Tarsus Pharmaceuticals(TARS) - 2021 Q1 - Quarterly Report

PART I—FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed financial statements for Tarsus Pharmaceuticals, Inc. for the three months ended March 31, 2021, and December 31, 2020, including balance sheets, statements of operations, stockholders' equity, and cash flows, along with detailed notes explaining the company's business, accounting policies, and specific account details Condensed Balance Sheets This section presents the company's financial position, including assets, liabilities, and equity, at specific reporting dates Condensed Balance Sheets | ASSETS (in thousands) | March 31, 2021 | December 31, 2020 | | :-------------------- | :------------- | :---------------- | | Cash and cash equivalents | $156,179 | $168,129 | | Total current assets | $191,451 | $170,655 | | Total assets | $193,954 | $171,972 | | LIABILITIES (in thousands) | | | | Total current liabilities | $10,118 | $5,387 | | Total liabilities | $10,722 | $5,992 | | STOCKHOLDERS' EQUITY (in thousands) | | | | Total stockholders' equity | $183,232 | $165,980 | - Total assets increased from $171.972 million at December 31, 2020, to $193.954 million at March 31, 2021. Total liabilities increased from $5.992 million to $10.722 million, and total stockholders' equity increased from $165.980 million to $183.232 million[12] Condensed Statements of Operations and Comprehensive Income (Loss) This section details the company's financial performance, including revenues, expenses, and net income or loss, over specific periods Condensed Statements of Operations and Comprehensive Income (Loss) | (in thousands, except per share) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :------------------------------- | :-------------------------------- | :-------------------------------- | | Total revenues | $33,432 | $— | | Total operating expenses | $22,718 | $2,118 | | Income (loss) from operations | $10,714 | $(2,118) | | Net income (loss) | $10,376 | $(1,957) | | Basic Net income (loss) per share | $0.51 | $(0.74) | | Diluted Net income (loss) per share | $0.47 | $(0.74) | - The company reported a net income of $10.376 million for the three months ended March 31, 2021, a significant improvement from a net loss of $1.957 million in the prior-year period, driven by $33.432 million in total revenues from license fees and collaboration[16] Condensed Statements of Preferred Stock and Stockholders' Equity (Deficit) This section outlines changes in the company's equity, including preferred stock, common stock, and accumulated deficit, over the reporting period Condensed Statements of Preferred Stock and Stockholders' Equity (Deficit) | (in thousands, except share data) | Balance as of Dec 31, 2020 | Net Income | Stock-based Comp. | Exercise of Options | Shares Issued for In-license | Balance as of Mar 31, 2021 | | :-------------------------------- | :------------------------- | :--------- | :---------------- | :------------------ | :--------------------------- | :------------------------- | | Common Stock Shares | 20,323,201 | — | — | 13,773 | 187,500 | 20,524,474 | | Common Stock Amount | $4 | — | — | — | — | $4 | | Additional Paid-In Capital | $198,821 | — | $1,363 | $19 | $5,494 | $205,697 | | Accumulated Deficit | $(32,845) | $10,376 | — | — | — | $(22,469) | | Total Stockholders' Equity | $165,980 | $10,376 | $1,363 | $19 | $5,494 | $183,232 | - Stockholders' equity increased from $165.980 million at December 31, 2020, to $183.232 million at March 31, 2021, primarily due to net income of $10.376 million and the issuance of shares for in-license rights valued at $5.494 million[20] Condensed Statements of Cash Flows This section presents the company's cash inflows and outflows from operating, investing, and financing activities over specific periods Condensed Statements of Cash Flows | (in thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :------------- | :-------------------------------- | :-------------------------------- | | Net cash used in operating activities | $(11,794) | $(1,996) | | Net cash used in investing activities | $(175) | $(36) | | Net cash provided by (used in) financing activities | $19 | $(27) | | Net decrease in cash, cash equivalents and restricted cash | $(11,950) | $(2,059) | | Cash, cash equivalents, and restricted cash — end of period | $156,199 | $55,913 | - Net cash used in operating activities increased to $11.794 million for the three months ended March 31, 2021, from $1.996 million in the prior-year period, despite reporting net income, due to changes in operating assets and liabilities, including a $25 million increase in accounts receivable and a $7.199 million contract asset[23] Notes to Condensed Financial Statements This section provides detailed explanations and additional information supporting the condensed financial statements, including accounting policies and specific account breakdowns 1. Description of Business and Presentation of Financial Statements This note describes the company's core business, its financial statement presentation, and its capital structure and funding outlook - Tarsus Pharmaceuticals, Inc. is a late clinical-stage biopharmaceutical company focused on developing therapeutic candidates for ophthalmic conditions, with an accumulated deficit of $22.5 million as of March 31, 2021, and $32.8 million as of December 31, 2020[26][30] - The company completed its IPO on October 20, 2020, raising $91.7 million in net proceeds, and all outstanding convertible preferred stock converted into common stock[27][28] - Management believes existing capital resources will be sufficient for at least 12 months, but the company will require additional capital for future operations, facing risks of dilution or restrictive debt covenants[31][34][35] 2. Summary of Significant Accounting Policies and Use of Estimates This note outlines the key accounting principles and significant management judgments used in preparing the financial statements, including revenue recognition and R&D costs - The financial statements are prepared in conformity with GAAP for interim information, with management making estimates for equity-based awards, income tax assets/liabilities, and R&D expense accruals[42][45] - The company's operations have not been significantly impacted by COVID-19 to date, but it continues to monitor potential future impacts on clinical trials[49][51] - Revenue recognition for out-license arrangements involves significant judgment in identifying performance obligations, allocating transaction price (including variable consideration like milestones and royalties), and determining recognition periods[55][56][57] - Research and development costs, including upfront and milestone payments for in-licensed intellectual property, are expensed as incurred because the acquired assets have not yet received regulatory approval and have no alternative future uses[65][67] - Stock-based compensation expense is recognized at fair value using the Black-Scholes model, with assumptions for expected term, volatility, risk-free interest rate, and dividend yield[68][69] 3. Balance Sheet Account Detail This note provides a detailed breakdown of specific balance sheet accounts, including property and equipment, other assets, and accrued liabilities Property and Equipment, net of Accumulated Depreciation (in thousands) | Category | March 31, 2021 | December 31, 2020 | | :------- | :------------- | :---------------- | | Furniture and fixtures | $349 | $294 | | Office equipment | $52 | $74 | | Lab equipment | $167 | $173 | | Leasehold improvements | $163 | $141 | | Total, at cost | $731 | $682 | | Accumulated depreciation and amortization | $142 | $134 | | Net | $589 | $548 | Other Assets (in thousands) | Category | March 31, 2021 | December 31, 2020 | | :------- | :------------- | :---------------- | | Deposits | $27 | $33 | | Equity warrant rights | $1,233 | $— | | Other long term assets | $70 | $48 | | Total | $1,330 | $81 | Accounts Payable and Other Accrued Liabilities (in thousands) | Category | March 31, 2021 | December 31, 2020 | | :------- | :------------- | :---------------- | | Trade accounts payable and other | $4,997 | $2,237 | | Operating lease liability, current portion | $221 | $282 | | Accrued clinical studies | $3,567 | $1,524 | | Income taxes payable | $313 | $— | | Employee stock option early exercise liability, current portion | $335 | $304 | | Total | $9,433 | $4,347 | 4. Stockholders' Equity This note details the company's authorized and outstanding common and preferred stock, along with shares reserved for future issuance under equity plans - The company is authorized to issue 200 million shares of common stock and 10 million shares of preferred stock. No dividends were declared for the three months ended March 31, 2021, or the year ended December 31, 2020[95][96] Common Stock Reserved for Future Issuance | Category | March 31, 2021 | December 31, 2020 | | :------- | :------------- | :---------------- | | Stock options issued and outstanding | 2,448,675 | 1,836,739 | | Stock options reserved for future grant | 9,790,635 | 9,414,091 | | Total shares of common stock reserved | 12,239,310 | 11,250,830 | 5. Stock-Based Compensation This note describes the company's equity incentive plans and the stock-based compensation expense recognized for employee and non-employee awards - The 2020 Equity Incentive Plan, adopted October 8, 2020, replaced the 2016 Plan and automatically increases shares reserved for issuance annually by the lesser of 4% of outstanding common stock or a board-determined number[98][99] Stock-Based Compensation Expense (in thousands) | Category | Three months ended March 31, 2021 | Three months ended March 31, 2020 | | :------- | :-------------------------------- | :-------------------------------- | | Research and development | $344 | $1 | | General and administrative | $1,019 | $3 | | Total | $1,363 | $4 | - Stock-based compensation expense significantly increased to $1.363 million for the three months ended March 31, 2021, from $4 thousand in the prior-year period[104] 6. Net Income (Loss) Per Share This note presents the basic and diluted net income or loss per share calculations, including the weighted-average shares outstanding for each period Net Income (Loss) Per Share Attributable to Common Stockholders | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :----- | :-------------------------------- | :-------------------------------- | | Basic Net Income (Loss) | $0.51 | $(0.74) | | Diluted Net Income (Loss) | $0.47 | $(0.74) | | Basic Weighted Average Shares Outstanding | 20,336,022 | 2,650,363 | | Diluted Weighted Average Shares Outstanding | 21,824,574 | 2,650,363 | - For the three months ended March 31, 2021, basic net income per share was $0.51 and diluted net income per share was $0.47, a positive shift from a basic and diluted net loss per share of $(0.74) in the prior-year period[110] - The 'two-class method' was used for diluted EPS calculation in 2021 as it was more dilutive, while in 2020, all potentially dilutive securities were anti-dilutive due to net loss[109] 7. Fair Value Measurements This note provides information on assets and liabilities measured at fair value, categorized by the input levels used in the valuation techniques Fair Value Measurements (in thousands) | Category | March 31, 2021 (Level 1) | March 31, 2021 (Level 3) | March 31, 2021 (Total) | | :------- | :----------------------- | :----------------------- | :--------------------- | | Money market funds | $156,179 | $— | $156,179 | | Equity warrant rights | $— | $1,233 | $1,233 | | Total assets measured at fair value | $156,179 | $1,233 | $157,412 | | Category | December 31, 2020 (Level 1) | December 31, 2020 (Level 3) | December 31, 2020 (Total) | | :------- | :-------------------------- | :-------------------------- | :------------------------ | | Money market funds | $168,129 | $— | $168,129 | | Total assets measured at fair value | $168,129 | $— | $168,129 | - Equity warrant rights, classified as Level 3 fair value measurements, were recognized at $1.233 million as of March 31, 2021, stemming from the China Out-License transaction with LianBio[112][114][116] 8. Commitments & Contingencies This note details the company's contractual obligations, including lease agreements, in-license payments, and potential future milestone and royalty payments - The company has two capitalized facility leases expiring January 31, 2024, with a weighted-average remaining lease term of 2 years, 10 months, and a weighted-average estimated incremental borrowing rate of 10%[120][123] Total Lease Cost (in thousands) | Category | Three months ended March 31, 2021 | Three months ended March 31, 2020 | | :------- | :-------------------------------- | :-------------------------------- | | Operating lease cost | $60 | $16 | | Variable lease cost | $60 | $1 | | Short-term lease cost | $32 | $— | | Total lease cost | $152 | $17 | - Under in-license agreements for lotilaner, the company made a $2.0 million clinical milestone payment in Q1 2021 (paid April 2021) and issued 187,500 common shares valued at $5.5 million to Elanco for continued license exclusivity[128][131] - Future potential payments to Elanco include up to $3.0 million for skin disease clinical milestones, $79.0 million for commercial/sales milestones (January 2019 Agreement), and $4.5 million for other clinical milestones, $77.0 million for commercial/sales milestones (September 2020 Agreement), plus single-digit royalties on net sales[129][133] 9. Out-License Agreement This note details the exclusive out-license agreement with LianBio for TP-03 in Greater China, including recognized revenue and future potential payments - On March 26, 2021, Tarsus entered into an out-license agreement with LianBio for exclusive development and commercialization rights of TP-03 in Greater China for Demodex blepharitis and Meibomian Gland Disease[139] - The company recognized $33.3 million in license fees and $0.1 million in collaboration revenue for the three months ended March 31, 2021, related to the transfer of TP-03 license rights and partial completion of clinical activities[141] - Future contractual receipts from LianBio include $15.0 million (received April 2021), $10.0 million (received May 2021), up to $75.0 million in development/regulatory milestones, $100.0 million in sales-based milestones, and tiered mid-to-high-teen royalties[140] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations for the three months ended March 31, 2021, compared to 2020. It highlights the company's transition to net income due to out-licensing revenue, ongoing R&D investments, and liquidity position, while also discussing future funding requirements and the impact of COVID-19 Overview of our Business This section provides an overview of Tarsus Pharmaceuticals, Inc.'s focus as a late clinical-stage biopharmaceutical company and its lead product candidate, TP-03 - Tarsus Pharmaceuticals is a late clinical-stage biopharmaceutical company focused on ophthalmic conditions, with its lead product candidate, TP-03, in Phase 2b/3 for Demodex blepharitis[150] - TP-03 is designed to paralyze and eradicate mites by inhibiting parasite-specific GABA-Cl channels, with an estimated 9 million cases of Demodex blepharitis in the U.S. and potential for TP-03 to be the first FDA-approved therapeutic[151][152] - The company is advancing its pipeline with lotilaner API for other diseases, including TP-03 for Meibomian Gland Disease (MGD), TP-04 for rosacea, and TP-05 for Lyme prophylaxis and community malaria reduction[154] Recent Business and Clinical Highlights This section highlights recent achievements, including clinical trial progress for TP-03, the LianBio out-license agreement, and the FDA's acceptance of the IND for TP-05 - The Saturn-1 trial for TP-03 in Demodex blepharitis was fully enrolled by Q1 2021, with topline data expected in July 2021, and the Saturn-2 pivotal trial commenced in Q2 2021[155] - An out-license agreement for TP-03 in Greater China with LianBio was executed on March 26, 2021, with initial time-based proceeds of $15 million received in April 2021 and $10 million in May 2021[156] - The FDA accepted the Investigational New Drug (IND) application for TP-05 for Lyme disease prevention, with a Phase 1 study anticipated to initiate in Q3 2021[159] Corporate and Financial Overview This section summarizes the company's financing activities, including IPO proceeds, and its financial performance, highlighting the first quarter of revenue generation - The company has financed operations through private placements of preferred stock ($101.0 million net proceeds) and an IPO ($91.7 million net proceeds) in October 2020[162][163] Net Income (Loss) (in millions) | Period | Net Income (Loss) | | :----- | :---------------- | | Q1 2021 | $10.4 | | Q1 2020 | $(2.0) | - The company recognized $33.4 million in license fee and collaboration revenue in Q1 2021 from the China Out-License, marking its first revenue generation[166] Impact of the COVID-19 Pandemic on our Operations This section discusses the company's efforts to continue business and clinical programs amidst the COVID-19 pandemic, including safety measures and trial protocols - The company has continued key business activities and clinical programs despite the COVID-19 pandemic, implementing workplace safety measures and work-from-home policies[170][171] - Protocols for Saturn-1 and Saturn-2 trials include increased health screening, enhanced communication, and over-enrollment of participants to mitigate potential COVID-19 impacts[171] Result of Operations This section analyzes the company's financial performance, detailing changes in revenues, operating expenses, and net income or loss for the reported periods Summary of Results of Operations (in thousands) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change | | :----- | :-------------------------------- | :-------------------------------- | :----- | | Total revenues | $33,432 | $— | $33,432 | | Total operating expenses | $22,718 | $2,118 | $20,600 | | Income (loss) from operations | $10,714 | $(2,118) | $12,832 | | Net income (loss) | $10,376 | $(1,957) | $12,333 | - License fees and collaboration revenue totaled $33.4 million for Q1 2021, attributable to the China Out-License, with additional revenue expected as performance obligations are satisfied[175][176] - Research and development expenses increased by $14.7 million, primarily due to a $5.5 million payment for lotilaner rights, a $2.0 million clinical milestone, and increased clinical/preclinical study costs[178] - General and administrative expenses increased by $4.6 million, driven by higher payroll, insurance, professional fees, and commercial/market research costs[179] Liquidity and Capital Resources This section discusses the company's cash position, expected future cash inflows, and its ability to fund operations and capital expenditures - As of March 31, 2021, cash and cash equivalents were $156.2 million. The company expects to receive an additional $70 million from the China Out-License by March 31, 2022[183] - Existing capital resources and anticipated proceeds are expected to fund operating expenses and capital expenditure requirements into the first half of 2023[186] Summary Statement of Cash Flows (in thousands) | Activity | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :------- | :-------------------------------- | :-------------------------------- | | Operating activities | $(11,794) | $(1,996) | | Investing activities | $(175) | $(36) | | Financing activities | $19 | $(27) | | Net increase in cash, cash equivalents and restricted cash | $(11,950) | $(2,059) | - Net cash used in operating activities was $11.8 million for Q1 2021, primarily due to cash payments to vendors ($9.2 million) and payroll ($2.7 million), despite recognized revenue[194] Critical Accounting Policies, Significant Judgments and Use of Estimates This section outlines the company's critical accounting policies, particularly regarding revenue recognition for out-licenses and collaborative agreements, and the significant judgments involved - No material changes to critical accounting policies were reported, except for revenue recognition for out-licenses and collaborative agreements, which involves deferring upfront fees and constraining variable consideration (milestones) until uncertainty is resolved[199] Item 3. Quantitative and Qualitative Disclosures about Market Risk This section assesses the company's exposure to market risks, primarily interest rate risk, and concludes that such risks did not materially impact operations for the reported periods - The company's primary market risk is interest rate risk, but due to the short-term maturities and low-risk profile of its $156.2 million cash and cash equivalents (money market accounts), a 100 basis point change in interest rates would not have a material effect[207] - Inflation, interest rate changes, or foreign currency exchange rate fluctuations did not have a significant impact on results of operations for the periods presented[208] Item 4. Controls and Procedures This section details management's evaluation of the company's disclosure controls and procedures, concluding their effectiveness as of March 31, 2021, and noting no material changes in internal control over financial reporting - Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of March 31, 2021, providing reasonable assurance for timely and accurate financial reporting[209] - There were no material changes in internal control over financial reporting during the period covered by the report[210] - Management acknowledges the inherent limitations of control systems, which can only provide reasonable, not absolute, assurance against errors and fraud[212] PART II—OTHER INFORMATION Item 1. Legal Proceedings The company is not currently involved in any material legal proceedings, though it acknowledges that litigation, if it arises, could adversely impact the business - The company is not currently a party to any material legal proceedings[215] - Litigation, regardless of outcome, can negatively impact the company due to defense costs, diversion of management resources, and reputational harm[215] Item 1A. Risk Factors This section states that there have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K - No material changes to the risk factors included in the Annual Report on Form 10-K for the year ended December 31, 2020, have occurred as of the filing date[216] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section confirms that there has been no material change in the planned use of proceeds from the company's Initial Public Offering (IPO) - There has been no material change in the planned use of proceeds from the company's IPO[217] Item 3. Defaults Upon Senior Securities The company reports no defaults upon senior securities - No defaults upon senior securities were reported[218] Item 4. Mine Safety Disclosures The company has no mine safety disclosures to report - No mine safety disclosures were reported[219] Item 5. Other Information The company has no other information to disclose under this item - No other information was reported[220] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including corporate documents, certifications, and the Development and License Agreement with LianBio Ophthalmology - Key exhibits filed include the Amended and Restated Certificate of Incorporation and Bylaws, certifications from executive officers (31.1, 31.2, 32.1, 32.2), and the Development and License Agreement with LianBio Ophthalmology dated March 26, 2021[222] Signatures This section contains the signatures of the company's authorized officers, certifying the filing of the Form 10-Q - The report is signed by Bobak Azamian, M.D., Ph.D., President and Chief Executive Officer, and Leo M. Greenstein, Chief Financial Officer, on May 11, 2021[227][228]