 (39)143 (73)
Unrealized loss on equity investments(121) (313) 
Change in fair value of equity warrants issued by licensee(257)(876)(502)(876)
Total other expense, net (519)(908)(1,235)(933)
Provision for income taxes (29)(1)(342)
Net (loss) income and comprehensive (loss) income$(5,743)$6,345 $(25,981)$16,721 
Net (loss) income per share, basic$(0.24)$0.31 $(1.15)$0.81 
Net (loss) income per share, diluted$(0.24)$0.29 $(1.15)$0.76 
Weighted-average shares outstanding, basic24,332,531 20,555,258 22,531,384 20,446,246 
Weighted-average shares outstanding, diluted24,332,531 21,966,599 22,531,384 21,895,304 

See accompanying notes to these unaudited condensed financial statements.
F-3

Table of Contents
TARSUS PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
(Unaudited)
(In thousands, except share data)

 Preferred StockCommon StockAdditional Paid-In CapitalAccumulated
Deficit
Total
Stockholders’
Equity
 Shares    AmountSharesAmount
Balance as of December 31, 2021 $ 20,698,737 $4 $213,398 $(46,672)$166,730 
Net loss— — — — — (20,238)(20,238)
Recognition of stock-based compensation expense — — — — 2,674 — 2,674 
Exercise of vested stock options— — 225 — — — — 
Issuance of common stock upon the vesting of restricted stock units— — 4,257 — — — — 
Lapse of repurchase obligation for stock option exercises, prior to vesting— — 15,309 — 31 — 31 
Balance as of March 31, 2022 $ 20,718,528 $4 $216,103 $(66,910)$149,197 
Net loss— — — — — (5,743)(5,743)
Recognition of stock-based compensation expense — — — — 3,532 — 3,532 
Issuance of common stock upon follow-on public offering, net of issuance costs of $5,246
— — 5,889,832 1 74,266 — 74,267 
Shares issued in connection with the employee stock purchase plan— — 17,874 — 222 222 
Exercise of vested stock options— — 7,056 — 17 — 17 
Issuance of common stock upon the vesting of restricted stock units— — 4,257 — — — — 
Lapse of repurchase obligation for stock option exercises, prior to vesting— — 6,705 — 13 — 13 
Balance as of June 30, 2022 $ 26,644,252 $5 $294,153 $(72,653)$221,505 


Preferred StockCommon StockAdditional Paid-In CapitalAccumulated
Deficit
Total
Stockholders’
Equity
SharesAmountSharesAmount
Balance as of December 31, 2020 $ 20,323,201 $4 $198,821 $(32,845)$165,980 
Net income— — — — — 10,376 10,376 
Recognition of stock-based compensation expense— — — — 1,363 — 1,363 
Exercise of vested stock options— — 13,773 — 19 — 19 
Shares issued as consideration for in-license rights— — 187,500 — 5,494 — 5,494 
Balance as of March 31, 2021 $ 20,524,474 $4 $205,697 (22,469)$183,232 
Net income— — — — — 6,345 6,345 
Recognition of stock-based compensation expense— — — — 2,794 — 2,794 
Lapse of repurchase obligation for stock option exercises, prior to vesting— — 49,222 — 99 — 99 
Exercise of vested stock options— — 255 — 1 — 1 
Balance as of June 30, 2021 $ 20,573,951 $4 $208,591 (16,124)$192,471 

See accompanying notes to these unaudited condensed financial statements.
F-4

Table of Contents
TARSUS PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 Six Months Ended
June 30,
 20222021
Cash Flows From Operating Activities:
Net (loss) income $(25,981)$16,721 
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Depreciation and amortization133 189 
Amortization and accretion of term loan-related costs137  
Stock-based compensation6,206 4,157 
Non-cash lease expense226 87 
Loss on disposal of property and equipment 70 
Loss on lease termination 2 
Unrealized loss on equity investments313  
Change in fair value of equity warrants issued by licensee502 876 
Unrealized gain from transactions denominated in a foreign currency(1)(8)
Issuance of common stock upon in-license agreement milestone achievement 5,494 
Changes in operating assets and liabilities:
Accounts receivable(17)(20,000)
Other receivables(510)(137)
Prepaid expenses and other current assets(254)(1,527)
Other non-current assets(75)(2,326)
Accounts payable and other accrued liabilities(135)4,622 
Accrued payroll and benefits(18)430 
Other long-term liabilities(71)107 
Net cash used in operating activities(19,545)8,757 
Cash Flows From Investing Activities:
Purchases of property and equipment(283)(191)
Cash used in investing activities(283)(191)
Cash Flows From Financing Activities:
Proceeds from issuance of common stock upon follow-on public offering, net of paid issuance costs74,570  
Proceeds from sale of common stock under employee stock purchase plan
222  
Proceeds from exercise of vested stock options17 20 
Payment of deferred offering costs
(75) 
Proceeds from term loan20,000  
Payment of term loan issuance costs(875) 
Net cash provided by financing activities93,859 20 
Net increase in cash and cash equivalents74,031 8,586 
Cash and cash equivalents — beginning of period171,332 168,149 
Cash and cash equivalents — end of period$245,363 $176,735 
Supplemental Disclosures Noncash Investing and Financing Activities:
"Interest expense" paid in cash$127 $ 
Additions of "property and equipment, net" included within "accounts payable and other accrued liabilities"$59 $ 
Expensing of "operating lease right-of-use assets" upon lease termination$ $(38)
Stock issued for in-license agreements included within "research and development" expense$ $5,494 
Deferred offering costs included within "additional-paid in capital"$184 $ 
Deferred offering costs included within "accounts payable and accrued liabilities"$ $281 
See accompanying notes to these unaudited condensed financial statements.
F-5

Table of Contents
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 biopharmaceutical company focused on the development and commercialization of therapeutics, starting with eye care.
(b) Liquidity Overview
The Company has no product sales and has accumulated losses and negative cash flows from operations since inception (other than consideration received from an out-licensing agreement, as discussed in Note 9), resulting in an accumulated deficit of $72.7 million as of June 30, 2022 and $46.7 million as of December 31, 2021. The Company’s cash and cash equivalents were $245.4 million and $171.3 million as of June 30, 2022 and December 31, 2021, respectively. The Company expects to continue to incur operating losses and negative cash flows.
The Company has funded its inception-to-date operations primarily through equity capital raises, proceeds from its out-license agreement, and draw downs on its credit facility. The Company estimates its existing capital resources will be sufficient to meet projected operating expense requirements for at least 12 months from the filing date of the accompanying Condensed Financial Statements in this Form 10-Q; accordingly, these financial statements have been prepared on a "going-concern" basis.
The Company’s operations currently consist of its corporate organization build-out, intellectual property licensing activities, and preclinical and clinical study progression. The Company faces the clinical, business, and liquidity risks that are typically associated with biopharma companies; it must significantly invest in and conduct research and development activities, achieve research and development outcomes that are inherently uncertain, recruit and retain skilled personnel (including executive management), and expand and defend its intellectual property rights.
Management expects the Company to continue to incur losses in the foreseeable future as a result of research and development activities and other operating expenses. The Company may be required to raise additional capital to fund its future operations. However, no assurance can be given as to whether financing will be available on terms acceptable to the Company, if at all. If the Company raises additional funds by issuing equity securities, its stockholders may experience dilution. The Company's Credit Facility imposes additional covenants that restrict operations, including limitations on its ability to incur liens or additional debt, pay dividends, repurchase common stock, make certain investments, or engage in certain merger or asset sale transactions. Any debt financing or additional equity raise may contain terms that are not favorable to the Company or its stockholders. The Company’s potential inability to raise capital when needed could have a negative impact on its financial condition and ability to pursue planned business strategies. If the Company is unable to raise additional funds as required, it may need to delay, reduce, or terminate some or all of its development programs and clinical trials. The Company may also be required to sell or license its rights to product candidates in certain territories or indications that it would otherwise prefer to develop and commercialize on its own. If the Company is required to enter into collaborations and other arrangements to address its liquidity needs, it may have to give up certain rights that limit its ability to develop and commercialize product candidates or may have other terms that are not favorable to the Company or its stockholders, which could materially and adversely affect its business and financial prospects. 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.
(c) Operating Segment
To date, the Company has operated and managed its business and financial information on an aggregate basis based on its organizational structure, for the purposes of evaluating financial performance and the allocation of capital and personnel resources, consistent with the way operations and investments are centrally managed and evaluated. Accordingly, the Company’s management determined that it operates one reportable operating segment. This single segment is focused exclusively on developing pharmaceutical products for eventual commercialization.
(d) Emerging Growth Company Status
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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)
The Company is an "emerging growth company," as defined in the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act"). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. The Company has irrevocably elected to not take this exemption. As a result, it will adopt new or revised accounting standards on the relevant effective dates on which adoption of such standards is required for other public companies that are not emerging growth companies.
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 generally accepted accounting principles ("GAAP") in the United States ("U.S.") for interim financial information and pursuant to Form 10-Q and with the rules and regulations 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 June 30, 2022, the interim Condensed Statements of Operations and Comprehensive (Loss) Income, and Stockholders’ Equity for the three and six months ended June 30, 2022 and 2021, and the interim Condensed Cash Flows for the six months ended June 30, 2022 and 2021 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 for the fair presentation of its financial information.
The financial data and other information disclosed in these notes related to the three and six-month periods are also unaudited. The Condensed Balance Sheet as of December 31, 2021 has been derived from the audited financial statements at that date but does not include all information and footnotes required by GAAP for annual financial statements. The condensed interim operating results for three and six months ended June 30, 2022 are not necessarily indicative of results to be expected for the year ending December 31, 2022 or any other interim or annual period.
The accompanying interim unaudited Condensed Financial Statements should be read in conjunction with the audited financial statements and the related notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on March 14, 2022.
The preparation of financial statements in conformity with GAAP and with the rules and regulations of the SEC requires management to make informed estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes. These estimates and assumptions involve judgments with respect to numerous factors that are difficult to forecast and may materially differ from the amounts ultimately realized and reported due to the inherent uncertainty of any estimate or assumption.

There have been no significant changes in the Company’s significant accounting policies during the three and six months ended June 30, 2022, as compared with those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 14, 2022. The accounting policies and estimates that most significantly impact the presented amounts within the accompanying Condensed 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, that are readily convertible into cash without penalty, with original maturities of three months or less from the purchase date.
(iii) Marketable Securities and Long-Term Investments
As of December 31, 2021, "marketable securities" represents LianBio common stock (see Note 7). These shares are reported within "long-term investments" on the Condensed Balance Sheet as of June 30, 2022, reflecting the intent to hold these shares for at least one year from the balance sheet date. These securities are designated as "available-for-sale" with associated
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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)
gains or losses reported in "other expense, net" within the Condensed Statements of Operations and Comprehensive (Loss) Income for each reported period.
(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. The COVID-19 pandemic continues to evolve and its impact on the Company’s business will depend on several factors that are highly uncertain and unpredictable, including the efficacy and adoption of vaccines, future resurgences of the virus and its variants, and the speed at which government restrictions are lifted. To date, the Company’s operations have not been significantly impacted by the COVID-19 pandemic, though the Company continues to monitor 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 may 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, (3) uncertainty of market acceptance of its product candidates, (4) competition from substitute products and other companies, (5) securing and protecting proprietary technology and strategic relationships, and (6) 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 the necessary approvals. If the Company is denied approval, approval is delayed, or the Company is unable to maintain approval for any product candidate, it could have a materially adverse impact on its business.
(v) Revenue Recognition for Out-License Arrangements
    
Overview

The Company currently has one out-license arrangement that allows the third-party licensee to market the TP-03 product candidate (representing "functional intellectual property") in certain territories for a certain field of use and for a stated term - see Note 9. The accounting and reporting of revenue for out-license arrangements requires significant judgment for: (a) identification of the number of performance obligations within the contract, (b) the contract’s transaction price for allocation (including variable consideration), (c) the stand-alone selling price for each identified performance obligation, and (d) the timing and amount of revenue recognition in each period.

The Company's out-license arrangement, as described in Note 9, was analyzed under GAAP to determine whether the promised goods or services (which include the license, and know-how, data, and information necessary or reasonably useful for the research, development, manufacture, or commercialization of any licensed product, and governance committee services) are distinct or must be accounted for as part of a combined performance obligation. In making these assessments, the Company considers factors such as the stage of development of the underlying intellectual property and the capabilities of the customer to develop the intellectual property on their own, and/or whether the required expertise is readily available. If the license is considered to not be distinct, the license is combined with other promised goods or services as a combined performance obligation for revenue recognition.
The Company's out-license arrangement includes the following forms of consideration: (i) non-refundable upfront license payments, (ii) equity-based consideration, (iii) sales-based royalties, (iv) sales threshold milestones, (v) development milestone payments, and (vi) regulatory milestone payments. Revenue is recognized in proportion to the allocated transaction price when (or as) the respective performance obligation is satisfied. The Company evaluates the progress related to each milestone at each reporting period and, if necessary, also adjusts the probability of achievement and related revenue recognition. The measure of progress, and thereby periods over which revenue is recognized, is subject to estimates by management and may change over the course of the respective agreement.
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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)

Contractual Terms for Receipt of Payments

The contractual terms that establish the Company’s right to collect specified amounts from its customers and that require contemporaneous evaluation and documentation under GAAP for the corresponding timing and amount of revenue recognition, are as follows:

(1) Upfront License Fees: The Company determines whether non-refundable license fee consideration is recognized at the time of contract execution (i.e., when the license is transferred to the customer and the customer is able to use and benefit from the license) or over the actual (or implied) contractual period of the out-license. The Company also evaluates whether it has any other requirements to provide substantive services that are inseparable from the performance obligation of the license transfer to determine whether any combined performance obligation is satisfied over time or at a point in time. Upfront payments may require deferral of revenue recognition to a future period until the Company performs obligations under these arrangements.

(2) Development Milestones: The Company utilizes the “most likely amount” method to estimate the amount of consideration to which it will be entitled for achievement of development milestones as these represent variable consideration. For those payments based on development milestones (e.g., patient dosing in a clinical study or the achievement of statistically significant clinical results), the Company assesses the probability that the milestone will be achieved, including its ability to control the timing or likelihood of achievement, and any associated revenue constraint. Given the high degree of uncertainty around the occurrence of these events, the Company determines the milestone and other contingent amounts to be "constrained" until the uncertainty associated with these payments is resolved. At each reporting period, the Company re-evaluates this associated revenue recognition constraint. Any resulting adjustments are recorded to revenue on a cumulative catch-up basis, and reflected in the financial statements in the period of adjustment.

(3) Regulatory Milestones: The Company utilizes the “most likely amount” method to estimate the consideration to which it will be entitled and recognizes revenue in the period regulatory approval occurs (the performance obligation is satisfied) as these represent variable consideration. Amounts constrained as variable consideration are included in the transaction price to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The Company evaluates whether the milestones are considered probable of being reached and not otherwise "constrained." Accordingly, due to the inherent uncertainty of achieving regulatory approval, associated milestones are deemed constrained for revenue recognition until achievement.

(4) Royalties: Under the "sales-or-usage-based royalty exception" the Company recognizes revenue based on the contractual percentage of the licensee’s sale of products to its customers at the later of (i) the occurrence of the related product sales or (ii) the date upon which the performance obligation to which some or all of the royalty has been allocated has been satisfied or partially satisfied. To date, the Company has not recognized any royalty revenue from its out-licensing arrangements.

(5) Sales Threshold Milestones: Similar to royalties, applying the "sales-or-usage-based royalty exception", the Company recognizes revenue from sales threshold milestones at the later of (i) the period the licensee achieves the one-time annual product sales levels in their territories for which the Company is contractually entitled to a specified lump-sum receipt, or (ii) the date upon which the performance obligation to which some or all of the milestone has been allocated has been satisfied or partially satisfied. To date, the Company has not recognized any sales threshold milestone revenue from out-licensing arrangements.

The Company re-evaluates the measure of progress to each performance obligation in each reporting period as uncertain events are resolved and other changes in circumstances occur. A "performance obligation" is a promise in a contract to transfer a distinct good or service and is the unit of accounting. A contract’s "transaction price" is allocated among each distinct performance obligation based on relative standalone selling price and recognized when, or as, the applicable performance obligation is satisfied.
(vi) Research and Development Costs
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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)
Research and development costs are expensed as incurred or as certain upfront or milestone payments become contractually due to licensors upon the achievement of clinical or regulatory events. These expenses also include internal costs directly attributable to in-development programs, including cost of certain salaries, payroll taxes, employee benefits, and stock-based compensation expense, as well as laboratory and clinical supplies, pre-clinical and clinical trial related expenses, clinical manufacturing costs, and the cost of services provided by outside contractors. The Company recognizes expense for pre-clinical studies and clinical trial activities performed by these third parties. This is typically based upon estimates of the proportion of work completed over the term of the individual study or trial, as well as patient enrollment and dosing events in accordance with agreements established with clinical research organizations (CROs) and clinical trial or pre-clinical study sites.
The Company has entered, and may continue to enter into, license agreements to access and utilize intellectual property for drug development. In each case, the Company evaluates if the assets acquired in a transaction represent the acquisition of an asset or a business, as defined under applicable GAAP. The Company’s executed in-license agreements (see Note 8(b)) were evaluated and determined to represent asset acquisitions. Because these assets have not yet received regulatory approval and have no alternative future use, the purchase price for each was immediately recognized as research and development expense. In addition, any future milestone payments (whether in the form of cash or stock) made before product regulatory approval (that do not meet the definition of a derivative) will also be immediately recognized as research and development expense when paid or becomes payable, provided there is no alternative future use of the rights in other research and development projects.
(vii) Stock-Based Compensation
The Company recognizes stock-based compensation expense for equity awards granted to employees, consultants, and members of its Board of Directors. The Black-Scholes pricing model is used to estimate the fair value of stock option awards as of the date of grant. The fair value of restricted stock units is representative of the closing share price preceding the date of grant.
For stock-based awards that vest subject to the satisfaction of a service requirement, the related expense is recognized on a straight-line basis over each award’s actual or implied vesting period. For stock-based awards that vest subject to a performance condition, the Company recognizes related expense on an accelerated attribution method, if and when it concludes that it is highly probable that the performance condition will be achieved. As applicable, the Company reverses previously recognized expense for unvested awards in the same period of forfeiture.
The measurement of the fair value of stock option awards and recognition of stock-based compensation expense requires assumptions to be estimated by management that involve inherent uncertainties and the application of management’s judgment, including (a) the fair value of the Company’s common stock on the date of the option grant for all awards granted prior to its October 2020 Initial Public Offering ("IPO"), (b) the expected term of the stock option until its exercise by the recipient, (c) 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” for awards as the Company does not yet have sufficient exercise history since its November 2016 corporate formation. Additionally, the Company lacks company-specific historical and implied volatility information of its stock since its IPO. Accordingly, management estimated this expected volatility based on a designated peer-group of publicly-traded companies for a look-back period, as of the date of grant, that corresponded 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 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.
The fair value of the Company’s common stock is based on the closing quoted market price of its common stock as reported by the Nasdaq Global Select Market on the date of grant.
All stock-based compensation expense is reported in the Statements of Operations and Comprehensive (Loss) Income within "research and development" expense or "general and administrative" expense, based upon the assigned department of the award recipient.
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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)
(viii) Net (Loss) Income per Share
Basic net (loss) income per share is calculated by dividing the net (loss) income by the weighted-average number of shares of common stock outstanding for the period, without consideration for potential dilutive shares of common stock. Diluted net (loss) income per share is computed by dividing the net (loss) income by the weighted-average number of common stock equivalents outstanding for the period determined using the "treasury-stock method" and "if-converted method" as applicable.
The Company’s "participating securities" include unvested common stock awards issued upon early exercise of certain stock options, as early exercised unvested common stock awards have a non-forfeitable right to dividends. The Company’s participating securities do not have a contractual obligation to share in the Company’s losses, so in periods of net losses, the "two-class method" of calculating basic and diluted earnings per share is not required. In periods of net income, basic and diluted net loss per share attributable to common stockholders is presented in conformity with the two-class method required for participating securities. Also, net income is attributed to both common stockholders and participating security holders, and therefore, net income is allocated to shares of common stock and participating securities, as if all of the earnings for the period had been distributed. Diluted earnings per share under the two-class method is calculated using the more dilutive of the treasury stock or the two-class method.

Due to a net loss for the three and six months ended June 30, 2022, all otherwise potentially dilutive securities are antidilutive, and accordingly, the reported basic net loss per share equals the reported diluted net loss per share in this period.
(ix) 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.
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 the short maturities for each. The Company's equity warrant holdings are carried at fair value based on unobservable market inputs (see Note 7).
Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurements. The Company reviews the fair value hierarchy classification on a quarterly basis. Changes in the ability to observe valuation inputs may result in a reclassification of levels for certain assets or liabilities within the fair value hierarchy. The Company did not have any transfers of assets and liabilities between the levels of the fair value measurement hierarchy during the years presented.
(x) Comprehensive (Loss) Income
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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)
Comprehensive (loss) income represents all changes in stockholders’ equity, except those resulting from distributions to stockholders. For all periods presented in the accompanying Condensed Financial Statements, comprehensive (loss) income was the same as reported net (loss) income.
(xi) 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 captions within the accompanying Condensed Balance Sheets are summarized below:
(a) Property and Equipment, Net
“Property and equipment, net” consists of the following:
June 30, 2022December 31, 2021
Furniture and fixtures$596 $596 
Office equipment197 84 
Laboratory equipment167 167 
Leasehold improvements357 129 
Property and equipment, at cost1,317 976 
(Less): Accumulated depreciation and amortization354 221 
Property and equipment, net $963 $755 
Depreciation expense (included within “total operating expenses” in the accompanying Condensed Statements of Operations and Comprehensive (Loss) Income) for the three months ended June 30, 2022 and 2021 was $92 thousand and $125 thousand, respectively, and for the six months ended June 30, 2022 and 2021 was $133 thousand and $189 thousand, respectively.
(b) Other Assets
"Other assets" consists of the following:
June 30, 2022December 31, 2021
Deposits$71 $71 
Equity warrants issued by licensee (Note 7)
264 663 
Other long-term assets265 392 
Other assets$600 $1,126 
(c) Accounts Payable and Other Accrued Liabilities 
“Accounts payable and other accrued liabilities” consists of the following:
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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)
June 30, 2022December 31, 2021
Trade accounts payable and other$4,093 $2,856 
Operating lease liability, current605 609 
Accrued clinical studies4,068 4,407 
Contract liability 697 
Accrued interest, current160  
Income taxes payable 55 
Employee stock option pre-vesting exercise liability12 56 
Accounts payable and other accrued liabilities$8,938 $8,680 
(d) Other Long-Term Liabilities
“Other long-term liabilities” consists of the following:
June 30, 2022December 31, 2021
Operating lease liability, non-current$300 $585 
Lotilaner licensor liability43 114 
Other long-term liabilities$343 $699 
4. STOCKHOLDERS’ EQUITY AND EQUITY INCENTIVE PLANS
Common Stock Outstanding and Reserves for Future Issuance
As of June 30, 2022, the Company had 26.7 million and 26.6 million common shares issued and outstanding, respectively. As of December 31, 2021, the Company had 20.7 million common shares issued and outstanding, respectively. Each share of common stock is entitled to one vote.
The Company's outstanding equity awards and shares reserved for future issuance under its 2020 and 2016 Equity Incentive Plans and 2020 Employee Stock Purchase Plan is summarized below:
June 30, 2022December 31, 2021
Common stock awards reserved for future issuance under 2020 and 2016 Equity Incentive Plans8,678,128 9,266,200 
Common stock awards reserved for future issuance under the 2020 Employee Stock Purchase Plan2,682,601 2,493,488 
Stock options issued and outstanding under 2020 and 2016 Equity Incentive Plans3,739,078 2,759,830 
Restricted stock units outstanding under 2020 Equity Incentive Plan440,737 17,251 
Total shares of common stock reserved15,540,544 14,536,769 
Follow-On Public Offering
On May 5, 2022, the Company completed a follow-on public offering under its Shelf Registration Statement for an initial underwritten sale of 5,600,000 shares of its common stock at a price of $13.50 per share. This resulted in gross proceeds of $75.6 million, before underwriting discounts, commissions and other estimated offering expenses, for net proceeds of $70.6 million.
The Company also granted the underwriters a 30-day option to purchase up to 840,000 additional shares of its common stock at the public offering price, less underwriting discounts and commissions. On June 1, 2022, the underwriters partially exercised this option by purchasing an additional 289,832 shares of the Company's common stock at the public offering price of $13.50 per share for additional gross proceeds of $3.9 million, before underwriting discounts and commissions for net proceeds of $3.7 million.
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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)
After giving effect to the exercise of the underwriters’ option, the Company sold 5,889,832 shares for total gross proceeds of $79.5 million, before underwriting discounts, commissions and other estimated offering expenses. Total net proceeds during the second quarter of 2022 from this offering were $74.3 million.
5. STOCK-BASED COMPENSATION
Stock-Based Compensation Summary
Stock-based compensation expense is recorded to "research and development" or "general and administrative" expenses in the accompanying Condensed Statements of Operations and Comprehensive (Loss) Income, based on the functional role of each recipient. Stock-based compensation expense for the three and six months ended June 30, 2022 and 2021 was reported as follows:
Three Months Ended June 30,Six Months Ended June 30,
2022202120222021
Research and development$984 $427 $1,662 $771 
General and administrative2,548 2,367 4,544 3,386 
Total stock-based compensation$3,532 $2,794 $6,206 $4,157 
6. NET (LOSS) INCOME PER SHARE
The following table sets forth the computation of basic and diluted net (loss) income per share:
Three Months Ended June 30,Six Months Ended June 30,
2022202120222021
Basic EPS
Net (loss) income $(5,743)$6,345 $(25,981)$16,721 
Less: undistributed income allocated to participating securities 46  133 
Net (loss) income available to common shareholders$(5,743)$6,299 $(25,981)$16,588 
Basic weighted average shares outstanding24,332,531 20,555,258 22,531,384 20,446,246 
Net (loss) income per share—basic$(0.24)$0.31 $(1.15)$0.81 
Diluted EPS
Net (loss) income $(5,743)$6,345 $(25,981)$16,721 
Less: undistributed income reallocated to participating securities 43  124 
Net (loss) income available to common shareholders$(5,743)$6,302 $(25,981)$16,597 
Basic weighted average shares outstanding24,332,531 20,555,258 22,531,384 20,446,246 
Effect of dilutive securities:
Common stock options 1,411,341  1,449,058 
Diluted weighted average shares outstanding24,332,531 21,966,599 22,531,384 21,895,304 
Net (loss) income per share—diluted$(0.24)$0.29 $(1.15)$0.76 
The following outstanding potentially dilutive securities were excluded from the calculation of diluted net loss per
share because their impact under the “treasury stock method” and “if-converted method” would have been anti-dilutive for the
periods presented:


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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)
Three Months Ended June 30,Six Months Ended June 30, 2022
2022202120222021
Stock options, unexercised—vested and unvested3,739,078 803,238 3,739,078 803,238 
Stock options exercised prior to vesting— remaining unvested5,826 130,153 5,826 130,153 
Restricted stock units—unvested440,737 4,257 440,737 4,257 
Total4,185,641 937,648 4,185,641 937,648 

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(ix)):
 June 30, 2022 Fair Value Measurements
 Level 1Level 2Level 3Total
Assets:
Money market funds$245,363 $ $ $245,363 
Common stock in LianBio (included in "long-term investments")169   169 
Equity warrants in LianBio (included in "other assets")  264 264 
Total assets measured at fair value$245,532 $ $264 $245,796 
 December 31, 2021 Fair Value Measurements
 Level 1Level 2Level 3Total
Assets:
Money market funds$171,332 $171,332 
Common stock in LianBio (included in "marketable securities")483   $483 
Equity warrants in LianBio (included in "other assets")  663 $663 
Total assets measured at fair value$171,815 $ $663 $172,478 
Money Market Funds
Money market fund holdings are included in "cash and cash equivalents" on the accompanying Condensed Balance Sheets and are classified within Level 1 of the fair value hierarchy because they have readily-available market prices in active markets that are publicly observable at the measurement date. These money market funds are invested in U.S. Treasury bills and notes and other securities issued or guaranteed as to principal and interest by the U.S. Government or its agencies.
Equity Warrants
In March 2021, contemporaneous with the China Out-License transaction (see Note 9), the Company and LianBio, executed a warrant agreement for the Company to purchase, in three tranches, a stated number of common shares in LianBio, a pharmaceutical company focused on the Greater China and other Asian markets (NASDAQ: LIAN). These warrants vest or have vested upon the achievement of certain clinical and regulatory events and have an exercise price at common stock par value.
In June 2021, one of these three warrant tranches vested and converted to 78,373 shares of LianBio common stock, reported within "marketable securities" as of December 31, 2021, and within "long-term investments" as of June 30, 2022. LianBio common stock is classified within Level 1 of the fair value hierarchy, given its publicly reported price on the NASDAQ Global Market.
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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 May 2022, the second warrant tranche vested, but has not yet been exercised, leaving one remaining unvested tranche. The second and third warrant tranche remain classified as Level 3 in the fair value measurement hierarchy as of June 30, 2022 and December 31, 2021 and is presented within "other assets" in the accompanying Condensed Balance Sheets (see Note 3(b)). The most significant assumptions used in the option pricing valuation model as of each balance sheet date to determine its fair value included: LianBio common stock volatility (based on the historical volatility of similar companies), the probability of regulatory milestone achievement for vesting, and the application of an assumed discount rate.
The estimated fair value of these equity warrants will be remeasured each reporting period with adjustments reported within "other expense, net" on the accompanying Statements of Operations and Comprehensive (Loss) Income, until exercised or expired, and is presented in these accompanying financial statements as follows:
Value of equity warrants (see Note 3(b))
Fair value as of December 31, 2021$663 
Revaluation of equity warrant value in "other expense, net" within the Condensed Statement of Operations(245)
Fair value as of March 31, 2022$418 
Recognition of equity warrant value in "total revenues" within the Condensed Statement of Operations for the three months ended June 30, 2022103 
Revaluation of equity warrant value in "other expense, net" within the Condensed Statement of Operations for the three months ended June 30, 2022(257)
Fair value as of June 30, 2022$264 
Value of equity warrants (see Note 3(b))
Fair value as of December 31, 2020$ 
Initial fair value estimate of equity warrant value in "total revenues"1,233 
Fair value as of March 31, 2021$1,233 
Recognition of equity warrant value in "total revenues" within the Condensed Statement of Operations for the three months ended June 30, 2021719 
Revaluation of equity warrant value in "other expense, net" within the Condensed Statement of Operations for the three months ended June 30, 2021(876)
Fair value as of June 30, 2021$1,076 
8. COMMITMENTS & CONTINGENCIES
(a) Facility Leases
Overview
In the ordinary course of business, the Company enters lease agreements with unaffiliated third parties for facilities and office equipment. As of June 30, 2022 and December 31, 2021, the Company had four active leases in Irvine, California for adjacent office and laboratory suites that each expire on January 31, 2024.
The Company's operating leases have annual rent that is payable monthly and carry fixed annual increases. Under these arrangements the Company is responsible for real estate taxes, certain operating expenses, and common area maintenance. Since these costs are variable in nature, they are expensed as incurred and excluded from the reported amounts on the accompanying Condensed Balance Sheets, summarized below. During the year ended December 31, 2021, and the six months ended June 30, 2022, the Company had no sublease arrangements with it as lessor.
Financial Reporting Captions

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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)
The below table summarizes the lease asset and liability accounts presented on the accompanying Condensed Balance Sheets:
Operating LeasesCondensed Balance Sheet CaptionJune 30, 2022December 31, 2021
Operating lease right-of-use assets— non-currentOperating lease right-of-use assets$813 $1,074 
Operating lease liability— currentAccounts payable and other accrued liabilities$605 $609 
Operating lease liability— non-currentOther long-term liabilities300 585 
Total lease liabilities$905 $1,194 
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 "operating lease right-of-use assets" are amortized over each lease term on a straight-line basis to lease expense and is allocated to "research and development" and "general and administrative" expenses in the accompanying Condensed Statements of Operations and Comprehensive (Loss) Income. The Company combines lease and non-lease components in the recognition of lease expense. The components of total lease cost were as follows:
Three Months Ended June 30,Six Months Ended June 30,
2022202120222021
Operating lease cost$142 $60 $285 $120 
Variable lease cost62 11 101 71 
Short-term lease cost 63  95 
Total lease cost$204 $134 $386 $286 
Weighted-Average Remaining Lease Term and Applied Discount Rate
As of June 30, 2022, the Company's facility leases had a weighted average remaining lease term of 1 year, 7 months. The weighted-average estimated incremental borrowing rate of 10% was utilized to present value future minimum lease payments since an implicit interest rate in each at-market lease agreement was not determinable.
Future Contractual Lease Payments
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:
Operating Leases - Future PaymentsJune 30, 2022
2022 (remaining six months)$164 
2023761 
202466 
2025 
2026 
Total future lease payments, undiscounted$991 
(Less): Imputed interest(86)
Present value of operating lease payments$905 
(b) In-License Agreements for Lotilaner
January 2019 Agreement for Skin and Eye Disease or Conditions in Humans
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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 January 2019, the Company entered into a license agreement with Elanco Tiergesundheit AG (“Elanco”) for exclusive worldwide rights to certain intellectual property for the development and commercialization of lotilaner in the treatment or cure of any eye or skin disease or condition in humans, as amended in June 2022 (the "Eye and Derm Elanco Agreement"). The Company has sole financial responsibility for related development, regulatory, and commercialization activities.
The Company made a $1.0 million upfront payment at execution of the Eye and Derm Elanco Agreement in January 2019, and also made a required $1.0 million clinical milestone payment in September 2020, associated with the first two U.S. pivotal trials for the treatment of Demodex blepharitis. The Company paid an additional $2.0 million for its second pivotal trial milestone in April 2021, which was recorded in “research and development” expense in the accompanying Statements of Operations and Comprehensive Loss for the three months ended June 30, 2021. As part of the China Out-License discussed in Note 9, the Company made a contractual payment in the amount of $2.5 million to Elanco following the receipt of $25 million of initial proceeds from LianBio during the second quarter of 2021. In June 2022, the Company made a contractual prepayment of $1.5 million that can be applied towards any milestones that become due under the Eye and Derm Elanco Agreement and/or the All Human Uses Elanco Agreement. This prepayment is included within "prepaid expenses and other current assets" on the accompanying Condensed Balance Sheet as of June 30, 2022.
The Company may make further cash payments to Elanco under the Eye and Derm Elanco Agreement upon achievement of certain clinical milestones in the treatment of human skin diseases using lotilaner for an aggregate maximum of $3.0 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 tiered contractual royalties to Elanco in the mid to high single digits of its net sales. If the Company receives certain types of payments from its 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 it achieved applicable regulatory approval prior to sublicense execution.
September 2020 Agreement for All Other Diseases or Conditions in Humans

In September 2020, the Company executed an expanded in-license agreement with Elanco, granting it a worldwide license to certain intellectual property for the development and commercialization of lotilaner for the treatment, palliation, prevention, or cure of "all other" diseases and conditions in humans (i.e., beyond that of the eye or skin), as amended in June 2022 (the “All Human Uses Elanco Agreement”). In September 2020, the Company issued Elanco 222,460 shares of its common stock at the execution of the All Human Uses Elanco Agreement with an estimated fair value of $3.1 million ($14.0003 per share, approximating the issuance price of the Company's Series C preferred stock in September 2020).

The Company is required to make cash payments to Elanco under the All Human Uses Elanco Agreement upon the 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 product sales. If the Company receives certain types of payments from its sublicensees, it will also be obligated to pay Elanco a variable percentage in the low to mid double-digits of such proceeds, except for territories in which it achieved applicable regulatory approval prior to sublicense execution.

In March 2021, the Company entered into the China Out-License agreement with LianBio (see Note 9) that required it to grant Elanco an additional fixed 187,500 shares of its common stock that otherwise would have been issuable no later than the 18-month anniversary of the All Human Uses Elanco Agreement for its continued license exclusivity. These issued shares were valued at $5.5 million, based on the Company's stock closing price of $29.30 per share on the date this issuance became contractually required and is reported within "research and development" expense within the accompanying Condensed Statements of Operations and Comprehensive (Loss) Income for the six months ended June 30, 2021.

(c) Employment Agreements
The Company has entered into employment agreements with eight of its 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.
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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)
(d) Litigation 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, if any, 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 vary, and in certain cases, are indefinite and do 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.
9. OUT-LICENSE AGREEMENT
Out-License of TP-03 Commercial Rights in Greater China in March 2021

On March 26, 2021, the Company entered into an out-license agreement with LianBio for its exclusive development and commercialization rights of TP-03 (lotilaner ophthalmic solution, 0.25%) in the People’s Republic of China, Hong Kong, Macau, and Taiwan (the “China Territory”) for the treatment of Demodex blepharitis and Meibomian Gland Disease (the “China Out-License”). LianBio is contractually responsible for all clinical development and commercialization activities and costs within the China Territory.

Through June 30, 2022, the Company received payments from LianBio totaling $70.0 million that is comprised of initial consideration of $25.0 million and $45.0 million for the achievement of three clinical development milestones, including $15.0 million received in June 2022.

The Company is eligible to receive further consideration from LianBio upon the achievement of additional milestones, including: (i) TP-03 clinical development and regulatory milestones of up to $30.0 million, (ii) expected drug supply agreement milestone of $5.0 million, (iii) TP-03 sales-based milestones for the China Territory of up to $100 million, (iv) tiered mid-to-high-teen royalties for China Territory TP-03 product sales, and (v) LianBio equity, subject to regulatory milestone achievement for vesting.
For the three and six months ended June 30, 2022 and 2021, the Company reported "license fees" and "collaboration revenue" in the accompanying Condensed Statements of Operations and Comprehensive (Loss) Income, in accordance with the revenue recognition accounting policy described in Note 2(vii). Reported revenue in each presented period relates to the satisfaction performance obligations relating to (i) the transfer of TP-03 license rights in the China Territory to LianBio and (ii) the completion of clinical activities and providing LianBio with the related data for its pivotal trials of TP-03 in the treatment of Demodex blepharitis.

10. CREDIT FACILITY AGREEMENT

On February 2, 2022, the Company executed the Credit Facility with Hercules and SVB that expires on February 2, 2027. The Credit Facility provides an aggregate principal amount of up to $175.0 million with tranched availability as follows: $40.0 million at its execution (to-date, $20.0 million drawn February 2022), $25.0 million upon submission of a New Drug Application ("NDA") with the FDA for TP-03, $35.0 million upon FDA approval of TP-03, $50.0 million upon achievement of product net revenue thresholds, and $25.0 million upon lender approval.

Each of these tranches may be drawn down in $5.0 million increments at the Company's election. The Credit Facility requires interest-only payments through February 1, 2026, followed by 12 months of principal amortization, unless extended for one year to its maturity, upon meeting certain contractual conditions. All unpaid amounts under the Credit Facility become due on its February 2, 2027 expiry.

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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)
Principal draws accrue interest on the outstanding principal balance at a floating interest rate per annum equal to the greater of either (i) The Wall Street Journal ("WSJ") prime rate plus 5.20% or (ii) 8.45%. At the execution date of the Credit Facility, the WSJ prime rate was 3.25% and further increased during 2022 to 4.75% as of June 30, 2022.

The Company is required to pay a fee upon the earlier of (i) February 2, 2027 or (ii) the date the Company prepays, in full or in part, the outstanding principal balance of the Credit Facility ("End of Term Charge"). The current End of Term Charge of $1.0 million was derived at the execution of the Credit Facility by multiplying 4.75% by the $20.0 million drawn at closing and is accreted to "interest expense" through maturity.

As of June 30, 2022, the carrying value of the Credit Facility (reported as "term loan, net" on the accompanying Condensed Balance Sheets) consisted of $20.0 million principal outstanding less legal and administrative issuance costs of approximately $0.9 million that were recorded as a contra-liability to the "term loan, net" and accreted to "interest expense" using the effective interest method during its term.

The calculated effective interest rate (i.e., coupon rate and other applicable fees) during the term of the credit facility was 10.90% for the six months ended June 30, 2022. As of December 31, 2021 the Company had no outstanding debt.

During the three and six months ended June 30, 2022, the Company recognized "interest expense" on its Condensed Statement of Operations and Comprehensive (Loss) Income in connection with the Credit Facility as follows:

Three Months Ended
June 30, 2022
Six Months Ended
June 30, 2022
Interest expense for term loan$462 $736 
Accretion of end of term charge48 79 
Amortization of debt issuance costs35 59 
Total interest expense related to term loan$545 $874 

The principal balance of this term loan and related accretion and amortization as of June 30, 2022, were as follows:

June 30, 2022
Term loan, gross (amount drawn)$20,000 
Debt issuance costs (legal and other administrative fees)(875)
Accretion of end of term charge79 
Accumulated amortization of debt issuance costs58 
Term loan, net $19,262 


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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains certain forward-looking statements. All statements other than statements of historical facts contained in this report, including statements regarding our future results of operations and financial position, future revenue, business strategy, product candidates, planned preclinical studies and clinical trials, results of clinical trials, research and development costs, regulatory approvals, timing and likelihood of success, as well as plans and objectives of management for future operations, are forward-looking statements. These statements involve known and unknown risks, uncertainties and other important factors that are in some cases beyond our control and may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.
The words “anticipate,” “believe,” contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will,” or “would,” or the negative of these terms or other similar expressions are intended to identify forward-looking statements. Factors that may cause actual results to differ from expected results, include, among others:
the likelihood of our clinical trials demonstrating safety and efficacy of our product candidates, and other positive results;
the timing and progress of our current clinical trials and timing of initiation of our future clinical trials, and the reporting of data from our current and future trials;
our plans relating to the clinical development of our current and future product candidates, including the size, number and disease areas to be evaluated;
the prevalence of Demodex blepharitis and the size of the market opportunity for our product candidates;
the rate and degree of market acceptance and clinical utility of our product candidates;
our plans relating to commercializing our product candidates, if approved, including sales strategy;
the impact of COVID-19 on our business and operations;
the success of competing therapies that are or may become available;
our estimates of the number of patients in the United States ("U.S.") or globally, as applicable, who suffer from Demodex blepharitis, Meibomian Gland Disease ("MGD"), rosacea, Lyme disease and malaria and the number of patients that will enroll in our clinical trials;
the beneficial characteristics, safety, efficacy, therapeutic effects and potential advantages of our product candidates;
the timing or likelihood of regulatory filings and approval for our product candidates;
our ability to obtain and maintain regulatory approval of our product candidates and our product candidates to meet existing or future regulatory standards;
our plans relating to the further development and manufacturing of our product candidates, including additional indications for which we may pursue;