Tarsus Pharmaceuticals, Inc. (TARS) FY 2021 MD&A

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, is a novel investigational eye drop in Phase 3 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 a 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 are an estimated 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 active pharmaceutical ingredient ("API") of TP-03, lotilaner, paralyzes and eradicates mites and other parasites through the inhibition of parasite-specific gamma-aminobutyric acid-gated chloride ("GABA-Cl") channels.

To date, we have completed four Phase 2 trials and the Phase 2b/3 Saturn-1 trial for TP-03 in Demodex blepharitis, all of which met their primary, secondary and/or exploratory endpoints, and was well tolerated. In February 2022, we completed enrollment in our Saturn-2 trial, which is similar in design and size to Saturn-1. We expect to report topline data results in April 2022 and if Saturn-2 results are positive, to use the data from the Saturn-1 and Saturn-2 trials to support our submission of an NDA in 2022. We believe that TP-03 has the potential to be the first therapeutic approved by the FDA for the treatment of Demodex blepharitis and become the standard of care.

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 and Clinical Highlights

TP-03 Demodex Blepharitis Pivotal Trials, Saturn-1 & Saturn-2:

In February 2022, we announced that the Saturn-2 trial completed enrollment of 412 patients. This Phase 3 pivotal trial is similar in design and size to Saturn-1 and we are on track to report topline data results in April 2022. If Saturn-2 results are positive, we expect to use the data from the Saturn-1 and Saturn-2 trials to support our submission of an NDA in 2022.

In July 2021, we presented additional data from the Saturn-1 trial at the American Society of Cataract and Refractive Surgery 2021 Annual Meeting demonstrating high treatment response rates, and reinforcing the potential of TP-03 to be the standard of care for Demodex blepharitis patients.

•95% of TP-03 patients showed a significant improvement in mite count, achieving ≤0.5 mites per lash

•93% of TP-03 patients improved by at least one collarette grade

We also announced results from additional Saturn-1 safety analysis, which reinforced TP-03’s positive safety profile, revealing that TP-03 had no clinically significant adverse effect on multiple safety measures including Corrected Distance Visual Acuity ("CDVA"), corneal staining, and intraocular pressure ("IOP"), and no significant findings from slit lamp biomicroscopy or fundus exam. In addition, no impact to endothelial cell density ("ECD") was seen in a subset of 21 patients. ECD will be further evaluated as part of the Saturn-2 trial plan. We believe that the results from our Saturn-1 trial, along with previously announced data, reinforce that TP-03 is potentially safe to use in a broad patient population.

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In June 2021, we announced positive results of the Saturn-1 trial. The pre-specified primary and secondary endpoints were met, and complete resolution of Demodex blepharitis signs was demonstrated in patients treated with TP-03 (lotilaner ophthalmic solution, 0.25%).

•44% of patients on TP-03 achieved the primary endpoint of complete collarette cure, defined as 0-2 collarettes per lid at day 43, compared to 7% on vehicle (p0.0001).

•81% of patients on TP-03 achieved a clinically meaningful collarette cure, defined as 0-10 collarettes per lid at day 43 compared to 23% of those on vehicle (p0.0001).

•68% of patients on TP-03 achieved mite eradication defined as 0 mites per lash at day 43, compared to 18% on vehicle (p0.0001).

•Additionally, significant efficacy in lid erythema (redness) was demonstrated across multiple measures including complete and clinically meaningful composite cures, and in erythema alone. Results showed 45% of patients improved erythema by one (1) grade or more (compared to 28% of patients on vehicle, p=0.0002) and 19% of patients on TP-03 achieved a complete erythema cure (compared to 7% of patients on vehicle, p0.0001).

•TP-03 was well tolerated with a safety profile similar to the vehicle group. Additionally, 92% of TP-03 patients reported that the drop comfort was neutral to very comfortable. There were no serious treatment-related adverse events nor any treatment-related adverse events leading to treatment discontinuation.

TP-03 Demodex Blepharitis Studies, Titan and Atlas: On November 4, 2021, data from two pioneering studies on the prevalence and impact of Demodex blepharitis were presented at the American Academy of Optometry ("AAO") 2021 Annual Meeting:

•Titan, a real-world prevalence study, revealed that Demodex blepharitis accounts for 69% of blepharitis cases and is present in many commonly seen patient groups. Additionally, 75% of patients using tea tree oil and 57% of those using lid wipes still had collarettes, showing these current management tools are ineffective at treating Demodex blepharitis.

•Atlas is the first multi-centered observational study to evaluate the impact of Demodex blepharitis and showed that Demodex blepharitis is associated with a significant symptomatic and psychosocial burden, negatively affecting daily life in 80% of patients.

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. LianBio has recently communicated to us that they expect to initiate a TP-03 Phase 3 pivotal trial in China for the treatment of Demodex blepharitis in the second half of 2022.

We received payments from LianBio totaling $25 million in April and May 2021 as initial consideration for this out-license, and a total of $30 million in June and August 2021 for the achievement of two clinical development milestones. We also received equity warrants in LianBio in March 2021, with two of three tranches remaining subject to clinical and regulatory vesting provisions.

We are further eligible to receive (i) a Saturn-2 clinical milestone of $15 million (expected to be achieved during the first half of 2022), (ii) China-based clinical and regulatory milestones and a supply agreement milestone totaling $30 million ($15 million of which we expect to be achieved by the second half of 2022), and (iii) sales threshold milestones in the China Territory totaling $100 million. We are also entitled to receive tiered mid-to-high teen royalties on the net sales of TP-03 within the China Territory.

TP-05 Initiation of Phase 1 Trial, Callisto: We continued to advance our Phase 1 Callisto trial, evaluating TP-05, a novel, oral, non-vaccine therapeutic, for the prevention of Lyme disease with data expected in the second half of 2022. In June 2021, we initiated the Callisto trial, a single ascending dose and multiple ascending dose trial to evaluate the safety, tolerability and PK of TP-05 in healthy volunteers. There are currently no FDA-approved pharmacological prophylactic options for Lyme disease, which is the most common vector-borne disease in the U.S., transmitted to humans via Borrelia burgdorferi bacterium infection following the bite of a tick vector.

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We believe TP-05 is currently the only non-vaccine, drug-based, preventive therapeutic in development that targets the ticks, and potentially prevents Lyme disease transmission. It is designed to rapidly 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 a loan and security agreement with Hercules Capital and Silicon Valley Bank (the "Credit Facility). This $175 million Credit Facility has tranched availability as follows: $40 million at closing ($20 million drawn in February 2022), $25 million upon NDA submission of TP-03, $35 million upon FDA approval of TP-03, and $75 million upon achievement of certain revenue thresholds and other conditions. Capital draws, at our election, are in $5 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.

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, out-licensing arrangements, and the net proceeds from our Initial Public Offering ("IPO"), cash proceeds from our out-licensing arrangements, and draw-downs from our Credit Facility. From inception through December 31, 2021, we have raised net proceeds of approximately $103.2 million through private placements of preferred stock. In February 2022, we received $20 million from the initial draw down under the executed Credit Facility.

In advance of our IPO, on October 8, 2020, our board of directors approved a 1-for-7.4276 reverse stock split of our capital stock. All share and per share information was adjusted to reflect this reverse stock split. On October 20, 2020, we completed our IPO through an underwritten sale of 6,325,000 shares of our common stock at a price of $16.00 per share, inclusive of 825,000 shares of common stock sold upon the full exercise of the underwriters’ purchase option. The aggregate net proceeds from the offering after deducting underwriting discounts and commissions and other offering expenses were $91.7 million. Concurrent with the IPO, all then-outstanding shares of our convertible preferred stock automatically converted into an aggregate of 11,107,018 issued shares of common stock.

In March 2021, we executed an out-license of TP-03 for the China Territory (see Note 9). During the year ended December 31, 2021, we received cash proceeds of $55.0 million from our licensee. We expect to receive additional cash proceeds of $20.0 million in the first half of 2022 upon achievement of our Saturn-2 clinical milestone.

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 from the China Out-License, increasing operating losses for the foreseeable future. Our net losses were $13.8 million and $26.8 million for the years ended December 31, 2021 and 2020, respectively. Our net losses may fluctuate significantly from quarter to quarter and year to year and could be substantial. As of December 31, 2021 and 2020, we had an accumulated deficit of $46.7 million and $32.8 million, respectively, from research and development and general and administrative activities since our inception. We anticipate that our operating expenses will increase significantly as we:

•conduct additional clinical activities of our lead product candidate, TP-03, for the treatment of Demodex blepharitis;

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

•seek regulatory and marketing approvals for product candidates that successfully complete clinical development, if any;

•establish our own sales force in the U.S. to commercialize our products for which we obtain regulatory approval;

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

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•maintain, expand and protect our intellectual property portfolio;

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

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

We do not have any products approved for sale and we have not yet generated any revenue from product sales. However, we recognized "license fees" and "collaboration revenue" from our China Out-License for the year ended December 31, 2021 of an aggregate $53.1 million and $4.0 million, respectively (see Note 9), and expect to recognize additional revenue under these captions from this arrangement 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, 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, 2021, our aggregate cash and cash equivalents was $171.3 million – see Liquidity and Capital Resources.

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.

Components of our Results of Operations

License Fees and Collaboration Revenue

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We recognize "license fee 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 China, and (iii) sales by our licensee of TP-03 in the China Territory.

Operating Expenses

Our operating expenses consist of cost of license fees and collaboration revenue, research and development expenses and general and administrative expenses.

Cost of License Fees and Collaboration Revenue

Our 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

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

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

•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 contract manufacturing organizations ("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, 2021 and 2020, substantially all 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 and community malaria reduction. 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

Our general and administrative expenses consist of personnel-related costs including payroll, benefits, and stock-based compensation for our executive, finance, and other administrative functions. Other general and administrative expenses

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include consulting fees, legal services, rent and other facilities costs, and other general operating expenses not otherwise classified as research and development expenses.

We expect that our general and administrative expenses will increase substantially in the future as a result of expanding our operations, including hiring 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 (Expense) Income, Net

The change in other (expense) income, net was primarily due to a change in estimated fair value of the

equity warrants and LianBio common stock related to our China Out-License executed in March 2021.

Income Tax Provision

Since our inception, we have not recorded any U.S. federal or state income tax benefits for the net operating losses we have incurred in each year, or for our earned research and development tax credits, due to our uncertainty of realizing a benefit from either. As a result of the Tax Cuts and Jobs Act of 2017, net operating losses (for U.S. income tax purposes) generated prior to December 31, 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.

Results of Operations

Comparison of the Years Ended December 31, 2021 and 2020

The following table summarizes our results of operations for the years ended December 31, 2021 and 2020 (in thousands):

License Fees and Collaboration Revenue

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License fees and collaboration revenue was $57.0 million for the year ended December 31, 2021. This amount was attributable to the contractual milestones under the China Out-License that have been fully or partially completed by December 31, 2021. These amounts represent the satisfaction of the transfer of TP-03 license rights to LianBio and the partial completion of clinical-related "performance obligations".

We will recognize additional "license fee and collaboration revenue" to the extent the contractual performance obligations are further satisfied or other events occur, specifically related to (i) milestone payments upon TP-03 pivotal trial completion and the delivery of associated clinical data and reports to our licensee, (ii) achievement of regulatory events that trigger milestone payments, and (iii) 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 $2.1 million for the year ended December 31, 2021. This amount relates to (i) a portion of our contractual payment obligations attached to our China Out-License proceeds as part of our January 2019 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 increased by $22.9 million for the year ended December 31, 2021. The increase was primarily due to (i) contractual payment in March 2021 in the form of 187,500 shares of our common stock (valued at $5.5 million) to extend the period of our September 2020 in-license agreement, (ii) contractual payment of $2.0 million under our January 2019 in-license agreement for the commencement of our Saturn-2 trial, (iii) increased clinical and preclinical study costs of $9.6 million, (iv) increased manufacturing and formulation costs of $4.6 million, and (v) increased payroll and personnel-related costs, including stock-based compensation, of $4.4 million for 10 employee additions in 2021 to drive our product development initiatives. These increases were partially offset by non-recurring costs for the year ended December 31, 2020, including (i) upfront contractual payment under our January 2019 in-license in the form of 222,460 shares of our common stock (valued at $3.1 million), and (ii) $1.0 million contractual payment under our January 2019 in-license for our Saturn-1 trial commencement in September 2020.

General and Administrative Expenses

General and administrative expenses increased by $17.2 million for the year ended December 31, 2021. The increase was primarily due to (i) $10.2 million increase in payroll and personnel-related costs (including stock-based compensation) for 16 employee additions in 2021 to support our business growth, (ii) increased corporate insurance and other administrative costs of $2.6 million, (iii) increased professional and legal fees of $2.4 million, (iv) increased commercial and market research costs of $1.4 million, and (v) increased facility-related costs of $0.7 million.

Other (Expense) Income, Net

Other (expense) income, net for the year ended December 31, 2021 primarily consists of (i) mark-to-market decrease of $1.0 million for the LianBio equity warrants we received as part of our China Out-License in March 2021, (ii) mark-to-market decrease of $0.6 million for LianBio common stock (after our exercise of the first warrant tranche), and (iii) $0.1 million of realized loss for fixed asset disposals. In the prior year, this caption only included interest income of $0.2 million.

Liquidity and Capital Resources

Sources of Liquidity

We will continue to be dependent upon equity, debt financing, and/or other forms of capital raises at least until we are able to generate significant ongoing positive cash flows to support our operations. As of December 31, 2021, we had cash and cash equivalents of $171.3 million and marketable securities of $0.5 million.

Since our inception in 2016 and through December 31, 2021, our operations have been substantially financed by cash proceeds of $61.0 million from private placements of preferred stock, the proceeds from our IPO, and China Out-License consideration. In connection with our IPO, we sold 6,325,000 shares of our common stock (inclusive of the full exercise of the

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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 the second quarter of 2021, we received $25.0 million of initial proceeds from our licensee as part of the execution of our China Out-License in March 2021. In June and August 2021, we received $30.0 million for the achievement of clinical development milestones. We expect to receive an additional $30.0 million during 2022 for the achievement of a clinical development milestone and a drug supply agreement milestone, for aggregate milestone receipts of $85.0 million through December 2022. The remaining $120.0 million of potential milestones under this out-license are subject to future clinical, regulatory and sales achievements within the China Territory.

On February 2, 2022, we entered into the Credit Facility with tranched availability as follows: $40 million at closing (we took the minimum required draw for the term of the agreement of $20 million in February 2022), $25 million upon NDA submission of TP-03, $35 million upon FDA approval of TP-03, and $75 million upon achievement of certain revenue thresholds and other conditions. Capital draws, at our election, are in $5 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.

Funding Requirements

Our current cash balance funds our operating expenditures and other working capital requirements. Our operating

expenditures currently consist of research and development expenses (including activities within our preclinical, clinical,

regulatory, and drug manufacturing initiatives) and general and administrative expenses. 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, cash equivalents and marketable securities of $171.8 million as of December 31, 2021 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. In addition, our expected $30 million of additional proceeds during 2022 as part of the China Out-License, and available funds under our Credit Facility, should enable us to fund our planned corporate expenses and research and development expenses and capital expenditure requirements at least into the second half of 2024. We based this cash runway estimate on our current assumptions that may require future adjustments as part of our ongoing business decisions within pipeline development and other corporate initiatives. Accordingly, we may require additional capital resources earlier than we currently expect.

On November 1, 2021, we filed a shelf registration statement (the “Shelf Registration Statement”) on Form S-3 with the SEC (that was declared effective by the SEC on November 5, 2021), which permits 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. Our Shelf Registration Statement is intended to provide us with additional flexibility to access capital markets for general corporate purposes, which may include working capital, capital expenditures, other corporate expenses and acquisitions of complementary products, technologies, or businesses.

On November 1, 2021, as part of the Shelf Registration Statement, we also filed a sale agreement prospectus covering the sale of up to $100.0 million of our common stock pursuant to an Open Market Sale AgreementSM (the “Sale Agreement”) with Jefferies LLC. Through the date of this filing, we have not sold any shares of our common stock pursuant to the Sale Agreement or any securities under the Shelf Registration Statement.

To date, we have not generated revenue from any product sales. We do not expect to generate 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 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.

We expect to incur significant operating losses for the foreseeable future, and for these losses to further increase, as we ramp up our clinical development programs and begin activities for commercial launch readiness. We may also encounter unforeseen expenses, difficulties, complications, delays and other currently unknown factors that could adversely affect our business.

We will likely 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;

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•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;

•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 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 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

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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. As of December 31, 2021, our contractual commitments for our leases were $1.2 million, which will be paid over the lease term.

Purchase Obligations

We enter contracts in the normal course of business with CROs and clinical sites. As of December 31, 2021, our contractual commitments for such obligations were $11.3 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 $164 million.

Summary Statement of Cash Flows

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

Net Cash Provided by (Used in) Operating Activities

Net cash provided by operating activities was $3.7 million for the year ended December 31, 2021. We received $55 million in cash (of the $57.0 million recognized in revenue during 2021) in connection with the China Out-License transaction. In the current year, our cash payments to vendors for our operating activities totaled $42.5 million and payroll-related cash payments (inclusive of 2020 bonus payouts) totaled $9.4 million. In addition, we made contractual payments of $4.5 million to our intellectual property licensor (see Note 8(b)).

Net cash used in operating activities was $21.1 million for the year ended December 31, 2020, which was primarily attributable to our net loss of $26.8 million, partially offset by non-cash items (i.e., stock-based compensation and stock issuance costs at IPO) totaling $4.2 million.

Net Cash Used in Investing Activities

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 and software and office equipment.

Net cash used in investing activities was $0.5 million for the year ended December 31, 2020, which consisted of equipment purchases and leasehold improvements for our laboratory and administrative offices.

Net Cash Provided by Financing Activities

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

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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.

Net cash provided by financing activities was $131.8 million for the year ended December 31, 2020 due to our issuance of Series C preferred stock for net proceeds of $39.8 million and net proceeds from our IPO of $91.7 million.

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 (including variable consideration), upon satisfaction of the respective performance obligation, (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 (which include the license, and know-how, data, and information necessary or reasonably useful for the research, development, manufacture, or commercialization of any license product, and governance committee 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 considered to not be distinct, the license is combined with other promised goods or services as a combined performance obligation for revenue recognition.

The China Out-License arrangement is in exchange for the following forms of consideration: (i) non-refundable upfront cash payments, (ii) equity-based consideration, (iii) sales royalties, (iv) sales-based threshold milestones, (v) development milestone payments, and (vi) regulatory milestone payments. Revenue is recognized in proportion to the allocated transaction price when (or as) the respective performance obligation is satisfied. We evaluate the progress related to each milestone at each reporting period and, if necessary, adjust 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

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

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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. 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.

Research and Development Expenses

Research and development costs are expensed as incurred or as certain upfront or milestone payments become contractually due to licensors upon the achievement of clinical or regulatory events. These expenses also include internal costs directly attributable to in-development programs, including cost of certain salaries, payroll taxes, employee benefits, and stock-based compensation expense, as well as laboratory and clinical supplies, pre-clinical and clinical trial related expenses, and the cost of services provided by outside contractors.

We have entered, and may continue to enter into, license agreements to access and utilize certain technology. In each case, we evaluate if the assets acquired in a transaction represent the acquisition of an asset or a business, as defined under applicable GAAP. Our only executed in-license agreement was evaluated and determined to represent an asset acquisition. Because this asset had not yet received regulatory approval and has no alternative future use, its fair value was immediately recognized as research and development expense.

We make research and development expense accrual estimates as of each balance sheet date, based on facts known to us at that time. This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf, and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. We periodically confirm the accuracy of our estimates with the service providers, including CROs, and record adjustments, if necessary. To date, there have been no material differences between our estimates of such expenses and the amounts actually incurred.

Stock-Based Compensation

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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. 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 (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 Our IPO

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 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.

Common Stock Valuations Following Our IPO

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

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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, 2021.

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 $1.07 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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