krys-10q_20190630.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from               to                    

Commission file number: 001-38210 

 

Krystal Biotech, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

82-1080209

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

2100 Wharton Street, Suite 701

Pittsburgh, Pennsylvania 15203

(Address of principal executive offices and zip code)

(412) 586-5830 

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

 

 

 

Non-accelerated filer

 

☐  

 

Smaller reporting company

 

Emerging growth company

If emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

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

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    Yes       No  

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock

KRYS

NASDAQ

As of July 31, 2019, there were   17,300,390 shares of the registrants common stock issued and outstanding as of July 31, 2019.

 

 

 


 

Krystal Biotech, Inc.

TABLE OF CONTENTS

 

 

 

Page No.

PART I. FINANCIAL INFORMATION

 

 

 

 

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2019 (unaudited) and December 31, 2018

 

3

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months Ended June 30, 2019 (unaudited) and 2018 (unaudited)

 

4

 

Condensed Consolidated Statements of Stockholders’ Equity for the Six Months Ended June 30, 2019 (unaudited) and 2018 (unaudited)

 

5

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2019 (unaudited) and 2018 (unaudited)

 

6

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations 

 

17

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

24

Item 4.

Controls and Procedures

 

24

 

 

PART II. OTHER INFORMATION 

 

25

 

 

 

 

Item 1.

Legal Proceedings

 

25

Item 1A.

Risk Factors

 

25

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

25

Item 3.

Defaults Upon Senior Securities

 

25

Item 4.

Mine Safety Disclosures

 

25

Item 5.

Other Information

 

25

Item 6.

Exhibits

 

26

Signatures

 

27

 

2


 

ITEM 1.

 

Krystal Biotech, Inc.

Condensed Consolidated Balance Sheets

 

 

 

June 30,

 

 

December 31,

 

(In thousands, except shares and per share data)

 

2019

 

 

2018

 

 

 

(unaudited)

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

186,587

 

 

$

103,670

 

Short-term investments

 

 

8,879

 

 

 

8,091

 

Prepaid and other current assets

 

 

737

 

 

 

889

 

Total current assets

 

 

196,203

 

 

 

112,650

 

Property and equipment, net

 

 

5,961

 

 

 

3,014

 

Right-of-use asset

 

 

2,906

 

 

 

 

Other noncurrent assets

 

 

86

 

 

 

452

 

Total assets

 

$

205,156

 

 

$

116,116

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

896

 

 

$

888

 

Current portion of lease liability

 

 

438

 

 

 

 

Accrued expenses and other current liabilities

 

 

2,606

 

 

 

1,708

 

Total current liabilities

 

 

3,940

 

 

 

2,596

 

Lease liability

 

 

2,926

 

 

 

 

Other noncurrent liabilities

 

 

 

 

 

294

 

Total liabilities

 

 

6,866

 

 

 

2,890

 

Commitments and contingencies (Note 5)

 

 

 

 

 

 

 

 

Stockholders' equity

 

 

 

 

 

 

 

 

Preferred stock; $0.00001 par value; 20,000,000 shares authorized at

   June 30, 2019 (unaudited) and December 31, 2018; 2,061,773

   shares issued, and no shares outstanding at June 30, 2019

   (unaudited) and December 31, 2018

 

 

 

 

 

 

Common stock; $0.00001 par value; 80,000,000 shares authorized at

   June 30, 2019 (unaudited) and December 31, 2018; 16,945,069

   and 14,428,916 shares issued and outstanding at June 30, 2019

   (unaudited) and December 31, 2018, respectively

 

 

 

 

 

 

Additional paid-in capital

 

 

227,690

 

 

 

133,183

 

Accumulated other comprehensive income

 

 

18

 

 

 

2

 

Accumulated deficit

 

 

(29,418

)

 

 

(19,959

)

Total stockholders' equity

 

 

198,290

 

 

 

113,226

 

Total liabilities and stockholders' equity

 

$

205,156

 

 

$

116,116

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

3


 

Krystal Biotech, Inc.  

Condensed Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

(In thousands, except share and per share data)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

4,216

 

 

$

1,525

 

 

$

7,383

 

 

$

3,045

 

General and administrative

 

 

1,674

 

 

 

924

 

 

 

3,202

 

 

 

1,681

 

Total operating expenses

 

 

5,890

 

 

 

2,449

 

 

 

10,585

 

 

 

4,726

 

Loss from operations

 

 

(5,890

)

 

 

(2,449

)

 

 

(10,585

)

 

 

(4,726

)

Other Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other income, net

 

 

542

 

 

 

173

 

 

 

1,126

 

 

 

300

 

Total interest and other income, net

 

 

542

 

 

 

173

 

 

 

1,126

 

 

 

300

 

Net loss

 

 

(5,348

)

 

 

(2,276

)

 

 

(9,459

)

 

 

(4,426

)

Unrealized gain (loss) on available-for-sale securities

 

 

2

 

 

 

(2

)

 

 

16

 

 

 

(2

)

Comprehensive loss

 

 

(5,346

)

 

 

(2,278

)

 

 

(9,443

)

 

 

(4,428

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to common stockholders per share:

   Basic and diluted

 

$

(0.37

)

 

$

(0.22

)

 

$

(0.65

)

 

$

(0.43

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding:

   Basic and diluted

 

 

14,522,515

 

 

 

10,310,101

 

 

 

14,470,371

 

 

 

10,308,747

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

4


 

Krystal Biotech, Inc.

Condensed Consolidated Statements of Stockholders' Equity

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Other

Comprehensive

 

 

Accumulated

 

 

Total

Stockholders'

 

(In thousands, except shares)

 

Shares

 

 

Amount

 

 

Capital

 

 

Income

 

 

Deficit

 

 

Equity

 

Balances at January 1, 2019

 

 

14,428,916

 

 

$

 

 

$

133,183

 

 

$

2

 

 

$

(19,959

)

 

$

113,226

 

Issuance of common stock

 

 

14,653

 

 

 

 

 

 

44

 

 

 

 

 

 

 

 

 

44

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

313

 

 

 

 

 

 

 

 

 

313

 

Unrealized gain on investments

 

 

 

 

 

 

 

 

 

 

 

14

 

 

 

 

 

 

14

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,111

)

 

 

(4,111

)

Balances at March 31, 2019

 

 

14,443,569

 

 

$

 

 

$

133,540

 

 

$

16

 

 

$

(24,070

)

 

$

109,486

 

Issuance of common stock

 

 

2,501,500

 

 

 

 

 

 

93,825

 

 

 

 

 

 

 

 

 

93,825

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

325

 

 

 

 

 

 

 

 

 

325

 

Unrealized gain on investments

 

 

 

 

 

 

 

 

 

 

 

2

 

 

 

 

 

 

2

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,348

)

 

 

(5,348

)

Balances at June 30, 2019

 

 

16,945,069

 

 

$

 

 

$

227,690

 

 

$

18

 

 

$

(29,418

)

 

$

198,290

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Other

Comprehensive

 

 

Accumulated

 

 

Total

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income

 

 

Deficit

 

 

Equity

 

Balances at January 1, 2018

 

 

10,307,247

 

 

$

 

 

$

58,544

 

 

$

 

 

$

(9,070

)

 

$

49,474

 

Issuance of common stock

 

 

2,368

 

 

 

 

 

 

10

 

 

 

 

 

 

 

 

 

10

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

65

 

 

 

 

 

 

 

 

 

65

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,150

)

 

 

(2,150

)

Balances at March 31, 2018

 

 

10,309,615

 

 

$

 

 

$

58,619

 

 

$

 

 

$

(11,220

)

 

$

47,399

 

Issuance of common stock

 

 

1,875

 

 

 

 

 

 

4

 

 

 

 

 

 

 

 

 

4

 

Stock-based compensation expense

 

 

42,426

 

 

 

 

 

 

147

 

 

 

 

 

 

 

 

 

147

 

Unrealized loss on investments

 

 

 

 

 

 

 

 

 

 

 

(2

)

 

 

 

 

 

 

(2

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,276

)

 

 

(2,276

)

Balances at June 30, 2018

 

 

10,353,916

 

 

$

 

 

$

58,770

 

 

$

(2

)

 

$

(13,496

)

 

$

45,272

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

5


 

Krystal Biotech, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

Six months Ended

June 30,

 

(In thousands)

 

2019

 

 

2018

 

Operating Activities

 

 

 

 

 

 

 

 

Net loss

 

$

(9,459

)

 

$

(4,426

)

Adjustments to reconcile net loss to net cash used in operating activities

 

 

 

 

 

 

 

 

Depreciation

 

 

307

 

 

 

42

 

Stock-based compensation expense

 

 

638

 

 

 

212

 

Loss on disposals of fixed assets

 

 

54

 

 

 

 

Decrease in

 

 

 

 

 

 

 

 

Prepaids and other current assets

 

 

63

 

 

 

63

 

Amortization of right-of-use asset, net

 

 

132

 

 

 

 

Accounts payable

 

 

413

 

 

 

21

 

Accrued expenses and other current liabilities

 

 

428

 

 

 

101

 

Net cash used in operating activities

 

 

(7,424

)

 

 

(3,987

)

 

 

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(2,945

)

 

 

(98

)

Purchases of short-term investments

 

 

(4,649

)

 

 

(3,639

)

Proceeds from maturities of short-term investments

 

 

3,876

 

 

 

 

Purchases of other noncurrent assets

 

 

 

 

 

(64

)

Net cash used in investing activities

 

 

(3,718

)

 

 

(3,801

)

 

 

 

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

 

 

 

Issuance of common stock, net

 

 

94,059

 

 

 

10

 

Net cash provided by financing activities

 

 

94,059

 

 

 

10

 

Net increase (decrease) in cash and cash equivalents

 

 

82,917

 

 

 

(7,778

)

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

 

103,670

 

 

 

49,591

 

Cash and cash equivalents at end of period

 

$

186,587

 

 

$

41,813

 

 

 

 

 

 

 

 

 

 

Supplemental Disclosures of Non-Cash Investing and Financing Activities

 

 

 

 

 

 

 

 

Unpaid purchases of property and equipment

 

$

313

 

 

$

 

Unpaid offering costs

 

$

190

 

 

$

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

6


 

Krystal Biotech, Inc.  

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(In thousands, except per share data)

1.

Organization

Krystal Biotech, Inc. and its consolidated subsidiary (the “Company,” or “we” or other similar pronouns) commenced operations in April 2016. In March 2017, the Company converted from a California limited liability company to a Delaware C-corporation, and changed its name from Krystal Biotech LLC to Krystal Biotech, Inc. On June 19, 2018, the Company incorporated Krystal Australia Pty Ltd., an Australian proprietary limited company, for the purposes of undertaking preclinical and clinical studies in Australia. On April 24, 2019, we incorporated Jeune, Inc. in Delaware, a wholly-owned subsidiary, for the purposes of undertaking preclinical studies for aesthetic skin conditions.

 

We are a clinical stage gene therapy company currently dedicated to developing and commercializing novel treatments for patients suffering from dermatological skin diseases. We have developed a proprietary gene therapy platform that consists of a patented engineered viral vector based on herpes simplex virus 1 (“HSV-1”) and skin-optimized gene transfer technology, to develop off-the-shelf treatments for dermatological diseases for which we believe there are no known effective treatments. We are initially using the platform to develop treatments for rare or orphan dermatological indications caused by the absence of or a mutation in a single gene, and plan to leverage our platform in the future to expand our pipeline to include other dermatological indications and skin conditions. In June 2019, we announced positive results from Phase 2 clinical trial of KB103, our lead product candidate.

Liquidity and Risks

As of June 30, 2019, the Company had an accumulated deficit of $29.4 million. With the net proceeds raised upon the close of its initial public offering (“IPO”) in September 2017, a private placement in August 2018, two secondary public offerings in October 2018 and June 2019, as described in Note 6 “Capitalization”, the Company believes that its cash, cash equivalents and short-term investments of approximately $195.5 million as of June 30, 2019 will be sufficient to allow the Company to fund its operations for at least 12 months from the filing date of this Form 10-Q. As the Company continues to incur losses, a transition to profitability is dependent upon the successful development, approval and commercialization of its product candidates and the achievement of a level of revenues adequate to support the Company’s cost structure. The Company may never achieve profitability and unless and until it does, the Company will continue to need to raise additional capital or obtain financing from other sources. Management intends to fund future operations through the sale of equity or debt financings and may also seek additional capital through arrangements with strategic partners. There can be no assurances that additional funding will be available on terms acceptable to the Company, if at all.

The Company is subject to risks common to companies in the biotechnology industry, including, but not limited to, development of technological innovations by its competitors, risks of failure of clinical studies, dependence on key personnel, protection of proprietary technology, compliance with government regulations, and ability to transition from preclinical manufacturing to commercial production of products.

 

2.

Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and follow the requirements of the Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. GAAP can be condensed or omitted. These condensed consolidated financial statements have been prepared on the same basis as the Company’s annual consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. In the opinion of management, the condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair statement of the Company’s condensed consolidated financial information. The results of operations for the three and six month period ended June 30, 2019 are not necessarily indicative of the results to be expected for the full year or any other future period. The condensed consolidated balance sheet as of December 31, 2018 has been derived from audited consolidated financial statements at that date but does not include all of the information required by U.S. GAAP for complete consolidated financial statements.

7


 

Use of Estimates

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts in the condensed consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates. Management considers many factors in selecting appropriate financial accounting policies and controls, and in developing the estimates and assumptions that are used in the preparation of these financial statements. Management must apply significant judgment in this process. In addition, other factors may affect estimates, including expected business and operational changes, sensitivity and volatility associated with the assumptions used in developing estimates, and whether historical trends are expected to be representative of future trends. The estimation process often may yield a range of potentially reasonable estimates of the ultimate future outcomes and management must select an amount that falls within that range of reasonable estimates. This process may result in actual results differing materially from those estimated amounts used in the preparation of the financial statements. Estimates are used in the following areas including stock-based compensation expense, accrued research and development expenses, the fair value of financial instruments and the valuation allowance included in deferred income taxes calculations.

Segment and Geographical Information

Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company and the Company’s chief operating decision maker view the Company’s operations and manage its business in one operating segment, which is the business of developing and commercializing pharmaceuticals.  

Concentrations of Credit Risk and Off-Balance Sheet Risk

Financial instruments that potentially subject the Company to credit risk consist of cash, cash equivalents and short-term investments. The Company’s policy is to invest its cash and cash equivalents in money market funds and various bank deposit accounts. The counterparties to the agreements relating to the Company’s investments consist of financial institutions of high credit standing. The Company is exposed to credit risk in the event of default by the financial institutions to the extent of amounts recorded on the balance sheets which may be in excess of insured limits. The Company has not experienced any credit losses in such accounts and does not believe it is exposed to any significant credit risk on these funds. The Company has no financial instruments with off-balance sheet risk of loss.

Cash, Cash Equivalents and Short-Term Investments

Cash and cash equivalents consist of money market funds and bank deposits. Cash equivalents are defined as short-term, highly liquid investments with original maturities of 90 days or less at the date of purchase.

Investments with maturities of greater than 90 days but less than one year are classified as short-term investments on the condensed consolidated balance sheets and consist of U.S. Treasury bills and certificates of deposit. Accrued interest on U.S. Treasury bills and certificates of deposit are also classified as short-term investments.

As our entire investment portfolio is considered available for use in current operations, we classify all investments as available-for-sale and as current assets. Available-for-sale securities are carried at fair value, with unrealized gains and losses reported in accumulated other comprehensive gain or loss, which is a separate component of stockholders’ equity in the condensed consolidated balance sheets.

8


 

Fair Value of Financial Instruments

The Company is required to disclose information on all assets and liabilities reported at fair value that enables an assessment of the inputs used in determining the reported fair values. FASB ASC Topic 820, Fair Value Measurement and Disclosures, established a hierarchy of inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the financial instrument based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs that market participants would use in pricing the financial instrument and are developed based on the best information available in the circumstances. The fair value hierarchy applies only to the valuation inputs used in determining the reported or disclosed fair value of the financial instruments and is not a measure of the investment credit quality. Fair value measurements are classified and disclosed in one of the following three categories:

 

Level 1—Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

 

Level 2—Valuations based on quoted prices for similar assets or liabilities in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

 

Level 3—Valuations that require inputs that reflect the Company’s own assumptions that are both significant to the fair value measurement and are unobservable.

To the extent that a valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized within Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

There have been no changes to the valuation methods utilized by the Company during the periods presented. The Company evaluates transfers between levels at the end of each reporting period. There were no transfers of financial instruments between levels during the periods presented.

The carrying amounts of financial instruments consisting of cash and cash equivalents, prepaid expenses and other current assets, accounts payable, accrued expenses and other current liabilities included in the Company’s financial statements, are reasonable estimates of fair value, primarily due to their short maturities.

Our available-for-sale short-term investments, which consist of US Treasury bills and certificates of deposit, are considered to be level 2. The fair value of Level 2 financial assets is determined using inputs that are observable in the market or can be derived principally from or corroborated by observable market data such as pricing for similar securities, recently executed transactions, cash flow models with yield curves, and benchmark securities. In addition, Level 2 financial instruments are valued using comparisons to like-kind financial instruments and models that use readily observable market data as their basis.

Property and Equipment, net

Property and equipment, net, is stated at cost, less accumulated depreciation. Maintenance and repairs that do not improve or extend the lives of the respective assets are expensed to operations as incurred, while costs of major additions and betterments are capitalized. Upon disposal, the related cost and accumulated depreciation is removed from the accounts and any resulting gain or loss is included in the results of operations. Depreciation is recorded using the straight-line method over the estimated useful lives of the respective assets, which are as follows:

 

Computer equipment and software

 

3 years

Lab equipment

Furniture and fixtures

Leasehold improvements

 

3-7 years

3 years

remaining life of lease

 

Construction-in-progress is not depreciated until the asset is placed in service.

9


 

Impairment of Long-Lived Assets

The Company evaluates long-lived assets for potential impairment when events or changes in circumstances indicate the carrying value of the assets may not be recoverable. Recoverability is measured by comparing the book values of the assets to the expected future net undiscounted cash flows that the assets are expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the book value of the assets exceed their fair value. The Company recognized impairment losses of $54 thousand on equipment in the three and six months ending June 30, 2019.

 

Leases

We have entered into a lease agreement for our laboratory and office space. As described below under "Recent Accounting Standards,” we adopted ASU 2016-02 – Leases (Topic 842) (“ASU 2016-02”) as of January 1, 2019. Pursuant to ASU 2016-02, all of our leases outstanding on January 1, 2019 continued to be classified as operating leases. With the adoption of ASU 2016-02, we recorded an operating lease right-of-use asset and an operating lease liability on our balance sheet. Right-of-use lease assets represent our right to use the underlying asset during the lease term and the lease obligation represents our commitment to make lease payments arising from the lease. Right-of-use lease assets and obligations were recognized based on the present value of remaining lease payments over the lease term. As the Company’s leases do not provide an implicit rate, we have used an estimated incremental borrowing rate based on the information available at our adoption date in determining the present value of lease payments. Operating lease expense is recognized on a straight-line basis over the lease term. Variable lease costs such as common area costs and other operating costs are expensed as incurred. For all lease agreements we combine lease and non-lease components. Leases with an initial term of 12 months or less are not recorded on the balance sheet.

Prior to our adoption of ASU 2016-02, when our lease agreements contained tenant improvement allowances and rent escalation clauses, we recorded a deferred rent asset or liability equal to the difference between the rent expense and the future minimum lease payments due. The lease expense related to operating leases was recognized on a straight-line basis in the statements of operations over the term of each lease. In cases where the lessor granted us leasehold improvement allowances that reduced our lease expense, we capitalized the improvements as incurred and recognized deferred rent, which was amortized over the shorter of the lease term or the expected useful life of the improvements.

Research and Development Expenses

Research and development costs are charged to expense as incurred in performing research and development activities. The costs include employee compensation costs, facilities and overhead, preclinical activities and related clinical manufacturing costs, regulatory and other related costs.

The Company estimates contract research and clinical trials materials manufacturing expenses based on the services performed pursuant to contracts with research and manufacturing organizations that manufacture materials used in the Company’s ongoing preclinical studies. Nonrefundable advanced payments for goods or services to be received in the future for use in research and development activities are deferred and capitalized. The capitalized amounts are expensed as the related goods are delivered or the services are performed.

In accruing service fees, the Company estimates the time period over which services will be performed and the level of effort to be expended in each period. These estimates are based on communications with the third party service providers and the Company’s estimates of accrued expenses using information available at each balance sheet date. If the actual timing of the performance of services or the level of effort varies from the estimate, the Company will adjust the accrual accordingly.

Stock-Based Compensation Expense

The Company accounts for its stock-based compensation awards to employees and directors in accordance with FASB ASC Topic 718, Compensation-Stock Compensation (“ASC 718”). ASC 718 requires all stock-based payments to employees, including grants of employee stock options and restricted stock, to be recognized in the statements of operations based on their grant-date fair values. Compensation expense related to awards to employees is recognized on a straight-line basis based on the grant-date fair value over the associated service period of the award, which is generally the vesting term. Beginning in the first quarter of 2019, the Company adopted ASU 2018-07 - Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which no longer required non-employee stock options to be periodically revalued. The adoption of this amended guidance did not have a material effect on our condensed consolidated financial statements. Prior to the first quarter of 2019, share-based payments issued to non-employees were recorded at their fair values and were  periodically revalued as the equity instruments vest and were recognized as expense over the related service period in accordance with the provisions of ASC 718 and ASC Topic 505, Equity, and were expensed ratably over the vesting term.

10


 

The Company estimates the fair value of its stock options using the Black-Scholes option pricing model, which requires the input of subjective assumptions, including: (i) the expected stock price volatility; (ii) the expected term of the award; (iii) the risk-free interest rate; (iv) expected dividends; and (v) the estimated fair value of its common stock on the measurement date. Due to the lack of sufficient history and trading volume of its Common Stock and a lack of Company-specific historical and implied volatility data, the Company has based its estimate of expected volatility on the historical volatility of a group of similar companies that are publicly traded. When selecting these public companies on which it has based its expected stock price volatility, the Company selected companies with comparable characteristics to it, including enterprise value, risk profiles, position within the industry, and with historical share price information sufficient to meet the expected term of the stock-based awards. The Company computes historical volatility data using the daily closing prices for the selected companies’ shares during the equivalent period of the calculated expected term of the stock-based awards. The Company will continue to apply this process until a sufficient amount of historical information regarding the volatility of its own stock price becomes available. Due to the lack of Company-specific historical option activity, the Company has estimated the expected term of its employee stock options using the “simplified” method, whereby the expected term equals the arithmetic mean of the vesting term and the original contractual term of the option. Beginning in the first quarter of 2019, the expected term of non-employee stock options also used the “simplified” method. Prior to the first quarter of 2019, the expected term for non-employee awards was the remaining contractual term of the option. The risk-free interest rates are based on the U.S. Treasury securities with a maturity date commensurate with the expected term of the associated award. The Company has never paid and does not expect to pay dividends in the foreseeable future. The Company is also required to estimate forfeitures at the time of grant and to revise those estimates in subsequent periods if actual forfeitures differ from its estimates. Beginning in the first quarter of 2019, the Company used historical data to estimate forfeitures and recorded stock-based compensation expense only for those awards that were expected to vest. Prior to the first quarter of 2019, the forfeiture rate was estimated to be zero. To the extent that actual forfeitures differ from the Company’s estimates, the differences are recorded as a cumulative adjustment in the period the estimates were revised. Stock-based compensation expense recognized in the financial statements is based on awards that are ultimately expected to vest.

Comprehensive Loss

Comprehensive loss is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. The Company is required to record all components of comprehensive loss in the financial statements in the period in which they are recognized. Net loss and other comprehensive income or loss are reported, net of their related tax effect, to arrive at a comprehensive loss.

Recent Accounting Pronouncements

In August 2018, the SEC issued a final rule to simplify certain disclosure requirements. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders’ equity for interim financial statements. In August and September 2018, further amendments were issued to provide implementation guidance on adoption of the SEC rule and transition guidance for the new interim stockholders’ equity disclosure. We adopted this amended guidance in the first quarter of 2019. The adoption of this amended guidance resulted in us disclosing the Condensed Consolidated Statements of Stockholders’ Equity for the three and six months ending June 30, 2018 and 2019.

In August 2018, the FASB issued ASU 2018-13 - Fair Value Measurement (Topic 820) (“ASU 2018-13”) which removes, modifies and adds disclosure requirements on fair value measurements.  ASU 2018-13 removes disclosure requirements for transfers between Level 1 and Level 2 measurements and valuation processes for Level 3 measurements but adds new disclosure requirements including changes in unrealized gains/losses in other comprehensive income related to recurring Level 3 measurements. The amended guidance is effective for us commencing in the first quarter of 2020.  Certain aspects may be applied prospectively while other aspects may be applied retrospectively upon the effective date. Early adoption is permitted.  We are in the process of evaluating the effect of this guidance on our consolidated financial statements and related disclosures.

11


 

In June 2018, the FASB issued ASU 2018-07 - Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting which simplifies the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with certain exceptions. The new guidance expands the scope of ASC 718 to include share-based payments granted to nonemployees in exchange for goods or services used or consumed in an entity’s own operations. The amended guidance is effective for us commencing in the first quarter of 2019.  The adoption of this amended guidance did not have a material effect on our condensed consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02 - Leases (Topic 842) (“ASU 2016-02”), which replaces the existing lease accounting standards. The new standard requires a dual approach for lessee accounting under which a lessee would account for leases as finance (also referred to as capital) leases or operating leases. Both finance leases and operating leases with terms longer than 12 months will result in the lessee recognizing a right-of-use asset and a corresponding lease liability. For finance leases the lessee would recognize interest expense and amortization of the right-of-use asset and for operating leases the lessee would recognize straight-line total lease expense. In July 2018, further amendments were issued to clarify how to apply certain aspects of the amended lease guidance and to address certain implementation issues. ASU 2016-02 was effective for the Company beginning in the first quarter of 2019. The Company generally does not finance purchases of equipment but does lease office and lab facilities. The adoption of this amended guidance resulted in $3.1 million of right-of-use asset and $3.4 million of lease liability being recognized on the condensed consolidated balance sheet as of January 1, 2019.

3.

Net Loss Per Share Attributable to Common Stockholders  

Basic net loss per share attributable to common stockholders is calculated by dividing net loss attributable to common stockholders by the weighted average shares outstanding during the period, without consideration for common stock equivalents. Diluted net loss per share attributable to common stockholders is computed by dividing the net loss by the weighted-average number of shares of common stock and common share equivalents outstanding for the period. There were 433,936 and 354,515 common stock equivalents outstanding as of June 30, 2019 and 2018, respectively, in the form of stock options and unvested restricted stock awards, that have been excluded from the calculation of diluted net loss per share attributable to common stockholders as their effect would be anti-dilutive for all periods presented.  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

 

Six months Ended June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

(In thousands, except shares, units, and per share data)

 

(Unaudited)

 

 

(Unaudited)

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss applicable to common stockholders and

   members

 

$

(5,348

)

 

$

(2,276

)

 

$

(9,459

)

 

$

(4,426

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average basic and diluted common shares

 

 

14,522,515

 

 

 

10,310,101

 

 

 

14,470,371

 

 

 

10,308,747

 

Basic and diluted net loss per common share

 

$

(0.37

)

 

$

(0.22

)

 

$

(0.65

)

 

$

(0.43

)

 

12


 

4.

Balance Sheet Components

Property and Equipment, Net

Property and equipment, net consist of the following (in thousands):

 

 

 

June 30,

2019

 

 

December 31,

2018

 

 

 

(Unaudited)

 

 

 

 

 

Construction-in-progress

 

 

1,754

 

 

 

2,259

 

Leasehold improvements

 

 

2,172

 

 

 

3

 

Furniture & fixtures

 

 

99

 

 

 

99

 

Computer equipment and software

 

 

18

 

 

 

40

 

Laboratory equipment

 

 

2,331

 

 

 

779

 

Total property and equipment

 

 

6,374

 

 

 

3,180

 

Accumulated depreciation and amortization

 

 

(413

)

 

 

(166

)

Property and equipment, net

 

$

5,961

 

 

$

3,014

 

 

Depreciation expense was $175 thousand and $307 thousand for the three and six months ended June 30, 2019, and $23 thousand and $42 thousand for the three and six months ended June 30, 2018, respectively.

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following (in thousands):

 

 

 

June 30,

2019

 

 

December 31,

2018

 

 

 

(Unaudited)

 

 

 

 

 

Accrued pre-clinical expenses

 

$

766

 

 

$

537

 

Accrued professional fees

 

 

111

 

 

 

41

 

Accrued payroll and benefits

 

 

498

 

 

 

348

 

Accrued taxes

 

 

20

 

 

 

154

 

Accrued construction in progress

 

 

807

 

 

 

589

 

Other current liabilities

 

 

404

 

 

 

39

 

Total

 

$

2,606

 

 

$

1,708

 

 

5.

Commitments and Contingencies

Significant Contracts and Agreements

Lease Agreement

In May 2016, the Company signed an operating lease for laboratory and office space that commenced in June 2016 (the 2016 Lease). The 2016 Lease was amended to increase the area leased to approximately 31,000 square feet and to extend the expiration date to February 28, 2027.   As mentioned above in “Recent Accounting Pronouncements” in Note 2, the adoption of ASU 2016-02 on January 1, 2019 for the 2016 Lease, as amended, resulted in a $3.1 million of right-of-use asset and $3.4 million of lease liability being recognized on the condensed consolidated balance sheet as of January 1, 2019.

13


 

The Company’s future minimum operating lease payments from the 2016 Lease, as amended, were as follows (in thousands):

 

 

 

Operating

Leases

 

2019 (remaining six months)

 

$

224

 

2020

 

 

515

 

2021

 

 

592

 

2022

 

 

604

 

2023

 

 

616

 

Thereafter

 

 

2,033

 

Future minimum operating lease payments

 

$

4,584

 

Less: Interest

 

 

1,220

 

Present value of lease liability

 

$

3,364

 

Current portion of lease liability

 

$

438

 

Long-term portion of lease liability

 

$

2,926

 

 

The Company recorded $ 174 thousand and $ 299 thousand in rent expense for the three and six months ended June 30, 2019 respectively, and $34 thousand and $ 65 thousand in rent expense for the three and six months ended June 30, 2018, respectively.

 

Clinical Supply Agreement

The Company has entered into various product manufacturing and clinical supply agreements with Contract Manufacturing Organizations (“CMOs”). The product manufacturing and clinical supply agreements provide the terms and conditions under which the CMOs will formulate, fill, inspect, package, label and test our product candidates, KB103 and KB105 for clinical supply. The Company is obligated to make milestone payments. Additionally, certain raw materials, supplies, outsourced testing and other services for the purposes of batch production will be invoiced separately by the CMOs. The estimated remaining commitment as of June 30, 2019 under these agreements for the manufacturing of our drug product is approximately $2.5 million. The Company is also responsible for the payment of a monthly service fee for project management services for the duration of the arrangement. The Company has incurred expenses under these agreements of $1.1 million and $1.9 million for the three and six months ended June 30, 2019, and $662 thousand and $1.5 million for the three and six months ended June 30, 2018, respectively.

 

6.

Capitalization

Sale of Common Stock

On November 1, 2017, the Company entered into a stock purchase agreement (the “Agreement”) with the Epidermolysis Bullosa Medical Research Foundation, a California not-for-profit corporation (“EBMRF”), and EB Research Partnership, Inc., a New York not-for-profit corporation (“EBRP” and together with EBMRF, the “Purchasers”), pursuant to which the Company sold to the Purchasers an aggregate of 70,000 shares of the Company’s common stock  for a purchase price of $11.00 per share (the “Transaction”). There are redemption features whereby the Company is required to repurchase all or a portion of the shares at a purchase price of $11.00 per share or the closing trading price of the common stock on the redemption request date, whichever is higher, should the Company cease commercially reasonable efforts to work on the research plan pursuant to the Agreement. As the remaining redemption feature is within the control of the Company, the issued common stock has been classified as permanent equity.

 

On June 27, 2019, the Company completed a public offering of 2,500,000 shares of its common stock to the public at $40.00 per share. Net proceeds to the Company from the offering were $93.8 million after deducting underwriting discounts and commissions of approximately $6.0 million, and other offering expenses payable by the Company of approximately $188 thousand. On July 3, 2019, the underwriters exercised their option to purchase an additional 353,946 shares of common stock at $40.00 per share for additional net proceeds of $13.3 million after deducting underwriting discounts and commissions of approximately $849 thousand. In connection with the public offering, the Company suspended its “at-the-market”  equity offering program (“ATM Facility”) that had previously been put in place in March 2019 which had allowed the Company to sell shares of its common stock for up to $50.0 million in gross proceeds. Following the completion of the offering, $16.8 million remains available for future sale under our registration statement, which the company could elect to sell under the ATM facility. The remaining $33.2 million of the ATM facility is no longer available.

 

14


 

Shares Outstanding

There were 16,945,069 and 14,428,916 shares of common stock outstanding at June 30, 2019 and December 31, 2018, respectively. No shares of preferred stock were outstanding at June 30, 2019 or December 31, 2018.

 

7.

Stock-Based Compensation

On September 5, 2017, the Board approved the establishment of the Krystal Biotech, Inc. 2017 IPO Plan (the 2017 IPO Plan), which was adopted prior to the effectiveness of our registration statement on Form S-1 relating to our IPO. Under the 2017 IPO Plan, the Company may grant incentive stock options, non-qualified stock options, stock appreciation rights, dividend equivalent rights, restricted stock and stock grants for the issuance of up to 900,000 shares of the Companys Common Stock.

The Company granted 42,000 and 109,500 stock options to employees and directors of the Company during the three and six months ended June 30, 2019, and 80,500 and 135,500 stock options during the three and six months ended June 30, 2018, respectively. Options granted to employees vest ratably over a four-year period and options granted to directors of the company vest ratably between one and four-year periods. Options have a life of ten years. Commencing in the first quarter of 2019, the accounting treatment for stock options granted to non-employees was aligned with the accounting for employee stock options upon the adoption of ASU 2018-07 as described in Note 2 “Summary of Significant Accounting Policies”. Prior to the first quarter of 2019, stock options granted to non-employees were accounted for using the fair value method of accounting, and were periodically revalued as the options vest, and recognized as expense over the related service period.

The following table summarizes the Companys stock option activity:

 

 

 

 

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

 

 

 

 

Weighted-

 

 

average

 

 

Aggregate

 

 

 

Stock

 

 

average

 

 

Remaining

 

 

Intrinsic

 

 

 

Options

 

 

Exercise

 

 

Contractual

 

 

Value

 

 

 

Outstanding

 

 

Price

 

 

Life (Years)

 

 

(In thousands) (1)

 

Balance at December 31, 2018

 

 

357,089

 

 

$

8.73

 

 

 

8.8

 

 

$

4,302

 

Granted

 

 

109,500

 

 

$

27.14

 

 

 

 

 

 

 

 

 

Exercised

 

 

(16,153

)

 

$

3.43

 

 

 

 

 

 

 

 

 

Cancelled or forfeited

 

 

(16,500

)

 

$

19.65

 

 

 

 

 

 

 

 

 

Balance at June 30, 2019

 

 

433,936

 

 

$

13.16

 

 

 

8.6

 

 

$

11,764

 

Exercisable at June 30, 2019

 

 

131,348

 

 

$

6.68

 

 

 

8.1

 

 

$

4,412

 

Vested at June 30, 2019

 

 

151,744

 

 

$

6.22

 

 

 

8.0

 

 

$

5,168

 

 

 

(1)

Aggregate intrinsic value represents the difference between the closing stock price of our common stock on June 30, 2019 and the exercise price of outstanding in-the-money options.

Options for 16,153 shares of our common stock with an intrinsic value of $595 thousand were exercised during the six months ended June 30, 2019.

The Company has recorded aggregate stock-based compensation expense related to the issuance of stock option awards to employees and non-employees in the condensed consolidated statements of operations for the three and six months ended June 30, 2019 and 2018 as follows (in thousands):

 

 

 

Three Months Ended June 30,

 

 

Six months Ended June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Research and development

 

$

125

 

 

$

76

 

 

$

242

 

 

$

122

 

General and administrative

 

 

127

 

 

 

34

 

 

 

214

 

 

 

53

 

Total stock-based compensation

 

$

252

 

 

$

110

 

 

$

456

 

 

$

175

 

 

Stock Options Granted to Employees. The Company recorded stock-based compensation expense related to employee’s and board member’s stock options of $250 thousand and $435 thousand for the three and six months ended June 30, 2019, and of $91 thousand and $152 thousand for the three and six months ended June 30, 2018, respectively. The fair value of options

15


 

granted to employees was estimated at the date of grant using the Black-Scholes valuation model with the following weighted-average assumptions for the three and six months ended June 30, 2019 and 2018:

 

 

 

Three Months Ended June 30,

 

 

Six months Ended June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Expected stock price volatility

 

 

73

%

 

 

80

%

 

 

72

%

 

 

80

%

Expected term of the award (years)

 

 

6.24

 

 

 

6.25

 

 

 

6.04

 

 

 

6.25

 

Risk-free interest rate

 

 

2.11

%

 

 

2.76

%

 

 

2.34

%

 

 

2.73

%

Forfeiture Rate

 

 

10.00

%

 

 

0.00

%

 

 

10.00

%