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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, 2022
or
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 No.)
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, a 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 ☒

26,672,188 shares of common stock, $0.0001 par value, outstanding as of November 7, 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
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Table of Contents
TARSUS PHARMACEUTICALS, INC.
CONDENSED BALANCE SHEETS
(In thousands, except share and par value amounts)
 
 
September 30, 2022December 31, 2021
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents$169,489 $171,332 
Marketable securities57,083 483 
Accounts receivable17  
Other receivables3,995 92 
Prepaid expenses3,494 4,045 
Total current assets234,078 175,952 
Property and equipment, net951 755 
Operating lease right-of-use assets696 1,074 
Long-term investments157  
Other assets583 1,126 
Total assets$236,465 $178,907 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued liabilities$10,181 $8,680 
Accrued payroll and benefits4,092 2,798 
Total current liabilities14,273 11,478 
Term loan, net19,356  
Other long-term liabilities209 699 
Total liabilities33,838 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; 26,671,812 shares issued and outstanding at September 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 capital297,796 213,398 
Accumulated other comprehensive loss(10) 
Accumulated deficit(95,164)(46,672)
Total stockholders’ equity202,627 166,730 
Total liabilities and stockholders’ equity$236,465 $178,907 
See accompanying notes to these unaudited condensed financial statements.
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TARSUS PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
(Unaudited)
(In thousands, except share and per share amounts)

 Three Months Ended
September 30,
Nine Months Ended
September 30,
 2022202120222021
Revenues:
License fees$ $708 $13,893 $53,067 
Collaboration revenue 532 1,923 3,622 
Total revenues 1,240 15,816 56,689 
Operating expenses:
Cost of license fees and collaboration revenue 65 555 2,099 
Research and development10,912 10,209 32,596 33,674 
General and administrative11,994 6,671 30,316 18,625 
Total operating expenses22,906 16,945 63,467 54,398 
(Loss) income from operations before other income (expense) and income taxes(22,906)(15,705)(47,651)2,291 
Other income (expense):
Interest income1,061 8 1,372 24 
Interest expense(633) (1,507) 
Other (expense) income, net(7)5 136 (68)
Unrealized loss on equity investments(13) (326) 
Change in fair value of equity warrants issued by licensee(18)(346)(520)(1,222)
Total other income (expense), net 390 (333)(845)(1,266)
Benefit (provision) for income taxes5 341 4 (1)
Net (loss) income$(22,511)$(15,697)$(48,492)$1,024 
Other comprehensive (loss) income:
Unrealized loss on marketable securities and cash equivalents(10) (10) 
Comprehensive (loss) income$(22,521)$(15,697)$(48,502)$1,024 
Net (loss) income per share, basic$(0.84)$(0.76)$(2.03)$0.05 
Net (loss) income per share, diluted$(0.84)$(0.76)$(2.03)$0.05 
Weighted-average shares outstanding, basic26,662,374 20,641,285 23,923,512 20,511,973 
Weighted-average shares outstanding, diluted26,662,374 20,641,285 23,923,512 22,032,487 

See accompanying notes to these unaudited condensed financial statements.
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Table of Contents
TARSUS PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
(In thousands, except share data)

 Preferred StockCommon StockAdditional Paid-In CapitalAccumulated Other Comprehensive LossAccumulated
Deficit
Total
Stockholders’
Equity
 SharesAmountSharesAmount
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 
Net loss — — — — — — (22,511)(22,511)
Recognition of stock-based compensation expense— — — — 3,583 — — 3,583 
Lapse of repurchase obligation for stock option exercises, prior to vesting— — 5,826 — 12 — — 12 
Exercise of vested stock options— — 21,734 — 82 — — 82 
Issuance costs related to follow-on public offering— — — — (34)— — (34)
Unrealized loss on marketable securities and cash equivalents— — — — — (10)— (10)
Balance as of September 30, 2022 $ 26,671,812 $5 $297,796 $(10)$(95,164)$202,627 

See accompanying notes to these unaudited condensed financial statements.

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TARSUS PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
(In thousands, except share data)

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 
Net loss— — — — — (15,697)(15,697)
Recognition of stock-based compensation expense— $— — $— $2,119 $— $2,119 
Lapse of repurchase obligation for stock option exercises, prior to vesting— — 87,004 — 174 — 174 
Exercise of vested stock options— — 10,124 — 75 — 75 
Balance as of September 30, 2021 $ 20,671,079 $4 $210,959 $(31,821)$179,142 

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,
 20222021
Cash Flows From Operating Activities:
Net (loss) income $(48,492)$1,024 
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation and amortization227 272 
Accretion of term loan-related costs231  
Stock-based compensation9,789 6,276 
Non-cash lease expense343 178 
Loss on disposal of property and equipment 70 
Loss on lease termination 2 
Unrealized loss on equity investment326  
Amortization of discount on available-for-sale debt securities(63) 
Change in fair value of equity warrants issued by licensee520 1,222 
Unrealized gain from transactions denominated in a foreign currency(1)(4)
Issuance of common stock upon in-license agreement milestone achievement 5,494 
Changes in operating assets and liabilities:
Accounts receivable(17) 
Other receivables(3,902)(119)
Prepaid expenses551 (663)
Other non-current assets(75)(2,762)
Accounts payable and other accrued liabilities1,187 3,523 
Accrued payroll and benefits1,294 1,206 
Other long-term liabilities(74)150 
Net cash (used in) provided by operating activities(38,156)15,869 
Cash Flows From Investing Activities:
Purchases of marketable securities(57,031) 
Purchases of property and equipment(379)(312)
Cash used in investing activities(57,410)(312)
Cash Flows From Financing Activities:
Proceeds from issuance of common stock upon follow-on public offering, net of paid issuance costs74,352  
Proceeds from sale of common stock under employee stock purchase plan
222  
Proceeds from exercise of vested stock options99 95 
Payment of deferred offering costs
(75) 
Proceeds from term loan20,000  
Payment of term loan issuance costs(875) 
Net cash provided by financing activities93,723 95 
Net (decrease) increase in cash and cash equivalents(1,843)15,652 
Cash and cash equivalents — beginning of period171,332 168,149 
Cash and cash equivalents — end of period$169,489 $183,801 
Supplemental Disclosures Noncash Investing and Financing Activities:
"Operating lease right-of-use asset" obtained in exchange for operating lease liability$ $741 
"Interest expense" paid in cash$1,094 $ 
Additions of "property and equipment, net" included within "accounts payable and other accrued liabilities"$44 $ 
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 
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 biopharmaceutical company focused on the development and commercialization of therapeutics, starting with eye care.
(b) Liquidity Risk Overview
The Company has no product sales and has accumulated losses and negative cash flows from operations since inception. The Company has funded its inception-to-date operations through equity capital raises, proceeds from its out-license agreement, and a draw 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 preclinical and clinical studies, corporate administration build-out to support its planned business growth, commercial leadership build-out in anticipation of the potential approval of TP-03 by the FDA in 2023 (see Note 11), and in/out-licensing activities. 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 with inherently uncertain outcomes, recruit and retain skilled personnel (including executive management), and expand and defend its intellectual property rights.
Management expects the Company to continue to incur operating losses for the foreseeable future and may be required to raise additional capital to fund its ongoing operations. However, no assurance can be given as to whether financing will be available on terms acceptable to the Company, or at all. If the Company raises additional funds by issuing equity securities, its stockholders may experience significant dilution. The Company's credit facility imposes certain covenants that limit its ability to incur liens or secure additional debt financing, pay dividends, repurchase common stock, make certain investments, or engage in certain merger or asset sale transactions. Any new debt financing or additional equity raise may contain additional 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 and/or enter into collaborations and other arrangements to address its liquidity needs which could materially and adversely affect its business and financial 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
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.
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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 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 and 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 interim Condensed Balance Sheet as of September 30, 2022, the interim Condensed Statements of Operations and Comprehensive (Loss) Income, and the interim Condensed Statements of Stockholders’ Equity for the three and nine months ended September 30, 2022 and 2021, and the interim Condensed Statements of Cash Flows for the nine months ended September 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 nine-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 nine months ended September 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 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 nine months ended September 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, except as discussed below. 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 September 30, 2022, marketable securities consist of short term fixed income investments that have been classified as available-for-sale and are carried at estimated fair value as determined based upon quoted market prices or pricing models for similar securities (see Note 7). Management determines the appropriate classification of its investments in fixed income securities at the time of purchase. Available-for-sale securities are classified as current assets on the accompanying Condensed Balance Sheets due to their highly liquid nature and availability for use in current operations.
Marketable securities are recorded at fair value with unrealized losses and gains reported as a component of "accumulated other comprehensive loss" within the Condensed Statements of Stockholders' Equity until realized. The Company periodically evaluates whether declines in fair values of its available-for-sale securities below their book value are other-than-temporary. This evaluation consists of several qualitative and quantitative factors regarding the severity and duration of the unrealized loss as well as the Company’s ability and intent to hold the available-for-sale security until a forecasted recovery
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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)
occurs. Additionally, the Company assesses whether it has plans to sell the security or it is more likely than not it will be required to sell any available-for-sale securities before recovery of its amortized cost basis. The cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion, as well as interest and dividends, are included in interest income. Realized losses and gains as well as credit losses, if any, on marketable securities identified on a specific identification basis and are included in "other income (expense), net" on the accompanying Condensed Statement of Operations. The Company evaluated the underlying credit quality and credit ratings of the issuers during the period. To date, the Company has not identified any other than temporary declines in fair value of its investments and no credit losses have occurred or have been recorded. Interest earned on marketable securities is included in "interest income" within the accompanying Condensed Statement of Operations.
As of December 31, 2021, marketable securities consisted of holdings of LianBio common stock. These shares are reported within "long-term investments" on the accompanying Condensed Balance Sheet as of September 30, 2022, reflecting the intent to hold these shares for at least one year from the balance sheet date. These equity securities are designated as "available-for-sale" with associated gains or losses reported in "other income (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, cash equivalents and marketable securities. The Company maintains deposits in federally insured financial institutions in excess of federally insured limits. Management believes the Company is not exposed to significant credit risk due to the financial position of the depository institutions in which those deposits are held.
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 no product revenue. Reported revenue in the accompanying Statements of Operations and Comprehensive (Loss) Income is associated with one out-license agreement (the "China Out-License") that allows the third-party licensee to market the Company's TP-03 product candidate (representing "functional intellectual property") in the People's Republic of China, Hong Kong, Macau, and Taiwan (the "China territory") - 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 China Out-License was analyzed under GAAP to determine whether the promised goods or services are distinct, or in the alternative, 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.
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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 China Out-License includes the following forms of consideration: (i) non-refundable upfront license payments, (ii) equity securities and warrants, (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.

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 China 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 arrangement.

(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 the out-licensing arrangement.

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
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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 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
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 expenses, manufacturing costs for drug products before FDA approval, and the costs of various research and development contractors. Expenses for pre-clinical studies and clinical trial activities that are performed by third parties on behalf of the Company are 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. These costs are in accordance with the agreements established with the contracted clinical research organizations and associated trial 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 the accompanying financial statements. 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 it becomes payable, provided there is no alternative future use in other research and development projects for its capitalization.
(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, (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 since the Company does not yet have sufficient exercise history since its November 2016 corporate formation and also lacks specific historical and implied stock volatility information. Accordingly, management estimates this expected volatility based on a designated peer-group of publicly-traded companies for a look-back period (from 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 at award grant for time period that corresponds 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.
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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)
All stock-based compensation expense is reported in the accompanying Condensed 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.
(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 nine months ended September 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.
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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 did not have any transfers of assets and liabilities between the levels of the fair value hierarchy during the years presented.
(x) Comprehensive (Loss) Income
Comprehensive (loss) income represents (i) net loss or income for the periods presented, and (ii) unrealized gains or losses on our reported available-for-sale debt securities.
(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) Prepaid Expenses
“Prepaid expenses” consists of the following:
September 30, 2022December 31, 2021
Other prepaid expenses$3,430 $2,832 
Prepaid insurance64 1,213 
Prepaid expenses$3,494 $4,045 
(b) Other Receivables
“Other receivables” consists of the following:
September 30, 2022December 31, 2021
PDUFA Fee reimbursement (1)
$3,117 $ 
R&D payroll tax receivable340 90 
Clinical receivables292  
Interest receivable198 2 
Income tax receivable48  
Other receivables$3,995 $92 
(1)    This amount represents the required FDA filing fee upon the Company's submission of its New Drug Application ("NDA") for TP-03 in the third quarter of 2022. This fee is expected to be refunded in full, based on the Company's status as a qualified "Small Business" as defined in the relevant Federal statute.
(c) Property and Equipment, Net
“Property and equipment, net” 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)
September 30, 2022December 31, 2021
Furniture and fixtures$632 $596 
Office equipment197 84 
Laboratory equipment167 167 
Leasehold improvements403 129 
Property and equipment, at cost1,399 976 
(Less): Accumulated depreciation and amortization448 221 
Property and equipment, net $951 $755 
Depreciation expense (included within “total operating expenses” in the accompanying Condensed Statements of Operations and Comprehensive (Loss) Income) for the three months ended September 30, 2022 and 2021 was $0.1 million and $0.1 million, respectively, and for the nine months ended September 30, 2022 and 2021 was $0.2 million and $0.3 million, respectively.
(d) Other Assets
"Other assets" consists of the following:
September 30, 2022December 31, 2021
Deposits$71 $71 
Equity warrants issued by licensee (Note 7)
246 663 
Other non-current assets266 392 
Other assets$583 $1,126 
(e) Accounts Payable and Other Accrued Liabilities 
“Accounts payable and other accrued liabilities” consists of the following:
September 30, 2022December 31, 2021
Trade accounts payable and other$5,592 $2,856 
Operating lease liability, current572 609 
Accrued clinical studies3,821 4,407 
Contract liability 697 
Accrued interest, current182  
Income taxes payable14 55 
Employee stock option pre-vesting exercise liability 56 
Accounts payable and other accrued liabilities$10,181 $8,680 
(f) Other Long-Term Liabilities
“Other long-term liabilities” consists of the following:
September 30, 2022December 31, 2021
Operating lease liability, non-current$169 $585 
Lotilaner licensor liability40 114 
Other long-term liabilities$209 $699 
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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)
4. STOCKHOLDERS’ EQUITY AND EQUITY INCENTIVE PLANS
Common Stock Outstanding and Reserves for Future Issuance
As of September 30, 2022, the Company had 26.7 million common shares issued and outstanding. As of December 31, 2021, the Company had both issued and outstanding shares of 20.7 million. 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:
September 30, 2022December 31, 2021
Common stock awards reserved for future issuance under 2020 and 2016 Equity Incentive Plans8,482,877 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 (unvested and vested) under 2020 and 2016 Equity Incentive Plans3,839,077 2,759,830 
Restricted stock units issued and outstanding (unvested) under 2020 Equity Incentive Plan516,005 17,251 
Total shares of common stock reserved15,520,560 14,536,769 
Follow-On Public Offering
In May 2022, the Company completed a follow-on public offering under its Shelf Registration Statement for an initial underwritten sale of 5.6 million shares of its common stock at a price of $13.50 per share. 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. In June 2022, the underwriters partially exercised this option and the Company's sale of additional 289,832 shares at $13.50 per share was concurrently completed.
Total gross proceeds from this offering were $79.5 million (before underwriting discounts, commissions and other estimated offering expenses), resulting in net proceeds of $74.3 million.
5. STOCK-BASED COMPENSATION
Stock-Based Compensation Summary
Stock-based compensation expense for the three and nine months ended September 30, 2022 and 2021 was reported in the accompanying Condensed Statements of Operations and Comprehensive (Loss) Income as follows:
Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
Research and development$1,015 $544 $2,677 $1,315 
General and administrative2,568 1,575 7,112 4,961 
Total stock-based compensation$3,583 $2,119 $9,789 $6,276 
6. NET (LOSS) INCOME PER SHARE
The following table sets forth the computation of basic and diluted net (loss) income per share:
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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 September 30,Nine Months Ended September 30,
2022202120222021
Basic EPS
Net (loss) income $(22,511)$(15,697)$(48,492)$1,024 
Less: undistributed income allocated to participating securities   7 
Net (loss) income available to common shareholders$(22,511)$(15,697)$(48,492)$1,017 
Basic weighted average shares outstanding26,662,374 20,641,285 23,923,512 20,511,973 
Net (loss) income per share—basic$(0.84)$(0.76)$(2.03)$0.05 
Diluted EPS
Net (loss) income $(22,511)$(15,697)$(48,492)$1,024 
Less: undistributed income reallocated to participating securities   7 
Net (loss) income available to common shareholders$(22,511)$(15,697)$(48,492)$1,017 
Basic weighted average shares outstanding26,662,374 20,641,285 23,923,512 20,511,973 
Effect of dilutive securities:
Common stock options   1,520,514 
Diluted weighted average shares outstanding26,662,374 20,641,285 23,923,512 22,032,487 
Net (loss) income per share—diluted$(0.84)$(0.76)$(2.03)$0.05 
The following outstanding and 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 each period presented:


Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
Stock options, unexercised—vested and unvested3,839,077 2,663,356 3,839,077 902,981 
Stock options exercised prior to vesting— remaining unvested 43,149  43,149 
Restricted stock units—unvested516,005 4,257 516,005 4,257 
Total4,355,082 2,710,762 4,355,082 950,387 

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)):
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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)
 September 30, 2022 Fair Value Measurements
 Level 1Level 2Level 3Total
Assets:
Money market funds$159,552 $ $ $159,552 
U.S. Treasury securities34,482   34,482 
Commercial paper 27,377  27,377 
Corporate debt securities 5,161  5,161 
Common stock (LianBio shares included in "long-term investments")157   157 
Equity warrants (for LianBio shares included in "other assets")  246 246 
Total assets measured at fair value$194,191 $32,538 $246 $226,975 
 December 31, 2021 Fair Value Measurements
 Level 1Level 2Level 3Total
Assets:
Money market funds$171,332 $ $ $171,332 
Common stock (LianBio shares included in "marketable securities")483   483 
Equity warrants (for LianBio shares included in "other assets")  663 663 
Total assets measured at fair value$171,815 $ $663 $172,478 
Money Market Funds and U.S. Treasury Securities
Money market funds and U.S. Treasury securities have readily-available market prices in active markets that are publicly observable at the measurement date.
Commercial Paper and Corporate Debt Securities
Commercial paper and corporate debt securities were valued using third-party pricing services. The pricing services utilize industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value.
LianBio Common Stock and Equity Warrants
In March 2021, contemporaneous with the China Out-License transaction (see Note 9), the Company and LianBio (a pharmaceutical company focused on the Greater China and other Asian markets; NASDAQ: LIAN), executed a warrant agreement for the Company to purchase, in three tranches, a stated number of common shares in LianBio. The first two tranches are vested as of September 30, 2022 and the third warrant tranche will vest upon the achievement of a certain regulatory event; each has an exercise price at common stock par value.
In June 2021, one of these three warrant tranches was vested and then-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 September 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.
In May 2022, the second warrant tranche vested, but has not yet been exercised. The second and third warrant tranche remain classified as Level 3 in the fair value hierarchy as of September 30, 2022 and December 31, 2021 and are presented within "other assets" in the acco