Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our “Selected Financial Data” and our financial statements and the related notes to those statements included elsewhere in this Annual Report on Form 10-K. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including, but not limited to, those discussed under the section titled “Risk Factors” and elsewhere in this Annual Report on 10-K. See the section titled “Special Note Regarding Forward-Looking Statements” elsewhere in this Annual Report on Form 10-K.

Overview

Our Business

We are a biopharmaceutical company focused on the development and commercialization of therapeutics, starting with eye care. Our lead product candidate, TP-03 (lotilaner ophthalmic solution, 0.25%), is a novel investigational eye drop to treat blepharitis caused by the infestation of Demodex mites, which is referred to as Demodex blepharitis. Blepharitis (“Blephar” is a reference to eyelid and “itis” is a reference to inflammation) is an ophthalmic lid margin disease characterized by inflammation of the eyelid margin, redness and ocular irritation, including a specific type of eyelash dandruff called collarettes, which are pathognomonic for Demodex blepharitis. Poorly controlled and progressive blepharitis can lead to corneal damage over time and, in extreme cases, blindness. There may be as high as approximately 25 million people in the U.S. who suffer from Demodex blepharitis.

We designed TP-03 to target and eradicate the root cause of Demodex blepharitis – Demodex mite infestation. The API of TP-03, lotilaner, paralyzes and eradicates mites and other parasites through the inhibition of parasite-specific GABA-Cl channels.

We intend to further advance our pipeline with lotilaner API to address several diseases across therapeutic categories in human medicine, including eye care, dermatology, and other diseases. We are developing product candidates to address targeted diseases with high unmet medical needs, which currently include TP-03 for the potential treatment of MGD, TP-04 for the potential treatment of rosacea, and TP-05 for potential Lyme disease prophylaxis and community malaria reduction.

Recent Business Highlights

TP-03 Demodex Blepharitis:

To date, we have completed seven clinical trials that include a Phase 1 trial, four Phase 2 trials, a Phase 2b/3 Saturn-1 trial, and a Phase 3 Saturn-2 trial for TP-03 in Demodex blepharitis, all of which met their primary, secondary and/or certain exploratory endpoints, with the drug well tolerated. In November 2022, we announced that the NDA submission packagefor TP-03 for the treatment of Demodex blepharitis was accepted by the FDA, with a PDUFA decision date of August 25, 2023. We believe TP-03 has the potential to be the first therapeutic approved by the FDA and become the definitive standard of care for the treatment of Demodex blepharitis.

During 2022, we began the expansion of our commercial organization to support our business growth and the commercial leadership needed for TP-03 commercial launch readiness in the second half of 2023. We expect this commercial expansion to continue with a meaningful ramp during 2023 as part of our TP-03 commercial launch-readiness activities.

TP-03 Meibomian Gland Disease:

In August 2022, we announced the enrollment of our first patient in the Ersa trial studying TP-03 for the treatment of MGD. We expect to report topline data during the second half of 2023.

TP-03 China Territory Out-License:

In March 2021, we executed the China Out-License with LianBio, granting exclusive commercial rights to TP-03 for the treatment of Demodex blepharitis and MGD within the China Territory. In November 2022, LianBio announced the dosing of their first patient in the TP-03 Phase 3 LIBRA pivotal trial in Chinese patients for the treatment of Demodex blepharitis to support regulatory approval in China.

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To date, we received contractual cash proceeds from LianBio totaling $80.0 million, representing initial consideration of $15.0 million and $65.0 million for the achievement of specified milestone events. We also received equity in LianBio as part of our China Out-License, a portion of which remains subject to a China-based regulatory vesting provision.

We are further eligible to receive:

•China-based development milestones totaling $25.0 million (includes $2.5 million for a milestone triggered in February 2023);

•Sales threshold milestones in the China Territory totaling $100.0 million; and

•Tiered low-to-high teen royalties on the net sales of TP-03 within the China Territory.

TP-04 Rosacea, Galatea Trial:

In March 2023, we initiated the Galatea trial, a Phase 2a trial evaluating TP-04, a novel gel formulation of lotilaner, for the treatment of rosacea.

TP-05 Lyme Disease, Callisto and Carpo Trials:

In December 2022, we announced positive topline results from the completed Phase 1 Callisto trial and enrollment of the first patient in the Phase 2a Carpo trial. The Callisto and Carpo trials are designed to evaluate TP-05, a novel investigative oral, non-vaccine pharmacological prophylactic for the potential prevention of Lyme disease. The Callisto Phase 1 trial was a randomized, double-blind, single and multiple-ascending dose trial that evaluated the safety, tolerability, and PK of TP-05 in healthy subjects. Results from the trial showed that TP-05 was well tolerated with no dose-related or drug-related serious adverse events. Pharmacokinetic data from the trial demonstrated rapid absorption and an extended half-life of TP-05 that potentially supports a convenient oral therapy regimen, supporting its potential as a rapid onset, prophylactic therapy for Lyme disease. Additionally, exploratory ex-vivo tick kill modeling utilizing a serum from TP-05 treated subjects demonstrated potent, rapid killing of adult and nymph ticks. The Carpo trial, evaluating TP-05 for the potential prevention of Lyme disease in humans, is a randomized, double-blind trial that will evaluate the efficacy of TP-05 in killing lab grown, non-disease carrying ticks after they have attached to the skin of healthy volunteers, as well as confirm the safety, tolerability, and blood concentration of TP-05. We expect to report topline data from the Phase 2a Carpo trial during the second half of 2023.

We believe TP-05 is currently the only non-vaccine, drug-based, prophylaxis in development that targets the ticks, and potentially prevents Lyme disease transmission. It is designed to rapidly and durably provide systemic blood levels of lotilaner potentially sufficient to kill infected ticks attached to the human body before they can transmit the Borrelia bacteria that causes Lyme disease.

Credit Facility with Hercules Capital and Silicon Valley Bank:

On February 2, 2022 we executed the Credit Facility Hercules Capital and SVB. On January 5, 2023, the Company entered into an amendment to the loan and security agreement, which set a maximum interest rate, and updated the terms of prepayment under the Credit Facility and other certain specific conditions (see Note 10).

As of December 31, 2022, the Credit Facility provides for a remaining aggregate principal amount of up to $135.0 million, with tranched availability as follows: $25.0 million upon NDA submission of TP-03 , $35.0 million upon FDA approval of TP-03, and $75.0 million upon achievement of certain revenue thresholds and other conditions. On March 15, 2023, we made a $5.0 million draw (including SVB's commitment of $1.25 million) from the $25.0 million tranche that became available upon submission of the NDA.

Capital draws, at our election, are in $5.0 million increments. This credit facility includes a four-year interest only period and is extendable to five years upon meeting certain conditions. There is no warrant coverage to the lenders. .

Follow-On Public Offering:

In May 2022, we completed a follow-on public offering under our effective Form S-3 shelf registration statement through an initial underwritten sale of 5,600,000 shares of common stock at a price of $13.50 per share (the “Follow-On Public Offering”). We also granted the underwriters a 30-day option to purchase up to 840,000 additional shares of common stock at the public offering price, less discounts and commissions. In June 2022, the underwriters partially exercised this option by purchasing an additional 289,832 shares of common stock at $13.50 per share.

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After giving effect to the exercise of the underwriters’ option, the total number of shares of our common stock sold in the Follow-On Public Offering was 5,889,832 shares which resulted in total gross proceeds of $79.5 million before underwriting discounts, commissions and other estimated offering expenses for total net proceeds of $74.3 million.

Impact of the COVID-19 Pandemic on our Operations

Efforts to contain the spread of COVID-19 in the U.S. (including in California where our corporate headquarters and laboratory facility are located) and other countries have included quarantines, shelter-in-place orders, and various other government restrictions in order to control the spread of this virus.

We have been carefully monitoring the COVID-19 pandemic as it continues to progress and its potential impact on our business. We have taken important steps to ensure the workplace safety of our employees when working within our laboratory and administrative offices, or when traveling to our clinical trial sites. We have also implemented a vaccination policy and we may take further actions as may be required by federal, state or local authorities.

To date, we have been able to continue our key business activities and advance our clinical programs. However, in the future, it is possible that our clinical development timelines and business plans could be adversely affected. We maintain regular communication with our vendors and clinical sites to appropriately plan for, and mitigate, the impact of the COVID-19 pandemic on our operations. Specifically, for our Phase 3 Saturn-2 trial, we have instituted various protocols for our sites, including increasing health screening of individuals and providing enhanced communication and training to staff regarding COVID-19. However, the ultimate effect from this pandemic on our development timelines for TP-03 and our other product candidates is inherently uncertain.

See the section titled Risk Factors in this report for a further discussion of the potential adverse impact of COVID-19 on our business, results of operations and financial condition.

Corporate and Financial Overview

We were incorporated as a Delaware corporation in November 2016, and our headquarters is located in Irvine, California. Since our inception, we have devoted substantially all of our resources to organizing and staffing our company, acquiring intellectual property, clinical development of our product candidates, building our research and development capabilities, raising capital, and enhancing our corporate infrastructure.

To date we have financed our operations through private placements of preferred stock, convertible promissory notes, the net proceeds from issuance of common stock in our IPO and Follow-On Public Offering, cash proceeds from our China Out-License, and draw-downs from our Credit Facility.

We have incurred significant net operating losses in every year since our inception and expect to continue to incur significant operating expenses and, other than the effect of license fee revenue and collaboration revenue from the China Out-License, increasing operating losses for the foreseeable future. Our net loss was $62.1 million and $13.8 million for the years ended December 31, 2022 and 2021, respectively. Our net losses may fluctuate significantly from quarter to quarter and year to year and could be substantial. We anticipate that our operating expenses will increase significantly as we:

•seek regulatory approvals for TP-03 and other product candidates that successfully complete clinical development, if any;

•advance the clinical development of TP-03 for the treatment of MGD, TP-04 for the potential treatment of rosacea and TP-05 for potential Lyme prophylaxis;

•establish our own sales force in the U.S. to commercialize TP-03 upon regulatory approval and our other products for which we obtain such approvals;

•engage with contract manufacturers to ensure a sufficient supply chain capacity to provide commercial quantities of any products for which we may obtain marketing approval;

•maintain, expand and protect our intellectual property portfolio;

•hire additional staff, including clinical, scientific, technical, regulatory, marketing, operations, financial, and other support personnel, to execute our business plan; and

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•add information systems and personnel to support our product development and potential future commercialization efforts, and to enable us to operate as a public company.

We do not yet have revenue from product sales. Our reported revenue within license fees and collaboration revenue is from our China Out-License; we expect to report additional revenue under these captions in future periods.

We do not expect to generate revenues from product sales unless and until we successfully complete clinical development and obtain regulatory approval for a product candidate and commercially launch such product. Until such time as we can generate significant revenue from product sales and achieve profitability, if ever, we expect to finance our operations through private or public equity or debt financings, or collaborations, strategic alliances, or licensing arrangements with third parties. Adequate funding may not be available to us when needed on acceptable terms, or at all. If we raise additional funds through collaborations, strategic alliances, or licensing arrangements with third parties, we may have to relinquish valuable rights to our intellectual property, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional capital or enter into such agreements as and when needed, we could be forced to significantly delay, scale back, or discontinue our product development and/or commercialization plans, which would negatively and adversely affect our financial condition.

Because of the numerous risks and uncertainties associated with drug product development, we are unable to accurately predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate revenue from product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels.

As of December 31, 2022, our aggregate cash, cash equivalents and marketable securities was $217.0 million – see "Liquidity and Capital Resources."

Components of our Results of Operations

License Fees and Collaboration Revenue

We recognize license fees and collaboration revenue as identified performance obligations are satisfied or other events occur, specifically related to (i) TP-03 pivotal trial completion and the delivery of associated clinical data and reports to our licensee, (ii) achievement of certain clinical and regulatory events in the China Territory, (iii) milestone achievement of a drug supply agreement execution, and (iv) royalties and milestones from our licensee's product sales of TP-03 in the China Territory.

Cost of License Fees and Collaboration Revenue

Cost of license fees and collaboration revenue includes (i) the proportion of expense recognized under the terms of the China Out-License payable under the terms of our in-license agreement for lotilaner, and (ii) valuation adjustments to the equity warrants and LianBio common stock for the portion contractually due under our January 2019 in-license agreement.

Research and Development Expenses

Research and development expenses consist of expenses incurred in connection with the development of our product candidates, including:

•fees paid to third parties to conduct certain research and development activities on our behalf, including under agreements with CROs;

•payments under licensing agreements, such as our upfront in-license fee for lotilaner;

•consulting costs and certain allocated payroll and employee-related expenses (including stock-based compensation and salaries) for personnel engaged in research and development functions;

•costs related to compliance with clinical regulatory requirements;

•costs of procuring drug products for use in our preclinical studies and clinical trials; and

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•facilities expenses, which include direct and allocated expenses for rent of our laboratory.

We expense both internal and external research and development expenses as incurred or as certain upfront or milestone payments become contractually due to licensors upon achievement of clinical or regulatory events. We recognize external research and development costs based on an evaluation of the progress-to-completion of (i) specific tasks performed or deliverables provided by CROs and CMOs and (ii) patient visits for dosing or other follow-up. To estimate period expense for recognition, we use information provided to us by our service providers and we then apply the corresponding fee schedule.

We track our external research and development expenses on a program-by-program basis, such as fees paid to CROs, CMOs, and research laboratories in connection with our pre-clinical development, process development, manufacturing and clinical development activities. However, we do not currently track employee time on a program-by-program basis. For the years ended December 31, 2022 and 2021, the vast majority of our external and internal research and development expenses are attributable to our TP-03 program for Demodex blepharitis.

We expect our research and development expenses to increase substantially in the future, as we seek to initiate and progress additional clinical trials for our product candidates, including TP-03 for the potential treatment of MGD, TP-04 for the potential treatment of rosacea, and TP-05 for potential Lyme prophylaxis. We expect to complete our clinical programs for these product candidates, and as appropriate, pursue regulatory approval and prepare for the possible commercialization for each.

General and Administrative Expenses

General and administrative expenses consist of personnel-related costs including payroll, benefits, and stock-based compensation for our executive, finance, sales and marketing, and other administrative functions. Other general and administrative expenses include sales and marketing costs to support our anticipated commercial launch, consulting fees, legal services, rent and other facilities costs, and other general operating expenses not otherwise classified as research and development expenses.

We expect that our general and administrative expenses will increase substantially in the future as a result of expanding our operations, including hiring personnel, preparing for potential commercialization of our product candidates, and additional facility occupancy costs, as well various incremental costs associated with being a public company (including increased legal and accounting fees, regulatory costs associated with maintaining compliance with the rules of the Nasdaq Stock Market and SEC regulations, investor relations activities, directors and officers liability insurance premiums, and other accompanying compliance and governance costs).

Other Income (Expense), Net

Other income (expense), net primarily consists of (i) interest income earned on our cash, cash equivalents, and marketable securities, (ii) interest expense on the Credit Facility executed in February 2022, and (iii) the change in estimated fair value of the LianBio equity warrants and LianBio common stock we received as part of our China Out-License in March 2021.

Income Tax Benefit (Provision)

Since our inception, we have not recorded any U.S. federal or state income tax benefits for the net operating losses we have incurred in each year, or for our earned research and development tax credits, due to our uncertainty of realizing a benefit from either. As a result of the Tax Cuts and Jobs Act of 2017, net operating losses (for U.S. income tax purposes) generated prior to December 31, 2017 can be carried forward for up to 20 years, while net operating losses generated after December 31, 2017 can be carried forward indefinitely, but are limited to 80% utilization against taxable income. Our California net operating losses will begin to expire in 2037. The federal research and development tax credits begin to expire in 2040 unless previously utilized, and the California credit carryforwards are available indefinitely.

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Results of Operations

Comparison of the Years Ended December 31, 2022 and 2021

The following table summarizes our results of operations for the periods indicated:

Year EndedDecember 31,

(in thousands)

Revenues:

Operating expenses:

Cost of license fees and collaboration revenue 955 2,075 (1,120)

Other income (expense):

Other income (expense), net 86 (73) 159

Unrealized loss on equity investments (268) (591) 323

Change in fair value of equity warrants issued by licensee (501) (987) 486

Benefit (provision) for income taxes 4 (55) 59

License Fees and Collaboration Revenue

License fees and collaboration revenue was $25.8 million for the year ended December 31, 2022. This amount represents the contractual milestones achieved or allocated under the China Out-License that have been fully or partially completed by December 31, 2022. These allocated amounts represented the satisfaction of the transfer of license rights to LianBio and the completion of clinical-related performance obligations.

We will recognize additional license fees and collaboration revenue to the extent other events occur, specifically related to (i) milestone achievement of a drug supply agreement execution, (ii) milestone achievement of regulatory events in the China Territory, and (iii) royalties and milestones from our licensee's product sales of TP-03 in the China Territory.

Cost of License Fees and Collaboration Revenue

Cost of license fees and collaboration revenue was $1.0 million for the year ended December 31, 2022. This amount relates to our contractual payment obligations to Elanco, in proportion to our recognized license fee and collaboration revenue in the same period.

Research and Development Expenses

Research and development expenses increased by $0.9 million for the year ended December 31, 2022 compared to the year ended December 31, 2021. The increase was primarily due to (i) $7.3 million of increased payroll and personnel-related costs (including stock-based compensation), for 22 employee additions year-over-year to drive our product development initiatives, (ii) $1.0 million of increased regulatory and consulting costs related to our NDA filing for TP-03, (iii) $0.5 million of licensing milestone expense upon enrollment of the first patient in the first Phase 2a Carpo trial for the treatment of Lyme disease in December 2022, and (iv) $0.3 million of increased product manufacturing and formulation costs. These increases were partially offset by $0.8 million of decreased clinical expenses primarily related to the completion of our Saturn-2 trial during the first half of 2022, and other non-recurring contractual costs in the prior year period including (i) a payment in March

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2021 through the issuance of 187,500 shares of our common stock (then valued at $5.5 million to extend the period of our All Human Uses Elanco Agreement), and (ii) a payment of $2.0 million under the Eye and Derm Elanco Agreement for the commencement of our Saturn-2 trial.

General and Administrative Expenses

General and administrative expenses increased by $19.6 million for the year ended December 31, 2022 compared to the year ended December 31, 2021. The increase was primarily due to (i) $10.4 million of increased payroll and personnel-related costs (including stock-based compensation) for 19 employee additions year-over-year to support our business growth and commercialization efforts, (ii) $9.7 million of increased commercial and market research costs as we continue our commercial expansion and prepare for the potential launch of TP-03 in the second half of 2023, and (iii) $0.4 million of increased IT application expenses to support the continued growth and expansion of our corporate infrastructure. These increases were partially offset by $1.0 million of decreased professional and legal fees. We expect sales and marketing headcount and associated vendor spend to meaningfully increase during 2023 as part of our TP-03 commercial launch-related activities.

Other Income (Expense), Net

Other income (expense), net increased $2.2 million for the year ended December 31, 2022. The increase primarily consists of (i) $3.5 million of increased interest income earned on our cash, cash equivalents and marketable securities, (ii) $0.5 million change in estimated fair value of the LianBio equity warrants we received as part of our China Out-License in March 2021, and (iii) $0.3 million change in fair value of the LianBio common stock (after our exercise of the first and second warrant tranches). These increases were partially offset by $2.2 million of interest expense on the Credit Facility executed in February 2022.

Liquidity and Capital Resources

Sources of Liquidity

Overview

As of December 31, 2022, we had cash, cash equivalents and marketable securities of $217.0 million. Since our inception, our operations have been substantially financed by cash proceeds of private placements of preferred stock, IPO proceeds from the issuance of common stock, China Out-License consideration, Credit Facility draw, and the Follow-On Public Offering of common stock.

IPO and Follow-On Public Offering

In connection with our October 2020 IPO, we sold 6,325,000 shares of our common stock (inclusive of the full exercise of the underwriters' option to purchase 825,000 shares of common stock). After deducting underwriting discounts, commissions and other related expenses, our IPO proceeds were $91.7 million. In May 2022, we completed the Follow-On Public Offering. We also granted the underwriters a 30-day option to purchase up to 840,000 additional shares of common stock at the public offering price, less underwriting discounts and commissions. In June 2022, the underwriters partially exercised their option to purchase an additional 289,832 shares of common stock at the offering price of $13.50 per share, before underwriting discounts and commissions. After giving effect to the exercise of the underwriters’ option, we sold 5,889,832 shares for total gross proceeds of $79.5 million, before underwriting discounts, commissions and other estimated offering expenses for total net proceeds received of $74.3 million.

China Out-License

As of December 31, 2022, we have received $80.0 million of total proceeds in connection with our China Out-License, inclusive of 2022 milestone receipts of $25.0 million for the achievement of two development milestones. We expect to receive an additional $5.0 million during 2023 for the achievement of a development milestone, for cumulative milestone receipts of $85.0 million through December 2023. The remaining $120.0 million of available milestones under this arrangement will potentially be received upon future regulatory and sales achievements all within the China Territory.

Credit Facility

In February 2022, we drew $20.0 million from our Credit Facility with Hercules and SVB. Capital draws, at our election, are in $5.0 million increments. This Credit Facility was amended in January 2023. The Credit Facility, as amended,

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includes an extended period to draw down the tranche associated with the NDA submission, from March 15, 2023 to March 15, 2024 provided at least $5 million is drawn on or before March 15, 2023 and at least an additional $5 million is drawn on or before September 15, 2023. On March 15, 2023 we made a $5.0 million draw (including SVB's commitment of $1.25 million) from the $25.0 million tranche associated with the NDA submission of TP-03. This Credit Facility includes a four-year period of interest-only payments and is extendable for a fifth year to February 2027 maturity, upon our expected achievement of required conditions. We currently have no other financing commitments, such as lines of credit or guarantees.

As of the date of this filing, we have $130.0 million of remaining tranched availability as follows:

•$20.0 million upon the NDA submission of TP-03 in September 2022;

•$35.0 million upon FDA approval of TP-03;

•$50.0 million upon achievement of certain quarterly revenue thresholds; and

•$25.0 million available with lender approval.

Funding Requirements

Cash Runway

Our operating expenditures currently consist of research and development costs (including activities within our preclinical, clinical, regulatory, and drug manufacturing initiatives) and general and administrative costs. Our use of cash is impacted by the timing and extent of payments for each of these activities and other business requirements.

We believe that our cash and investments of $217.0 million as of December 31, 2022 is sufficient to fund our current and planned operations for at least the next twelve months from the date of filing this Annual Report on Form 10-K. These funds, in combination with our expected milestone proceeds through 2025 from our China Out-License of $20.0 million ($5 million of which is expected to be received during 2023), and total draws from our Credit Facility of $60.0 million or less, are anticipated to fully fund our planned requirements for commercial launch, pipeline development, operating expenses, and capital expenditures at least into the second half of 2026. We anticipate having at least $60.0 million of availability for new draws under our Credit Facility by December 2023 and $75.0 million of additional tranched availability through December 2024. The Credit Facility requires interest-only debt service payments that are expected to remain through its maturity in February 2027 and its remaining tranches are subject to undrawn expiry in either March 2024 or December 2024 (see Note 10).

Our cash runway estimate is predicated on current assumptions for future revenue, operating expenses, and debt availability and may require future adjustments. Accordingly, we may be required to raise additional capital earlier than we currently expect based on our cash requirements and market dynamics.

Shelf Registration Statement

On November 1, 2021, we filed a shelf registration statement on Form S-3 that was declared effective by the SEC on November 5, 2021 (the “Shelf Registration Statement”), which permitted us to offer up to $300.0 million of common stock, preferred stock, debt securities and warrants in one or more offerings and in any combination, including in units from time to time. We have approximately $220 million remaining under our Shelf Registration Statement, after giving effect to the Follow-On Public Offering (but inclusive of the sales agreement prospectus described below). Our Shelf Registration Statement is intended to provide us with additional flexibility to access capital markets for general corporate expenses and acquisitions of complementary products, technologies, or businesses. We completed the Follow-On Public Offering under this Shelf Registration Statement.

Also, as part of this Shelf Registration Statement, we concurrently filed a sales agreement prospectus covering the sale of up to $100.0 million of our common stock pursuant to an Open Market Sale AgreementSM (the “ATM Agreement”) with Jefferies LLC.Through the date of this filing, we have not sold any shares of our common stock under the ATM Agreement.

Other Liquidity Risks

To date, we have not generated revenue from any product sales, though we have recognized revenue and cash receipts from our China Out-License. We do not expect to report any product revenue unless and until we (1) complete development of any of our product candidates; (2) obtain applicable regulatory approvals; and then (3) successfully commercialize our product candidates or enter into other collaborative agreements for our product candidates with third parties. We do not know with certainty when, or if, any of these items will ultimately occur.

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We expect to incur significant operating losses for the foreseeable future, and for these losses to further increase, as we expand our clinical development programs and as we prepare for the potential commercial launch of TP-03. We may also encounter unforeseen expenses, difficulties, complications, delays and other currently unknown factors that could adversely affect our business.

We may require additional capital to fully develop our product candidates and to execute our business strategy. Our requirements of a future capital raise will depend on many factors, including:

•the scope, timing, rate of progress and costs of our drug discovery efforts, preclinical development activities, laboratory testing and clinical trials for our product candidates;

•the number and scope of clinical programs we decide to pursue;

•the cost, timing and outcome of preparing for and undergoing regulatory review of our product candidates;

•the scope and costs of development and commercial manufacturing activities;

•the cost and timing associated with commercializing our product candidates, if they receive marketing approval;

•the amount of revenue, if any, received from commercial sales of our product candidates, should any of our product candidates receive marketing approval;

•the achievement of milestones or occurrence of other developments that trigger payments under any collaboration agreements we might have at such time and availability of our Credit Facility;

•the extent to which we acquire or in-license other product candidates and technologies;

•the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims;

•our ability to establish and maintain collaborations on favorable terms, if at all;

•our efforts to enhance operational systems and our ability to attract, hire and retain qualified personnel, including personnel to support the development of our product candidates and, ultimately, the sale of our products, following FDA approval;

•our implementation of various computerized information systems;

•impact of health epidemics, including COVID-19, on our clinical development or operations; and

•the costs associated with being a public company.

A change in the outcome of any of these or other variables with respect to the development of any of our product candidates could significantly change the costs and timing associated with the development of that product candidate. Furthermore, our operating plans may change in the future, and we will continue to require additional capital to meet operational needs and capital requirements associated with such operating plans. If we raise additional funds by issuing equity securities, our stockholders may experience dilution. Any future debt financing into which we enter may impose upon us additional covenants that restrict our operations, including limitations on our ability to incur liens or additional debt, pay dividends, repurchase our common stock, make certain investments or engage in certain merger, consolidation or asset sale transactions. Any debt financing or additional equity that we raise may contain terms that are not favorable to us or our stockholders.

Adequate funding may not be available to us on acceptable terms or at all. Our potential inability to raise capital when needed could have a negative impact on our financial condition and our ability to pursue our business strategies. If we are unable to raise additional funds as required, we may need to delay, reduce, or terminate some or all development programs and clinical trials. We may also be required to sell or license our rights to product candidates in certain territories or indications that we would otherwise prefer to develop and commercialize ourselves. If we are required to enter into collaborations and other arrangements to address our liquidity needs, we may have to give up certain rights that limit our ability to develop and commercialize our product candidates or may have other terms that are not favorable to us or our stockholders, which could

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materially and adversely affect our business and financial prospects. See the section of this Annual Report on Form 10-K titled “Risk Factors” for additional risks associated with our substantial capital requirements.

Contractual Obligations and Commitments

We have entered into arrangements that contractually obligate us to make payments that will affect our liquidity and cash flows in future periods. Such arrangements include those related to the contractual obligations described below:

Lease Commitments

Our operating lease commitments reflect payments due for our active lease agreements in Irvine, California, for adjacent office and laboratory suites which expire on January 31, 2024, with a renewal option for a term of three years. As of December 31, 2022, our contractual commitments for our leases were $0.9 million, which will be paid over the lease term.

Purchase Obligations

We enter contracts in the normal course of business with CROs for our clinical trials and CMOs for contract manufacturing activities. As of December 31, 2022, our contractual commitments for such obligations were $10.8 million. We also enter contracts with contract manufacturers for pre-clinical and clinical drug supply, regulatory consultants and various other vendors in operating our business. These contracts generally provide for termination provisions with notice.

Milestone Obligations

Milestone obligations are contingent upon our achievement of specified development, regulatory and sales milestones. Given the unpredictability of the drug development process, and the infeasibility of predicting the success of current and future clinical trials and the timing of achievement (if at all) of sales milestones, these values assume that all development, regulatory, and sales milestones under our Eye and Derm Elanco Agreement and All Human Uses Elanco Agreement are successfully met. Assuming the milestones are met, the total future expected payment value aggregates $158.0 million.

Summary Statement of Cash Flows

The following table sets forth the primary sources and uses of cash and cash equivalents for each of the periods presented below:

Year EndedDecember 31,

(in thousands)

Net cash (used in) provided by:

Net (decrease) increase in cash and cash equivalents $ (99,672) $ 3,183

Net Cash (Used in) Provided by Operating Activities

Net cash used in operating activities was $49.0 million for the year ended December 31, 2022, which primarily consisted of our net loss of $62.1 million partially offset by stock-based compensation of $13.5 million. In the current year, our cash payments to vendors for our operating activities totaled $53.4 million and payroll-related cash payments (inclusive of 2021 bonus payouts) totaled $19.1 million. In addition, we made payments to Elanco of $1.5 million for future TP-04 and TP-05 licensing milestones (see Note 8(b)). These cash payments were partially offset by $25.0 million of cash received (of the $25.8 million recognized in revenue during 2022) in connection with the China Out-License transaction.

Net cash provided by operating activities was $3.7 million for the year ended December 31, 2021, which was primarily attributable to $55.0 million of cash (of the $57.0 million recognized in revenue during 2021) in connection with the China Out-License transaction. This cash provided by operating activities was partially offset by cash payments to vendors totaling $42.5 million for our operating activities and payroll-related cash payments (inclusive of 2020 bonus payouts) totaling $9.4 million. In addition, we made contractual payments of $4.5 million to Elanco (see Note 8(b)).

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Net Cash Used in Investing Activities

Net cash used in investing activities was $144.6 million for the year ended December 31, 2022, and primarily relates to $149.4 millionof purchased marketable securities and $0.5 million of purchased office equipment and leasehold improvements for our laboratory and administrative offices. This cash used in investing activities was partially offset by $5.3 million of proceeds received from sales of our marketable securities.

Net cash used in investing activities was $0.6 million for the year ended December 31, 2021, which consisted of leasehold improvements for our laboratory and administrative offices and various purchases of computer hardware/software and office equipment.

Net Cash Provided by Financing Activities

Net cash provided by financing activities was $94.0 million for the year ended December 31, 2022 which consisted primarily of (i) $74.4 million of net proceeds from the issuance of common stock in our Follow-On Public Offering, (ii) $20.0 million of proceeds from our Credit Facility, partially offset by $0.9 million of issuance costs, (iii) $0.5 million of proceeds from our employee stock purchase plan, and (iv) $0.1 million of proceeds from the exercise of vested employee stock options.

Net cash provided by financing activities was $21 thousand for the year ended December 31, 2021 which consisted of (i) $0.2 million of proceeds from our employee stock purchase plan, and (ii) $0.1 million of proceeds from the exercise of vested employee stock options. These increases in cash were partially offset by payments of $0.3 million related to the deferred offering costs associated with our Shelf Registration Statement filed on November 1, 2021.

Critical Accounting Policies, Significant Judgments and Use of Estimates

Our management’s discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions.

While our significant accounting policies are described in the notes to our financial statements also included in this Annual Report on Form 10-K, we believe these critical accounting policies are the most important to understanding and evaluating our reported financial results.

Revenue Recognition for Out-License Arrangements

Overview

We currently only have the China Out-License arrangement that allows a licensee to market our TP-03 product (representing functional intellectual property) in certain territories for a certain field of use and for a stated term. The accounting and reporting of revenue for out-license arrangements requires significant judgment for: (a) identification of performance obligations within the contract, (b) the contract’s transaction price for allocation to the identified performance obligations (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 arrangement was analyzed under GAAP to determine whether the promised goods or services are distinct or must be accounted for as part of a combined performance obligation. In making these assessments, we consider 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 not distinct, the license is combined with other promised goods or services as a combined performance obligation for revenue recognition.

The China Out-License arrangement included the following forms of consideration: (i) non-refundable upfront cash payment, (ii) equity-based consideration, (iii) sales-based royalties, (iv) sales-based threshold milestones, (v) drug supply agreement milestone, (vi) development milestone payments, and (vii) regulatory milestone payments. Revenue is recognized in proportion to the allocated transaction price when (or as) the respective performance obligation is satisfied. We evaluate the

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progress related to each milestone at each reporting period and, if necessary, adjusts the probability of achievement and related revenue recognition. The measure of progress, and thereby periods over which revenue is recognized, is subject to estimation by management and may change over the course of the agreement.

Contractual Terms for Receipt of Payments

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.

The contractual terms that establish our right to collect specified amounts from our 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: We determine 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 customer is able to use and benefit from the license) or over the actual (or implied) contractual period of the out-license. We also evaluate 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 we perform obligations under these arrangements.

(2) Development Milestones: We utilize 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), we assess 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, we determined the milestone and other contingent amounts to be constrained until the uncertainty associated with these payments is resolved. At each reporting period, we re-evaluate 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: We utilize 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. We evaluate 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 constrained for revenue recognition until achievement.

(4) Royalties: Under the sales-or-usage-based royalty exception we recognize revenue based on the contractual percentage of the licensee’s sales 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, we have not recognized any royalty revenue from our out-licensing arrangements.

(5) Sales Threshold Milestones: Similar to royalties, applying the sales-or-usage-based royalty exception, we recognize 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 we are 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, we have not recognized any sales threshold milestone revenue from out-licensing arrangements.

We will re-evaluate an out-license transaction price as determined by us in each reporting period as uncertain events are resolved and other changes in circumstances occur.

Research and Development Expenses

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financial terms of these contracts are subject to negotiations which vary from contract to contract and may result in payment flows that do not match the periods over which materials or services are provided under such contracts. Payments made prior to the receipt of goods or services to be used in research and development are capitalized until the goods or services are received. Such payments are evaluated for current or long-term classification based on when they will be realized. Our objective is to reflect the appropriate expense in our financial statements by matching those expenses with the period in which the services and efforts are expended. We account for these expenses according to the progress of the trial as measured by patient progression and the timing of various aspects of the trial taking into consideration discussions with applicable personnel and outside service providers. In this manner, our clinical trial accrual is dependent in part upon the timely and accurate reporting of progress and efforts incurred from CROs, contract manufacturers and other third-party vendors. Although we expect our estimates to be materially consistent with actual amounts incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed can vary and may result in our reporting changes in estimates in any particular period. We make significant judgments and estimates in determining the accrued liabilities balance at each reporting period. As actual costs become known, we adjust our accrued liabilities. To date, there have been no material differences between our estimates of such expenses and the amounts actually incurred.

Stock-Based Compensation

We recognize stock-based compensation expense for equity awards granted to employees, consultants, and members of our 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, we recognize related expense on an accelerated attribution method, if and when it concludes that it is highly probable that the performance condition will be achieved. At each reporting period, we reassess the probability of the achievement of the performance vesting conditions. As applicable, we reverse previously recognized expense in the same period of the forfeiture of unvested awards.

The measurement of the fair value of stock-based 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 our common stock on the date of option grant for all awards granted prior to the IPO (b) the expected term of the stock option until its exercise by the recipient, (c) our assumed stock price volatility through a designated peer group of publicly-traded companies for a period equal to the expected option term, (d) the prevailing risk-free interest rate over the expected term, and (d) any expected dividend payments over the expected term. If any of these assumptions change, our stock-based compensation expense for future grants could materially differ.

Expected Term – The expected term is calculated using the simplified method which is used when there is insufficient historical data about exercise patterns and post-vesting employment termination behavior. The simplified method is based on the vesting period and the contractual term for each grant, or for each vesting-tranche for awards with graded vesting. The mid-point between the vesting date and the maximum contractual expiration date is used as the expected term under this method. For awards with multiple vesting-tranches, the times from grant until the mid-points for each of the tranches may be averaged to provide an overall expected term.

Expected Volatility –We estimate the volatility of our common stock on the date of grant based on our designated peer group of publicly-traded companies for a look-back period, as of the date of grant, that corresponds with the expected term of the awarded stock option.

Expected Dividend Rate – We have an expected dividend yield of zero because we have never paid cash dividends and do not expect to for the foreseeable future.

Risk-Free Interest Rate – We estimate the risk-free interest rate based upon the U.S. Department of the Treasury yields in effect at award grant for a period equaling the expected term of the stock option.

Common Stock Valuations

Prior to the IPO, given the absence of a public trading market, our Board of Directors, with input from management, considered numerous objective and subjective factors to determine the fair value of its common stock. The factors

included: (i) third-party valuations of our common stock; (ii) our stage of development; (iii) the status of research and development efforts; (iv) the rights, preferences and privileges of our preferred stock relative to common stock; (v) our

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operating results and financial condition, including our levels of available capital resources; (vi) equity market conditions affecting comparable public companies; (vii) general U.S. market conditions; and (viii) the lack of current marketability of our common stock. The assumptions underlying these valuations represented management’s best estimate, which involved inherent uncertainties and the application of management’s judgment. As a result, if we had used different assumptions or estimates, the fair value of our common stock and our stock-based compensation expense could have been materially different.

Subsequent to the IPO, the fair value of our common stock is based on the closing quoted market price of our common stock as reported by the Nasdaq Global Select Market on the date of grant.

Recent Accounting Pronouncements

A description of recent accounting pronouncements that may potentially impact our financial position, results of operations or cash flows is disclosed in the notes to which they relate within our financial statements.

Indemnification Agreements

As permitted under Delaware law and in accordance with our bylaws, we indemnify our officers and directors for certain events or occurrences while the officer or director is or was serving in such capacity. We are also party to indemnification agreements with our officers and directors. We believe the fair value of the indemnification rights and agreements is minimal. Accordingly, we have not recorded any liabilities for these indemnification rights and agreements as of December 31, 2022.

JOBS Act Accounting Election

The JOBS Act permits an emerging growth company such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have irrevocably elected to opt out of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted.

We will remain an emerging growth company until the earliest of (1) the last day of our first fiscal year (a) following the fifth anniversary of the completion of our IPO, (b) in which we have total annual gross revenues of at least $1.235 billion or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700 million of the prior June 30th and (2) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period.

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Item 8. Financial Statements and Supplementary Data

TARSUS PHARMACEUTICALS, INC.

INDEX TO THE FINANCIAL STATEMENTS

Pages

Report of Independent Registered Public Accounting Firm (PCAOB ID: 42) 117

Balance Sheets 118

Statements of Operations and Comprehensive Loss 119

Statements of Stockholders’ Equity 120

Statements of Cash Flows 121

Notes to Financial Statements 122

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Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors of Tarsus Pharmaceuticals, Inc.

Opinion on the Financial Statements

We have audited the accompanying balance sheets of Tarsus Pharmaceuticals, Inc. (the Company) as of December 31, 2022 and 2021, the related statements of operations and comprehensive loss, stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 2020.

Irvine, California

March 17, 2023

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TARSUS PHARMACEUTICALS, INC.

BALANCE SHEETS

(In thousands, except share and par value amounts)

December 31,

ASSETS

Current assets:

Property and equipment, net 957 755

Operating lease right-of-use assets 575 1,074

Long-term investments 371 —

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Accounts payable and other accrued liabilities $ 9,910 $ 8,680

Other long-term liabilities 100 699

Commitments and contingencies (Note 8)

Stockholders’ equity:

Accumulated other comprehensive loss (74) —

Total liabilities and stockholders’ equity $ 227,863 $ 178,907

See accompanying notes to financial statements.

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TARSUS PHARMACEUTICALS, INC.

STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except share and per share amounts)

Year Ended December 31,

Revenues:

Operating expenses:

Cost of license fees and collaboration revenue 955 2,075

Other income (expense):

Interest expense (2,199) —

Other income (expense), net 86 (73)

Unrealized loss on equity investments (268) (591)

Change in fair value of equity warrants issued by licensee (501) (987)

Total other income (expense), net 617 (1,615)

Loss from operations before income taxes (62,095) (13,772)

Benefit (provision) for income taxes 4 (55)

Other comprehensive loss:

Unrealized loss on marketable securities and cash equivalents (74) —

Net loss per share, basic and diluted $ (2.52) $ (0.67)

See accompanying notes to financial statements.

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TARSUS PHARMACEUTICALS, INC.

STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except share data)

Shares Amount Shares Amount

Recognition of stock-based compensation expense — — — — 8,455 — — 8,455

Exercise of vested stock options — — 24,959 — 103 — — 103

Recognition of stock-based compensation expense — — — — 13,460 — — 13,460

Exercise of vested stock options — — 40,979 — 123 — — 123

Other comprehensive loss — — — — — (74) — (74)

See accompanying notes to financial statements.

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TARSUS PHARMACEUTICALS, INC.

STATEMENTS OF CASH FLOWS

(In thousands)

Year endedDecember 31,

Cash Flows From Operating Activities:

Depreciation and amortization 325 312

Accretion of term loan-related costs 309 —

Loss on lease termination — 2

Loss on disposal of property and equipment — 70

Amortization of discount on available-for-sale debt securities (1,316) —

Unrealized loss on equity investment 268 591

Change in fair value of equity warrants issued by licensee 501 987

Unrealized gain from transactions denominated in a foreign currency 1 (2)

Issuance of common stock upon in-license agreement milestone achievement — 5,494

Changes in operating assets and liabilities:

Other non-current assets (215) (2,265)

Accounts payable and other accrued liabilities 821 3,880

Other long-term liabilities (67) 115

Net cash (used in) provided by operating activities (49,030) 3,748

Cash Flows From Investing Activities:

Proceeds from sales of marketable securities 5,315 —

Purchases of marketable securities (149,438) —

Purchases of property and equipment (506) (586)

Net cash used in investing activities (144,629) (586)

Cash Flows From Financing Activities:

Proceeds from term loan 20,000 —

Proceeds from sale of common stock under employee stock purchase plan 462 221

Proceeds from exercise of vested stock options 123 103

Payment of deferred offering costs (75) (303)

Payment of term loan issuance costs (875) —

Net cash provided by financing activities 93,987 21

Net (decrease) increase in cash and cash equivalents (99,672) 3,183

Cash and cash equivalents — beginning of year 171,332 168,149

Cash and cash equivalents — end of year $ 71,660 $ 171,332

Supplemental Disclosures Noncash Investing and Financing Activities:

Interest expense paid in cash $ 1,675 $ —

Expense of right-of-use asset upon lease termination $ — $ (38)

See accompanying notes to 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)

1. DESCRIPTION OF BUSINESS AND PRESENTATION OF FINANCIAL STATEMENTS

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. The Company’s operations currently consist of its preclinical and clinical studies, corporate administration and commercial leadership supporting planned business growth.

Liquidity

The Company has a limited operating history, 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; including the Company's initial public offering in 2020 and the follow-on public offering completed in May 2022 (see Note 4), proceeds from an out-license agreement, and a draw on its credit facility.The Company estimates that its existing capital resources will be sufficient to meet projected operating expense requirements for at least 12 months from the issuance date of the Financial Statements that have been prepared on a going-concern basis.

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 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.

Operating Segment

To date, the Company has operated, managed and organized its business and financial information on an aggregate basis for the purpose of evaluating financial performance and the allocation of capital and personnel resources. The Company’s chief operating decision-maker (CODM), its Chief Executive Officer, reviews its operating results for the purpose of allocating resources and evaluating financial performance. Accordingly, the Company’s management determined that it operates one reportable operating segment.

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.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND USE OF ESTIMATES

(i) Basis of Presentation

The accompanying Financial Statements have been prepared in conformity with generally accepted accounting principles (“GAAP”) in the United States ("U.S.") and with the rules and regulations of the Securities and Exchange Commission (“SEC”). 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 accompanying Financial Statements and Notes. These estimates and assumptions are based upon historical experience, knowledge of current events and various other factors believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of expenses that are

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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)

not readily apparent from other sources and involve judgments with respect to numerous factors that are difficult to predict and may materially differ from the amounts ultimately realized and reported due to the inherent uncertainty of any estimate or assumption. Actual results could differ materially from those estimates.

The Company’s financial statements as of and for the year ended December 31, 2022 reflect the Company’s estimates of the impact of the macroeconomic environment, including the impact of inflation, higher interest rates, foreign exchange rate fluctuations and the COVID-19 pandemic. The duration and the scope of these conditions cannot be predicted; therefore, the extent to which these conditions will directly or indirectly impact the Company’s business, results of operations and financial condition, is uncertain. The Company is not aware of any specific event or circumstance that would require an update to its estimates, judgments and assumptions or a revision of the carrying value of the Company’s assets or liabilities as of the issuance date of the accompanying Financial Statements.

The accounting policies and estimates that most significantly impact the presented amounts within these accompanying Financial Statements are further described below:

(ii) Cash and Cash Equivalents

Cash and cash equivalents consist of bank deposits and highly liquid investments, including money market fund accounts, that are readily convertible into cash without penalty, with original maturities of three months or less from the purchase date. The carrying amounts reported in the accompanying Balance Sheets for cash and cash equivalents are valued at cost, which approximate their fair value.

(iii) Marketable Securities and Long-Term Investments

As of December 31, 2022, marketable securities consist of short-term fixed income investments 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 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 accompanying 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 occurs. 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 Statements of Operations and Comprehensive Loss. 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 associated with credit risk have occurred or have been recorded. Interest earned on marketable securities is included in interest income within the accompanying Statement of Operations and Comprehensive Loss.

As of December 31, 2021, marketable securities consisted of holdings of LianBio Ophthalmology Limited ("LianBio") common stock. These shares are classified within long-term investments on the accompanying Balance Sheet as of December 31, 2022, reflecting the intent to hold these shares for at least one year from the balance sheet date, with associated gains or losses reported in other income (expense), net within the accompanying Statements of Operations and Comprehensive Loss for each reported period.

(iv) 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

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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)

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, cash equivalents, short-term marketable securities, long-term investments, accounts payable and accrued liabilities approximate fair value due to the short maturities for each. The Company's equity warrant holdings disclosed as other assets 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 hierarchy during the years presented.

(v) Property and Equipment, Net

Property and equipment, net are stated at historical cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets that range from three to five years. Leasehold improvements are amortized on a straight-line basis over the shorter of the remaining lease term or the estimated useful lives of related improvements. The Company evaluates the recoverability of its property and equipment, net whenever events or changes in circumstances of the business indicate that the asset’s carrying amount may not be recoverable. Recoverability of these assets is measured by a comparison of the carrying amounts to the sum of the future undiscounted cash flows the assets are expected to generate over the remaining useful lives of the assets. If a long-lived asset fails a recoverability test, the Company measures the amount by which the carrying value of the asset exceeds its fair value. There were no impairments recognized during the years ended December 31, 2022 and 2021.

(vi) 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 cash held in deposit at financial institutions in the U.S., including at Silicon Valley Bank ("SVB"). These deposits are insured by the Federal Deposit Insurance Corporation (FDIC) in an amount up to $250,000 for any depositor, and with respect to SVB are fully insured per recent correspondence from the FDIC. To the extent the Company holds cash deposits in amounts that exceed the FDIC insurance limitation, it may incur a loss in the event of a failure of any of the financial institutions where it maintains deposits. Management believes the Company is not exposed to significant risk due to the financial position of the depository institution, but will continue to monitor regularly and adjust, if needed, to mitigate risk. The Company has established guidelines regarding diversification of its investments and their maturities, which are designed to maintain principal and maximize liquidity. To date, the Company has not experienced any losses associated with this credit risk and continues to believe that this exposure is not significant.

(vii) Revenue Recognition for Out-License Arrangements

Overview

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TARSUS PHARMACEUTICALS, INC.

NOTES TO THE FINANCIAL STATEMENTS

(all tabular amounts presented in thousands, except share, per share, per unit, and number of years)

The Company currently has no product revenue. Reported revenue in the accompanying Statements of Operations and Comprehensive Loss 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 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 not distinct, the license is combined with other promised goods or services as a combined performance obligation for revenue recognition.

The China Out-License arrangement included the following forms of consideration: (i) non-refundable upfront license payment, (ii) equity-based consideration, (iii) sales-based royalties, (iv) sales-based threshold milestones, (v) drug supply agreement milestone, (vi) development milestone payments, and (vii) 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, 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 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

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NOTES TO THE FINANCIAL STATEMENTS

(all tabular amounts presented in thousands, except share, per share, per unit, and number of years)

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 the China Out-License.

(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.

(viii) 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. Research and development expenses include internal costs directly attributable to in-development programs, including costs of certain salaries and other employee-related costs (including stock-based compensation), and costs to conduct nonclinical studies, clinical trials and contract manufacturing activities. The Company accrues for these costs based on factors such as estimates of the work completed and in accordance with agreements established with third-party service providers under the service agreements. As it relates to clinical trials, the financial terms of these contracts are subject to negotiations which vary from contract to contract and may result in payment flows that do not match the periods over which materials or services are provided under such contracts. Payments made prior to the receipt of goods or services to be used in research and development are capitalized until the goods or services are received. Such payments are evaluated for current or long-term classification based on when they will be realized. The Company's objective is to reflect the appropriate expense in its financial statements by matching those expenses with the period in which the services and efforts are expended. The Company accounts for these expenses according to the progress of the trial as measured by patient progression and the timing of various aspects of the trial taking into consideration discussions with applicable personnel and outside service providers. The clinical trial accrual is dependent in part upon the timely and accurate reporting of progress and efforts incurred from CROs, contract manufacturers and other third-party vendors. Although estimates are expected to be materially consistent with actual amounts incurred, the Company's understanding of the status and timing of services performed relative to the actual status and timing of services performed can vary and may result in changes in estimates in any particular period. The Company makes significant judgments and estimates in determining the accrued liabilities balance at each reporting period. As actual costs become known, the Company adjusts its accrued liabilities. To date, there have been no material differences between estimates of such expenses and the amounts actually incurred.

(ix) Stock-Based Compensation

The Company recognizes stock-based compensation expense for equity awards granted to employees, consultants, and members of its Board of Directors. Stock option awards are at an exercise price of not less than 100% of the fair market value of common stock on the respective date of grant. The grant date is the date the terms of the award are formally approved by the Company’s Board of Directors or its designee. The Company uses the Black-Scholes option pricing model 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 market price of the Company's common stock on the date preceding the award grant-date.

Stock awards granted typically have one to four-year service conditions and a contractual term of 10 years. Any performance conditions for vesting are explicitly stated in each award agreement and are associated with clinical, business

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NOTES TO THE FINANCIAL STATEMENTS

(all tabular amounts presented in thousands, except share, per share, per unit, and number of years)

development, or operational milestones. 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. At each reporting period, the Company reassesses the probability of the achievement of the performance vesting conditions. 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 the 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 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 the 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. Subsequent to the IPO, 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.

(x) Income Taxes

Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recorded based on the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts reported in the financial statements, as well as operating losses and tax credit carry forwards using enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period of enactment. Realization of deferred tax assets is dependent upon future earnings, the timing and amount of which are uncertain due to the Company’s historical operating performance and recorded cumulative net losses in prior fiscal periods. A valuation allowance is recorded to reduce deferred tax assets, because based upon a weighting of positive and negative factors, it is more likely than not that these deferred tax assets will not be realized. If/when the Company were to determine that deferred tax assets are realizable, an adjustment to the corresponding valuation allowance would increase the net income in the period that such determination was made.

The Company’s income tax returns are based on calculations and assumptions that are subject to examination by the Internal Revenue Service and other tax authorities. In addition, the calculation of the Company’s tax liabilities involves dealing with uncertainties in the application of complex tax regulations. The Company recognizes liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. While the Company believes it has appropriate support for the positions taken on its tax returns, the Company regularly assesses the potential outcomes of examinations by tax authorities in determining the adequacy of its provision for income taxes. The Company continually assesses the likelihood and amount of potential revisions and adjusts the income tax provision, income taxes payable and deferred taxes in the period in which the facts that give rise to a revision become known.

Interest and penalties related to unrecognized tax benefits, if any, are recorded as a component of income tax expense.

(xi) Net Loss per Share

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NOTES TO THE FINANCIAL STATEMENTS

(all tabular amounts presented in thousands, except share, per share, per unit, and number of years)

Basic net loss per share is calculated by dividing the net loss 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 per share is computed by dividing the net loss 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 net losses in all periods presented, all otherwise potentially dilutive securities are antidilutive, and accordingly, the reported basic net loss per share equals diluted net loss per share.

(xii) Comprehensive Loss

Comprehensive loss represents (i) net loss for the periods presented, and (ii) unrealized gains or losses on our reported available-for-sale debt securities.

(xiii) 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 Financial Statements have been determined by the Company’s management to have no impact, or an immaterial impact, on its current financial position, results of operations, or cash flows.

3. BALANCE SHEET ACCOUNT DETAIL

The composition of selected captions within the accompanying Balance Sheets are summarized below:

(a) Prepaid Expenses

Prepaid expenses consists of the following:

December 31,

Prepaid research and development expenses 757 671

Prepaid computer software fees 444 56

(b) Other receivables

Other receivables consists of the following:

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NOTES TO THE FINANCIAL STATEMENTS

(all tabular amounts presented in thousands, except share, per share, per unit, and number of years)

December 31,

Regulatory fee reimbursement (1) $ 3,117 $ —

Interest receivable 178 2

Research and development service receivables 161 —

Payroll tax receivable 90 90

Income tax receivable 36 —

(1) This amount represents the required FDA filing fee upon the Company's submission of its New Drug Application ("NDA") for TP-03 and was fully refundable based on the Company's status as a qualified "Small Business" as defined in the relevant Federal statute; it was received from the FDA in January 2023.

Property and equipment, net consists of the following:

December 31,

Furniture and fixtures $ 714 $ 596

Property and equipment, at cost 1,503 976

(Less): Accumulated depreciation and amortization 546 221

Property and equipment, net $ 957 $ 755

Depreciation expense for the years ended December 31, 2022 and 2021 was $0.3 million and $0.3 million, respectively.

(d) Other Assets

Other assets consists of the following:

December 31,

Equity warrants issued by licensee (Note 7) $ 108 $ 663

Other non-current assets 395 392

(e) Accounts Payable and Other Accrued Liabilities

Accounts payable and other accrued liabilities consists of the following:

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NOTES TO THE FINANCIAL STATEMENTS

(all tabular amounts presented in thousands, except share, per share, per unit, and number of years)

December 31,

Trade accounts payable and other $ 5,269 $ 2,856

Operating lease liability, current 721 609

Accrued interest, current 215 —

Income taxes payable 14 55

Contract liability — 697

Employee stock option pre-vesting exercise liability — 56

Accounts payable and other accrued liabilities $ 9,910 $ 8,680

(f) Other Long-Term Liabilities

Other long-term liabilities consists of the following:

December 31,

Operating lease liability, non-current $ 52 $ 585

Lotilaner licensor liability 48 114

Other long-term liabilities $ 100 $ 699

4. STOCKHOLDERS’ EQUITY

2020 and 2016 Equity Incentive Plans

The Company's Board of Directors and stockholders adopted and approved the Company's 2020 Equity Incentive Plan (the “2020 Plan”) in October 2020. The 2020 Plan replaced the Company's 2016 Equity Incentive Plan that was earlier adopted in December 2016 (the "2016 Plan"). However, awards outstanding under the 2016 Plan will continue to be governed by its original terms. The number of shares of the Company's common stock that were initially available for issuance under the 2020 Plan equaled the initial sum of 9,000,000 shares plus 2,432,980 shares that were then available for issuance under the 2016 Plan. The 2020 Plan provides for the following types of awards: incentive and non-statutory stock options, stock appreciation rights, restricted shares, and restricted stock units.

The number of shares of common stock reserved for issuance under the 2020 Plan are increased automatically on the first business day of each fiscal year, commencing in 2021 and ending in 2030, by a number equal to the lesser of: (i) 4% of the shares of common stock outstanding on the last business day of the prior fiscal year; or (ii) the number of shares determined by the Company's Board of Directors. In general, to the extent that any awards under the 2020 Plan are forfeited, terminate, expire or lapse without the issuance of shares, or if the Company reacquires the shares subject to awards granted under the 2020 Plan, those shares will again become available for issuance under the 2020 Plan, as will shares applied to pay the exercise or purchase price of an award or to satisfy tax withholding obligations related to any award.

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 5,600,000 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.

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NOTES TO THE FINANCIAL STATEMENTS

(all tabular amounts presented in thousands, except share, per share, per unit, and number of years)

Employee Stock Purchase Plan

Under the terms of the Company's 2020 Employee Stock Purchase Plan, eligible employees can purchase common stock through scheduled payroll deductions. The purchase price is equal to the closing price of the Company's common stock on the first or last day of the offering period (whichever is less), minus a 15% discount. To determine the value of ESPP expense to be recognized during each offering period, the Black-Scholes option-pricing model is used, in combination with the discounted employee price. A participant may purchase a maximum of 3,000 shares of common stock during a six-month offering period, not to exceed $25,000 at full market value on the offering date during each ESPP year.

Beginning on January 1, 2021, and each January 1st thereafter, pursuant to the terms of the ESPP, the number of common stock available for issuance under the ESPP is automatically increased by an amount equal to the lesser of (i) one percent of the total number of shares of common stock outstanding on the last day of the year, (ii) 2.5 million shares, or (iii) a number determined by the board of directors.

Common Stock Outstanding and Reserves for Future Issuance

Common stockholders have one vote for each share of common stock held and are entitled to receive dividends declared by the Company’s Board of Directors when legally available for distribution, then-subject to the dividend rights of the holders of preferred stock. For the years ended December 31, 2022 and 2021, no dividends were declared.

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 are summarized below:

December 31,

5. STOCK-BASED COMPENSATION

Stock-Based Compensation Expense

Stock-based compensation expense was recognized in the accompanying Statements of Operations and Comprehensive Loss for the years ended December 31, 2022 and 2021 as follows:

Year EndedDecember 31,

Total stock-based compensation $ 13,460 $ 8,455

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NOTES TO THE FINANCIAL STATEMENTS

(all tabular amounts presented in thousands, except share, per share, per unit, and number of years)

The fair value of granted stock options was estimated as of the date of grant using the Black-Scholes option-pricing model, based on the following inputs:

Year EndedDecember 31,

Expected term (in years) 6.25 6.25

Expected dividend yield — —

Weighted-average grant-date fair value per stock option $ 18.37 $ 38.06

Stock Option Activity

Stock option activity during the years ended December 31, 2022 and 2021 was as follows:

Expired — —

____________

(1)Represents the total difference between the stock price fair value as of December 31, 2022 and the stock option exercise price, multiplied by the number of in-the-money options as of December 31, 2022. The amount of any intrinsic value will change in relation to any increases or decreases in the then-determined fair value of the Company’s common stock.

The total grant-date fair value of options that vested during the years ended December 31, 2022 and 2021 was $13.7 million and $16.3 million, respectively.

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NOTES TO THE FINANCIAL STATEMENTS

(all tabular amounts presented in thousands, except share, per share, per unit, and number of years)

For the year ended December 31, 2022, the Company recorded stock-based compensation expense for stock options of $10.7 million. As of December 31, 2022, there was unrecognized compensation expense of $25.5 million related to unvested stock options, which the Company expects to recognize over a weighted average period of 2.3 years.

Restricted Stock Unit Activity

Restricted stock unit activity during the year ended December 31, 2022 was as follows:

Number ofShares Weighted Average Value per Share

For the year ended December 31, 2022, the Company recorded stock-based compensation expense for restricted stock units of $2.5 million. As of December 31, 2022, there was approximately $8.0 million of unrecorded expense that will be recognized over a weighted average period of 3.0 years.

6. NET LOSS PER SHARE

The following table sets forth the computation of basic and diluted net loss per share:

Year Ended December 31,

Net loss per share—basic and diluted $ (2.52) $ (0.67)

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:

Year Ended December 31,

Stock options exercised prior to vesting— remaining unvested — 27,840

7. FAIR VALUE MEASUREMENTS

Financial assets and liabilities subject to fair value measurements on a recurring basis and the level of inputs used in such measurements by major security type are presented in the following table (see Note 2(iv)):

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NOTES TO THE FINANCIAL STATEMENTS

(all tabular amounts presented in thousands, except share, per share, per unit, and number of years)

Fair Value Measurements

Level 1 Level 2 Level 3 Total

Assets:

Government-related debt securities — 10,821 — 10,821

Common stock in LianBio 371 — — 371

Equity warrants (for LianBio shares) — — 108 108

Fair Value Measurements

Level 1 Level 2 Level 3 Total

Assets:

Common stock in LianBio 483 — — 483

Equity warrants (for LianBio shares) — — 663 663

Money Market Funds and U.S. Treasury Securities

Money market funds and U.S. Treasury securities are highly liquid investments and are actively traded with readily-available market prices that are publicly observable and independently validated as of the measurement date. This approach results in the classification of these securities as Level 1 of the fair value hierarchy.

Commercial Paper, Corporate Debt Securities, and Government-related Debt Securities

Commercial paper, corporate debt securities and government-related debt securities were valued using Level 2 inputs that utilized 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. The Company reviews trading activity and pricing for these investments as of each measurement date.

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, common shares in LianBio. The first two tranches are vested and exercised as of December 31, 2022 and the third warrant tranche will vest upon the achievement of a 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, and recognized at fair value within marketable securities as of December 31, 2021, and within long-term investments on the accompanying Balance Sheets as of December 31, 2022. In May 2022, the second warrant tranche was vested and in December 2022, it was exercised and converted into 78,373 shares of LianBio common stock as recognized at fair value within long-term investments on the Balance Sheets as of December 31, 2022. LianBio common stock is classified within Level 1 of the fair value hierarchy, given its publicly reported price on the NASDAQ Global Market.

The third warrant tranche remains classified as Level 3 in the fair value hierarchy and is presented within other assets on the accompanying Balance Sheets as of December 31, 2022 and 2021 (see Note 3(d)). The most significant assumptions used in the option pricing valuation model as of each balance sheet date to determine its fair value included

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TARS US Equity

TARS · 10-K · period ended 2022-12-31

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Item 8. Financial Statements and Supplementary Data

TARS US Equity☆

TARS · 10-K · period ended 2022-12-31

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Item 8. Financial Statements and Supplementary Data

TARS US Equity