Table of Contents

As filed with the Securities and Exchange Commission on September 14, 2017

Registration No. 333-220085

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 2 TO

FORM S-1

REGISTRATION STATEMENT

under

The Securities Act of 1933

 

 

KRYSTAL BIOTECH, INC.

(Exact name of registrant as specified in its charter)

 

Delaware		2836		81-0930882
(State or other jurisdiction of incorporation or organization)		(Primary Standard Industrial Classification Code Number)		(I.R.S. Employer Identification Number)

2100 Wharton Street, Suite 701

Pittsburgh, Pennsylvania 15203

(412) 586-5830

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Krish S. Krishnan

Chief Executive Officer

2100 Wharton Street, Suite 701

Pittsburgh, Pennsylvania 15203

(412) 586-5830

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

John W. Campbell III Emiko Kurotsu Katherine A. Shaia Morrison & Foerster LLP 425 Market Street San Francisco, California 94105 (415) 268-7000		Michael D. Maline Seo Salimi Goodwin Procter LLP 620 Eighth Avenue New York, New York 10018 (212) 813-8800

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box:  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   ☐

If this Form is a post effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   ☐

If this Form is a post effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   ☐

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

 

Large accelerated filer		☐		Accelerated filer		☐
Non-accelerated filer		☐  (do not check if a smaller reporting company)		Smaller reporting company		☒

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

Emerging growth company ☒

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

 

 

CALCULATION OF REGISTRATION FEE

 

Title of Each Class of Securities to be Registered		Proposed Maximum Aggregate Offering Price(1)		Amount of Registration Fee(2)
Common Stock, par value $0.00001 per share		$37,950,000		$4,399

(1)

Estimated solely for the purpose of computing the amount of registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended, based on an estimate of the proposed maximum aggregate offering price. Includes the offering price of additional shares of common stock that the underwriters have the option to purchase to cover over-allotments, if any.

(2)	Previously paid.

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

---

Table of Contents

EXPLANATORY NOTE

Krystal Biotech, Inc. is filing this Amendment No. 2 (this “Amendment”) to its Registration Statement on Form S-1 (Registration No. 333-220085) (the “Registration Statement”) to update the report of the independent registered public accounting firm, and file certain exhibits to the Registration Statement as indicated on the Index to Exhibits.

---

Table of Contents

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to completion. Dated September 14, 2017.

Preliminary Prospectus

3,000,000 Shares

 

COMMON STOCK

 

 

We are offering 3,000,000 shares of our common stock. This is our initial public offering and no public market currently exists for our shares. We anticipate that the initial public offering price of our common stock will be between $9.00 and $11.00 per share.

 

 

We have applied to list our common stock on the NASDAQ Capital Market under the symbol “KRYS.”

 

 

We are an “emerging growth company” under the federal securities laws and are therefore subject to reduced public company reporting requirements.

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 12.

 

 

		Per Share				Total
Initial public offering price		$				$
Underwriting discounts and commissions(1)		$				$
Proceeds, before expenses, to Krystal Biotech, Inc.		$				$

 

(1)	See “Underwriting” for additional information regarding underwriting compensation.

We have granted the underwriters the right to purchase up to an additional 450,000 shares of common stock to cover over-allotments, if any.

Certain of our existing stockholders and members of management, including Krish S. Krishnan, our President and Chief Executive Officer, have indicated an interest in purchasing up to an aggregate of $5.0 million of shares of our common stock in this offering at the public offering price. However, because indications of interest are not binding agreements or commitments to purchase, the underwriters may determine to sell more, fewer, or no shares in this offering to these persons or entities, or these persons or entities may determine to purchase more, fewer, or no shares of common stock in this offering. The underwriters will receive the same underwriting discounts and commissions on any shares of common stock purchased by these persons or entities as they will on any other shares of common stock sold to the public in this offering.

The underwriters expect to deliver the shares of common stock to purchasers on                 , 2017.

 

Ladenburg Thalmann

                , 2017

---

Table of Contents

TABLE OF CONTENTS

 

		Page
PROSPECTUS SUMMARY			1
RISK FACTORS			12
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS			44
INDUSTRY AND MARKET DATA			46
USE OF PROCEEDS			47
DIVIDEND POLICY			49
CAPITALIZATION			50
DILUTION			53
SELECTED FINANCIAL DATA			55
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			56
BUSINESS			73
MANAGEMENT			101
EXECUTIVE COMPENSATION			107
CERTAIN RELATIONSHIPS AND RELATED PARTY AND OTHER TRANSACTIONS			115
PRINCIPAL STOCKHOLDERS			119
DESCRIPTION OF CAPITAL STOCK			121
SHARES ELIGIBLE FOR FUTURE SALE			126
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS OF OUR COMMON STOCK			128
UNDERWRITING			132
LEGAL MATTERS			136
EXPERTS			136
WHERE YOU CAN FIND MORE INFORMATION			136
INDEX TO FINANCIAL STATEMENTS			F-1

You should rely only on the information contained in this prospectus or contained in any free writing prospectus prepared by or on behalf of us. Neither we nor the underwriters have authorized anyone to provide you with information different from, or in addition to, that contained in this prospectus or any related free writing prospectus. This prospectus is an offer to sell only the shares offered hereby but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date, regardless of its delivery. Our business, financial condition, results of operations and prospects may have changed since that date.

Through and including                 , 2017 (25 days after the date of this prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to their unsold allotments or subscriptions.

For investors outside the United States: neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus.

---

Table of Contents

 

1

---

Table of Contents

 

2

---

Table of Contents

 

3

---

Table of Contents

 

4

---

Table of Contents

 

5

---

Table of Contents

 

6

---

Table of Contents

 

7

---

Table of Contents

 

8

---

Table of Contents

 

9

---

Table of Contents

 

10

---

Table of Contents

 

11

---

Table of Contents

RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the following risks and all other information contained in this prospectus, including our financial statements and the related notes, before investing in our common stock. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, also may become important factors that affect us. If any of the following risks occur, our business, financial condition, results of operations and prospects could be materially and adversely affected. In these circumstances, the market price of our common stock could decline, and you may lose all or part of your investment.

RISKS RELATED TO OUR FINANCIAL POSITION AND NEED FOR ADDITIONAL CAPITAL

We have never generated revenue and may never be profitable.

We have not generated any revenue to date and our ability to achieve profitability depends on our ability to successfully complete the development of, and obtain the regulatory approvals necessary to commercialize, KB103 and any additional product candidates that we may pursue in the future. We do not anticipate generating revenues from product sales for the next several years, if ever. We have devoted substantially all of our efforts to research and development of our gene therapy product candidate, KB103, as well as to building out our infrastructure. We expect that it could be several years, if ever, before we have a commercialized product candidate. We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future. The net losses we incur may fluctuate significantly from quarter to quarter. We anticipate that our expenses will increase substantially if, and as, we:

 

•

continue our research and the preclinical and clinical development of KB103, including our planned clinical trials;

 

•

initiate additional clinical trials and preclinical studies for any additional product candidates that we may pursue in the future;

 

•

prepare our biologics license application, or BLA, and marketing authorization application for KB103;

 

•

manufacture current good manufacturing practices, or cGMP, material for clinical trials or potential commercial sales;

 

•

establish and validate a commercial-scale cGMP manufacturing facility;

 

•

further develop our gene therapy product candidate portfolio;

 

•

establish a sales, marketing and distribution infrastructure to commercialize any product candidate for which we may obtain marketing approval;

 

•

develop, maintain, expand and protect our intellectual property portfolio;

 

•

acquire or in-license other product candidates and technologies; and

 

•

seek marketing approval for KB103 in the European Union and in other key geographies.

To become and remain profitable, we must develop and eventually commercialize one or more product candidates with significant market potential. This will require us to be successful in a range of challenging activities, including completing preclinical testing and clinical trials of KB103, developing and validating commercial scale manufacturing processes, obtaining marketing approval for this product candidate, manufacturing, marketing and selling any future product candidates for which we may obtain marketing approval and satisfying any post-marketing requirements. In addition, if we were required to discontinue development of KB103, if KB103 does not receive regulatory approval, if we do not obtain our targeted indications for KB103 or if KB103 fails to achieve sufficient market acceptance for any indication, we could be delayed by many years in our ability to achieve profitability, if ever, and would materially adversely affect our business prospects and financial condition. Moreover, if we decide to leverage any

 

12

---

Table of Contents

success with our KB103 product candidate to develop other product opportunities, we may not be successful in such efforts. In any such event, our business will be materially adversely affected.

We currently only have two product candidates, KB103 and KB104, and we may never develop, acquire or in-license additional product candidates. We may never succeed in any or all of these activities and, even if we do, we may never generate revenues that are significant or large enough to achieve profitability. If we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would decrease the value of our company and could impair our ability to raise capital, maintain our research and development efforts, expand our business or continue our operations. A decline in the value of our company also could cause you to lose all or part of your investment.

Because of the numerous risks and uncertainties associated with pharmaceutical product and biological development, we are unable to accurately predict the timing or amount of increased expenses or when, or if, we will be able to achieve profitability. If we are required by the U.S. Food and Drug Administration, or FDA, or the European Medicines Agency, or EMA, or other regulatory authorities to perform studies in addition to those currently expected, or if there are any delays in completing our clinical trials or the development of KB103, our expenses could increase and revenue could be further delayed.

Our independent registered public accounting firm has expressed substantial doubt about our ability to continue as a going concern.

As described in their audit report, our auditors have included an explanatory paragraph that states that we have incurred recurring losses and negative cash flows from operations since inception and have an accumulated deficit at June 30, 2017 of $2.4 million. These matters raise substantial doubt about our ability to continue as a going concern. Our consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. If we cannot continue as a viable entity, our securityholders may lose some or all of their investment in us.

Even if this offering is successful, we will need to raise additional funding in order to receive approval for KB103 or any other product candidate. Such funding may not be available on acceptable terms, or at all. Failure to obtain this necessary capital when needed may force us to delay, limit or terminate certain of our product development efforts or other operations.

We estimate that the net proceeds from this offering will be approximately $26.5 million (or $30.7 million, if the underwriters exercise their option to purchase additional shares in full), based on an assumed initial public offering price of $10.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. In order to complete the process of obtaining regulatory approval for KB103 and to build the sales, marketing and distribution infrastructure that we believe will be necessary to commercialize KB103, if approved, we will require substantial additional funding. In addition, if we obtain marketing approval for KB103, we expect to incur significant expenses related to product sales, medical affairs, marketing, manufacturing and distribution. Furthermore, we expect to incur additional costs associated with operating as a public company. We anticipate that we will need additional funding to complete the development of KB103 and any future product candidates and to commercialize any such approved products.

Our future capital requirements will depend on many factors, including:

 

•

the progress and results of our planned clinical trials of KB103;

 

•

the scope, progress, results and costs of drug discovery, laboratory testing, manufacturing, preclinical development and clinical trials for any other product candidates that we may pursue in the future, if any;

 

•

the costs, timing and outcome of regulatory review of KB103 and any other product candidates we may develop;

 

13

---

Table of Contents

•

the costs of establishing and maintaining our own commercial-scale cGMP manufacturing facility;

 

•

the costs associated with the manufacturing process development and evaluation of third-party manufacturers;

 

•

the costs of future activities, including product sales, medical affairs, marketing, manufacturing and distribution, in the event we receive marketing approval for KB103 or any other product candidates we may develop;

 

•

the extent to which the costs of our product candidates, if approved, will be paid by health maintenance, managed care, pharmacy benefit and similar healthcare management organizations, or will be reimbursed by government authorities, private health coverage insurers and other third-party payors;

 

•

revenue, if any, received from commercial sale of KB103 or other product candidates, should any of our product candidates receive marketing approval;

 

•

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

 

•

our current license agreements remaining in effect and our achievement of milestones under those agreements;

 

•

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

 

•

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

Identifying potential product candidates and conducting preclinical testing and clinical trials is a time-consuming, expensive and uncertain process that takes years to complete, and we may never generate the necessary data or results required to obtain marketing approval and achieve product sales. In addition, our product candidates, if approved, may not achieve commercial success. Our product revenues, if any, will be derived from or based on sales of product candidates that may not be commercially available for many years, if at all. Accordingly, we will need to continue to rely on additional financing to achieve our business objectives. Any additional fundraising efforts may divert our management from their day-to-day activities, which may adversely affect our ability to develop and commercialize our product candidates. Moreover, the terms of any financing may adversely affect the holdings or the rights of our stockholders and the issuance of additional securities, whether equity or debt, by us, or the possibility of such issuance, may cause the market price of our shares to decline. The sale of additional equity or convertible securities would dilute all of our stockholders. The incurrence of indebtedness would result in increased fixed payment obligations and a portion of our operating cash flows, if any, being dedicated to the payment of principal and interest on such indebtedness, and we may be required to agree to certain restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. Furthermore, existing stockholders may not agree with our financing plans or the terms of such financings. Adequate additional financing may not be available to us on acceptable terms, or at all.

Our limited operating history may make it difficult for you to evaluate the success of our business to date and to assess our future viability.

We are a development-stage company that commenced operations in 2016. Our efforts to date, with respect to the development of KB103, have been limited to organizing and staffing our company, business planning, raising capital, developing our STAR-D platform and related technologies, identifying KB103 as a potential gene therapy product candidate and undertaking preclinical trials of KB103. We have not yet demonstrated the ability to complete clinical trials of KB103 or any other product candidate, obtain marketing approvals, manufacture a commercial-scale product or conduct sales and marketing activities necessary for successful commercialization. Consequently, any predictions you make about our future

 

14

---

Table of Contents

success or viability may not be as accurate as they could be if we had more experience developing gene therapy products.

We do not currently have the ability to perform the sales, marketing and manufacturing functions necessary for the production and sale of KB103 on a commercial scale. Our lead product candidate, KB103, will be required to undergo significant clinical trials before it can be commercialized, if at all. The successful commercialization of KB103 will require us to perform a variety of functions, including:

 

•

clinical development of KB103;

 

•

obtaining required regulatory approvals;

 

•

formulating and manufacturing product candidates; and

 

•

conducting sales and marketing activities.

We expect our financial condition and operating results to continue to fluctuate from quarter to quarter and year to year due to a variety of factors, many of which are beyond our control. We will need to transition at some point from a company with a research and development focus to a company capable of undertaking commercial activities. We may encounter unforeseen expenses, difficulties, complications and delays and may not be successful in such a transition.

RISKS RELATED TO OUR BUSINESS

We are early in our development efforts and our lead product candidate, KB103, is still in preclinical development. If we are unable to advance KB103 to clinical trials, obtain regulatory approval and ultimately commercialize KB103, or experience significant delays in doing so, our business will be materially harmed.

We are early in our development efforts and KB103 is still in preclinical development. Pending additional regulatory approvals, we plan to initiate a Phase 1/2 clinical trial in the first quarter of 2018. The development and commercialization of KB103 or any other product candidate we may develop is subject to many uncertainties, including the following:

 

•

successful completion of additional preclinical studies and successful enrollment and completion of clinical trials;

 

•

an effective investigational new drug application, or IND, and clinical trial authorizations, or CTA, that allow us to commence our planned clinical trials for KB103;

 

•

positive results from our planned clinical trials;

 

•

receipt of regulatory approvals from applicable regulatory authorities;

 

•

maintenance of our existing arrangements with third-party manufacturers for clinical supply and successful development of our internal manufacturing processes on an ongoing basis;

 

•

commercial launch of KB103, if and when approved, whether alone or in collaboration with others;

 

•

acceptance of KB103, if and when approved, by patients, the medical community and third-party payors;

 

•

enforcement and defense of intellectual property rights and claims; and

 

•

maintenance of a continued acceptable safety profile of our product candidates following approval.

If we do not succeed in one or more of these factors in a timely manner or at all, we could experience significant delays or an inability to successfully commercialize KB103, which would materially harm our business. If we do not receive regulatory approvals for KB103, our business, financial condition, results of operations and prospects could be materially and adversely affected.

 

15

---

Table of Contents

We have not tested KB103 in clinical trials. Success in early preclinical studies may not be indicative of results obtained in later preclinical studies and clinical trials.

KB103 has never been evaluated in human clinical trials, and we may experience unexpected or adverse results in the future. We will be required to demonstrate through adequate and well-controlled clinical trials that KB103 is safe for humans and effective for indicated uses before we can seek regulatory approvals for commercial sale.

The positive results we have observed for KB103 in preclinical trials may not be predictive of outcomes in our future clinical trials. KB103, or other product candidates, may also fail to show the desired safety and efficacy in later stages of clinical development even if they successfully advance through initial clinical trials. The clinical trial process may fail to demonstrate that KB103 is safe for humans and effective for indicated uses, which may cause us to abandon KB103, which is currently our lead product candidate.

Many companies in the biotechnology industry have suffered significant setbacks in late-stage clinical trials after achieving positive results in early-stage development and there is a high failure rate for product candidates proceeding through clinical trials. Data obtained from preclinical and clinical activities are subject to varying interpretations, which may delay, limit or prevent regulatory approval. Regulatory delays or rejections may be encountered as a result of many factors, including changes in regulatory policy during the period of product development, failure to perform in accordance with FDA good clinical practices or applicable regulatory guidelines in the EU and other countries, selection of clinical endpoints that require prolonged periods of clinical observation or analysis of the resulting data, or changes in regulatory requirements and guidance that require amending or submitting new clinical protocols. In addition, the design of a clinical trial can determine whether its results will support approval of a product, and flaws in the design of a clinical trial may not become apparent until the clinical trial is well advanced. We cannot be certain that we will not face these or similar setbacks.

We may find it difficult to enroll an adequate number of patients in our clinical trials, which could delay or prevent us from proceeding with clinical trials of KB103.

Identifying and qualifying patients to participate in clinical trials of KB103 is critical to our success. The timing of our clinical trials depends on our ability to recruit an adequate number of patients to participate as well as completion of required follow-up periods. If patients are unwilling to participate in our gene therapy studies because of competitive clinical trials for similar patient populations, negative publicity from adverse events related to the biotechnology or gene therapy fields or for other reasons, the timeline for recruiting patients, conducting studies and obtaining regulatory approval of KB103 may be delayed. These delays could result in increased costs, delays in advancing KB103, delays in testing the effectiveness of KB103 or termination of clinical trials altogether.

Even if we complete the necessary clinical trials, we cannot predict when, or if, we will obtain regulatory approval to commercialize KB103 and the approval may be for a more narrow indication than we seek.

We cannot commercialize a product candidate until the appropriate regulatory authorities have reviewed and approved the product candidate. Even if KB103 meets its safety and efficacy endpoints in clinical trials, the regulatory authorities may not complete their review processes in a timely manner, or we may not be able to obtain regulatory approval. Additional delays may result if an FDA Advisory Committee or other regulatory authority recommends non-approval or restrictions on approval. In addition, we may experience delays or rejections based upon additional government regulation from future legislation or administrative action, or changes in regulatory authority policy during the period of product development, clinical trials and the review process.

Regulatory authorities also may approve a product candidate for more limited indications than requested or they may impose significant limitations in the form of narrow indications, warnings or a Risk Evaluation and Mitigation Strategy, or REMS. These regulatory authorities may require precautions or contra-indications with respect to conditions of use or they may grant approval subject to the performance

 

16

---

Table of Contents

of costly post-marketing clinical trials. In addition, regulatory authorities may not approve the labeling claims that are necessary or desirable for the successful commercialization of KB103. Any of the foregoing scenarios could materially harm the commercial prospects for KB103 and materially and adversely affect our business, financial condition, results of operations and prospects.

KB103 is based on a novel technology, which makes it difficult to predict the time and cost of development and of subsequently obtaining regulatory approval.

The clinical trial requirements of the FDA, EMA and other regulatory authorities and the criteria these regulators use to determine the safety and efficacy of a product candidate vary substantially according to the type, complexity, novelty and intended use and market of such product candidates. The regulatory approval process for novel product candidates such as ours can be more expensive and take longer than for other, better known or more extensively studied product candidates. To date, only one gene therapy product, Novartis’ Kymria, has received marketing approval by the FDA, and only two gene therapy products, uniQure N.V.’s Glybera^® and GlaxoSmithKline’s Strimvelis™, have received marketing authorization from the European Commission. It is difficult to determine how long it will take or how much it will cost to obtain regulatory approvals for our product candidates in either the United States or the European Union or how long it will take to commercialize our product candidates. Approvals by the European Commission may not be indicative of what FDA may require for approval.

Regulatory requirements governing gene and cell therapy products have changed frequently and may continue to change in the future. The FDA has established the Office of Cellular, Tissue and Gene Therapies within its Center for Biologics Evaluation and Research, or CBER, to consolidate the review of gene therapy and related products, and has established the Cellular, Tissue and Gene Therapies Advisory Committee to advise CBER in its review. Gene therapy clinical trials conducted at institutions that receive funding for recombinant DNA research from the United States National Institutes of Health, or the NIH, also are potentially subject to review by the NIH Office of Biotechnology Activities’ Recombinant DNA Advisory Committee, or the RAC; however, the NIH recently announced that the RAC will only publicly review clinical trials if the trials cannot be evaluated by standard oversight bodies and pose unusual risks. Although the FDA decides whether individual gene therapy protocols may proceed, the RAC public review process, if undertaken, can delay the initiation of a clinical trial, even if the FDA has reviewed the trial design and details and approved its initiation. Conversely, the FDA can put an IND on a clinical hold even if the RAC has provided a favorable review or an exemption from in-depth, public review. If we were to engage an NIH-funded institution to conduct a clinical trial, that institution’s institutional biosafety committee as well as its institutional review board, or IRB, would need to review the proposed clinical trial to assess the safety of the trial. In addition, adverse developments in clinical trials of gene therapy products conducted by others may cause the FDA or other oversight bodies to change the requirements for approval of our product candidates. Similarly, the EMA may issue new guidelines concerning the development and marketing authorization for gene therapy medicinal products and require that we comply with these new guidelines.

These regulatory review committees and advisory groups and the new guidelines they promulgate may lengthen the regulatory review process, require us to perform additional studies, increase our development costs, lead to changes in regulatory positions and interpretations, delay or prevent approval and commercialization of KB103 or future product candidates or lead to significant post-approval limitations or restrictions. As we advance KB103, we will be required to consult with these regulatory and advisory groups, and comply with applicable guidelines. If we fail to do so, we may be required to delay or discontinue development of KB103. These additional processes may result in a review and approval process that is longer than we otherwise would have expected. Delay or failure to obtain, or unexpected costs in obtaining, the regulatory approval necessary to bring a potential product to market could decrease our ability to generate sufficient product revenue, and our business, financial condition, results of operations and prospects would be materially and adversely affected.

 

17

---

Table of Contents

KB103 may cause undesirable side effects or have other properties that could delay or prevent its regulatory approval, limit the commercial potential or result in significant negative consequences following any potential marketing approval.

There have been several significant adverse side effects in gene therapy trials using other vectors in the past. Gene therapy is still a relatively new approach to disease treatment and additional adverse side effects could develop. There also is the potential risk of delayed adverse events following exposure to gene therapy products due to persistent biologic activity of the genetic material or other components of products used to carry the genetic material. Possible adverse side effects that could occur with treatment with gene therapy products include an immunologic reaction early after administration which, while not necessarily adverse to the patient’s health, could substantially limit the effectiveness of the treatment. In previous clinical trials involving vectors derived from adeno-associated virus for gene therapy, some subjects experienced the development of a T-cell response, whereby after the vector is within the target cell, the cellular immune response system triggers the removal of transduced cells by activated T-cells. If our vectors demonstrate a similar effect we may decide or be required to halt or delay further clinical development of KB103.

In addition to side effects caused by the product candidate, the administration process or related procedures also can cause adverse side effects. If any such adverse events occur, our clinical trials could be suspended or terminated. If in the future we are unable to demonstrate that such adverse events were caused by the administration process or related procedures, the FDA, the European Commission, the EMA or other regulatory authorities could order us to cease further development of, or deny approval of, KB103 for any or all targeted indications. Even if we are able to demonstrate that any serious adverse events are not product-related, such occurrences could affect patient recruitment or the ability of enrolled patients to complete the trial. Moreover, if we elect, or are required, to delay, suspend or terminate any clinical trial of KB103, the commercial prospects of such product candidate may be harmed and our ability to generate product revenues from this product candidate may be delayed or eliminated. Any of these occurrences may harm our ability to develop other product candidates, and may harm our business, financial condition and prospects significantly.

Additionally, if KB103 receives marketing approval, the FDA could require us to adopt a REMS to ensure that the benefits outweigh its risks, which may include, among other things, a medication guide outlining the risks of the product for distribution to patients and a communication plan to health care practitioners. Furthermore, if we or others later identify undesirable side effects caused by KB103, several potentially significant negative consequences could result, including:

 

•

regulatory authorities may suspend or withdraw approvals of such product candidate;

 

•

regulatory authorities may require additional warnings on the label;

 

•

we may be required to change the way a product candidate is administered or conduct additional clinical trials;

 

•

we could be sued and held liable for harm caused to patients; and

 

•

our reputation may suffer.

Any of these events could prevent us from achieving or maintaining market acceptance of KB103 and could significantly harm our business, financial condition, results of operations and prospects.

We may encounter substantial delays in our clinical trials or we may fail to demonstrate safety and efficacy to the satisfaction of applicable regulatory authorities.

Before obtaining marketing approval from regulatory authorities for the sale of our drug candidates, we must conduct extensive clinical trials to demonstrate the safety and efficacy of the drug candidate for its intended indications. Clinical trials are expensive, time consuming and uncertain as to outcome. We cannot guarantee that any clinical trials will be conducted as planned or completed on schedule, if at all. A

 

18

---

Table of Contents

failure of one or more clinical trials can occur at any stage of testing. Events that may prevent successful or timely completion of clinical development include:

 

•

delays in reaching a consensus with regulatory authorities on trial design;

 

•

delays in opening sites and recruiting suitable patients to participate in our clinical trials;

 

•

imposition of a clinical hold by regulatory authorities as a result of a serious adverse event or concerns with a class of drug candidates, or after an inspection of our clinical trial operations or trial sites;

 

•

delays in having patients complete participation in a trial or return for post-treatment follow-up;

 

•

occurrence of serious adverse events associated with the drug candidate that are viewed to outweigh its potential benefits; or

 

•

changes in regulatory requirements and guidance that require amending or submitting new clinical protocols.

In addition, if we make manufacturing or formulation changes to KB103, we may need to conduct additional studies to bridge our modified product candidate to earlier versions. Clinical trial delays could also shorten any periods during which we may have the exclusive right to commercialize KB103 or allow our competitors to bring products to market before we do, which could limit our potential revenue or impair our ability to successfully commercialize KB103 and may harm our business, financial condition, results of operations and prospects. Any delays, setbacks or failures in our clinical trials could materially and adversely affect our business, financial condition, results of operations and prospects.

Additionally, if the results of our clinical trials are inconclusive or if there are safety concerns or serious adverse events associated with our drug candidates, we may:

 

•

be delayed in obtaining marketing approval, if at all;

 

•

obtain approval for indications or patient populations that are not as broad as intended or desired;

 

•

obtain approval with labeling that includes significant use or distribution restrictions or safety warnings;

 

•

be subject to additional post-marketing testing requirements;

 

•

be required to perform additional clinical trials to support approval or be subject to additional post-marketing testing requirements;

 

•

have regulatory authorities withdraw, or suspend, their approval of the drug or impose restrictions on its distribution;

 

•

be subject to the addition of labeling statements, such as warnings or contraindications;

 

•

be sued; or

 

•

experience damage to our reputation

Our drug development costs will also increase if we experience delays in testing or obtaining marketing approvals. We do not know whether any of our preclinical studies or clinical trials will begin as planned, need to be restructured or be completed on schedule, if at all.

Further, we, the FDA or an institutional review board, or IRB, may suspend our clinical trials at any time if it appears that we or our collaborators are failing to conduct a trial in accordance with regulatory requirements, including the FDA’s current Good Clinical Practice, or GCP, regulations, that we are exposing participants to unacceptable health risks, or if the FDA finds deficiencies in our IND applications or the conduct of these trials. Therefore, we cannot predict with any certainty the schedule for commencement and completion of future clinical trials. If we experience delays in the commencement or

 

19

---

Table of Contents

completion of our clinical trials, or if we terminate a clinical trial prior to completion, the commercial prospects of our drug candidates could be negatively impacted, and our ability to generate revenues from our drug candidates may be delayed.

Negative public opinion and increased regulatory scrutiny of gene therapy may damage public perception of the safety of our gene therapy product candidates and adversely affect our ability to conduct our business or obtain regulatory approvals for our product candidates.

Gene therapy remains a novel technology, with only one gene therapy product approved to date in the United States and only two gene therapy products approved to date in the European Union. Public perception may be influenced by claims that gene therapy is unsafe, and gene therapy may not gain the acceptance of the public or the medical community. In particular, our success will depend upon physicians who specialize in the treatment of genetic diseases targeted by our product candidates prescribing treatments that involve the use of our product candidates in lieu of, or in addition to, existing treatments with which they are familiar and for which greater clinical data may be available. More restrictive government regulations or negative public opinion would have an adverse effect on our business, financial condition, results of operations and prospects and may delay or impair the development and commercialization of our product candidates or demand for any products we may develop. For example, earlier gene therapy trials led to several well-publicized adverse events, including cases of leukemia and death seen in trials using other vectors. Serious adverse events in our clinical trials, or other clinical trials involving gene therapy products or our competitors’ products, even if not ultimately attributable to the relevant product candidates, and the resulting publicity, could result in increased government regulation, unfavorable public perception, potential regulatory delays in the testing or approval of our product candidates, stricter labeling requirements for those product candidates that are approved and a decrease in demand for any such product candidates.

In addition, our success will depend upon physicians who specialize in the treatment of DEB prescribing treatments that involve the use of KB103 in lieu of, or in addition to, other treatments with which they are more familiar and for which greater clinical data may be available. More restrictive government regulations or negative public opinion would have an adverse effect on our business, financial condition, results of operations and prospects and may delay or impair the development and commercialization of KB103 or demand for any product candidate we may develop. Serious adverse events in our clinical trials, or other clinical trials involving gene therapy products or our competitors’ products, even if not ultimately attributable to the relevant product candidates, and the resulting publicity, could result in increased government regulation, unfavorable public perception, potential regulatory delays in the testing or approval of KB103, stricter labeling requirements for KB103 if approved and a decrease in demand for KB103.

If the market opportunities for KB103 or our future product candidates are smaller than we believe they are, our product revenues may be adversely affected and our business may suffer.

We are currently focusing our research and product development efforts on our KB103 treatment for DEB. Our understanding of both the number of people who have this disease, as well as the subset of people with this disease who have the potential to benefit from treatment with KB103, are based on estimates in published literature. These estimates may prove to be incorrect and new studies may reduce the estimated incidence or prevalence of this disease. The number of patients in the United States, the European Union and elsewhere may turn out to be lower than expected or these patients may not be otherwise amenable to treatment with KB103 or may become increasingly difficult to identify and access, all of which would adversely affect our business, financial condition, results of operations and prospects.

Further, there are several factors that could contribute to making the actual number of patients who receive KB103 less than the potentially addressable market. These include the lack of widespread availability of, and limited reimbursement for, new therapies in many underdeveloped markets. Further, the severity of the progression of a disease up to the time of treatment will likely diminish the therapeutic

 

20

---

Table of Contents

benefit conferred by a gene therapy due to irreversible cell damage. Lastly, certain patients’ immune systems might prohibit the successful delivery of certain gene therapy products to the target tissue, thereby limiting the treatment outcomes.

The commercial success of KB103 and any future product candidates will depend upon its degree of market acceptance by physicians, patients, third-party payors and others in the medical community.

Ethical, social and legal concerns about gene therapy could result in additional regulations restricting or prohibiting KB103. Even with the requisite approvals from the FDA in the United States, the EMA in the European Union and other regulatory authorities internationally, the commercial success of KB103 will depend, in part, on the acceptance of physicians, patients and health care payors of gene therapy products in general, and KB103 in particular, as medically necessary, cost-effective and safe. Any product that we commercialize may not gain acceptance by physicians, patients, health care payors and others in the medical community. If these products do not achieve an adequate level of acceptance, we may not generate significant product revenue and may not become profitable. The degree of market acceptance of gene therapy products and, in particular, KB103, if approved for commercial sale, will depend on several factors, including:

 

•

the efficacy and safety of KB103 as demonstrated in clinical trials;

 

•

the efficacy, potential and perceived advantages of KB103 over alternative treatments;

 

•

the cost of KB103 relative to alternative treatments;

 

•

the clinical indications for which KB103 is approved by the FDA or the European Commission;

 

•

patient awareness of, and willingness to seek, genotyping;

 

•

the willingness of physicians to prescribe new therapies;

 

•

the willingness of the target patient population to try new therapies;

 

•

the prevalence and severity of any side effects;

 

•

product labeling or product insert requirements of the FDA, the EMA or other regulatory authorities, including any limitations or warnings contained in a product’s approved labeling;

 

•

relative convenience and ease of administration;

 

•

the strength of marketing and distribution support;

 

•

the timing of market introduction of competitive products;

 

•

the availability of products and their ability to meet market demand;

 

•

publicity concerning our product candidates or competing products and treatments;

 

•

any restrictions on the use of our products together with other medications; and

 

•

favorable third-party payor coverage and adequate reimbursement.

Even if a potential product displays a favorable efficacy and safety profile in preclinical studies and clinical trials, market acceptance of the product will not be fully known until after it is launched.

Even if we obtain and maintain approval for our product candidates from the FDA, we may never obtain approval for them outside of the United States, which would limit our market opportunities and adversely affect our business.

Approval of a product candidate in the United States by the FDA does not ensure approval of such product candidate by regulatory authorities in other countries or jurisdictions, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or by the

 

21

---

Table of Contents

FDA. Sales of KB103 or other future product candidates outside of the United States will be subject to foreign regulatory requirements governing clinical trials and marketing approval. Even if the FDA grants marketing approval for a product candidate, comparable regulatory authorities of foreign countries also must approve the manufacturing and marketing of the product candidate in those countries. Approval procedures vary among jurisdictions and can involve requirements and administrative review periods different from, and more onerous than, those in the United States, including additional preclinical studies or clinical trials. In many countries outside the United States, a product candidate must be approved for reimbursement before it can be approved for sale in that country. In some cases, the price that we intend to charge for our product candidates, if approved, is also subject to approval. We intend to submit a marketing authorization application to the EMA for approval of KB103 in the European Union, but obtaining such approval from the European Commission following the opinion of the EMA is a lengthy and expensive process. Even if a product candidate is approved, the FDA or the European Commission, as the case may be, may limit the indications for which the product may be marketed, require extensive warnings on the product labeling or require expensive and time-consuming additional clinical trials or reporting as conditions of approval. Regulatory authorities in countries outside of the United States and the European Union also have requirements for approval of product candidates with which we must comply prior to marketing in those countries. Obtaining foreign regulatory approvals and compliance with foreign regulatory requirements could result in significant delays, difficulties and costs for us and could delay or prevent the introduction of our product candidates in certain countries.

Further, clinical trials conducted in one country may not be accepted by regulatory authorities in other countries. Also, regulatory approval for any of our product candidates may be withdrawn. If we fail to comply with the regulatory requirements, our target market will be reduced and our ability to realize the full market potential of KB103 or our future product candidates will be harmed and our business, financial condition, results of operations and prospects will be adversely affected.

We have a limited number of employees and limited corporate infrastructure, and may experience difficulties in managing growth.

We are a small company with a limited number of employees and corporate infrastructure. For example, we currently do not have a full-time chief financial officer or principal accounting officer in-house, and rely on professional service providers for these functions. We expect to experience a period of significant expansion in headcount, facilities, infrastructure and overhead as we mature and to meet our new reporting requirements under the Securities Exchange Act of 1934, as amended. Future growth will impose significant added capital requirements, as well as added responsibilities on members of management, including the need to identify, recruit, maintain and integrate new personnel. Our future financial performance and our ability to compete effectively will depend, in part, on our ability to manage any future growth effectively.

Even if we obtain regulatory approval for a product candidate, our product candidates will remain subject to regulatory oversight.

Even if we obtain any regulatory approval for KB103, our lead product candidate, it will be subject to ongoing regulatory requirements for manufacturing, labeling, packaging, storage, advertising, promotion, sampling, record-keeping and submission of safety and other post-market information. Any regulatory approvals that we receive for KB103 may also be subject to a REMS, limitations on the approved indicated uses for which the product may be marketed or to the conditions of approval, or contain requirements for potentially costly post-marketing testing, including Phase 4 clinical trials, and surveillance to monitor the quality, safety and efficacy of the product. For example, the holder of an approved BLA is obligated to monitor and report adverse events and any failure of a product to meet the specifications in the BLA. FDA guidance advises that patients treated with some types of gene therapy undergo follow-up observations for potential adverse events for as long as 15 years, and our current and each of our proposed clinical trials for KB103 includes a 15 year long-term follow-up phase, limited to confirmed data collection

 

22

---

Table of Contents

from annual visits with standard care physicians. The holder of an approved BLA also must submit new or supplemental applications and obtain FDA approval for certain changes to the approved product, product labeling or manufacturing process. Advertising and promotional materials must comply with FDA rules and are subject to FDA review, in addition to other potentially applicable federal and state laws.

In addition, product manufacturers and their facilities are subject to payment of user fees and continual review and periodic inspections by the FDA and other regulatory authorities for compliance with cGMP requirements and adherence to commitments made in the BLA or foreign marketing application. If we, or a regulatory authority, discover previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured or disagrees with the promotion, marketing or labeling of that product, a regulatory authority may impose restrictions relative to that product, the manufacturing facility or us, including requiring recall or withdrawal of the product from the market or suspension of manufacturing.

If we fail to comply with applicable regulatory requirements following approval of KB103 or any future product candidate, a regulatory authority may:

 

•

issue a warning letter asserting that we are in violation of the law;

 

•

seek an injunction or impose administrative, civil or criminal penalties or monetary fines;

 

•

suspend or withdraw regulatory approval;

 

•

suspend any ongoing clinical trials;

 

•

refuse to approve a pending BLA or comparable foreign marketing application (or any supplements thereto) submitted by us or our strategic partners;

 

•

restrict the marketing or manufacturing of the product;

 

•

seize or detain the product or otherwise require the withdrawal of the product from the market;

 

•

refuse to permit the import or export of product candidates; or

 

•

refuse to allow us to enter into supply contracts, including government contracts.

Any government investigation of alleged violations of law could require us to expend significant time and resources in response and could generate negative publicity. The occurrence of any event or penalty described above may inhibit our ability to commercialize KB103 and adversely affect our business, financial condition, results of operations and prospects.

In addition, the FDA’s policies, and those of equivalent foreign regulatory agencies, may change and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of KB103. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the United States or abroad. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may lose any marketing approval that we may have obtained and we may not achieve or sustain profitability, which would materially and adversely affect our business, financial condition, results of operations and prospects.

We may be unable to obtain orphan drug exclusivity for KB103 or any other future product candidate. If our competitors are able to obtain orphan drug exclusivity for products that constitute the same drug and treat the same indications as KB103 before us, we may not be able to have competing products approved by the applicable regulatory authority for a significant period of time.

We plan to seek an orphan drug designation from the FDA for KB103. Regulatory authorities in some jurisdictions, including the United States and the European Union, may designate drugs for relatively small patient populations as orphan drugs. Under the Orphan Drug Act of 1983, the FDA may designate a product candidate as an orphan drug if it is intended to treat a rare disease or condition, which

 

23

---

Table of Contents

is generally defined as having a patient population of fewer than 200,000 individuals in the United States, or a patient population greater than 200,000 in the United States where there is no reasonable expectation that the cost of developing the drug will be recovered from sales in the United States. In the European Union, the EMA’s Committee for Orphan Medicinal Products grants orphan drug designation to promote the development of products that are intended for the diagnosis, prevention or treatment of a life-threatening or chronically debilitating condition affecting not more than 5 in 10,000 persons in the European Union. Additionally, orphan designation is granted for products intended for the diagnosis, prevention or treatment of a life-threatening, seriously debilitating or serious and chronic condition and when, without incentives, it is unlikely that sales of the drug in the European Union would be sufficient to justify the necessary investment in developing the drug or biologic product.

Generally, if a product candidate with an orphan drug designation receives the first marketing approval for the indication for which it has such designation, the product is entitled to a period of marketing exclusivity, which precludes the FDA or the European Commission from approving another marketing application for a product that constitutes the same drug treating the same indication for that marketing exclusivity period, except in limited circumstances. If another sponsor receives such approval before we do (regardless of our orphan drug designation), we will be precluded from receiving marketing approval for our product for the applicable exclusivity period. The applicable period is seven years in the United States and 10 years in the European Union. The exclusivity period in the European Union can be reduced to six years if a product no longer meets the criteria for orphan drug designation or if the product is sufficiently profitable so that market exclusivity is no longer justified. Orphan drug exclusivity may be revoked if any regulatory agency determines that the request for designation was materially defective or if the manufacturer is unable to assure sufficient quantity of the product to meet the needs of patients with the rare disease or condition.

Even if we obtain orphan drug exclusivity for KB103, that exclusivity may not effectively protect the product candidate from competition because different drugs can be approved for the same condition. In the United States, even after an orphan drug is approved, the FDA may subsequently approve another drug for the same condition if the FDA concludes that the latter drug is not the same drug or is clinically superior in that it is shown to be safer, more effective or makes a major contribution to patient care. In the European Union, marketing authorization may be granted to a similar medicinal product for the same orphan indication if:

 

•

the second applicant can establish in its application that its medicinal product, although similar to the orphan medicinal product already authorized, is safer, more effective or otherwise clinically superior;

 

•

the holder of the marketing authorization for the original orphan medicinal product consents to a second orphan medicinal product application; or

 

•

the holder of the marketing authorization for the original orphan medicinal product cannot supply sufficient quantities of orphan medicinal product.

Breakthrough therapy designation, Fast Track designation or Rare Pediatric Disease designation by the FDA, even if granted for any of our product candidates, may not lead to a faster development, regulatory review or approval process, and it does not increase the likelihood that any of our product candidates will receive marketing approval in the United States.

We may, in the future, apply for breakthrough therapy designation or Fast Track designation in the United States for our product candidates. We plan to apply for breakthrough therapy designation in the first quarter of 2017 and Fast Track designation in the second quarter of 2018 for KB103 and we have been granted rare pediatric disease designation for KB103. Each of these designations is within the discretion of the FDA. Accordingly, even if we believe one of our product candidates meets the criteria for breakthrough therapy designation, Fast Track designation or rare pediatric disease designation, the FDA may disagree. In any event, the receipt of any of these designations for a product candidate may not result in a faster development process, review or approval compared to products considered for approval under conventional FDA procedures and does not assure ultimate approval by the FDA.

 

24

---

Table of Contents

A breakthrough therapy product candidate is defined as a product candidate that is intended, alone or in combination with one or more other drugs, to treat a serious or life-threatening disease or condition and preliminary clinical evidence indicates that such product candidate may demonstrate substantial improvement on one or more clinically significant endpoints over existing therapies. Drugs designated as breakthrough therapies by the FDA are eligible for accelerated approval and increased interaction and communication with the FDA designed to expedite the development and review process. If a drug, or biologic in our case, is intended for the treatment of a serious or life-threatening condition and the biologic demonstrates the potential to address unmet medical needs for this condition, the biologic sponsor may apply for FDA Fast Track designation. Even if we do receive Fast Track designation, we may not experience a faster development process, review or approval compared to conventional FDA procedures. In addition, the FDA may withdraw Fast Track designation if it believes that the designation is no longer supported by data from our clinical development program. Many biologics that have received Fast Track designation have failed to obtain approval. A sponsor who receives an approval for a drug or biologic for a “rare pediatric disease” may qualify for a voucher that can be redeemed to receive a priority review of a subsequent marketing application for a different product. In December 2016, we received the designation of “rare pediatric disease” for KB103 and conditional designation of our marketing application as a “rare pediatric disease product application,” which, if granted, could qualify us to receive a Rare Pediatric Priority Review Voucher. According to the FDA website, a Rare Pediatric Priority Review Voucher can be redeemed to receive a priority review of a subsequent marketing application for a different product.

There is no assurance we will receive breakthrough therapy or Fast Track designations for any of our product candidates and the receipt of any of these designations for a product candidate may not result in a faster development process, review or approval and does not assure ultimate approval by the FDA. Further, even though we have received rare pediatric disease designation for KB103, we may not experience a faster development process, review or approval for a subsequent marketing application.

We may expend our limited resources to pursue a particular product candidate or indication and fail to capitalize on product candidates or indications that may be more profitable or for which there is a greater likelihood of success.

We have limited financial and managerial resources. As a result, we may forego or delay pursuit of opportunities with other product candidates or for other indications that later prove to have greater commercial potential. Our resource allocation decisions may cause us to fail to timely capitalize on viable commercial products or profitable market opportunities. Our spending on current and future research and development programs and product candidates for specific indications may not yield any commercially viable products. If we do not accurately evaluate the commercial potential or target market for a particular product candidate, we may relinquish valuable rights to that product candidate through collaboration, licensing or other royalty arrangements in cases in which it would have been more advantageous for us to retain sole development and commercialization rights to such product candidate.

If we are not successful in discovering, developing and commercializing additional product candidates, our ability to expand our business and achieve our strategic objectives would be impaired.

Although a substantial amount of our efforts focuses on the potential approval of KB103, a key component our strategy is to discover, develop and potentially commercialize a portfolio of product candidates to treat orphan diseases and ultimately, non-orphan diseases. Identifying new product candidates requires substantial technical, financial and human resources, whether or not any product candidates are ultimately identified. Even if we identify product candidates that initially show promise, we may fail to successfully develop and commercialize such product candidates for many reasons, including the following:

 

•

the research methodology used may not be successful in identifying potential product candidates;

 

•

competitors may develop alternatives that render our product candidates obsolete;

 

25

---

Table of Contents

•

product candidates we develop may nevertheless be covered by third parties’ patents or other exclusive rights;

 

•

a product candidate may, on further study, be shown to have harmful side effects or other characteristics that indicate it is unlikely to be effective or otherwise does not meet applicable regulatory criteria;

 

•

a product candidate may not be capable of being produced in commercial quantities at an acceptable cost, or at all; and

 

•

a product candidate may not be accepted as safe and effective by patients, the medical community or third-party payors.

If we are unsuccessful in identifying and developing additional product candidates, our potential for growth may be impaired.

We face significant competition in an environment of rapid technological change and the possibility that our competitors may achieve regulatory approval before us or develop therapies that are more advanced or effective than ours, which may adversely affect our financial condition and our ability to successfully market or commercialize KB103.

At this time, there are no known FDA or EMA approved treatments for DEB, or any approved gene therapy treatment for dermatological indications, generally. However, we are aware of several companies and institutions that are currently developing alternative autologous or palliative gene therapy approaches for DEB. Many of our potential competitors, alone or with their strategic partners, have substantially greater financial, technical and other resources, such as larger research and development, clinical, marketing and manufacturing organizations. Mergers and acquisitions in the biotechnology and pharmaceutical industries may result in even more resources being concentrated among a smaller number of competitors. Our commercial opportunity could be reduced or eliminated if competitors develop and commercialize products that are safer, more effective, have fewer or less severe side effects, are more convenient or are less expensive than any product candidate that we may develop. Competitors also may obtain FDA or other regulatory approval for their products more rapidly or earlier than we may obtain approval for ours, which could result in our competitors establishing a strong market position before we are able to enter the market. Additionally, technologies developed by our competitors may render KB103 uneconomical or obsolete, and we may not be successful in marketing KB103 against competitors.

In addition, as a result of the expiration or successful challenge of our patent rights, we could face more litigation with respect to the validity and/or scope of patents relating to our competitors’ products. The availability of our competitors’ products could limit the demand, and the price we are able to charge, for any product candidate that we may develop and commercialize.

Delays in obtaining regulatory approvals of the process and facilities needed to manufacture KB103 or disruptions in our manufacturing process may delay or disrupt our product development and commercialization efforts.

Before we can begin to commercially manufacture KB103, whether in a third-party facility or in our own facility, once established, we must obtain regulatory approval from FDA for our manufacturing process and facility. A manufacturing authorization must also be obtained from the appropriate European Union regulatory authorities. The timeframe required for us to obtain such approvals is uncertain. In addition, we must pass a pre-approval inspection of our manufacturing facility by the FDA before KB103 can obtain marketing approval. In order to obtain approval, we will need to ensure that all of our processes, methods and equipment are compliant with cGMP, and perform extensive audits of vendors, contract laboratories and suppliers. If any of our vendors, contract laboratories or suppliers is found to be out of compliance with cGMP, we may experience delays or disruptions in manufacturing while we work with these third parties to remedy the violation or while we work to identify suitable replacement vendors. The cGMP requirements govern quality control of the manufacturing process and documentation policies

 

26

---

Table of Contents

and procedures. In complying with cGMP, we will be obligated to expend time, money and effort in production, record keeping and quality control to assure that the product meets applicable specifications and other requirements. If we fail to comply with these requirements, we would be subject to possible regulatory action and may not be permitted to sell any product candidate that we may develop.

In addition, the manufacturing process used to produce KB103 is complex, novel and has not been validated for commercial use. In order to produce sufficient quantities of KB103 for future clinical trials and initial U.S. commercial demand, we will need to increase the scale of our manufacturing process. The production of KB103 requires processing steps that are more complex than those required for most chemical pharmaceuticals. Moreover, unlike chemical pharmaceuticals, the physical and chemical properties of a biologic such as ours generally cannot be fully characterized. As a result, assays of the finished product may not be sufficient to ensure that the product will perform in the intended manner. Accordingly, we employ multiple steps to control our manufacturing process to assure that the process works and that KB103 is made strictly and consistently in compliance with the process. Problems with the manufacturing process, even minor deviations from the normal process, could result in product defects or manufacturing failures that result in lot failures, product recalls, product liability claims or insufficient inventory. We may encounter problems achieving adequate quantities and quality of clinical-grade materials that meet FDA, EMA or other applicable standards or specifications with consistent and acceptable production yields and costs.

Although we intend to establish our own KB103 manufacturing facility, we expect to utilize third parties to conduct our product manufacturing for the near future. Therefore, we are subject to the risk that these third parties may not perform satisfactorily.

Until such time as we establish our manufacturing facility that has been properly validated to comply with FDA cGMP requirements, we will not be able to independently manufacture material for our planned preclinical and clinical programs. Even following our establishment of a validated cGMP manufacturing facility, we intend to maintain third-party manufacturing capabilities in order to provide multiple sources of supply. In the event that the establishment of our own manufacturing facility is delayed and if these third-party manufacturers do not successfully carry out their contractual duties, meet expected deadlines or manufacture KB103 in accordance with regulatory requirements or if there are disagreements between us and these third-party manufacturers, we will not be able to complete, or may be delayed in completing, the preclinical studies required to support future IND submissions and the clinical trials required for approval of KB103. In such instances, we may need to locate an appropriate replacement third-party relationship, which may not be readily available or on acceptable terms, which would cause additional delay or increased expense prior to the approval of KB103 and would thereby have a material adverse effect on our business, financial condition, results of operations and prospects.

Building our own manufacturing facility will require additional investment, will be time consuming and may be subject to delays, including because of shortage of labor or compliance with regulatory requirements. In addition, building a manufacturing facility may cost more than we currently anticipate. Delays or problems in the build out of our manufacturing facility may adversely impact our ability to obtain regulatory approval and provide supply for the development and commercialization of KB103 as well as our financial condition.

If we or our third-party manufacturer fails to comply with applicable cGMP regulations, the FDA and foreign regulatory authorities can impose regulatory sanctions including, among other things, refusal to approve a pending application for a new product candidate or suspension or revocation of a pre-existing approval. Such an occurrence may cause our business, financial condition, results of operations and prospects to be materially harmed.

 

27

---

Table of Contents

Any contamination in our manufacturing process, shortages of raw materials or failure of any of our key suppliers to deliver necessary components could result in delays in our clinical development or marketing schedules.

Given the nature of biologics manufacturing, there is a risk of contamination. Any contamination could materially adversely affect our ability to produce KB103 on schedule and could, therefore, harm our results of operations and cause reputational damage.

Some of the raw materials required in our manufacturing process are derived from biologic sources. Such raw materials are difficult to procure and may be subject to contamination or recall. A material shortage, contamination, recall or restriction on the use of biologically derived substances in the manufacture of KB103 could adversely impact or disrupt the commercial manufacturing or the production of clinical material, which could materially and adversely affect our development timelines and our business, financial condition, results of operations and prospects.

Our future success depends on our ability to retain key employees and scientific advisors and to attract, retain and motivate qualified personnel.

We are highly dependent on members of our executive team, the loss of whose services may adversely impact the achievement of our objectives. Our employees and scientific advisors are at-will employees and consultants, and the loss of one or more of them might impede the achievement of our research, development and commercialization objectives.

Recruiting and retaining other qualified employees and scientific advisors for our business, including scientific and technical personnel, also will be critical to our success. There currently is a shortage of skilled individuals with substantial gene therapy experience, which is likely to continue. As a result, competition for skilled personnel, including in gene therapy research and vector manufacturing, is intense and the turnover rate can be high. We may not be able to attract and retain personnel on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies and academic institutions for individuals with similar skill sets. In addition, failure to succeed in preclinical or clinical trials or applications for marketing approval may make it more challenging to recruit and retain qualified personnel. The inability to recruit, or loss of services of certain executives, key employees or advisors, may impede the progress of our research, development and commercialization objectives and have a material adverse effect on our business, financial condition, results of operations and prospects.

Our employees, principal investigators and advisors may engage in misconduct or other improper activities, including non-compliance with regulatory standards and requirements and insider trading.

We are exposed to the risk of fraud or other misconduct by our employees, principal investigators and advisors. Misconduct by these parties could include intentional failures to comply with FDA regulations or the regulations applicable in the European Union and other jurisdictions, provide accurate information to the FDA, the European Commission and other regulatory authorities, comply with healthcare fraud and abuse laws and regulations in the United States and abroad, report financial information or data accurately or disclose unauthorized activities to us. In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. These laws and regulations restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Such misconduct also could involve the improper use of information obtained in the course of clinical trials or interactions with the FDA or other regulatory authorities, which could result in regulatory sanctions and cause serious harm to our reputation. It is not always possible to identify and deter employee misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from government investigations or other actions or lawsuits stemming from a failure to comply with these laws or regulations. If any such actions are instituted against us and we are not successful in defending ourselves

 

28

---

Table of Contents

or asserting our rights, those actions could have a significant impact on our business, financial condition, results of operations and prospects, including the imposition of significant fines or other sanctions.

In addition, principal investigators for our clinical trials may serve as scientific advisors or consultants to us from time to time and receive compensation in connection with such services. Under certain circumstances, we may be required to report some of these relationships to the FDA. The FDA may conclude that a financial relationship between us and a principal investigator has created a conflict of interest or otherwise affected interpretation of the trial. The FDA may therefore question the integrity of the data generated at the applicable clinical trial site and the utility of the clinical trial itself may be jeopardized. This could result in a delay in approval, or rejection, of our marketing applications by the FDA and may ultimately lead to the denial of marketing approval of our current and future drug candidates.

Healthcare legislative reform measures may have a material adverse effect on our business and results of operations.

In the United States and some foreign jurisdictions, there have been, and continue to be, several legislative and regulatory changes and proposed changes regarding the healthcare system that could prevent or delay marketing approval of our product candidates, restrict or regulate post-approval activities, and affect our ability to profitably sell any product candidates for which we obtain marketing approval.

For example, in March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or the PPACA, was passed, which substantially changes the way healthcare is financed by both the government and private insurers, and significantly impacts the U.S. pharmaceutical industry. The PPACA, among other things: (i) addresses a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for drugs that are inhaled, infused, instilled, implanted or injected; (ii) increases the minimum Medicaid rebates owed by manufacturers under the Medicaid Drug Rebate Program and extends the rebate program to individuals enrolled in Medicaid managed care organizations; (iii) establishes annual fees and taxes on manufacturers of certain branded prescription drugs; (iv) expands the availability of lower pricing under the 340B drug pricing program by adding new entities to the program; and (v) establishes a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% point-of-sale discounts off negotiated prices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for the manufacturer’s outpatient drugs to be covered under Medicare Part D.

Since its enactment, there have been judicial and Congressional challenges to certain aspects of the PPACA. As a result, there have been delays in the implementation of, and action taken to repeal or replace, certain aspects of the PPACA. In January 2017, President Trump signed an Executive Order directing federal agencies with authorities and responsibilities under the PPACA to waive, defer, grant exemptions from, or delay the implementation of any provision of the ACA that would impose a fiscal or regulatory burden on states, individuals, healthcare providers, health insurers, or manufacturers of pharmaceuticals or medical devices. Further, in January 2017, Congress adopted a budget resolution for fiscal year 2017, or the Budget Resolution, that authorizes the implementation of legislation that would repeal portions of the PPACA. Following the passage of the Budget Resolution, in March 2017, the U.S. House of Representatives introduced legislation known as the American Health Care Act, which, if enacted, would amend or repeal significant portions of the PPACA. Among other changes, the American Health Care Act would repeal the annual fee on certain brand prescription drugs and biologics imposed on manufacturers and importers, eliminate penalties on individuals and employers that fail to maintain or provide minimum essential coverage, and create refundable tax credits to assist individuals in buying health insurance. The American Health Care Act would also make significant changes to Medicaid by, among other things, making Medicaid expansion optional for states, repealing the requirement that state Medicaid plans provide the same essential health benefits that are required by plans available on the exchanges, modifying federal funding, including implementing a per capita cap on federal payments to states, and changing certain eligibility requirements. While it is uncertain when or if the provisions in the

 

29

---

Table of Contents

American Health Care Act will become law, or the extent to which any changes may impact our business, it is clear that concrete steps are being taken to repeal and replace certain aspects of the PPACA.

Additionally, in the United States, the Biologics Price Competition and Innovation Act of 2009 created an abbreviated approval pathway for biologic products that are demonstrated to be “highly similar” or “biosimilar or interchangeable” with an FDA-approved biologic product. This new pathway could allow competitors to reference data from biologic products already approved after 12 years from the time of approval. This could expose us to potential competition by lower-cost biosimilars even if we commercialize a product candidate faster than our competitors. Moreover, the creation of this abbreviated approval pathway does not preclude or delay a third party from pursuing approval of a competitive product candidate via the traditional approval pathway based on their own clinical trial data. Other legislative changes have been proposed and adopted in the United States since the PPACA was enacted. For example, in August 2011, the Budget Control Act of 2011, among other things, created measures for spending reductions by Congress. A Joint Select Committee on Deficit Reduction, tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the years 2012 through 2021, was unable to reach required goals, thereby triggering the legislation’s automatic reduction to several government programs. This includes aggregate reductions of Medicare payments to providers of up to 2% per fiscal year, which went into effect in April 2013 and will remain in effect through 2025 unless additional Congressional action is taken. In January 2013, the American Taxpayer Relief Act of 2012, among other things, further reduced Medicare payments to certain providers, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. Additionally, there have been several recent U.S. Congressional inquiries and proposed bills designed to, among other things, bring more transparency to drug pricing, reduce the cost of prescription drugs under Medicare, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for drugs.

Additional changes that may affect our business include those governing enrollment in federal healthcare programs, reimbursement changes, fraud and abuse enforcement, and expansion of new programs, such as Medicare payment for performance initiatives.

We expect that these initiatives, as well as other healthcare reform measures that may be adopted in the future, may result in more rigorous coverage criteria and in additional downward pressure on the price that we receive for any approved product. Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payors. The implementation of cost containment measures or other healthcare reforms could result in reduced demand for KB103 or additional pricing pressures, and may prevent us from being able to generate revenue, attain profitability, or commercialize our products.

We may be subject, directly or indirectly, to federal and state healthcare fraud and abuse laws, false claims laws and health information privacy and security laws. If we are unable to comply, or have not fully complied, with such laws, we could face substantial penalties.

If we obtain FDA approval for KB103 and begin commercializing it in the United States, our operations will be directly, or indirectly through our prescribers, customers and purchasers, subject to various federal and state fraud and abuse laws and regulations, including, without limitation, the federal Health Care Program Anti-Kickback Statute, the federal civil and criminal laws and Physician Payments Sunshine Act and regulations. These laws will impact, among other things, our proposed sales, marketing and educational programs. In addition, we may be subject to patient privacy laws by both the federal government and the states in which we conduct our business. The laws that will affect our operations include, but are not limited to:

 

•

the federal Health Care Program Anti-Kickback Statute, which prohibits, among other things, persons or entities from knowingly and willfully soliciting, receiving, offering or paying any remuneration (including any kickback, bribe or rebate), directly or indirectly, overtly or covertly, in

 

30

---

Table of Contents

cash or in kind, in return for the purchase, recommendation, leasing or furnishing of an item or service reimbursable under a federal healthcare program, such as the Medicare and Medicaid programs. This statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on the one hand, and prescribers, purchasers and formulary managers on the other. The PPACA amended the intent requirement of the federal Anti-Kickback Statute. A person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it;

 

•

federal civil and criminal false claims laws and civil monetary penalty laws which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment or approval from Medicare, Medicaid or other government payors that are false or fraudulent. The PPACA provides and recent government cases against pharmaceutical and medical device manufacturers support the view that Federal Anti-Kickback Statute violations and certain marketing practices, including off-label promotion, may implicate the False Claims Act;

 

•

the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which created new federal criminal statutes that prohibit a person from knowingly and willfully executing a scheme or from making false or fraudulent statements to defraud any healthcare benefit program, regardless of the payor (e.g., public or private);

 

•

HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, and its implementing regulations, and as amended again by the final HIPAA omnibus rule, Modifications to the HIPAA Privacy, Security, Enforcement, and Breach

 

•

Notification Rules Under HITECH and the Genetic Information Nondiscrimination Act; Other Modifications to HIPAA, published in January 2013, which imposes certain requirements relating to the privacy, security and transmission of individually identifiable health information without appropriate authorization by entities subject to the rule, such as health plans, health care clearinghouses and health care providers;

 

•

federal transparency laws, including the federal Physician Payment Sunshine Act, that require certain manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program, with specific exceptions, to report annually to the Centers for Medicare & Medicaid Services, or CMS, information related to: (i) payments or other “transfers of value” made to physicians and teaching hospitals and (ii) ownership and investment interests held by physicians and their immediate family members;

 

•

state and foreign law equivalents of each of the above federal laws, state laws that require drug manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures and state laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts in certain circumstances, such as specific disease states; and

 

•

state and foreign laws that govern the privacy and security of health information in some circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.

Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available, it is possible that some of our business activities could be subject to challenge under one or more of such laws. If our operations are found to be in violation of any of the laws described above or any other government regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from participation in government health care programs, such as Medicare and Medicaid, imprisonment and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our results of operations.

 

31

---

Table of Contents

Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs. It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, imprisonment, exclusion of products from government funded healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of our operations.

The risk of our being found in violation of these laws is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. The shifting compliance environment and the need to build and maintain a robust and expandable systems to comply with multiple jurisdictions with different compliance and/or reporting requirements increases the possibility that a healthcare company may run afoul of one or more of the requirements.

If we fail to comply with environmental, health and safety laws and regulations, we could become subject to fines or penalties or incur costs that could have a material adverse effect on the success of our business.

We are subject to numerous environmental, health and safety laws and regulations, including those governing laboratory procedures and the generation, handling, use, storage, treatment, manufacture, transportation and disposal of, and exposure to, hazardous materials and wastes, as well as laws and regulations relating to occupational health and safety. Our operations involve the use of hazardous and flammable materials, including chemicals and biologic materials. Our operations also produce hazardous waste products. We generally contract with third parties for the disposal of these materials and wastes. We cannot eliminate the risk of contamination or injury from these materials. In the event of contamination or injury resulting from our use of hazardous materials, we could be held liable for any resulting damages, and any liability could exceed our resources. We also could incur significant costs associated with civil or criminal fines and penalties. We do not carry specific biological or hazardous waste insurance coverage, and our property, casualty and general liability insurance policies specifically exclude coverage for damages and fines arising from biological or hazardous waste exposure or contamination. Accordingly, in the event of contamination or injury, we could be held liable for damages or be penalized with fines in an amount exceeding our resources, and our clinical trials or regulatory approvals could be suspended.

Although we maintain workers’ compensation insurance for certain costs and expenses we may incur due to injuries to our employees resulting from the use of hazardous materials or other work-related injuries, this insurance may not provide adequate coverage against potential liabilities. We do not maintain insurance for toxic tort claims that may be asserted against us in connection with our storage or disposal of biologic, hazardous or radioactive materials.

In addition, we may incur substantial costs in order to comply with current or future environmental, health and safety laws and regulations, which have tended to become more stringent over time. These current or future laws and regulations may impair our research, development or production efforts. Failure to comply with these laws and regulations also may result in substantial fines, penalties or other sanctions or liabilities, which could materially adversely affect our business, financial condition, results of operations and prospects.

Our business continuity and disaster recovery plans may not adequately protect us from a serious disaster.

Natural disasters could severely disrupt our operations or the operations of manufacturing facilities and have a material adverse effect on our business, financial condition, results of operations and prospects. If a natural disaster, power outage or other event occurred that prevented us from using all or a significant

 

32

---

Table of Contents

portion of our headquarters, that damaged critical infrastructure, such as manufacturing facilities, or that otherwise disrupted operations, it may be difficult or, in certain cases, impossible for us to continue our business for a substantial period of time. The disaster recovery and business continuity plans we have in place currently are limited and may not prove adequate in the event of a serious disaster or similar event. Our third-party manufacturing facility, as well as substantially all of our current supply of KB103 is located in Pittsburgh, Pennsylvania, and we do not have any existing back-up facilities in place or plans for such back-up facilities. We may incur substantial expenses as a result of the limited nature of our disaster recovery and business continuity plans, which could have a material adverse effect on our business, financial condition, results of operations and prospects.

RISKS RELATED TO OUR INTELLECTUAL PROPERTY

If we are unable to obtain and maintain patent protection for our lead product candidate, KB103, any future product candidates we may develop and our STAR-D platform, or if the scope of the patent protection obtained is not sufficiently broad, our competitors could develop and commercialize products and technology similar or identical to ours, and our ability to successfully commercialize our current product candidate, any future product candidates we may develop and our technology may be adversely affected.

We do not currently own any patents. Our success depends, in large part, on our ability to obtain and maintain patent protection in the United States and other countries with respect to both KB103 and future innovations related to our STAR-D platform. The patent prosecution process is expensive, time-consuming and complex, and we may not be able to file, prosecute, maintain, enforce or license all necessary or desirable patent applications at a reasonable cost or in a timely manner. We are actively prosecuting a patent application in front of the U.S. Patent and Trademark Office, or USPTO, directed, in part, to pharmaceutical formulations and methods of treating dystrophic epidermolysis bullosa using our KB103 product. A corresponding international application has also been filed in accordance with the Paris Cooperation treaty. In addition, we are seeking patent protection for key aspects of our viral platform technologies through a second patent application on file at the USPTO. We do not, however, yet know the outcome of these patent applications.

Even if we are granted the patents we are currently pursuing, they may not issue in a form that will provide us with the full scope of protection we desire, they may not prevent competitors or other third parties from competing with us, and/or they may not otherwise provide us with a competitive advantage. Our competitors, or other third parties, may be able to circumvent our patents by developing similar or alternative technologies or products in a non-infringing manner. Even assuming patents issue from our pending and future patent applications, changes in either the patent laws or interpretation of the patent laws in the United States and foreign jurisdictions may diminish the value of our patents, or narrow their scope of protection.

In addition, we may not be aware of all third-party intellectual property rights potentially relating to technologies similar to KB103. Publications of discoveries in the scientific literature often lag behind their actual discoveries, and patent applications in the United States and other jurisdictions are typically not published until 18 months after filing or, in some cases, not at all. Therefore, it is impossible to be certain that we were the first to develop the specific technologies as claimed in any owned patents or pending patent applications, or that we were the first to file for patent protection of such inventions.

We may not be able to protect our intellectual property rights throughout the world.

Filing, prosecuting and defending patents on product candidates in all countries throughout the world would be prohibitively expensive, and intellectual property rights in some countries outside the United States may differ in scope from those eventually granted in the United States. Thus, in some cases, we will not have the opportunity to obtain patent protection for certain technologies in some jurisdictions outside the United States. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as federal and state laws in the United States. Consequently, we may not be able

 

33

---

Table of Contents

to prevent third parties from practicing our inventions in all countries outside the United States, even in jurisdictions where we do pursue patent protection. Competitors may use our technologies in jurisdictions where we have not pursued and obtained patent protection to develop their own products and, further, may export otherwise infringing products to territories where we have patent protection, but enforcement is not as strong as that in the United States. These products may compete with our product candidates, and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing.

Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents, trade secrets and other intellectual property protection, particularly those relating to biotechnology products. Such challenges in enforcing rights in these countries could make it difficult for us to stop the infringement of our patents, if pursued and obtained, or marketing of competing products in violation of our proprietary rights generally. Proceedings to enforce our future patent rights in foreign jurisdictions could result in substantial costs and may divert our efforts and attention from other aspects of our business; could put our patents at risk of being invalidated or interpreted narrowly; could put any future patent applications, including continuation and divisional applications, at risk of not issuing; and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate, and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce any intellectual property rights around the world stemming from intellectual property that we develop or license may be inadequate to obtain a significant commercial advantage in these foreign jurisdictions.

Third parties may initiate legal proceedings alleging that we are infringing their intellectual property rights, the outcome of which would be uncertain and could have a material adverse effect on the success of our business.

Our commercial success depends upon our ability (and the ability of any potential future collaborators) to develop, manufacture, market and sell our product candidates, and to use our proprietary technologies without infringing the rights and intellectual property of others. Many companies and institutions have filed, and continue to file, patent applications related to various aspects of gene therapy. Some of these patent applications have already been allowed or issued, while others may issue in the future. Since the areas of gene delivery and gene therapeutics are competitive and of strong interest to pharmaceutical and biotechnology companies, there will likely be additional patent applications filed, and additional patents granted, in the future, as well as additional gene therapy research and development programs. Furthermore, because patent applications can take many years to issue, may be confidential for 18 months or more after filing, and can be revised before issuance, there may be applications now pending which may later result in issued patents that a third party asserts are infringed by the manufacture, use, sale, or importation of our products. The biotechnology and pharmaceutical industries are characterized by extensive and complex litigation regarding patents and other intellectual property rights. We may in the future become party to, or be threatened with, adversarial proceedings or litigation regarding intellectual property rights with respect to KB103 or related technologies, including, for example, interference proceedings, post grant review challenges, and inter partes review before the USPTO. Our competitors or other third parties may assert infringement claims against us, alleging that our therapeutics, manufacturing methods, formulations or administration methods are covered by their patents. Moreover, we may face patent infringement claims from non-practicing entities that have no relevant product revenue, and against whom our licensed patent portfolio may therefore have no deterrent effect.

Third parties may assert infringement claims against us based on existing patents or patents that may be granted in the future, regardless of their merit. There is a risk that third parties may choose to engage in litigation with us to enforce or to otherwise assert their patents or other intellectual property rights against us. Even if we believe such claims are without merit, a court of competent jurisdiction could hold that these third-party patents are valid, enforceable and infringed, which could materially and adversely affect our ability to commercialize KB103. In order to successfully challenge the validity of any such U.S. patent in

 

34

---

Table of Contents

federal court, we would need to overcome a presumption of validity. As this burden is a high, one requiring us to present clear and convincing evidence as to the invalidity of any such U.S. patent claim, there is no assurance that a court of competent jurisdiction would invalidate the claims of any such U.S. patent. In such a hypothetical situation, there is no assurance that a court of competent jurisdiction would find that KB103 or our other product candidates or technologies do not infringe a third-party patent.

Patent and other types of intellectual property litigation can involve complex factual and legal questions, and their outcomes are uncertain. If we are found, or believe there is a risk that we may be found, to infringe a third party’s valid and enforceable intellectual property rights, we could be required (or may choose) to obtain a license from such a third party to continue developing, manufacturing and marketing our technologies. However, we may not be able to obtain any required license on commercially reasonable terms, if at all. Even if we were able to obtain a license, it could be non-exclusive, thereby giving our competitors and other third parties access to the same technologies licensed to us, and further, it could require us to make substantial licensing and royalty payments. We could be forced, including by court order, to cease developing, manufacturing and commercializing the infringing technologies, including KB103. In addition, we could be found liable for monetary damages, including treble damages and attorneys’ fees, if we are found to have willfully infringed a patent or other intellectual property right. A finding of infringement could prevent us from manufacturing and commercializing KB103, or force us to cease some or all of our business operations. Claims that we have misappropriated the confidential information or trade secrets of third parties could have a similar negative impact on our business, financial condition, results of operations and prospects.

Intellectual property litigation could cause us to spend substantial resources and distract our personnel from their normal responsibilities.

Litigation or other legal proceedings relating to intellectual property claims, with or without merit, is unpredictable and generally expensive and time consuming. Competitors may infringe our patents, should such patents issue, or we may be required to defend against claims of infringement. Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims may cause us to incur significant expenses, and could distract our scientific and management personnel from their normal responsibilities. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. In addition, there could be public announcements of the results of hearings, motions, or other interim proceedings or developments, and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available for development activities or any future sales, marketing, or distribution activities.

We may not have sufficient financial or other resources to adequately conduct such litigation or proceedings. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources. Accordingly, despite our efforts, we may not be able to prevent third parties from infringing, misappropriating, or successfully challenging our intellectual property rights. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace.

We may be subject to claims asserting that our employees or advisors have wrongfully used or disclosed alleged trade secrets of their current or former employers or claims asserting ownership of what we regard as our own intellectual property.

Certain of our employees or advisors are currently, or were previously, employed at universities or other biotechnology or pharmaceutical companies, including potential competitors. Although we try to ensure that our employees and advisors do not use the proprietary information or know-how of others in

 

35

---

Table of Contents

their work for us, we may be subject to claims that these individuals, or we, have used or disclosed intellectual property, including trade secrets or other proprietary information, of any such individual’s current or former employer. Litigation may be necessary to defend against these claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. Moreover, any such litigation, or the threat thereof, may adversely affect our ability to hire new employees or contract with independent contractors. A loss of key personnel or their work product could hamper or prevent our ability to commercialize our technologies, which would have an adverse effect on our business, results of operations, and financial condition. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management.

In addition, while it is our policy to require our employees and contractors who may be involved in the conception of intellectual property to execute agreements assigning such intellectual property rights to us, unforeseen complications may arise when fully and adequately executing such an agreement with each party who, in fact, conceives of intellectual property that we regard as our own. Examples of such complications may include, for example, when we obtain agreements assigning intellectual property to us, the assignment of intellectual property rights may not be self-executing or the assignment agreements may be breached. Such complications may lead to us being forced to bring claims against third parties, or defend claims that they may bring against us, to determine the ownership of what we regard as our intellectual property. Moreover, individuals executing agreements with us may have preexisting or competing obligations to a third party, such as an academic institution, and thus an agreement with us may be insufficient in fully perfecting ownership of inventions developed by that individual. Disputes about the ownership of intellectual property that we may own may have a material adverse effect on our business.

Changes in U.S. patent law could diminish the value of patents in general, thereby impairing our ability to protect our product candidates.

Patent reform legislation could increase the uncertainties and costs surrounding the prosecution of patent applications and the enforcement or defense of issued patents. For example, on September 16, 2011, the Leahy-Smith America Invents Act, or the Leahy-Smith Act, was signed into law. The Leahy-Smith Act included several significant changes to U.S. patent law, including provisions that affected the way patent applications are prosecuted, and altered strategies regarding patent litigation. These provisions also switched the United States from a “first-to-invent” system to a “first-to-file” system, allowed third-party submission of prior art to the USPTO during patent prosecution, and set forth additional procedures to attack the validity of a patent through various post grant proceedings administered by the USPTO. As patent reform legislation can inject serious uncertainty into the patent prosecution and litigation processes, it is not clear what impact future patent reform legislation will have on the operation of our business. However, such future legislation, and its implementation, could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of any issued patents, all of which could have a material adverse effect on our business, financial condition, results of operations and prospects.

Moreover, the patent positions of companies engaged in the development and commercialization of biologics and pharmaceuticals are particularly uncertain given the ever evolving and constantly shifting nature of precedential patent cases decided by both the U.S. Court of Appeals for the Federal Circuit and the U.S. Supreme Court. For instance, two cases involving diagnostic method claims and “gene patents” have recently been decided by the Supreme Court. On March 20, 2012, the Supreme Court issued a decision in Mayo Collaborative Services v. Prometheus Laboratories, Inc., or Prometheus, a case involving patent claims directed to a process of measuring a metabolic product in a patient to optimize a drug dosage for the patient. According to the Supreme Court, the addition of well-understood, routine or conventional activity such as “administering” or “determining” steps was not enough to transform an otherwise patent-ineligible natural phenomenon into patent-eligible subject matter. On July 3, 2012, the USPTO issued a guidance memo to patent examiners indicating that process claims directed to a law of

 

36

---

Table of Contents

nature, a natural phenomenon or a naturally occurring relation or correlation that do not include additional elements or steps that integrate the natural principle into the claimed invention such that the natural principle is practically applied (and thus, the claim amounts to significantly more than the natural principle itself) should be rejected as directed to patent-ineligible subject matter. On June 13, 2013, the Supreme Court issued its decision in Association for Molecular Pathology v. Myriad Genetics, Inc., or Myriad, a case involving patent claims held by Myriad Genetics, Inc. relating to the breast cancer susceptibility genes BRCA1 and BRCA2. In its decision, the US Supreme Court held that an isolated segment of naturally occurring DNA, such as the DNA constituting the BRCA1 or BRCA2 genes, is not patent eligible subject matter; however, complementary DNA may be patent eligible.

Although the Supreme Court held in Myriad that isolated segments of naturally occurring DNA are not patent-eligible subject matter, certain third parties could allege that potential activities that we undertake in the future may infringe other gene-related patent claims, and we may deem it necessary to defend ourselves against these claims by asserting non-infringement and/or invalidity positions, or paying to obtain a license to these claims. In any situation involving third-party intellectual property rights, such as those directed to gene-related patent claims, if we are unsuccessful in defending against claims of patent infringement (e.g., by asserting invalidity of the infringed patent in view of the Supreme Court’s Myriad decision), we could be forced to pay damages or be subjected to an injunction that would prevent us from utilizing the patented subject matter. Such outcomes could harm our business, financial condition, results of operations or prospects.

Moreover, we cannot assure you that our efforts to seek patent protection for our technology and product candidates will not be negatively impacted by the decisions described above, rulings in other cases, or changes in guidance or procedures issued by the USPTO. These decisions, the guidance issued by the USPTO (or changes thereto), and rulings in other cases could have a material adverse effect on our existing patent portfolio and our ability to protect and enforce our intellectual property rights in the future.

If our trademarks and trade names are not adequately protected, then we may not be able to build name recognition in our markets of interest and our business may be adversely affected.

We are currently in the process of registering our trademarks and trade names. Once registered, our trademarks or trade names may be challenged, infringed, circumvented or declared generic or determined to be infringing on other marks. We may not be able to protect our rights to these trademarks and trade names, which we need to build name recognition among potential partners or customers in our markets of interest. At times, competitors may adopt trade names or trademarks similar to ours, thereby impeding our ability to build brand identity and possibly leading to market confusion. In addition, there could be potential trade name or trademark infringement claims brought by owners of other registered trademarks or trademarks that incorporate variations of our registered or unregistered trademarks or trade names. Over the long term, if we are unable to establish name recognition based on our trademarks and trade names, then we may not be able to compete effectively and our business may be adversely affected. Our efforts to enforce or protect our proprietary rights related to trademarks, trade secrets, domain names, copyrights or other intellectual property may be ineffective and could result in substantial costs and diversion of resources and could adversely impact our financial condition or results of operations.

Intellectual property rights and regulatory exclusivity rights do not necessarily address all potential threats.

The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations, and may not adequately protect our business or permit us to maintain our competitive advantage. For example:

 

•

others may be able to make gene therapy products that are similar to our product candidates but that are not covered by the claims of the patents that we may own or license in the future;

 

•

we, or any future license partners or collaborators, might not have been the first to develop the specific technologies covered by the issued patents or pending patent applications that we may own or license in the future;

 

37

---

Table of Contents

•

we, or any future license partners or collaborators, might not have been the first to file patent applications covering certain aspects of the concerned technologies;

 

•

others may independently develop similar or alternative technologies, or duplicate any of our technologies, potentially without falling within the scope of our future issued claims, thus not infringing our intellectual property rights;

 

•

others may circumvent our regulatory exclusivities, such as by pursuing approval of a competitive product candidate via the traditional approval pathway based on their own clinical data, rather than relying on the abbreviated pathway provided for biosimilar applicants;

 

•

it is possible that our filed or future patent applications will not lead to issued patents;

 

•

issued patents to which we hold rights in the future may be held invalid or unenforceable, including as a result of legal challenges by our competitors;

 

•

others may have access to any future intellectual property rights licensed to us on a non-exclusive basis;

 

•

our competitors might conduct research and development activities in countries where we do not have or pursue patent rights, and then use the information learned from such activities to develop competitive products for sale in our major commercial markets;

 

•

we may not develop additional proprietary technologies that are patentable;

 

•

the patents or other intellectual property rights of others may have an adverse effect on our business; and

 

•

we may choose not to file a patent for certain trade secrets or know-how, and a third party may subsequently file a patent covering such intellectual property

Should any of these events occur, they could significantly harm our business, financial condition, results of operations and prospects.

RISKS RELATED TO THIS OFFERING AND OWNERSHIP OF OUR COMMON STOCK

After this offering, our Chief Executive Officer and Chairman of the Board of Directors and our founder, Chief Operating Officer and director will maintain the ability to substantially influence all matters submitted to stockholders for approval.

Upon completion of this offering, assuming the sale by us of all of the shares set forth on the cover page of this prospectus (other than shares subject to the underwriter’s option to purchase additional shares) Krish S. Krishnan and Suma M. Krishnan, our Chief Executive Officer and Chairman of the Board and our founder, Chief Operating Officer and director, respectively, will, in the aggregate, beneficially own shares representing approximately 43.6% of our capital stock and may beneficially own a greater percentage if Mr. Krishnan or Ms. Krishnan purchase additional shares of our common stock in this offering. As a result, they will be able to substantially influence all matters submitted to our stockholders for approval, as well as our management and affairs. For example, these persons would substantially influence the election of directors and approval of any merger, consolidation or sale of all or substantially all of our assets. This concentration of voting power could delay or prevent an acquisition of our company on terms that other stockholders may desire or result in management of our company that our public stockholders disagree with.

A significant portion of our total outstanding shares are restricted from immediate resale but may be sold into the market in the near future, which could cause the market price of our common stock to drop significantly, even if our business is performing well.

Sales of a substantial number of shares of our common stock in the public market could occur at any time, subject to certain restrictions described below. These sales, or the perception in the market that

 

38

---

Table of Contents

holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. After this offering, we will have outstanding 8,683,247 shares of common stock based on the number of shares outstanding as of August 31, 2017, all of which may be resold in the public market immediately without restriction, other than shares owned by our affiliates, which may be sold pursuant to Rule 144. However, the resale of an aggregate of 5,683,247 shares will be restricted as a result of lock-up agreements executed in conjunction with this offering, as described in the “Shares Eligible for Future Sale” and “Underwriting” sections of this prospectus. We will register all shares of common stock that we may issue under our equity compensation plans on a Registration Statement on Form S-8. These shares can be freely sold in the public market upon issuance, subject to volume limitations applicable to affiliates and the lock-up agreements described in the “Shares Eligible for Future Sale” section of this prospectus.

If you purchase shares of common stock in this offering, you will suffer immediate dilution of your investment.

The public offering price of our common stock will be substantially higher than the net tangible book value per share of our common stock. Therefore, if you purchase shares of our common stock in this offering, you will pay a price per share that substantially exceeds our net tangible book value per share after this offering. To the extent outstanding options are exercised, you will incur further dilution. Based on the assumed public offering price of $10.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, you will experience immediate dilution of $5.64 per share, representing the difference between the assumed public offering price and our as adjusted net tangible book value per share of $4.36 after giving effect to this offering. See “Dilution.”

If securities analysts do not publish research or reports about our business or if they publish negative evaluations of our stock, the price of our stock could decline.

The trading market for our common stock will rely, in part, on the research and reports that industry or financial analysts publish about us or our business. If securities analysts do not commence coverage of us, the trading price of our stock could decrease. Additionally, if one or more of the analysts covering our business downgrade their evaluations of our stock, the price of our stock could decline. If one or more of these analysts cease to cover our stock, we could lose visibility in the market for our stock, which in turn could cause our stock price to decline.

The price of our common stock may be volatile and fluctuate substantially, which could result in substantial losses for purchasers of our common stock in this offering.

The offering price for the shares of our common stock sold in this offering will be determined by negotiation between the representatives of the underwriters and us. This price may not reflect the market price of our common stock following this offering. In addition, the market price of our common stock is likely to be highly volatile due to many factors, including:

 

•

our ability to successfully proceed to and conduct clinical trials;

 

•

results of clinical trials of our product candidates or those of our competitors;

 

•

the success of competitive products or technologies;

 

•

commencement or termination of collaborations;

 

•

regulatory or legal developments in the United States and other countries;

 

•

developments or disputes concerning patent applications, issued patents or other proprietary rights;

 

•

the recruitment or departure of key personnel;

 

•

the level of expenses related to any of our product candidates or clinical development programs;

 

•

the results of our efforts to discover, develop, acquire or in-license additional product candidates;

 

39

---

Table of Contents

•

actual or anticipated changes in estimates as to financial results, development timelines or recommendations by securities analysts;

 

•

our inability to obtain or delays in obtaining adequate product supply for any approved product or inability to do so at acceptable prices;

 

•

disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our technologies;

 

•

significant lawsuits, including patent or stockholder litigation;

 

•

variations in our financial results or those of companies that are perceived to be similar to us;

 

•

changes in the structure of healthcare payment systems;

 

•

market conditions in the pharmaceutical and biotechnology sectors;

 

•

general economic, industry and market conditions; and

 

•

the other factors described in this “Risk Factors” section.

An active trading market for our common stock may not develop and you may not be able to resell your shares at or above the initial public offering price.

Prior to this offering, there has been no public market for shares of our common stock. Although we have applied to list our common stock on the NASDAQ Capital Market, an active trading market for our shares may never develop or be sustained following this offering. The initial public offering price of our common stock will be determined through negotiations between us and the underwriters. This initial public offering price may not be indicative of the market price of our common stock after this offering. In the absence of an active trading market for our common stock, investors may not be able to sell their common stock at or above the initial public offering price or at the time that they would like to sell. Furthermore, certain of our existing stockholders and members of management, including Krish S. Krishnan, our President and Chief Executive Officer, have indicated an interest in purchasing up to an aggregate of $5.0 million of shares of our common stock in this offering at the public offering price. To the extent these members of management purchase shares in this offering, fewer shares may be actively traded in the public market, which would reduce the liquidity of the market for our common stock.

We have broad discretion in the use of our cash, including the net proceeds from this offering, and may not use them effectively.

Our management will have broad discretion in the application of our cash, including the net proceeds from this offering, and could spend the proceeds in ways that do not improve our results of operations or enhance the value of our common stock. The failure by our management to apply these funds effectively could result in financial losses that could have a material adverse effect on our business, cause the price of our common stock to decline and delay the development of KB103, KB104 and any other product candidates we may develop. Pending their use, we may invest our cash, including the net proceeds from this offering, in a manner that does not produce income or that loses value. See “Use of Proceeds.”

Raising additional capital may cause dilution to our existing stockholders, restrict our operations or require us to relinquish rights to our technologies or KB103.

We may seek additional capital through a combination of public and private equity offerings, debt financings, collaborations and licensing arrangements. To the extent that we raise additional capital through the sale of equity or debt securities, your ownership interest will be diluted and the terms may include liquidation or other preferences that adversely affect your rights as a stockholder. The incurrence of indebtedness would result in increased fixed payment obligations and could involve restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire or

 

40

---

Table of Contents

license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. If we raise additional funds through strategic partnerships and alliances and licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies or KB103, or grant licenses on terms unfavorable to us.

We are an “emerging growth company” and the reduced disclosure requirements applicable to emerging growth companies may make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and we may take advantage of certain exemptions and relief from various reporting requirements that are applicable to other public companies that are not “emerging growth companies.” In particular, while we are an “emerging growth company: (i) we will not be required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act; (ii) we will be exempt from any rules that may be adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotations or a supplement to the auditor’s report on financial statements; (iii) we will be subject to reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements; and (iv) we will not be required to hold nonbinding advisory votes on executive compensation or stockholder approval of any golden parachute payments not previously approved. Investors may find our common stock less attractive if we rely on the exemptions and relief granted by the JOBS Act. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may decline or become more volatile.

We have taken advantage of reduced reporting burdens in this prospectus. In particular, we have not included all of the executive compensation information that would be required if we were not an emerging growth company. We cannot predict whether investors will find our common stock less attractive if we rely on certain or all of these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

In addition, the JOBS Act provides that an emerging growth company may take advantage of an extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

We will incur increased costs as a result of operating as a smaller reporting public company, and our management will be required to devote substantial time to new compliance initiatives.

As a smaller reporting public company, and particularly after we are no longer an emerging growth company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act and rules subsequently implemented by the SEC and NASDAQ have imposed various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance practices. Our management and other personnel will need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time consuming and costly. For example, we expect that these rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance.

Pursuant to Section 404, we will be required to furnish a report by our management on our internal control over financial reporting, including an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. However, while we remain an emerging growth company, we will not be required to include an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. To achieve compliance with

 

41

---

Table of Contents

Section 404 within the prescribed period, we will be engaged in a process to document and evaluate our internal control over financial reporting, which is both costly and challenging. In this regard, we will need to continue to dedicate internal resources, potentially engage outside consultants and adopt a detailed work plan to assess and document the adequacy of internal control over financial reporting, continue steps to improve control processes as appropriate, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting. Despite our efforts, there is a risk that neither we nor our independent registered public accounting firm will be able to conclude within the prescribed timeframe that our internal control over financial reporting is effective as required by Section 404. This could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements.

Provisions in our corporate charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.

Provisions in our corporate charter and our bylaws may discourage, delay or prevent a merger, acquisition or other change in control of us that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. These provisions also could limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. In addition, because our board of directors is responsible for appointing the members of our management team, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors. Among other things, these provisions:

 

•

establish a classified board of directors such that not all members of the board are elected at one time;

 

•

allow the authorized number of our directors to be changed only by resolution of our board of directors;

 

•

limit the manner in which stockholders can remove directors from the board;

 

•

establish advance notice requirements for stockholder proposals that can be acted on at stockholder meetings and nominations to our board of directors;

 

•

require that stockholder actions must be effected at a duly called stockholder meeting and prohibit actions by our stockholders by written consent;

 

•

limit who may call stockholder meetings;

 

•

authorize our board of directors to issue preferred stock without stockholder approval, which could be used to institute a stockholder rights plan, or so-called “poison pill,” that would work to dilute the stock ownership of a potential hostile acquirer, effectively preventing acquisitions that have not been approved by our board of directors; and

 

•

require the approval of the holders of at least 80% of the votes that all our stockholders would be entitled to cast to amend or repeal certain provisions of our bylaws.

Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner.

 

42

---

Table of Contents

Because we do not anticipate paying any cash dividends on our capital stock in the foreseeable future, capital appreciation, if any, will be your sole source of gain.

We have never declared or paid cash dividends on our capital stock. We currently intend to retain all of our future earnings, if any, to finance the growth and development of our business. In addition, the terms of any future debt agreements may preclude us from paying dividends. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.

 

43

---

Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that involve substantial risks and uncertainties. The forward-looking statements are contained principally in the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” Forward-looking statements include information concerning our strategy, future operations, future financial position, future revenue, projected expenses, prospects and plans and objectives of management. Forward-looking statements include all statements that are not historical facts and can be identified by terms such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict, “project,” “seek,” “should,” “target,” “will,” “would” or similar expressions and the negatives of those terms.

Forward-looking statements contained in this prospectus include, but are not limited to, statements about the following:

 

•

the initiation, timing, progress and results of preclinical and clinical trials for KB103 and any other product candidates, including statements regarding the timing of initiation and completion of studies or trials and related preparatory work, the period during which the results of the trials will become available and our research and development programs;

 

•

the timing, scope or results of regulatory filings and approvals, including timing of final FDA marketing and other regulatory approval of KB103;

 

•

our ability to achieve certain accelerated or orphan drug designations from the FDA;

 

•

our estimates regarding the potential market opportunity for KB103;

 

•

our research and development programs for our product candidates;

 

•

our plans and ability to successfully develop and commercialize our product candidates, including KB103 and KB104;

 

•

our ability to identify and develop new product candidates;

 

•

our ability to identify, recruit and retain key personnel;

 

•

our commercialization, marketing and manufacturing capabilities and strategy;

 

•

the implementation of our business model, strategic plans for our business, product candidates and technology;

 

•

the scalability and commercial viability of our proprietary manufacturing methods and processes;

 

•

the rate and degree of market acceptance and clinical utility of our product candidates and gene therapy, in general;

 

•

our competitive position;

 

•

our intellectual property position and our ability to protect and enforce our intellectual property;

 

•

our financial performance;

 

•

developments and projections relating to our competitors and our industry;

 

•

our ability to establish and maintain collaborations or obtain additional funding;

 

•

our expectations related to the use of proceeds from this offering;

 

•

our estimates regarding expenses, future revenue, capital requirements and needs for or ability to obtain additional financing;

 

•

the impact of laws and regulations; and

 

•

our expectations regarding the time during which we will be an emerging growth company under the JOBS Act.

 

44

---

Table of Contents

Forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in “Risk Factors” and elsewhere in this prospectus. Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this prospectus may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this prospectus. You should read this prospectus and the documents that we have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect.

Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

 

45

---

Table of Contents

INDUSTRY AND MARKET DATA

We obtained the industry, statistical and market data in this prospectus from our own internal estimates and research, as well as from industry and general publications and research, surveys and studies conducted by third parties. In presenting this information, we have made assumptions based on such data and other similar sources, and on our knowledge of, and our experience to date in, the potential markets for our product candidates. Although we believe the data from these third-party sources is reliable, we have not independently verified any third-party information. The industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the section entitled “Risk Factors.” These and other factors could cause results to differ materially from those expressed in the estimates made by third parties and by us.

 

46

---

Table of Contents

USE OF PROCEEDS

We estimate that the net proceeds from our issuance and sale of 3,000,000 shares of our common stock in this offering will be approximately $26.5 million (or $30.7 million if the underwriters exercise in full their option to purchase additional shares), assuming an initial public offering price of $10.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

Each $1.00 increase (decrease) in the assumed initial public offering price of $10.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the net proceeds to us from this offering by approximately $2.8 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.  Similarly, each 1.0 million increase (decrease) in the number of shares offered by us, as set forth on the cover of this prospectus, would increase (decrease) the net proceeds to us by $9.3 million, assuming the assumed initial public offering price per share remains the same, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

As of August 31, 2017, we had cash of approximately $10.8 million. We intend to use the net proceeds from this offering, together with our existing cash, as follows:

 

•

Approximately $10.0 million to advance preclinical development, IND submission and completion of Phase 1/2 study of KB103 for the treatment of DEB through the first half of 2018;

 

•

Approximately $4.0 million to advance the development of KB104, our second pipeline compound being developed to treat Netherton Syndrome through the submission of an IND during the second half of 2018;

 

•

Approximately $2.0 million to begin research activities on our STAR-D platform to develop treatments for STAR-D platform to the development of treatments for broader dermatological indications like psoriasis, atopic dermatitis and chronic wound healing through the end of 2018;

 

•

Approximately $15.0 million to design and build a current good manufacturing practices certified manufacturing facility for scale-up production of our pipeline compounds; and

 

•

The balance for general corporate purposes, including general and administrative expenses and working capital.

We believe that our current cash, along with the net proceeds from this offering, will be sufficient for us to fund our operating expenses and capital expenditure requirements for the next 21 to 24 months.

The expected net proceeds of this offering will not be sufficient for us to fund any of our product candidates, including KB103, through regulatory approval, and we will need to raise substantial additional capital to complete the development and commercialization of our product candidates, as well as to establish an in-house manufacturing facility.

The amounts and timing of our actual expenditures will depend on numerous factors, including the progress of our preclinical and clinical trials and other development and commercialization efforts for KB103 and our other product candidates, as well as the amount of cash used in our operations. Although we have no present intention or commitment to do so, we may use a portion of the net proceeds for the acquisition of, or investment in, technologies, intellectual property or businesses that complement our business.

 

47

---

Table of Contents

Our expected use of net proceeds from this offering represents our current intentions based upon our present plans and business condition. As of the date of this prospectus, we cannot predict with complete certainty all of the particular uses for the net proceeds to be received upon the completion of this offering or the actual amounts that we will spend on the uses set forth above. We may find it necessary or advisable to use the net proceeds for other purposes, and our management will retain broad discretion over the allocation of the net proceeds of this offering. Pending the uses described above, we plan to invest the net proceeds from this offering in short- and intermediate-term, interest-bearing obligations, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the U.S. government.

 

48

---

Table of Contents

DIVIDEND POLICY

We have never declared or paid cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any dividends on our common stock in the foreseeable future. Any future determination to declare dividends will be made at the discretion of our board of directors and will depend on our financial condition, operating results, capital requirements, general business conditions and other factors that our board of directors may deem relevant.

 

49

---

Table of Contents

CAPITALIZATION

The following table sets forth our cash and our capitalization as of June 30, 2017:

 

•

on an actual basis;

 

•

on a pro forma basis to give effect to: (i) 130,590 shares of common stock issued to an entity owned and controlled by Daniel S. Janney, a member of our board of directors, in August 2017; (ii) the automatic conversion of all outstanding shares of our preferred stock on a one-to-one basis into an aggregate of 2,061,773 shares of common stock immediately prior to the completion of this offering, which includes 179,613 shares of our Series Seed preferred stock, 968,053 shares of preferred stock we issued in August 2017 upon conversion of our outstanding convertible promissory notes and accrued interest thereon, and 914,107 shares of Series A Preferred issued to Sun Pharma in August 2017; and (iii) the 1-to-4.5 forward stock split, in the form of a dividend, which occurred on September 14, 2017; and

 

•

on a pro forma as adjusted basis to give further effect to our issuance and sale of 3,000,000 shares of common stock in this offering at an assumed public offering price of $10.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us and excluding any additional shares of common stock that may be issuable upon the exercise of the underwriters’ option to purchase additional shares.

 

50

---

Table of Contents

The pro forma as adjusted information set forth in the table below is illustrative only and will be adjusted based on the actual initial public offering price and other final terms of this offering. You should read this information together with our financial statements and the related notes thereto and the information set forth under the headings “Selected Financial Information” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus.

 

		As of June 30, 2017
(in thousands, except share and per share amounts)		Actual				Pro Forma				Pro Forma As  Adjusted(1)
							(unaudited)				(unaudited)
Cash		$	3,518			$	11,518			$	37,983
Convertible promissory notes
Related party convertible promissory notes			1,698
Convertible promissory notes			2,444
Total convertible promissory notes			4,142
Convertible preferred stock
Convertible preferred stock, $0.00001 par value; 100,000 shares authorized, 179,613 shares issued and outstanding at June 30, 2017, no shares authorized, issued and outstanding pro forma or pro forma as adjusted (unaudited)			1,406
Total convertible preferred stock			1,406
Stockholders’ equity:
Common stock; $0.00001 par value; 80,000,000 shares authorized, 3,490,884 shares issued and outstanding at June 30, 2017, and 80,000,000 shares authorized, 5,683,247 shares issued and outstanding pro forma, and 80,000,000 shares authorized, 8,683,247 shares issued and outstanding pro forma as adjusted (unaudited)			—
Preferred stock; $0.00001 par value; no shares authorized, no shares issued and outstanding at June 30, 2017, and no shares authorized, no shares issued and outstanding pro forma, and 20,000,000 shares authorized, no shares issued and outstanding pro forma as adjusted (unaudited)			—
Additional paid-in capital			168				16,929				43,394
Accumulated deficit			(2,403	)			(5,536	)			(5,536	)
Total stockholders’ (deficit) equity			(2,235	)			11,393				37,858
Total capitalization		$	3,313			$	11,393			$	37,858

 

 

(1)

A $1.00 increase (decrease) in the assumed initial public offering price of $10.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) each of cash, additional paid-in capital, total stockholders’ (deficit) equity and total capitalization by approximately $2.8 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of 1,000,000 in the number of shares we are offering would increase (decrease) cash, additional paid-in capital, total stockholders’ (deficit) equity and total capitalization by approximately $9.3 million, assuming the assumed initial public offering price remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

51

---

Table of Contents

The table above excludes the following:

 

•

159,633 shares of our common stock issuable upon the exercise of options outstanding as of June 30, 2017, with a weighted average exercise price of $3.21 per share;

 

•

18,949 shares of our common stock issuable upon the exercise of options granted after June 30, 2017 through August 15, 2017, with an exercise price of $7.66 per share;

 

•

14,468 shares of common stock reserved for future issuance under our Krystal Biotech, Inc. 2017 Stock Incentive Plan as of August 15, 2017, and any future increase in shares reserved for issuance under such plan; and

 

•

900,000 shares of common stock reserved for future issuance under our Krystal Biotech, Inc. 2017 IPO Stock Incentive Plan, which will become effective upon the completion of this offering, and any future increase in shares reserved for issuance under such plan.

 

52

---

Table of Contents

DILUTION

If you invest in our common stock, your ownership interest will be immediately diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering. Net tangible book value dilution per share represents the difference between the amount per share paid by purchasers of shares of common stock in this offering and the pro forma as adjusted net tangible book value per share of common stock immediately after the completion of this offering.

As of June 30, 2017, our net tangible book value was approximately $(2,522) thousand, or $(0.72) per share of common stock. Net tangible book value per share represents the amount of our tangible assets less our liabilities and preferred stock, which is not included in equity, divided by the total number of shares of our common stock outstanding as of June 30, 2017. Our net tangible book value calculation excludes intangible assets and deferred tax liability associated with intangible assets. Our pro forma net tangible book value as of June 30, 2017 was $11.1 million, or $1.95 per share, based on the total number of shares of our common stock outstanding as of June 30, 2017, after giving effect to: (i) 130,590 shares of common stock issued to an entity owned and controlled by Daniel S. Janney, a member of our board of directors, in August 2017; (ii) the automatic conversion of all outstanding shares of our preferred stock on a one-to-one basis into an aggregate of 2,061,773 shares of common stock immediately prior to the completion of this offering, which includes 179,613 shares of our Series Seed preferred stock, 968,053 shares of preferred stock we issued in August 2017 upon conversion of our outstanding convertible promissory notes and accrued interest thereon, and 914,107 shares of Series A Preferred issued to Sun Pharma in August 2017; and (iii) the 1-to-4.5 forward stock split, in the form of a dividend, which occurred on September 14, 2017.

After giving effect to the sale of 3,000,000 shares of common stock in this offering at an assumed initial public offering price of $10.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of June 30, 2017 would have been $37.9 million, or $4.36 per share. This represents an immediate increase in pro forma as adjusted net tangible book value of $2.41 per share to our existing stockholders and an immediate dilution of $5.64 per share to new investors participating in this offering.

The following table illustrates this dilution on a per share basis:

 

Assumed initial public offering price per share						$	10.00
Historical net tangible book value per share as of June 30, 2017		$	(0.72)
Pro forma increase per share attributable to the pro forma transactions and other adjustments described above			2.67
Pro forma net tangible book value per share as of June 30, 2017		$	1.95
Increase in pro forma net tangible book value per share attributable to new investors in this offering			2.41
Pro forma as adjusted net tangible book value per share immediately after this offering							4.36
Dilution in pro forma net tangible book value per share to new investors in this offering						$	5.64

Each $1.00 increase (decrease) in the assumed initial public offering price of $10.00, the midpoint of the price range set forth on the cover page of this prospectus, would increase our pro forma as adjusted net tangible book value per share after this offering by $0.32 per share and the dilution per share to new investors participating in this offering by $0.68 per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each 1.0 million

 

53

---

Table of Contents

increase (decrease) in the number of shares offered by us would increase (decrease) the pro forma as adjusted net tangible book value per share after this offering by $0.51 per share and the dilution per share to new investors participating in this offering by $(0.51) per share, assuming that the assumed initial public offering price remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

If the underwriters exercise in full their option to purchase up to 450,000 additional shares of common stock to cover over-allotments, if any, the pro forma as adjusted net tangible book value per share after giving effect to this offering would be $4.60 per share, representing an immediate increase (decrease) to existing stockholders of $0.24 per share and immediate dilution to new investors participating in this offering of $(0.24) per share assuming that the assumed initial public offering price remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

To the extent any outstanding options to purchase common stock are exercised, new investors would experience further dilution.

The following table summarizes, on a pro forma as adjusted basis as of June 30, 2017, the differences between the number of shares of common stock purchased from us, the total cash consideration and the average price per share paid to us by existing stockholders and by new investors purchasing shares in this offering, at an assumed initial public offering price of $10.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us:

 

		Shares Purchased								Total Consideration								Average Price Per Share
		Number				Percent				Amount				Percent
Existing stockholders			5,683,247				65.45	%		$	16,929				36.07	%		$	2.98
New public investors			3,000,000				34.55	%			30,000				63.93	%		$	10.00
Total			8,683,247				100	%		$	46,929				100	%

If the underwriters exercise their option to purchase additional shares in full, the number of shares of common stock held by existing stockholders will be reduced to 62.23% of the total number of shares of common stock to be outstanding after this offering, and the number of shares of common stock held by investors participating in this offering will be further increased to 37.77% of the total number of shares of common stock to be outstanding after this offering.

The number of shares of our common stock to be outstanding after this offering excludes:

 

•

159,633 shares of our common stock issuable upon the exercise of options outstanding on June 30, 2017, with a weighted-average exercise price of $3.21 per share;

 

•

18,949 shares of our common stock issuable upon the exercise of options granted after June 30, 2017 through August 15, 2017, with an exercise price of $7.66 per share;

 

•

14,468 shares of common stock reserved for future issuance under our Krystal Biotech, Inc. 2017 Stock Incentive Plan as of August 15, 2017, and any future increase in shares reserved for issuance under such plan; and

 

•

900,000 shares of common stock reserved for future issuance under our Krystal Biotech, Inc. 2017 IPO Stock Incentive Plan, which will become effective upon the completion of this offering, and any future increase in shares reserved for issuance under such plan.

 

54

---

Table of Contents

SELECTED FINANCIAL DATA

The selected statements of operation data for the year ended December 31, 2016 has been derived from our audited financial statements appearing elsewhere in this prospectus. The selected financial data as of June 30, 2017 and for the six months ended June 30, 2016 and 2017 have been derived from our unaudited financial statements included elsewhere in this prospectus. The unaudited financial statements have been prepared on a basis consistent with our audited financial statements and, in the opinion of our management, contain all adjustments, consisting only of normal and recurring adjustments, necessary for a fair statement of such financial data. You should read this data together with our audited financial statements and related notes appearing elsewhere in this prospectus and the information under the captions “Risk Factors,” “Capitalization,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our historical results are not necessarily indicative of our future results, and our operating results for the six-month period ended June 30, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2017 or any other interim periods or any future year or period.

 

		Year Ended December 31, 2016				Six Months Ended June 30,
						2016				2017
(in thousands, except shares, units and per share data)						(unaudited)
Statements of operations data:
Revenues
Revenues		$	—			$	—			$	—
Total revenues			—				—				—
Expenses
Research and development			741				98				765
General and administrative			402				103				415
Total operating expenses			1,143				201				1,180
Loss from operations			(1,143	)			(201	)			(1,180	)
Other Income (Expense)
Interest expense			(7	)			—				(73	)
Total other income (expense)			(7	)			—				(73	)
Net loss			(1,150	)			(201	)			(1,253	)
Net loss applicable to stockholders and members		$	(1,150	)		$	(201	)		$	(1,253	)
Net loss attributable to common stockholders per share:
Basic and diluted		$	(1.31	)		$	(447.03	)		$	(0.36	)
Weighted-average common shares and common units outstanding
Basic and diluted			877,490				450				3,490,884

 

		As of December 31, 2016				As of June 30, 2017
(in thousands)						(unaudited)
Balance sheet data:
Cash		$	1,923			$	3,518
Working capital (deficit)			2,126				(877	)
Total assets			2,182				3,977
Accrued expenses			1				324
Related party promissory notes			698				1,698
Total liabilities			1,893				4,806
Convertible preferred units and preferred stock			—				1,406
Total stockholders’ and members’ equity (deficit)			289				(2,235	)

 

55

---

Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with the section entitled “Selected Financial Data” and our financial statements and related notes appearing in this prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section of this prospectus, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

We are a gene therapy company dedicated to developing and commercializing novel treatments for patients suffering from dermatological diseases. We have developed a proprietary gene therapy platform, which we refer to as the Skin TARgeted Delivery platform, or STAR-D platform, that consists of an engineered patent pending viral vector based on herpes simplex virus 1, or 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 our STAR-D 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.

Our lead product candidate, KB103, is currently in preclinical development and seeks to use gene therapy to treat dystrophic epidermolysis bullosa, or DEB, a rare and severe genetic disease, for which there is currently no approved treatment. DEB affects the skin and mucosal tissues, and is caused by one or more mutations in a gene called COL7A1, which is responsible for the formation of protein type VII collagen, or COL7, that forms anchoring fibrils that bind the dermis to the epidermis. In DEB patients, the genetic defect in COL7A1 results in loss or malfunctioning of these anchoring fibrils, leading to extremely fragile skin that blisters and tears from minor friction or trauma. Those who are born with DEB are sometimes called “butterfly children”, because their skin is likened to be as fragile as the wings of a butterfly. DEB patients may suffer from open wounds, skin infections, fusion of fingers and toes, and gastrointestinal tract problems throughout their lifetime, and may eventually develop squamous cell carcinoma, a potentially fatal condition. Based on information from DEBRA International, a worldwide alliance of patient support groups for epidermolysis bullosa, or EB, of which DEB is a subset, we believe there may be as many as 125,000 patients worldwide who suffer from DEB. We estimate that there are 3,200 to 3,500 diagnosed DEB patients in the European Union, United States, Japan and Canada.

Our company was organized in December 2015 in the State of California and commenced operations on April 15, 2016. On March 31, 2017, we converted from a California limited liability company to a Delaware C-corporation, and changed our name from Krystal Biotech, LLC to Krystal Biotech, Inc. To date, our operations have been limited to organizing and staffing our company, developing our proprietary STAR-D platform, identifying potential product candidates and undertaking preclinical studies and preparing for clinical trials of our product candidates. We have primarily financed our operations through the issuance of our equity securities and debt financings. At June 30, 2017, we had received $1.4 million in gross proceeds from the issuance of equity securities and $4.1 million in gross proceeds from debt financings. At June 30, 2017, our cash was approximately $3.5 million.

Since operations began, we have incurred operating losses. Our net losses were $1.2 million, $201 thousand and $1.3 million for the year ended December 31, 2016 and the six months ended June 30, 2016 and 2017, respectively. At June 30, 2017, we had accumulated a deficit of $2.4 million. We expect to incur significant expenses and increasing operating losses for the foreseeable future. Our net losses may fluctuate significantly from quarter to quarter and year to year. We will need to generate significant

 

56

---

Table of Contents

revenue to achieve profitability, and we may never generate revenue or enough revenue to achieve profitability.

Costs related to clinical trials can be unpredictable and therefore there can be no guarantee that the net proceeds from this offering and from these other sources will be sufficient to fund our planned preclinical and clinical studies or our operations through this period. These funds may not be sufficient to enable us to conduct pivotal clinical trials for, seek marketing approval for or commercially launch KB103 or any other product candidate. Accordingly, to obtain marketing approval for and to commercialize this or any other product candidates, we may be required to obtain further funding through public or private equity offerings, debt financings, collaboration and licensing arrangements or other sources. Adequate additional financing may not be available to us on acceptable terms, or at all. Our failure to raise capital when needed would have a negative effect on our financial condition and our ability to pursue our business strategy.

Financial Overview

The results of operations contained within this Management’s Discussion and Analysis do not contain comparative results to the year ended December 31, 2016 because we did not exist as a legal entity prior to December 20, 2015.

Revenue

We currently have no approved products for commercial marketing or sale and have not generated any revenue from the sale of products or other sources to date. In the future, we may generate revenue from product sales, royalties on product sales, or license fees, milestones, or other upfront payments if we enter into any collaborations or license agreements. We expect that our future revenue will fluctuate from quarter to quarter for many reasons, including the uncertain timing and amount of any such payments and sales.

Research and Development Expenses

Research and development expenses consist primarily of costs incurred to advance our preclinical and clinical candidates, which include:

 

•

expenses incurred under agreements with contract manufacturing organizations, or CMOs, consultants and other vendors that conduct our preclinical activities;

 

•

costs of acquiring, developing and manufacturing clinical trial materials and lab supplies; and

 

•

facility costs, depreciation and other expenses, which include direct expenses for rent and maintenance of facilities and other supplies.

We expense internal research and development costs to operations as incurred. We expense third party costs for research and development activities, such as the manufacturing of preclinical and clinical materials, based on an evaluation of the progress to completion of specific tasks such as manufacturing of drug substance, fill/finish and stability testing, which is provided to us by our vendors.

We expect our research and development expenses will increase as we continue the manufacture of preclinical and clinical materials and manage the clinical trials of, and seek regulatory approval for, our product candidates and expand our product portfolio. In the near term, we expect that our research and development expenses will increase as we conduct our ongoing preclinical trials and our planned Phase 1/2 clinical trial for KB103. Due to the numerous risks and uncertainties associated with product development, we cannot determine with certainty the duration, costs and timing of this clinical trial, and, as a result, the actual costs to complete this planned clinical trial may exceed the expected costs.

 

57

---

Table of Contents

General and Administrative Expenses

General and administrative expenses consist principally of professional fees associated with corporate and intellectual property legal expenses, consulting and accounting services and facility-related costs. Other general and administrative costs include stock-based compensation and travel expenses.

We anticipate that our general and administrative expenses will increase in the future to support the continued research and development of our product candidates and to operate as a public company. These increases will likely include increased costs for insurance, costs related to the hiring of additional personnel and payments to outside consultants, lawyers and accountants, among other expenses. Additionally, if and when we believe a regulatory approval of our first product candidate appears likely, we anticipate that we will increase our salary and personnel costs and other expenses as a result of our preparation for commercial operations.

Interest Expense, Net

Interest expense, net consists primarily of interest expense on our convertible promissory notes, which is partially offset by interest earned on our cash.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of our financial position and results of operations is based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, we evaluate estimates which include, but are not limited to, estimates related to contract manufacturing prepayments and accruals, stock-based compensation expense, and reported amounts of expenses during the reported period. We base our estimates on historical experience and other market-specific or other relevant assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from those estimates or assumptions.

While our significant accounting policies are described in more detail in the notes to our financial statements appearing elsewhere in this prospectus, we believe the following accounting policies to be most critical to the judgments and estimates used in the preparation of our financial statements.

Accrued Research and Development Expenses

As part of the process of preparing our financial statements, we are required to estimate our accrued research and development expenses, current assets and other current liabilities. This process involves reviewing open contracts and commitments, communicating with our personnel to identify services that have been performed for us 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. The majority of our service providers invoice us monthly in arrears for services performed or when contractual milestones are met. We make estimates of our accrued research and development expenses, current assets and other current liabilities as of each balance sheet date in our financial statements based on facts and circumstances known to us at that time. Examples of estimated accrued research and development expenses, prepaid assets and other current liabilities include fees paid to contract manufacturers made in connection with the manufacturing of clinical trials materials.

We base our expenses related to clinical manufacturing on our estimates of the services performed pursuant to contracts with the entities producing clinical materials on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. Payments under these types of contracts depend heavily upon the successful completion of many separate tasks involved in the manufacturing of drug product. In accruing service fees, we estimate the time period over which services will be performed, and the actual services performed in each period. If

 

58

---

Table of Contents

our estimates of the status and timing of services performed differs from the actual status and timing of services performed we may report amounts that are too high or too low in any particular period. To date, there have been no material differences from our estimates to the amount actually incurred.

Stock-Based Compensation

We have applied the fair value recognition provisions of Financial Accounting Standards Board Accounting Standards Codification, or ASC, Topic 718, Compensation—Stock Compensation, or ASC 718, to account for stock-based compensation for employees and ASC 718 and ASC 505, Equity, or ASC 505, for non-employees. We recognize compensation costs related to stock options granted to employees based on the estimated fair value of the awards on the date of grant. Stock compensation related to non-employee awards is re-measured at each reporting period until the awards are vested. Described below is the methodology we have utilized in measuring stock-based compensation expense.

Determining the amount of stock-based compensation to be recorded requires us to develop estimates of the fair value of stock-based awards as of their measurement date. We recognize stock-based compensation expense over the requisite service period, which is the vesting period of the award. Calculating the fair value of stock-based awards requires that we make highly subjective assumptions. We use the Black-Scholes option pricing model to value our stock option awards. Use of this valuation methodology requires that we make assumptions as to the volatility of our common stock, the fair value of our common stock on the measurement date, the expected term of our stock options, the risk free interest rate for a period that approximates the expected term of our stock options and our expected dividend yield. Because we are a privately held company with a limited operating history, we utilize data from a representative group of publicly traded companies to estimate expected stock price volatility. We selected representative companies from the biopharmaceutical industry with characteristics similar to us. We use the simplified method as prescribed by the SEC Staff Accounting Bulletin No. 107, Share-Based Payment as we do not have sufficient historical stock option activity data to provide a reasonable basis upon which to estimate the expected term of stock options granted to employees. For non-employee grants, we use an expected term equal to the remaining contractual term of the award. We utilize a dividend yield of zero based on the fact that we have never paid cash dividends and have no current intention of paying cash dividends. The risk-free interest rate used for each grant is based on the U.S. Treasury yield curve in effect at the time of grant for instruments with a similar expected life.

Under ASC 718, we are required to estimate the level of forfeitures expected to occur and record stock-based compensation expense only for those awards that we ultimately expect will vest. For all periods presented, our estimated annual forfeiture rate was 0%.

Stock-based compensation expense includes options granted to employees and non-employees and has been reported in our statements of operations and comprehensive loss as follows (in thousands):

 

		Year Ended December 31, 2016				Six Months Ended June 30,
						2016				2017
						(unaudited)				(unaudited)
Research and development		$	25			$	3			$	67
General and administrative			8				—				68
Total		$	33			$	3			$	135

 

59

---

Table of Contents

We estimated the fair value of stock options of each employee stock award at the grant date using assumptions regarding the fair value of the underlying common stock on each grant date and the following additional assumptions:

 

		Year Ended December 31, 2016				Six Months Ended June 30, 2017
						(unaudited)
Employees
Expected volatility			80	%			80	%
Expected term of the award (in years)			6.25				6.25
Risk-free interest rate			1.97	%			1.91	%
Expected dividend yield			—				—
Non-employees
Expected volatility			80	%			—
Expected time to maturity (in years)			6.25				—
Risk-free interest rate			1.97	%			—
Expected dividend yield			—				—

At June 30, 2017, we had approximately $633 thousand of total unrecognized compensation expense, net of related forfeiture estimates, which we expect to recognize over a weighted-average remaining vesting period of approximately three years. We expect the effect of our stock based compensation expense to grow in future periods due to the potential increases in the value of our common stock and increased number of stock options granted due to anticipated increases in our overall headcount.

The following table presents the grant dates of stock options that we granted from inception through June 30, 2017 along with the corresponding exercise price for each option grant and our current estimate of the fair value per option on each grant date, which we utilize to calculate stock-based compensation expense:

 

Period Granted		Number of Shares Underlying Options Granted		Weighted-Average Exercise Price per Share		Weighted-Average Estimated Fair Value per Share of Common Stock		Weighted-Average Estimated Fair Value per Share of Options
November 2016		142,105		$2.46		$2.46		$1.73
May 2017		27,000		$2.46		$8.00		$6.82
June 2017		18,949		$8.79		$8.79		$6.17

 

60

---

Table of Contents

At June 30, 2017, options to purchase 159,633 shares of our common stock were outstanding. The aggregate intrinsic value of these options was $1.1 million, assuming an initial public offering price of $10.00 per share, the midpoint of the price range set forth on the cover page of this prospectus. The intrinsic value of all outstanding vested and unvested options as of June 30, 2017, assuming an initial public offering price of $10.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, are as follows:

 

		Shares				Weighted- Average Exercise Price				Weighted- Average Remaining Contractual Life (Years)				Aggregate Intrinsic Value (in thousands)
Outstanding at January 1, 2016
Granted			142,105			$	2.46							$	—
Exercised			—
Cancelled or forfeited			—
Outstanding at December 31, 2016			142,105			$	2.46				9.7			$	338
Granted (unaudited)			45,949			$	5.07
Exercised (unaudited)			—				—
Cancelled or forfeited (unaudited)			(28,421	)		$	2.46
Outstanding at June 30, 2017 (unaudited)			159,633			$	3.21				9.4			$	1,061
Exercisable at December 31, 2016			—			$	—				—			$	—
Vested at December 31, 2016			—			$	—				—			$	—
Exercisable at June 30, 2017 (unaudited)			18,945			$	2.46				9.1			$	143
Vested at June 30, 2017 (unaudited)			18,945			$	2.46				9.1			$	143

Determination of the Fair Value of Common Stock on Grant Dates

As there has been no public market for our equity instruments to date, the estimated fair value of our common shares has been determined by our board of directors as of the grant date, with input from management, considering our most recently available third-party valuations of common shares and our board of directors’ assessment of additional objective and subjective factors that it believed were relevant and which may have changed from the date of the most recent valuation through the date of the grant. Following the consummation of this offering, the fair value of our common stock will be determined based on the quoted market price of our common stock. We engaged an independent third-party valuation specialist to perform contemporaneous valuations as of September 30, 2016 and May 31, 2017. The third-party valuations were performed in accordance with the guidance outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held Company Equity Securities Issued as Compensation, or AICPA’s Practice Aid. In conducting the valuations, the independent third-party valuation specialist considered all objective and subjective factors that it believed to be relevant for each valuation conducted in accordance with AICPA’s Practice Aid, including our best estimate of our business condition, prospects and operating performance at each valuation date. Other significant factors included:

 

•

the rights, preferences and privileges of our preferred stock as compared to those of our common stock, including the liquidation preferences of our preferred stock;

 

•

our results of operations, financial position and the status of research and development efforts;

 

•

the composition of, and changes to, our management team and board of directors;

 

•

the lack of liquidity of our common stock;

 

•

our stage of development and business strategy and the material risks related to our business and industry;

 

61

---

Table of Contents

•

the valuation of publicly traded companies in the life sciences and biotechnology sectors, as well as recently completed mergers and acquisitions of guideline companies;

 

•

any external market conditions affecting the life sciences and biotechnology industry sectors;

 

•

the likelihood of achieving a liquidity event for the holders of our common stock and stock options, such as an initial public offering, or IPO, or a sale of our company, given prevailing market conditions; and

 

•

the state of the IPO market for similarly situated privately held biotechnology companies.

The dates of our contemporaneous valuations have not always coincided with the dates of our stock option grants. In determining the exercise prices of the stock options set forth in the table above, our board of directors considered, among other things, the most recent contemporaneous valuation of our common stock and their assessment of additional objective and subjective factors that were relevant as of the grant dates. The additional factors considered when determining whether any changes in the fair value of our common stock had occurred between the most recent contemporaneous valuation and the grant dates included our stage of research and preclinical development, our operating and financial performance and current business conditions.

There are significant judgments and estimates inherent in the determination of the fair value of our common stock. These judgments and estimates include assumptions regarding our future operating performance, the time to completing an IPO or other liquidity event, the related valuations associated with such events, and the determinations of the appropriate valuation methods at each valuation date. If we had made different assumptions, our stock-based compensation expense, net loss and net loss per share applicable to common stockholders could have been materially different.

Common Stock Valuation Methodologies

The valuations we obtained were prepared in accordance with the guidelines in AICPA’s Practice Aid, which prescribes several valuation approaches for setting the value of an enterprise, such as the cost, market and income approaches, and various methodologies for allocating the value of an enterprise to its common stock. We generally used the market approach, in particular the guideline company and precedent transaction methodologies, based on inputs from comparable public companies’ equity valuations and comparable acquisition transactions, to estimate the enterprise value of our company.

Methods Used to Allocate Our Enterprise Value to Classes of Securities

In accordance with AICPA’s Practice Aid, we considered the various methods for allocating the enterprise value across our classes and series of capital stock to determine the fair value of our common stock at each valuation date. The methods considered consisted of the following:

 

•

Probability-Weighted Expected Return Method, or PWERM.    The PWERM is a scenario-based analysis that estimates the value per share based on the probability-weighted present value of expected future investment returns, considering each of the possible outcomes available to us, as well as the economic and control rights of each share class.

 

•

Option Pricing Method, or OPM.    Under the option pricing method, shares are valued by creating a series of call options with exercise prices based on the liquidation preferences and conversion terms of each equity class. The values of the preferred and common stock are inferred by analyzing these options.

 

•

Current Value Method.    The current value method of allocating value between security holders analyzes the current capital structure of a business as of the time the valuation. It assumes that preferred shares can be valued based upon the amount of their liquidation preferences, unless their conversion rights are “in the money.” Preferred shares are “in the money” if the estimated fair value of the business is high enough that the preferred shareholder would choose to exercise their right to convert their preferred shares into of common stock, taking into account senior liquidation preferences, multiple liquidation preferences, and participation feature.

 

62

---

Table of Contents

The foregoing valuation methodologies are not the only methodologies available and they will not be used to value our common stock once this offering is complete. We cannot make assurances as to any particular valuation for our common stock. Accordingly, investors are cautioned not to place undue reliance on the foregoing valuation methodologies as an indicator of future stock prices.

Valuation of Common Stock as of September 30, 2016

We engaged a third-party valuation specialist to conduct a contemporaneous valuation of our common stock as of September 30, 2016. We chose the option-pricing method, or OPM, to estimate our enterprise value and to allocate this value to the various outstanding equity instruments. The option pricing method of allocating value between security holders analyzes the value of each class of security by treating it as a call option on a portion of the future of a business. It assumes that a formula, such as the Black-Scholes model, can calculate the fair value, if provided with estimate of certain values. The values to be estimated are:

 

•

Share price;

 

•

Expiration date;

 

•

Volatility; and

 

•

Risk-free rate of return.

Under this method, the common share has value only if the funds available for distribution to shareholders exceed the value of the liquidation preference at the time of a liquidity event, assuming the enterprise has funds available to make a liquidation preference meaningful and collectible by the shareholders. The common share is modeled as a call option that gives the owner the right but not the obligation to buy the underlying enterprise value at a predetermined or exercise price. In the model, the exercise price is based on a comparison with the equity value rather than, as in the case of a “regular” call option, a comparison with a per-share price. Thus, common shares are considered to be call options with a claim on the enterprise at an exercise price equal to the remaining value immediately after the preferred shares are liquidated.

The OPM considers the various factors, including the level of seniority among the securities, dividend policy, conversion ratios, and cash allocations, upon liquidation of the enterprise. In addition, the method implicitly considers the effects of the liquidation preference as of the future liquidation date, not as of the valuation date. However, the method may be complex to implement and is sensitive to certain key assumptions, such as the volatility assumption.

The OPM, as applied under the Black-Scholes model, is appropriate to use when the range of possible further outcomes is so difficult to predict that forecasts would be highly speculative. That is, use of the method under Black-Scholes is generally appropriate in situations in which the enterprise has many choices and options available, and the enterprise’s value depends on how well it follows an uncharted path through the various possible opportunities.

The inputs were applied in the Black-Scholes calculations of the OPM are as follows:

 

•

Time to liquidity: 5 years

 

•

Expected volatility of underlying securities: 80.0%

 

•

Risk free rate of return: 1.14%

 

•

Dividend yield: 0.0%

Based on these input variables, the fair value of our common stock on September 30, 2016 was $2.46 per share.

 

63

---

Table of Contents

Stock Options Granted in November 2016

Our board of directors granted options to purchase 142,105 common shares in November 2016 with an exercise price of $2.46 per share, which the board determined to be fair value per share of the common stock at the time of such grant.

At the time of the grant of the options, we considered the third-party valuation as of September 30, 2016 as well as other factors in estimating the fair value of our common stock on their respective grant dates. From September 30, 2016 through November 30, 2016, we did not receive any significant scientific data or results from the development of our lead product candidate KB103, or experience any other material events that would affect the fair value of our common stock. In addition, there were no significant changes in the overall capital markets that affected the assumptions used to estimate the fair value of our common stock. Given the uncertainty around a future liquidity event our board of directors considered that no significant event or other circumstances had occurred between September 30, 2016 and November 30, 2016, and determined that there was no change in the fair value of our common stock during that period.

Stock Options Granted in May 2017

Our board of directors approved four grants of options to purchase a total of 27,000 shares of common stock on May 1, 2017 with an exercise price of $2.46 per share, which the board determined to be the fair value per share of the common stock at the time of such grants. Two of the option grants for a total of 13,500 shares were to individuals who were expected to commence employment at the beginning of May. Those individuals subsequently delayed their employment commencement dates to June 1, 2017.

At the time of the grant of the options, we considered the third-party valuation as of September 30, 2016 as well as other factors in estimating the fair value of our common stock on their respective grant dates. From September 30, 2016 through May 1, 2017, we did not receive any scientific data or results from the development of its lead product candidate KB103 which, in in our judgment, had a concrete or ascertainable impact on the fair value of our common stock, or experience any other material events that would affect the fair value of our common stock. In addition, we had not yet engaged in meaningful discussions with consultants or investment bankers concerning the possibility or feasibility of completing an initial public offering. Furthermore, there were no significant changes in the overall capital markets that affected the assumptions used to estimate the fair value of our common stock. Given the uncertainty around a future liquidity event our board of directors considered that no significant event or other circumstances had occurred between September 30, 2016 and May 1, 2017, and determined that there was no change in the fair value of our common stock during that period.

Valuation of Common Stock as of May 31, 2017

We engaged a third-party valuation specialist to conduct a contemporaneous valuation of our common stock as of May 31, 2017. We chose the OPM to estimate our enterprise value and to allocate this value to the various outstanding equity instruments. The option pricing method of allocating value between security holders analyzes the value of each class of security by treating it as a call option on a portion of the future of a business. It assumes that a formula, such as the Black-Scholes model, can calculate the fair value, if provided with estimate of certain values. The values to be estimated are:

 

•

Share price;

 

•

Expiration date;

 

•

Volatility; and

 

•

Risk-free rate of return.

Under this method, the common share has value only if the funds available for distribution to shareholders exceed the value of the liquidation preference at the time of a liquidity event, assuming the

 

64

---

Table of Contents

enterprise has funds available to make a liquidation preference meaningful and collectible by the shareholders. The common share is modeled as a call option that gives the owner the right but not the obligation to buy the underlying enterprise value at a predetermined or exercise price. In the model, the exercise price is based on a comparison with the equity value rather than, as in the case of a “regular” call option, a comparison with a per-share price. Thus, common shares are considered to be call options with a claim on the enterprise at an exercise price equal to the remaining value immediately after the preferred shares are liquidated.

The OPM considers the various factors, including the level of seniority among the securities, dividend policy, conversion ratios, and cash allocations, upon liquidation of the enterprise. In addition, the method implicitly considers the effects of the liquidation preference as of the future liquidation date, not as of the valuation date. However, the method may be complex to implement and is sensitive to certain key assumptions, such as the volatility assumption.

The OPM, as applied under the Black-Scholes model, is appropriate to use when the range of possible further outcomes is so difficult to predict that forecasts would be highly speculative. That is, use of the method under Black-Scholes is generally appropriate in situations in which the enterprise has many choices and options available, and the enterprise’s value depends on how well it follows an uncharted path through the various possible opportunities.

The inputs were applied in the Black-Scholes calculations of the OPM are as follows:

 

•

Time to liquidity: 5 years

 

•

Expected volatility of underlying securities: 80.0%

 

•

Risk free rate of return: 1.75%

 

•

Dividend yield: 0.0%

Based on these input variables, the fair value of our common stock on May 31, 2017 was $8.79 per share.

Stock Options Granted in June 2017

Our board of directors granted 18,949 shares of common stock in June 2017 with an exercise price of $8.79 per share, which the board determined to be the fair value per share of the common stock at the time of such grant.

Retrospective Valuations as of May 1, 2017 and June 1, 2017

On July 13, 2017, our board of directors authorized the preparation and filing of a draft registration statement with the SEC to permit the issuance and sale of shares of our common stock to the public. In connection with the preparation of our financial statements for inclusion in this offering document and considering the fair value per share of our common stock, as determined by a third-party valuation specialist performed as of May 31, 2017, management and the our board of directors determined to retrospectively reassess, solely for financial reporting purposes, the estimated fair value of our common stock related to the May 1, 2017 stock option grants. In determining the retrospectively reassessed estimated fair values of these stock option grants, we extrapolated a value as of the option grant date of May 1, 2017 by assuming that the fair value of the common stock increased on a linear basis from the fair value of our common stock determined by a third-party valuation specialist on September 1, 2016, $2.46 per share, to the fair value of our common stock determined by a third-party valuation specialist on May 31, 2017, $8.79 per share. Applying this linear extrapolation, we determined that for financial reporting purposes the fair value of our common stock on May 1, 2017 was $8.00 per share. Additionally, we determined the fair value of the common stock as of June 1, 2017 to be $8.79 per share, as determined in the May 31, 2017 valuation, because the value per common share did not materially change with the passage of one day. We believe that the preparation of the retrospective valuations was necessary due to

 

65

---

Table of Contents

the fact that the timeframe and probability for a potential IPO had accelerated significantly since the time of our last valuation as of September 30, 2016, and that such acceleration would have a significant impact on the fair value of our common stock. We concluded that retrospective valuations for grant dates prior to May 1, 2017 were not necessary due to the early stage of our research programs and there being significantly less probability of an IPO in the near term prior to May 1, 2017.

Results of Operations

Year Ended December 31, 2016

 

		Year Ended December 31,
(in thousands)		2016
Revenues
Revenues		$	—
Total revenues			—
Expenses
Research and development			741
General and administrative			402
Total operating expenses			1,143
Loss from operations			(1,143	)
Other Expense
Interest expense, net			(7	)
Total other expense			(7	)
Net loss		$	(1,150	)

Research and Development Expenses

Research and development expenses at December 31, 2016 were $741 thousand. The expenses incurred were primarily related to lab supplies of $173 thousand, external development of $380 thousand, consulting costs of $131 thousand and facilities related costs of $57 thousand.

General and Administrative Expenses

General and administrative expenses at December 31, 2016 were $402 thousand. The expenses incurred were primarily related to travel and related costs of $142 thousand, legal costs of $141 thousand, accounting services of $61 thousand, facilities related costs of $18 thousand, office supplies of $18 thousand, other professional and consulting of $7 thousand, other administrative of $7 thousand, and stock based compensation expense of $8 thousand.

Interest Expense, Net

Interest expense was approximately $7 thousand for the year ended December 31, 2016.

 

66

---

Table of Contents

Six Months Ended June 30, 2016 and June 30, 2017

 

		Six Months Ended June 30,
(in thousands)		2016				2017				Change
		(unaudited)
Revenues
Revenues		$	—			$	—			$	—
Total revenues			—				—				—
Expenses
Research and development			98				765				667
General and administrative			103				415				312
Total operating expenses			201				1,180				979
Income (loss) from operations			(201	)			(1,180	)			(979	)
Other Expense
Interest expense, net			—				(73	)			(73	)
Total other expense			—				(73	)			(73	)
Net loss		$	(201	)		$	(1,253	)		$	(1,052	)

Research and Development Expenses

Research and development expenses increased $667 thousand in the six months ended June 30, 2017 as compared to the six months ended June 30, 2016. Higher research and development spending was due largely to increases in external development of $183 thousand, consulting costs of $183 thousand, lab supplies of $129 thousand, payroll, payroll taxes and stock-based compensation of $126 thousand and facilities related costs of $46 thousand.

General and Administrative Expenses

General and administrative expenses increased $312 thousand in the six months ended June 30, 2017 as compared to the six months ended June 30, 2016. Higher general and administrative spending was due largely to travel and related costs of $52 thousand, legal and professional services of $160 thousand, payroll, employee benefit and stock based compensation costs of $79 thousand and other administrative costs of $21 thousand.

Interest Expense, Net

Interest expense was $73 thousand for the six months ended June 30, 2017 related to the interest expense of our convertible promissory notes. There was no interest expense for the six months ended June 30, 2016 since we had not yet issued our convertible promissory notes.

Liquidity and Capital Resources

Overview

Since our inception and through June 30, 2017, we have received an aggregate of $1.4 million in gross proceeds from the issuance of equity securities and an aggregate of $4.1 million from debt financings. At June 30, 2017 our cash was approximately $3.5 million. In August 2017, we closed the sale of preferred stock for aggregate proceeds of $7.0 million. In August 2017, we closed the sale of 130,590 shares of our common stock with a party related to a director of our board for aggregate proceeds of $1.0 million.

Debt Financings

On November 16, 2016, we executed a note purchase agreement under which convertible promissory notes were issued. Each note bore interest at a rate of 6% per annum, which accrued based on a 365 day

 

67

---

Table of Contents

year and matured on May 14, 2018, unless sooner paid or converted. The notes become immediately due and payable in the event of an occurrence of default by us. As of December 31, 2016 and June 30, 2017, the outstanding principal balance of the notes was $1.8 million and $4.1 million, respectively. In the event we sold, merged, consolidated or reorganized, then all of the outstanding notes, at the option of the holder, would become immediately due and payable or convert into a number of shares of common stock or common units. In addition, the outstanding notes would automatically convert into shares of our common stock in the event we sell shares of our preferred stock in a minimum amount of $5.0 million.

Commensurate with the sale and issuance of the preferred stock on August 8, 2017, the convertible promissory notes were converted into 968,053 shares of preferred stock (inclusive of accrued interest thereon), in accordance with the conversion features of the notes.

Operating Capital Requirements

Our primary uses of capital are, and we expect will continue to be for the near future, compensation and related expenses, manufacturing costs for preclinical and clinical materials, third party clinical trial research and development services, laboratory and related supplies, clinical costs, legal and other regulatory expenses and general overhead costs.

Based on our planned use of the net proceeds of this offering and our existing cash resources, we believe that our available funds following this offering will be sufficient to enable us to obtain clinical data from our planned Phase 1/2 clinical trial for KB103. We expect that these funds will not be sufficient to enable us to seek marketing approval for or commercialize any of our product candidates.

We have based our projections of operating capital requirements on assumptions that may prove to be incorrect and we may use all of our available capital resources sooner than we expect. Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical products, we are unable to estimate the exact amount of our operating capital requirements. Our future funding requirements will depend on many factors, including, but not limited to:

 

•

the timing and costs of our ongoing planned Phase 1/2 clinical trial for KB103;

 

•

the progress, timing and costs of manufacturing of KB103 for planned clinical trials;

 

•

the initiation, progress, timing, costs and results of preclinical studies and clinical trials for our other product candidates and potential product candidates;

 

•

the outcome, timing and costs of seeking regulatory approvals;

 

•

the costs of commercialization activities for KB103 and other product candidates if we receive marketing approval, including the costs and timing of establishing product sales, marketing, distribution and manufacturing capabilities;

 

•

subject to receipt of marketing approval, revenue received from commercial sales of our product candidates;

 

•

the terms and timing of any future collaborations, licensing, consulting or other arrangements that we may establish;

 

•

the amount and timing of any payments we may be required to make, or that we may receive, in connection with the licensing, filing, prosecution, defense and enforcement of any patents or other intellectual property rights, including milestone and royalty payments and patent prosecution fees that we are obligated to pay pursuant to our license agreements;

 

•

the costs of preparing, filing and prosecuting patent applications, maintaining and protecting our intellectual property rights and defending against intellectual property related claims; and

 

•

the extent to which we in-license or acquire other products and technologies.

 

68

---

Table of Contents

We expect that we will need to obtain substantial additional funding in order to receive regulatory approval and to commercialize KB103 or any other product candidates. To the extent that we raise additional capital through the sale of common stock, convertible securities or other equity securities, the ownership interests of our existing stockholders may be materially diluted and the terms of these securities could include liquidation or other preferences that could adversely affect the rights of our existing stockholders. In addition, debt financing, if available, would result in increased fixed payment obligations and may involve agreements that include restrictive covenants that limit our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends, that could adversely affect our ability to conduct our business. If we are unable to raise capital when needed or on attractive terms, we could be forced to significantly delay, scale back or discontinue the development or commercialization of KB103 or our other product candidates, seek collaborators at an earlier stage than otherwise would be desirable or on terms that are less favorable than might otherwise be available, and relinquish or license, potentially on unfavorable terms, our rights to KB103 or our other product candidates that we otherwise would seek to develop or commercialize ourselves.

Cash Flows

The following table summarizes our sources and uses of cash (in thousands):

 

		Year Ended December 31,				Six Months Ended June 30,
		2016				2016				2017
						(unaudited)
Net cash used in operating activities		$	(1,311	)		$	(139	)		$	(665	)
Net cash used in investing activities			(15	)			(5	)			(39	)
Net cash provided by financing activities			3,249				854				2,299
Net increase in cash		$	1,923			$	710			$	1,595

Operating Activities

Net cash used in operating activities was $1.3 million for the year ended December 31, 2016 and consisted primarily of a net loss of $1.2 million adjusted for non-cash items including nominal depreciation expenses, stock-based compensation expense of $33 thousand and a net increase in operating assets and liabilities of approximately $194 thousand.

Net cash used by operating activities was $139 thousand for the six months ended June 30, 2016, which consisted primarily of a net loss of $201 thousand adjusted for non-cash items, including depreciation and stock-based compensation expense of $4 thousand, which was partially offset by net increases in operating assets and liabilities of $58 thousand.

Net cash used in operating activities was $665 thousand for the six months ended June 30, 2017 consisting primarily of a net loss of $1.3 million adjusted for non-cash items including depreciation expenses of $4 thousand, stock-based compensation expense of $135 thousand, non-cash interest expense of $73 thousand and a net increase in operating assets and liabilities of approximately $376 thousand.

Investing Activities

During the year ended December 31, 2016, our investing activities used net cash of $15 thousand. The use of net cash resulted from purchases of laboratory property and equipment.

During the six months ended June 30, 2016, our investing activities used net cash of $5 thousand for the purchase of computer equipment.

During the six months ended June 30, 2017, our investing activities used net cash of approximately $39 thousand. The use of net cash resulted primarily from purchase of computer and laboratory property and equipment.

 

69

---

Table of Contents

Financing Activities

Net cash provided by financing activities was $3.2 million for the year ended December 31, 2016, which consisted of $1.4 million from the issuance of preferred stock and $1.8 million from the issuance of convertible promissory notes.

Net cash provided by financing activities was $854 thousand for the six months ended June 30, 2016, which consisted of $100 thousand from the issuance of common units and $754 thousand from the issuance of preferred units.

Net cash provided by financing activities was $2.3 million for the six months ended June 30, 2017, which was from the issuance of convertible promissory notes.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Net Operating Loss Carryforwards

From our inception through December 31, 2016, we were organized as a California limited liability company, or LLC, for federal and state income tax purposes, and therefore, all items of income or loss through December 31, 2016 flowed through to the members of the LLC. Effective January 1, 2017, we converted from an LLC to a Delaware C-corporation for federal and state income tax purposes. Prior to the conversion to a C-corporation, we did not record deferred tax assets or liabilities or have any net operating loss, or NOL, carryforwards for federal income tax purposes. Effective upon our conversion to a C-corporation, we became subject to income tax at the federal and state levels. Accordingly, as of June 30, 2017, we recorded a deferred tax asset for federal and state income taxes, which consists primarily of NOL carryforwards and research & development credit, as defined by the Internal Revenue Service.

We did not record a current or deferred income tax expense or benefit for the year ended December 31, 2016 and the six months ended June 30, 2017. Because we were an LLC for the year ended December 31, 2016, we were not subject to federal income tax. A reconciliation of income tax expense (benefit) computed at the statutory federal income tax rate of 40 percent for the year to income tax expense (benefit) as reflected in our financial statements for the six months ended June 30, 2017 is as follows (in thousands):

 

		June 30, 2017
		(unaudited)
Federal income tax expense (benefit) at statutory rate		$	(501	)
Change in valuation allowance			515
Other non-deductible expenses			6
Research & development credit			(20	)
Others			—
Total tax expense (benefit)		$	—

The significant components of our deferred tax assets as of June 30, 2017 are as follows (in thousands):

 

		June 30, 2017
		(unaudited)
Deferred tax assets:
Net operating loss carryforwards		$	449
Non-qualified option			51
Research & development credit			20
Depreciation			(6	)
Accrued bonus expenses			1
Total deferred tax assets			515
Valuation allowance			(515	)
Net deferred tax assets		$	—

 

70

---

Table of Contents

We have evaluated the positive and negative evidence bearing upon the realizability of our deferred tax assets. Based on our history of operating losses, we have concluded that it is more likely than not that the benefit of our deferred tax assets will not be realized. Accordingly, we have provided a full valuation allowance for deferred tax assets as of June 30, 2017. The valuation allowance increased approximately $515 thousand during the six months ended June 30, 2017, due primarily to the federal and state net operating losses generated during the period.

As of December 31, 2016, we had no U.S. federal NOL carryforwards because we were organized as a flow-through entity. As of June 30, 2017, we had U.S. federal NOL carryforwards of approximately $449 thousand which may be available to offset future income tax liabilities and expire at various dates through 2037.

Under the provisions of the Internal Revenue Code, the NOL carryforwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities. NOL carryforwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant shareholders over a three-year period in excess of 50 percent, as defined under Sections 382 and 383 of the Internal Revenue Code, respectively, as well as similar state provisions. This could limit the amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities. The amount of the annual limitation is determined based on the value of our company immediately prior to the ownership change. Subsequent ownership changes may further affect the limitation in future years. We have completed financings since inception which may have resulted in a change in control as defined by Sections 382 and 383 of the Internal Revenue Code, or could result in a change in control in the future.

We file income tax returns in the United States at the federal level and in states in which we conduct business activities. The federal and state income tax returns are generally subject to tax examinations for the tax year ended December 31, 2016. To the extent we have tax attribute carryforwards, the tax years in which the attribute was generated may still be adjusted upon examination by the Internal Revenue Service or state tax authorities to the extent utilized in a future period.

Contractual Obligations

The following table summarizes our outstanding contractual obligations as of payment due date by period at December 31, 2016 (in thousands):

 

		Total				Less Than 1 Year				Years 1-3				Years 4-5				More Than 5 Years
Future minimum operating lease payments(1)		$	191			$	100			$	91			$	—			$	—
Less: minimum payments to be received from non-cancelable subleases			(39	)			(22	)			(17	)			—				—
Total minimum lease payment, net		$	152			$	78			$	74				—				—
Obligation to contract manufacturing organization		$	2,011			$	1,511			$	500			$	—			$	—

 

(1)	In May 2016, we leased office and laboratory space at 2100 Wharton St., Suite 701, Pittsburgh, PA that expires in October 2018.

Qualitative and Quantitative Disclosures About Market Risk

Our cash is held in an operating account as of June 30, 2017. The investments in these financial instruments are made in accordance with an investment policy which specifies the categories, allocations and ratings of securities we may consider for investment. The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive without significantly increasing risk. Some of the financial instruments in which we invest could be subject to market risk. This means that a change in prevailing interest rates may cause the value of the instruments to fluctuate. For example, if we purchase a security that was issued with a fixed interest rate and the prevailing interest rate later rises, the value of that security will probably decline. To minimize this risk, we intend to maintain a

 

71

---

Table of Contents

portfolio which may include cash, cash equivalents and investment securities available-for-sale in a variety of securities which may include money market funds, government and non-government debt securities and commercial paper, all with various maturity dates. Based on our current investment portfolio, we do not believe that our results of operations or our financial position would be materially affected by an immediate change of 10% in interest rates.

We do not hold or issue derivatives, derivative commodity instruments or other financial instruments for speculative trading purposes. Further, we do not believe our cash has significant risk of default or illiquidity. While we believe our cash account does not contain excessive risk, we cannot provide absolute assurance that any investments we make in the future will not be subject to adverse changes in market value. Our cash is recorded at fair value.

Subsequent Events

In August 2017, we issued 914,107 shares of Series A Preferred Stock, or Series A Preferred, to Sun Pharma (Netherlands) B.V., or Sun Pharma, an indirect subsidiary of Sun Pharmaceutical Industries Limited, pursuant to a stock purchase agreement for aggregate proceeds to us of approximately $7.0 million. Sun Pharma is a multinational pharmaceutical company and the largest pharmaceutical company headquartered in India. For so long as it is a holder of Series A Preferred, Sun Pharma has a right to designate and have elected a single representative to our board of directors and accordingly, in September 2017, Kirti Ganorkar was elected to our board of directors. Each share of Series A Preferred will convert into a share of common stock upon the closing of this offering. Simultaneously with the sale of the Series A Preferred, all of our outstanding convertible debt with accrued interest was converted into 968,053 shares of Series A-1 Preferred Stock and Series A-2 Preferred Stock, which will also convert into shares of common stock on a one-for-one basis upon closing of this offering.

Subsequently, in August, following the completion of the Sun Pharma investment, Daniel S. Janney, a member of our board of directors, purchased 130,590 shares of our common stock at the same price per share paid by Sun Pharma, $7.66 per share, through an investment entity owned and controlled by Mr. Janney for total consideration of approximately $1.0 million.

JOBS Act

In April 2012, the JOBS Act was enacted in the United States. Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth public companies.

 

72

---

Table of Contents

BUSINESS

Overview

We are a gene therapy company dedicated to developing and commercializing novel treatments for patients suffering from dermatological diseases. We have developed a proprietary gene therapy platform, which we refer to as the Skin TARgeted Delivery platform, or STAR-D platform, that consists of a patent pending engineered viral vector based on herpes simplex virus 1, or 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 STAR-D 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 to expand our pipeline to include other dermatological indications in the future.

Our lead product candidate, KB103, is currently in preclinical development and seeks to use gene therapy to treat dystrophic epidermolysis bullosa, or DEB, a rare and severe genetic disease, for which there is currently no approved treatment. DEB affects the skin and mucosal tissues, and is caused by one or more mutations in a gene called COL7A1, which is responsible for the formation of protein type VII collagen, or COL7, that forms anchoring fibrils that bind the dermis, or inner layer of the skin, to the epidermis, or outer layer of the skin. In DEB patients, the genetic defect in COL7A1 results in loss or malfunctioning of these anchoring fibrils, leading to extremely fragile skin that blisters and tears from minor friction or trauma. Those born with DEB are sometimes called “butterfly children,” because their skin is likened to be as fragile as the wings of a butterfly. DEB patients may suffer from open wounds, skin infections, fusion of fingers and toes and gastrointestinal tract problems throughout their lifetime, and may eventually develop squamous cell carcinoma, a potentially fatal condition. Based on information from DEBRA International, a worldwide alliance of patient support groups for epidermolysis bullosa, or EB, of which DEB is a subset, we believe there may be as many as 125,000 patients worldwide who suffer from DEB. We estimate that there are presently 3,200 to 3,500 diagnosed DEB patients in the European Union, United States, Japan and Canada.

We believe our approach to treating DEB with KB103, which has not yet been approved by either the U.S. Food and Drug Administration, or FDA, or the European Medicine Agency, or EMA, is novel. To date, only one gene therapy product has received marketing authorization from the FDA, and only two gene therapy products have received marketing authorization from the EMA. The current standard of care for DEB patients is limited to palliative measures which seek to provide relief from some of the symptoms of DEB but do not meaningfully impact disease outcomes. Other known efforts to develop DEB treatments are employing autologous approaches to creating therapeutic products. Autologous treatments use a patient’s own tissues and cells to manufacture an individualized therapy. Such therapies are expensive, invasive and time consuming to use, and require highly sophisticated medical teams and procedures. In contrast, KB103 is designed to be an off-the-shelf treatment for DEB that can be applied either intra-dermally or topically to a patient’s skin, every three to four months. Unlike the current standard of care, KB103 seeks to treat DEB at the molecular level through gene therapy, and is intended to be a non-invasive treatment that can be used without requiring hospitalization or individually customized treatment.

KB103 is a replication-defective, non-integrating viral vector that has been engineered employing our STAR-D platform to deliver functional human COL7A1 genes directly to the patients’ dividing and non-dividing skin cells. Non-integrating genes do not combine with the host cell’s DNA and express proteins separately from it. As a result, they do not disrupt the functioning of the host genes or present the cancer-causing risks associated with such disruption. We believe our STAR-D platform provides an optimal approach for treating dermatological conditions due to the nature of the HSV-1 viral vector we have created. Our viral vector has a natural affinity for the outermost layer of the epidermis, or skin epithelium, and we believe it can penetrate skin cells more efficiently than other viral vectors used in gene therapy. In addition, unlike many other gene therapy treatments, our viral vector is non-integrating. Our viral vector

 

73

---

Table of Contents

also has a high capacity or payload relative to most vectors, so it can accommodate large genes like COL7A1 and may allow us to insert single and multiple genes and other effectors in the future. This ability of our STAR-D platform could allow for the potential treatment of multi-factoral dermatological conditions like psoriasis and chronic wounds.

Preclinical studies evaluating intradermal and topical delivery of KB103 have been completed, and have demonstrated successful introduction of a functional COL7A1 gene to the host cells and subsequent expression of COL7. Additional studies to determine the durability, efficacy and dosing frequency using surrogate models of DEB are currently ongoing. We are presently completing a Good Laboratory Practice, or GLP, toxicity study and intend to file an Investigational New Drug, or IND, application for KB103 with the FDA in the first quarter of 2018.

Our management team includes individuals with expertise in gene therapy, product development, and manufacturing and commercialization in the biotechnology space. In addition, our management team members have successful track records in shepherding drugs from research to product approval. Suma M. Krishnan, our founder and Chief Operating Officer, has 25 years of drug development experience and led the discovery, development and approval of Vyvanse, a blockbuster drug to treat Attention Deficit Hyperactivity Disorder, or ADHD. She was also a member of the regulatory teams for both Adderall XR and Fosrenol, providing key support in moving both products toward approval, and more recently advanced several gene therapy programs from discovery to clinical development. Our Chairman and Chief Executive Officer, Krish S. Krishnan, brings 20 years of broad leadership and management experience in the biopharmaceutical industry. Our scientific team collectively has over 20 years of experience in HSV engineering and purification, providing the expertise needed to successfully optimize our HSV-1 vector production process. In addition, we are guided by key opinion leaders, or KOLs, who are generally accepted in the medical and scientific communities to be leading experts in the DEB and orphan dermatological disease space. Our KOLs, with whom we consult on an as-needed and project basis and compensate on an hourly or project basis, as the case may be, include Dr. Peter Marinkovich of the Department of Dermatology of Stanford University, Dr. Andrew South of the Department of Dermatology of Thomas Jefferson University and Dr. John McGrath of King’s College London.

Our success also depends in part on our ability to protect our intellectual property, including the STAR-D platform. We have adopted a strategy of seeking patent protection in the United States and abroad where appropriate with respect to certain of our technologies relating to our products and process. As of June 9, 2017, we are actively prosecuting a patent application in front of the USPTO directed to our products and processes related to the treatment of DEB, and a corresponding international patent application has been filed in accordance with the Paris Cooperation Treaty. Additionally, a patent application has been filed with the USPTO seeking protection for our core STAR-D viral platform technologies. We continue to actively develop our portfolio through the filing of new patent applications, divisionals and continuations relating to our technologies as we deem appropriate.

Our Strengths

We believe we are the first biotechnology company to seek to use gene therapy to develop products for dermatological indications that can be used without requiring individually customized treatment, which we refer to as an “off-the-shelf” treatment. We believe our organization and technology benefit from a singular set of strengths that will allow us to create and establish a leadership position in developing gene therapy treatments for dermatological indications. These strengths include:

 

•

A first mover advantage in dermatological gene therapy with regards to:

 

•

An off-the-shelf gene therapy product candidate, and

 

•

Topical gene therapy application.

 

•

Our STAR-D platform, a proprietary, integrated gene therapy platform comprised of a library of optimized HSV-1 vectors and their complimenting cell lines with higher and more durable

 

74

---

Table of Contents

expression, lower immune response and improved manufacturability when compared with other viral vectors currently being used in dermatological gene therapy.

 

•

The significant affinity to the skin and high payload capacity of our HSV-1 viral vector, which will allow us to efficiently deliver single and multiple genes to treat orphan and other dermatological indications.

 

•

A proprietary process for both upstream (vector production) and downstream (purification) portions of the manufacturing process, which positions us to maximize scalability, quality and reliability.

 

•

A scientific team with expertise in the HSV-1 viral vector.

 

•

A management team with a track record in developing drugs from research to approval.

Our Strategy

Our objective is to become a leader in developing and commercializing gene therapy treatments for dermatological indications. The strategy we intend to employ to accomplish this objective is to initially focus on dermatological indications in the rare or orphan disease space, build out and leverage our in-house manufacturing capabilities, and then leverage our STAR-D platform to develop, manufacture and commercialize treatments for non-orphan indications within dermatology.

 

•

Why dermatology—We believe the characteristics of our STAR-D platform are ideal for application in dermatology because of HSV-1’s high tropism, or natural affinity, for skin cells. This allows the viral vector to penetrate skin cells more efficiently than other gene therapy vectors, and makes topical delivery of gene therapy possible. Dermatology is also attractive because treatments for diseases affecting the skin have clearly defined, objective clinical endpoints with validated measurement tools that are accepted by the FDA. We believe these clearly defined endpoints will help accelerate the process of clinical development and regulatory approval for our dermatological products.

 

•

Why rare or orphan diseases—We believe there is significant unmet medical need for rare or orphan diseases, because the patient populations are not sizeable enough to attract the attention of large commercial entities. In contrast, we believe there are advantages to developing in this space, including that these diseases are genetic and frequently affect children, and so have been studied extensively and have concentrated, supportive networks of KOLs and patient advocacy groups. We have established strong relationships with such KOLs which we believe will aid us in obtaining data more rapidly and assist with the development and regulatory approval process. In addition, rare and orphan diseases, particularly monogenic ones like DEB, have defined clinical endpoints that have been validated by the FDA. There are also regulatory designations such as the FDA’s orphan drug designation, breakthrough drug designation, fast track drug designation and rare pediatric disease designation, one or more of which we believe, if successfully obtained, can provide certain regulatory and commercial advantages and incentives for developing treatments in this space. If we are able to successfully achieve one or more of these designations, we believe this will aid in the commercialization of our product candidates.

 

•

How we will manufacture—While we currently outsource our manufacturing, we believe there is value in maintaining control of our entire manufacturing process. We intend to continue to devote substantial resources to developing the STAR-D platform and bringing our scalable manufacturing process in-house. Because of the high demand for contract manufacturing in gene therapy, we believe the focus on expanding the STAR-D platform and establishing current good manufacturing practices, or cGMP, manufacturing in-house will ultimately accelerate the process of regulatory approval for our products.

 

•

How we can expand—We believe we can eventually expand beyond rare and orphan diseases by leveraging our STAR-D platform and expertise in viral vector selection and design, physical vector

 

75

---

Table of Contents

delivery and vector manufacturing to pivot into other gene therapy treatments for dermatological applications. For example, we believe that the large payload capacity of the viral “backbone” in the STAR-D platform will allow us to deliver multiple genes and other effectors using the platform and afford us an opportunity to treat non-monogenic diseases like psoriasis, as well as conditions which are not necessarily the result of an inherited genetic defect, such as chronic wounds. If we are able to successfully develop and commercialize products to treat non-orphan dermatological diseases, we intend to seek collaborative alliances towards commercializing these therapies among the broader population of patients in these indications.

Background on Gene Therapy

Many diseases have a genetic aspect whereby a mutated gene linked to a disease is passed down from generation to generation. Genes produce proteins that perform a vast array of functions within all living organisms, through a process called gene expression. A mutation, or alteration, in the gene or in sequences that control the expression of that gene can cause aberrations in intracellular protein production, which can cause disease. Gene therapy seeks to introduce a functional copy of the defective gene into a patient’s own cells, a process called gene transfer. Gene therapy thereby has the potential to change the way patients are treated by correcting the underlying genetic defect that is the cause of their disease, rather than offering solutions that only address their symptoms.

In the gene transfer process, a functional gene is delivered and incorporated into a patient’s cells through a delivery system called a vector, which are most commonly based on naturally occurring viruses that have been modified to take advantage of the virus’ natural ability to introduce genes into cells. However, unlike naturally occurring viruses, which replicate following infection of a target cell and have the capacity to infect new cells, our viral vectors are modified to be non-replicating by deleting that portion of the viral genome responsible for replication. Gene transfer using a viral vector is called transduction, and the resulting gene-modified cells are described as transduced cells.

A growing body of gene therapy-based clinical data, the establishment of regulatory guidelines to govern the development and approval of gene therapy products and increased investment from the biopharmaceutical industry suggest that gene therapy is being increasingly accepted as an important new therapeutic modality for patients with unmet medical need. We believe that if successful, our lead product candidate, KB103, together with the STAR-D platform, will help bring gene therapy to the treatment of dermatological indications. To date, only one gene therapy product has received marketing authorization from the FDA, and only two gene therapy products have received marketing authorization from the EMA.

Our STAR-D Gene Therapy Platform

We believe that certain inherent features of the HSV-1 virus, combined with our ability to strategically modify the virus in the form we employ as our gene delivery backbone, provides our proprietary gene therapy platform, which we refer to as the Skin TARgeted Delivery platform, or STAR-D platform, with several advantages over other viral vector platforms for use in dermatological applications, including the following:

 

•

Non-Integrating Nature: Conceptually, our STAR-D platform is similar in its simplicity, safety, and ease of use to other non-integrating gene therapy platforms like Adeno-Associated Virus, or AAV. Upon entry into cells, the HSV-1 vector persists as an episomal unit in the nucleus, meaning it remains physically separate from the host cell chromosome. Other vectors we are aware of currently being used in the development of gene therapy treatments for dermatological conditions, such as lentiviral and retroviral vectors, integrate into the host cell DNA in order to achieve gene expression. Integration into the host cell DNA carries the risk of disrupting host genes, and consequently can lead to a risk of causing cancer, or oncogenesis. In contrast, a non-integrating vector such as our HSV-1 vector does not carry the risk of disrupting the expression of host cell genes and the cancer-causing risks such disruptions could create.

 

76

---

Table of Contents

•

Payload Capacity: HSV-1 is a large virus, approximately 150 kilobase, or Kb, pairs of DNA in size. We have made strategic deletions within this genome to remove critical “immediate early”, or IE, genes. These IE genes are required for expression of most of the downstream genes that allow the HSV-1 virus to replicate and destroy host cells. Deletion of these IE genes inhibits expression of most of the viral proteins, making the resulting viral vector replication-deficient and non-toxic. These deletions also enable the vector to easily accommodate a payload of 30Kb or greater without any significant impact on yield or titer. In KB103, we have successfully inserted two functional copies of the complete ~9Kb human COL7A1 gene. In contrast, packaging capacity for most other viral vectors being used in dermatological indications is under 8Kb which limits their ability to package large genetic materials. In addition, we believe the high payload capacity of our viral vector will allow us to insert single and multiple genes and other effectors, allowing for the potential treatment of non-monogenic dermatological conditions such as psoriasis, atopic eczema and chronic wounds.

 

•

Skin Tropism: Poor infection of skin epithelia has remained a major hurdle for direct delivery of most viral vectors. HSV-1 has a natural affinity, or tropism, for the skin epithelium; therefore our viral vector penetrates skin cells much more efficiently than other viral vectors, resulting in transduction efficiencies or cell penetration as high as 95% in cell-based studies.

This efficient cell infection or penetration ability, along with the high payload capacity of our vector discussed above, are responsible for the high levels of transgene expression in animal models. In addition, these factors are critical contributors to our ability to create an off-the-shelf gene therapy treatment where others are taking autologous approaches. Because the genes that cause many dermatological diseases are quite large, many of our competitors can only fit a single gene, or in some cases may need to manipulate the genetic material in order to fit the limited payload capacity of their vectors. From our review of published research, we estimate that some of these autologous gene therapy approaches may have transduction efficiencies as low as 10% in skin. In order to develop an effective treatment in the face of payload capacity and transduction limitations, they may need to introduce the therapeutic gene into a patient’s tissues or cells ex vivo to create an individual treatment, which is re-administered back to the patient once the gene-modified tissues have achieved a sufficient level of gene expression. The greater payload capacity of our vector and the high transduction efficiencies achieved allow us to deliver a full gene directly to any patient’s tissues for in vivo gene expression without additional manipulation.

 

•

Immunogenicity: One of the major challenges with other viral vector platforms is that the host immune system may recognize them as foreign bodies and launch a robust immune response, resulting in toxicity and rapid removal of the virus. Wild type HSV-1 is known to persist in the body by becoming latent and hiding from the immune system in the cell bodies of neurons. We have harnessed the natural ability of HSV-1 to evade host-mediated immunogenicity, while removing specific viral elements that exacerbate the host immunity, thus making the viral vector safer and allowing for repeat administration as needed to achieve durability of effect. Because the tendency of the viral vector to invoke an immune response is low, the ability of the HSV-1 vector to effectively deliver therapeutic genes is enhanced.

 

•

Stability: HSV-1 is extremely stable and resistant to degradation by shear, solvents and enzymes, facilitating purification and final formulation of our product candidates. These characteristics of HSV-1 provide a stability advantage to our KB103 product candidate. Although frozen for long-term storage, it is also stable under refrigerated conditions for short-term storage and shipment, and stable over several freeze-thaw cycles.

 

•

Reproducible Manufacturing and Scalability: Successful production of viral vectors involves two steps: (i) the ‘upstream’ process, which yields a bulk virus harvest; and (ii) the ‘downstream’ process, which involves purification and concentration of the clinical product. Successful and reproducible execution of both processes is critical for clinical manufacturing and scale-up. Our scientific team

 

77

---

Table of Contents

collectively has over 20 years of experience and expertise in HSV engineering and purification that has allowed us to successfully optimize our HSV-1 vector production process.

 

•

Existing Regulatory Precedent: The first FDA- and EMA-approved oncolytic virus product, Imlygic® by Amgen, for treatment of melanoma, a skin cancer, is based on a genetically engineered HSV-1 virus. To our knowledge, this is the only FDA- and EMA-approved viral vector-based drug to date although it is not a gene therapy product. Because this product also employs an HSV-1 backbone, it has created a regulatory precedent for approval of an HSV-1-based therapy. In addition, Imlygic® is a chronic therapy, given bi-weekly, which provides support for the use of an HSV-1 backbone in chronic gene therapy of the type we are developing.

Background on Dystrophic Epidermolysis Bullosa

Dystrophic epidermolysis bullosa, or DEB, belongs to a group of genetic skin diseases known more broadly as epidermolysis bullosa, or EB, characterized by genetic defects of structural proteins of the skin, resulting in skin fragility and the formation of blisters. Blisters form as a result of rubbing, trauma or even in some cases from slight contact such as a simple hug. The subtypes of EB are distinguished by the location of the blister in the skin. DEB is associated with mutations in the gene coding for type VII collagen, or COL7, a major component of the anchoring fibrils which anchor the top layer of skin, called the epidermis, to an underlying layer, called the dermis, and provide structural adhesion in a normal individual. The lack of COL7 in DEB patients causes blisters to occur in the dermis as a result of separation from the epidermis. Genetic linkage studies have identified COL7A1 as the gene responsible for DEB. Over 200 distinct mutations in COL7A1 have been identified in DEB patients.

Figure 1. Healthy skin vs. DEB patient skin

The most severe form of DEB is recessive DEB, or RDEB, in which both COL7 and anchoring fibrils are severely diminished in the patient’s skin due to null mutations in the COL7A1 gene. As a result, RDEB is characterized by severe skin blistering, extremely fragile skin, mutilating scarring of the hands and feet, joint contractures, strictures of the esophagus, and often, eventually the development of aggressive squamous cell carcinomas which may shorten the patient’s life. DEB also occurs in the form of dominant DEB, or DDEB, which is considered to be a more mild form of DEB. In DDEB blistering is often limited to the hands, feet, knees, and elbows, and often improves somewhat with age.

Currently, there is no effective therapy for any form of DEB, and RDEB patients have a low life expectancy. Nearly 10% of RDEB patients die before the age of 10, almost 40% die by the age of 20, and over 70% die before the age of 30. Persistent blistering begins at birth and contributes to the high mortality risk due to bacterial infection. In a study of 41 RDEB patients, the infectious causes of pneumonia and sepsis resulted in death in close to 15% and 10% of cases, respectively. Patients who survive bacterial sepsis during early infancy are at a high risk of later developing more severe complications such as growth retardation due to gastrointestinal involvement, multifactorial anemia, esophageal strictures, corneal scarring and/or progressive blindness, renal failure, progressive hand and foot deformities, muscle contractures that restrict movement, anemia, esophageal strictures, rapid tooth decay, nail deformities,

 

78

---

Table of Contents

and hair loss. The onset of aggressive squamous cell carcinoma, sepsis or malnutrition due to an inability or unwillingness to eat due to mouth or esophagus involvement, may also result in death among these patients.

Existing Treatments for DEB

At present, there are no FDA- or EMA-approved treatments for DEB. The management of DEB currently consists of palliative care, which generally consists of prevention of mechanical forces that produce new blisters, wound care, nutritional support, and infection control, all of which help treat the symptoms but not the causes of DEB. We estimate that the annual cost of palliative care for a DEB patient is in the range of approximately $200,000 to $400,000 per year. Wound care usually includes treatment of new blisters by lancing and draining. Wounds are then dressed with a non-adherent material, covered with padding for stability and protection, and secured with an elastic wrap for integrity. Due to the increased risk of bacterial resistance, topical antibiotic ointments and antimicrobial dressings are typically reserved for those wounds that are colonized with bacteria and fail to heal, referred to as “critical colonization.”

Individuals with DEB have increased caloric and protein needs due to the increased energy utilized in wound healing. Involvement of the digestive system in RDEB may limit nutritional intake. Infants and children with RDEB may require nutritional support, including a gastrostomy feeding tube. Anemia is typically treated with iron supplements and transfusions as needed. Other nutritional supplements may include calcium, vitamin D, selenium, carnitine and zinc.

Surveillance is important for individuals with DEB. Biopsies of abnormal-appearing wounds that do not heal may be recommended in some types of DEB due to predisposition to squamous cell carcinoma, beginning in the second decade of life. Screening for deficiencies of iron, zinc, vitamin D, selenium, and carnitine is typically recommended after the first year of life. Routine echocardiograms are recommended to identify dilated cardiomyopathy, and bone mineral density studies are recommended to identify osteoporosis. It is also typically recommended to avoid activities and bandages (including all adhesives) that may traumatize the skin.

Our Lead Product Candidate: KB-103 for the Treatment of DEB

Our gene therapy approach uses a modified HSV-1 vector designed to deliver fully functional COL7A1 gene into the patient’s skin cells. Upon direct delivery to the skin, KB103 can efficiently transduce both keratinocytes and fibroblasts. Following entry of KB103 into the cell, the drug is transported down microtubules to the nucleus, and the viral genome is deposited into the nucleus. Once in the nucleus, it recruits the host cellular machinery to initiate transcription of COL7A1. The COL7A1 transcripts allow for production of a precursor protein, Procollagen 7, that is secreted by the cell and processed by enzymes to remove extra protein segments from the ends. Once these molecules are processed, they arrange themselves into long, thin bundles of mature COL7 that form anchoring fibrils. The anchoring fibrils hold the epidermis and dermis together and are essential for maintaining the integrity of the skin.

The high payload capacity of the HSV-1 vector allows us to insert two copies of the COL7A1 gene into each viral vector backbone, facilitating high expression of Procollagen 7. Current autologous therapies in development for DEB use lentivirus or retrovirus which have limited payload capacity and low transduction efficiencies. In addition, those viral vectors can target either keratinocytes or fibroblasts for gene delivery, but not both. In order to develop an effective treatment in the face of these limitations, autologous approaches treat the patient’s tissues or cells ex vivo for re-administration once sufficient gene expression is achieved, which leads to an extremely expensive, invasive and time consuming treatment requiring highly sophisticated medical teams and procedures. We believe that the limited payload capacity of lentivirus and retrovirus along with low transduction efficiencies will make it very difficult, if not impossible, to develop off-the-shelf gene therapies for DEB with these viral vectors. In contrast, KB103 can transduce not only keratinocytes and fibroblasts but also all skin cells that it comes in contact with to

 

79

---

Table of Contents

produce optimum therapeutic levels of secreted COL7 protein. It has been shown in clinical and non- clinical studies that functional and durable replacement of COL7 protein is necessary and sufficient to correct the debilitating skin disease that inflicts these patients.

 

Figure 2. KB103 transduces keratinocytes and fibroblasts, supplying functional COL7

The persistence of KB103 in the skin depends on the rate of turnover of the cells where it resides. The vector has been engineered to be able to evade the host immune response and persist for the life of the cell. Additionally, we have also optimized its design to be safe and nontoxic to both dividing and non-dividing cells so that it can be reapplied as often as required.

 

80

---

Table of Contents

Beyond the advantages surrounding the mechanism of action of KB103, it also has practical advantages as a therapy over autologous approaches. We believe that the major drawbacks of autologous therapies are the need for highly trained dermatologists, the high cost of treatment and the need for sophisticated equipment setup, including possible hospitalization. Additionally, because autologous treatments require time-consuming processing of a patient’s own cells and tissues, there can be a significant lag of six months or more between diagnosis and commencement of treatment. As a result, we believe an off-the-shelf, non-invasive treatment such as KB103 will, if successful, be an effective alternative for treating DEB.

 

Figure 3. Krystal’s approach compared to autologous therapies under development

Preclinical Proof of Concept for KB103

We have performed several preclinical tests and animal studies on KB103 to date. The studies described below were conducted between September 2016 and May 2017 and were evaluated for consistency and reproducibility. The results from these studies suggest the following:

 

•

Robust levels of COL7 in KB103 administered RDEB patient-derived fibroblasts. KB103 was evaluated for transduction efficiency, expression and functionality in 2-D and 3-D cell-based assays using normal and RDEB patient-derived fibroblasts, or HDFs. RDEB patient HDFs were infected with Multiplicity of Infection, or MOI, of 0.3, 1 or 3 viral particles per cell of KB103 to evaluate vector dose-dependent expression and toxicity. Transduction efficiency and COL7 expression were evaluated 48 hours post-infection using immunofluorescence, or IF, microscopy, a technique that uses fluorescent dye-conjugated antibodies that specifically bind to an antigen, to determine the localization and cellular expression of the antigens. After incubation with KB103, the HDFs were incubated with a fluorescent antibody that specifically recognizes and binds to human COL7 expressed by the cells, and imaged by fluorescence microscopy. Figure 4 below shows expected levels of endogenous COL7 in normal HDFs (N-HDFs) and the complete absence of COL7 in EB-HDFs that were not transduced with KB103 (EB-HDF, Control). In comparison, we detected high levels of COL7 expression at all three doses in fibroblasts administered with KB103. COL7 protein expression in KB103-transduced EB-HDFs was also confirmed using Western Blot, or WB, analysis to evaluate total COL7 protein levels in whole cell lysates, and qRT-PCR analysis to evaluate COL7A1 transcript levels. Figure 5 below depicting COL7A1 transcript levels highlights the

 

81

---

Table of Contents

significant increase in COL7A1 expression in KB103-transduced EB HDFs relative to normal HDFs (N-HDFs) and non-transduced HDFs (EB-HDFs, MOI 0).

 

Figure 4. KB103 expresses COL7 in fibroblasts

 

Figure 5. COL7A1 expression in fibroblasts

 

•

Robust levels of COL7 in KB103 administered RDEB patient-derived keratinocytes. KB103 was also evaluated for transduction efficiency, expression and functionality in 2-D and 3-D cell-based assays using normal and RDEB patient-derived keratinocytes, or HDKs. RDEB patient HDKs were infected with MOI of 0.3, 1, and 3 viral particles per cell of KB103 to evaluate vector dose-dependent expression and toxicity. Transduction efficiency and COL7 expression were evaluated 48 hours post-infection by IF microscopy, as described above. As shown in the figure below, we detected high levels of COL7 expression at all three doses in keratinocytes administered with KB103 relative to endogenous COL7 expression in normal keratinocytes (N-HDK) or complete lack of COL7 expression in EB-HDKs that did not get transduced with KB103 (EB-HDK, Control). COL7 expression was also confirmed using WB analysis to evaluate total COL7 protein levels in whole cell lysates, and qRT-PCR analysis to evaluate COL7A1 transcript levels. The COL7 panel in

 

82

---

Table of Contents

Figure 6 below shows actual levels of COL7 protein in lysates from RDEB and normal keratinocytes, transduced with different MOIs of KB103, and the intensity of the band is a direct representation of relative expression of COL7. No COL7 was detected in RDEB keratinocytes that received no KB103 (MOI 0, no band) and the levels of COL7 protein in normal un-transduced keratinocytes (MOI 0, no band) was below the level of detection of the assay. In comparison, high levels of COL7 expression were detected in both normal and RDEB keratinocytes transduced with KB103. Figure 7 below depicting COL7A1 transcript levels highlights the significant increase in COL7A1 expression KB103-transduced EB HDKs relative to normal HDKs (N-HDKs) and non-transduced HDKs (EB-HDKs, MOI 0).

 

 

Figure 6. KB103 expresses COL7 in keratinocytes

 

Figure 7. COL7A1 expression in keratinocytes

 

83

---

Table of Contents

•

Human COL7 expressed by KB103 in fibroblasts and keratinocytes is functionally active. COL7 expressed by KB103 was confirmed to be functionally active as it increased the expression of a downstream target, Lysyl Hydroxylase 3, or LH3, in RDEB keratinocytes as shown by WB analysis in Figure 8 below, which depicts actual levels of LH3. LH3 aids in post-translational modification of COL7 to form anchoring fibrils, and its expression is reduced in RDEB keratinocytes, as demonstrated by the weak intensity of the LH3 band in RDEB keratinocytes relative to normal keratinocyes at MOI 1. In contrast, the band intensity increased at all three doses in KB103-transduced keratinocytes, demonstrating a direct impact of COL7 overexpression. Glyceraldehyde-r Phosphate Dehydrogenase, or GAPDH, a cellular protein whose expression should not be impacted in RDEB skin due to COL7 loss, was utilized as a ‘loading’ control for relative quantitation of protein levels and to ensure that the same amount of cellular lysate was added to each well.

 

Figure 8. COL7 expressed by KB103 is functionally active

Functional COL7 is also known to inhibit production of Thromospondin-1, or TSP-1, an adhesive protein which is upregulated in the stroma of squamous cell carcinoma patients, and a marker for poor prognosis in RDEB patients who have developed squamous cell carcinoma. As seen in the figure below showing actual TSP-1 levels in normal and RDEB HDFs, COL7 expressed by KB103 inhibited TSP-1 production in a dose-dependent manner, further confirming functional activity.

 

Figure 9. COL7 expressed by KB103 inhibited TSP-1 production.

Functionality was also confirmed in plate-based assays evaluating adhesion of KB103-treated RDEB keratinocytes to type 1 collagen and fibronectin. 96-well tissue-culture plates were coated with different concentrations of Collagen 1 or fibronectin - Plastic (0ug/mL), 10ug/mL, 20ug/mL, and 50ug/mL. Mock (control) transduced or KB103-transduced RDEB keratinocytes were added to the plates and incubated at 37°C for 90 minutes. Unbound cells were removed by gentle washing, and adherent cells were fixed to the plate with a paraformaldehyde fixative. The fixed cells were then stained with crystal violet, and quantified by a colorimetric assay measuring absorbance at 630 nm. The y-axis of this graph depicts optical density (OD) which is a measure of this absorbance. As evidenced by the graphs below, keratinocytes expressing COL7 bind to type 1 collagen and fibronectin in a KB103 dose-dependent manner.

 

 

84

---

Table of Contents

Figure 10. Adhesion to Type 1 Collagen.

 

Figure 11. Adhesion to Fibronectin.

 

•

Confirmation of human COL7 in 3-D organotypic cultures. Confirmation of expression and functionality in 2-D assays prompted assessment in 3-D organotypic cultures composed of RDEB fibroblasts and keratinocytes transduced with KB103. We believe that our 3-D organotypic culture study is the first study to show that KB103 infects both keratinocytes and fibroblasts and secretes COL7 from the dermis and the epidermis to optimize deposition of COL7 at the basement membrane zone, or BMZ. We believe that most ex-vivo viral approaches are only able to target either fibroblasts or keratinocytes due to limitations of their viral vector that result in inefficient transduction and/or difficulties in selection and expansion of either cell type. Our data suggests that KB103, due to its ability to transduce both cell types, has the potential to achieve therapeutic levels of COL7 following direct application to the skin.

 

85

---

Table of Contents

•

Confirmation of COL7 expression in animal studies. Immunocompetent mice were administered KB103 via intradermal injection to evaluate expression of COL7. Human COL7 was detected in the mouse skin and also in the BMZ.

 

•

Repeat administration of KB103 boosts COL7 levels. KB103 was administered to mice on Day 1 and Day 5 and COL7 expression was assessed after one week. As seen from the graph below, levels of COL7 expression were higher after one week following repeat administration.

 

Figure 12. Repeat Administration Boosts COL7A1 Levels in Mouse Skin

 

•

Comparable expression levels of KB103 following intradermal and topical administration. Efficacy of intradermal delivery vs. topical delivery to intact abraded skin was evaluated in immunocompetent mice one week after administration. As shown in the figure below, both routes of administration yielded similar COL7A1 RNA and DNA levels in the skin.

 

Figure 13. Comparison of Intradermal vs. Topical Delivery

 

86

---

Table of Contents

We believe that collectively these studies suggest robust expression of functional COL7 in in-vitro and in-vivo models. Published studies have shown that, in animal models, expression of COL7 results in disease correction. In addition, recent publications from Stanford University on an autologous approach have shown strong correlation between COL7 expression in animal studies and efficacy in Phase 1 human trials. Consequently, we intend to complete the list of preclinical studies as requested by the FDA and file an IND application for KB103 with the FDA in the first quarter of 2018.

Clinical Development Plan for KB-103

In October 2016, we had a pre-IND meeting with the FDA. Based on responses from the FDA, we plan to submit an IND to initiate a Phase 1/2 clinical trial of KB103 in the first quarter 2018. Concurrent with our IND filing, we intend to apply for Fast Track designation. To date, we have reviewed preclinical results using an intradermal formulation of KB103 with FDA. Subsequent to our FDA meeting we completed preclinical studies indicating a topical formulation of KB103 showed equivalent levels of COL7 expression as the intradermal formulation. Therefore, we plan to use the topical formulation in our Phase 1/2 study. We plan to study three adult patients with RDEB in the initial stage of the Phase 1/2 trial and upon seeing a prospect of benefit, we will seek to enroll six RDEB patients who are five years and older. The Phase 1/2 trial will evaluate evidence of COL7 expression and the presence of mature anchoring fibrils as measured through skin biopsy. Based on our pre-IND discussions with the FDA to date, we believe that expression of COL7 resulting from the application of KB103 will be sufficient to define clinical benefit. Results of this trial, which we expect to receive in mid-2018, may allow us to apply for Breakthrough Therapy designation and will guide us in finalizing the design of a pivotal Phase 3 clinical trial. In this planned pivotal Phase 3 trial, up to 10 patients will be enrolled and evaluated. We anticipate enrolling both RDEB and DDEB patients in this trial. If successful, we believe the results of this Phase 3 trial could support submission of a Biologics License Application, or BLA, to the FDA in the United States and a Marketing Authorization Application, or MAA, to the EMA in Europe for our KB103 product candidate for the treatment of DEB. In December 2016, we received the designation of “rare pediatric disease” for KB103 and conditional designation of our marketing application as a “rare pediatric disease product application,” which, if granted, could qualify us to receive a Rare Pediatric Priority Review Voucher. According to the FDA website, a Rare Pediatric Priority Review Voucher can be redeemed to receive a priority review of a subsequent marketing application for a different product.

Future Opportunities

We believe our focus on the unique properties of dermatological diseases provides efficiencies as we select and pursue additional diseases associated with the skin. In addition, we will apply learnings from our near-term programs to future opportunities, which we believe will allow for rapid understanding and efficient drug development. We believe this will enable us to not only apply our gene therapy technology and specifically the STAR-D platform, across multiple severe, genetic diseases today, but across many broader indications associated with the skin, such as psoriasis, atopic dermatitis and chronic wound healing.

We are starting to conduct preclinical studies on our second pipeline compound, KB104, to treat Netherton Syndrome, a severe autosomal recessive form of ichthyosis, associated with mutations in the SPINK5 gene and characterized by chronic skin inflammation, itch, dehydration and stunted growth. We intend to file an IND on KB104 in the third quarter of 2018 and begin clinical studies in the first quarter of 2019. We have also commenced research activities on ichthyosis vulgaris (also known as “ichthyosis simplex”), an inherited disease associated with mutation in the filaggrin gene characterized by dry, scaly skin. Ichthyosis vulgaris is the most common form of ichthyosis affecting around one in 250 people worldwide. We intend to start research activities on treatments for psoriasis, atopic dermatitis and chronic wounds in the fourth quarter of 2017.

Given the low prevalence of the rare or orphan diseases we are seeking to treat initially, we intend to internally establish a targeted commercial infrastructure that will be able to serve these patient population

 

87

---

Table of Contents

markets effectively. As we expand our portfolio to treat other non-orphan dermatological diseases, we intend to establish collaborative commercial alliances with other companies who are presently commercializing treatments for dermatological indications.

Following successful completion of a Phase 1 clinical trial of KB103, we intend to design, build and validate a commercial-scale cGMP facility for the upstream and downstream manufacturing processes of products based on our STAR-D platform.

Manufacturing

Our proprietary manufacturing process for clinical grade KB103 was developed and optimized internally based on our STAR-D platform, and involves both an upstream production process and downstream purification step. Recombinant viral vectors are made safe by removal of most of the viral machinery, including packaging proteins, so that they are incapable of or attenuated for replicating in human cells. However, in order to produce the recombinant virus, these viral proteins have to be re-introduced to the process so that the viral vector can be packaged. In most other viral vector production systems, the missing viral proteins are supplied in one or more individual helper plasmids, along with the base viral vector plasmid. All the plasmids are then co-transfected into a production cell line in the presence of a transfection agent to facilitate viral vector production and packaging. The difficulty of this approach is that it requires cGMP-scale manufacturing and qualification of each of the packaging plasmids and optimization of the transfection method. Even with optimized reagents and methods, significant batch-to-batch variability is seen in viral vector yield and titer that, we believe, drives up the cost of viral vector manufacturing and scale-up, and increases the risk of failure during manufacturing.

Our proprietary upstream process for HSV-1 production avoids the aforementioned issues associated with AAV production systems. Our process requires three critical components:

 

•

Production of a master virus seed stock, or MVSS;

 

•

Production of complementing master cell bank, or MCB; and

 

•

Optimized transduction parameters

The MVSS is scaled up from a single purified clone of the modified HSV-1 vector expressing the therapeutic COL7A1 gene. The MCB is a complementing cell line that stably expresses the HSV-1 viral proteins that are required for HSV-1 growth but have been deleted from the recombinant HSV-1 backbone. By introducing the deleted proteins into the MCB, as opposed to including them in the viral replication process via co-transfection of individual plasmids, we eliminate the need for multiple cGMP qualifications of the plasmids or variability in transfection efficiency from batch to batch, that other production processes face. Infection of the MCB with the MVSS at the optimal concentration results in production of the viral particle. Once the MCB and MVSS and the conditions of infection are established, virus production and resultant yield and titer are highly reproducible and scalable over multiple runs and the risk of failure is minimal.

Optimization of MCB, MVSS and production methods requires extensive knowledge and technical experience with the HSV-1 genome and significant upfront effort to design and select the best virus seed stock and complementing cell line. To date we have screened through hundreds of cell line clones to find the best complementing cell lines, and similarly designed and generated the optimal virus seed stocks for our portfolio candidates. The viral seed stock expresses the therapeutic proteins under the control of strong constitutive or tissue-specific promoters, and additional non-coding regulatory sequences have been included to optimize gene expression. We have also optimized the transduction conditions to reproducibly obtain high yields of the virus.

Unlike the upstream process, steps used to purify and concentrate the viral vector product are often common across different viral vector platforms, and usually involve multiple stages of clarification, concentration, and diafiltration with the ultimate goal to remove contaminants and concentrate the

 

88

---

Table of Contents

product. We believe that we have successfully developed a robust and reproducible process for purifying our viral vector to required concentrations for clinical use, while successfully removing contaminants to meet FDA guidelines.

We believe that the MVSS and MCB are a vital part of the production of KB103, as they will ensure the reproducible production of multiple clinical batches in a short six week cycle time frame and in a cost-effective manner.

We have made significant investments in developing the most comprehensive and optimized manufacturing process for our vector product candidate including:

 

•

sufficient scale to support stability of KB103 with sufficient longevity that a small number of initial batches will likely provide adequate clinical supply up to pivotal Phase 3 trials;

 

•

a proprietary vector manufacturing technique that produces a highly purified KB103;

 

•

approximately 10 assays to accurately characterize our process and the HSV-1 vectors we produce; and

 

•

a series of high-efficiency purification processes, which can be adapted and customized for our HSV-1 platform products.

We believe these improvements and our continued investment in our STAR-D platform will enable us to develop best in class, next generation gene therapy products for dermatological indications.

Our entire manufacturing process has been successfully transferred to a contract manufacturing organization, and cGMP manufacturing for our lead candidate, KB103, is scheduled for later this year. However, our long-term strategy is to bring our cGMP manufacturing in-house in order to maximally control our intellectual property.

Competition

The biotechnology and pharmaceutical industries are highly competitive. In particular, the field of gene therapy is characterized by rapidly advancing technologies, intense competition and a strong emphasis on proprietary products. Some of our competitors have substantially greater financial resources and larger research and development organizations. In addition, our experience in clinical trials, obtaining FDA and other regulatory approvals, manufacturing and commercialization of products may be more limited. At this time, there is no FDA- or EMA-approved treatment for EB. However, a number of companies are developing drug candidates for EB. At this time, there is no FDA- or EMA-approved treatment for DEB. However, with respect to companies and institutions developing a treatment for DEB we do not believe that we have any direct competitors who provide an allogeneic approach to treating this disease in the way we seek. As a result, we believe our competitors are more indirect and general in nature and fall into three broad categories:

 

•

Autologous Approaches: We are aware of less than five companies and research institutions including Abeona, Fibrocell and Kings College who are developing autologous or grafting gene therapy approaches to treating DEB.

 

•

Palliative Treatments: We are aware of companies such as Amicus Therapeutics who are developing product candidates taking a palliative approach to treating the disease.

 

•

Non-Gene Therapy: We are aware that ProQR Therapeutics has a product candidate in preclinical development that intends to treat some forms of RDEB with a topical RNA-based treatment.

We believe that the major drawbacks of autologous therapies are the need for highly trained dermatologists, high cost of treatment and the need for sophisticated equipment setup and possible hospitalization. Additionally, because autologous treatments require processing patient’s own cells and tissues that takes time, there is a significant delay of eight months to more than one year between diagnosis

 

89

---

Table of Contents

and commencement of patient’s treatment. Potential palliative approaches may help mitigate some of the symptoms of the disease but do not treat the underlying disease at a molecular level. We expect that ProQR’s preclinical candidate will be able to treat only a subset of the many genetic defects that cause RDEB. Even if our competitors are able to successfully develop approved products for DEB, we believe there will remain a need for an off-the-shelf treatment such as KB103.

Intellectual Property

Protection of our intellectual property is an important part of our business. We seek patent protection in the United States and in other countries for our inventions and discoveries, and we develop and protect our key know-how and trade secrets relating to our platform technology and the products we are developing using our platform.

We have adopted a strategy of seeking patent protection in the United States and in other jurisdictions globally that we deem appropriate with respect to certain of our technologies relating to our products and process. As of June 9, 2017, we are actively prosecuting a patent application in front of the USPTO directed to our products and processes related to the treatment of epidermolysis bullosa, and a corresponding international patent application has been filed in accordance with the Paris Cooperation Treaty. Additionally, a patent application has been filed with the USPTO seeking protection for our core viral platform technologies, including the STAR-D platform. We continue to actively develop our portfolio through the filing of new patent applications, divisionals and continuations relating to our technologies as we deem appropriate.

In addition to patents and licenses, we rely on trade secrets and know-how to develop and maintain our competitive position. However, trade secrets can be difficult to protect. We seek to protect our proprietary technology and processes, and obtain and maintain ownership of certain technologies, in part, through confidentiality agreements and invention assignment agreements with our employees, consultants and commercial partners. We also seek to preserve the integrity and confidentiality of our data, trade secrets and know-how, as well as that of our licensees, including by implementing measures intended to maintain the physical security of research facilities and the physical and electronic security of our information technology systems.

Government Regulation and Product Approval

In the United States, the FDA regulates biologic products including gene therapy products under the Federal Food, Drug, and Cosmetic Act, or the FDCA, the Public Health Service Act, or the PHSA, and regulations and guidance implementing these laws. The FDCA, PHSA and their corresponding regulations govern, among other things, the testing, manufacturing, safety, efficacy, labeling, packaging, storage, record keeping, distribution, reporting, advertising and other promotional practices involving biologic products. Applications to the FDA are required before conducting human clinical testing of biologic products. Additionally, each clinical trial protocol for a gene therapy product candidate is reviewed by the FDA, and in limited instances the National Institutes of Health, or the NIH, through its Recombinant DNA Advisory Committee, or RAC. FDA approval also must be obtained before marketing of biologic products. The process of obtaining regulatory approvals and the subsequent compliance with appropriate federal, state, local and foreign statutes and regulations require the expenditure of substantial time and financial resources and we may not be able to obtain the required regulatory approvals to successfully develop and commercialize our product candidates.

Within the FDA, the Center for Biologics Evaluation and Research, or CBER, regulates gene therapy products. Within CBER, the review of gene therapy and related products is consolidated in the Office of Cellular, Tissue and Gene Therapies, or the OCTGT, and the FDA has established the Cellular, Tissue and Gene Therapies Advisory Committee, or the CTGTAC, to advise CBER on its reviews. CBER works closely with the NIH and the RAC, which makes recommendations to the NIH on gene therapy issues and engages in a public discussion of scientific, safety, ethical and societal issues related to proposed and

 

90

---

Table of Contents

ongoing gene therapy protocols. To date, the FDA has only approved one human gene therapy product for sale. The FDA has provided guidance for the development of gene therapy products generally, including a growing body of guidance documents on chemistry, manufacturing and control, or CMC, clinical investigations and other areas of gene therapy development, all of which are intended to facilitate the industry’s development of gene therapy products.

Ethical, social and legal concerns about gene therapy, genetic testing and genetic research could result in additional regulations restricting or prohibiting the processes we may use. Federal and state agencies, congressional committees and foreign governments have expressed interest in further regulating biotechnology. More restrictive regulations or claims that our products are unsafe or pose a hazard could prevent us from commercializing any products. New government requirements may be established that could delay or prevent regulatory approval of our product candidates under development. It is impossible to predict whether legislative changes will be enacted, regulations, policies or guidance changed, or interpretations by agencies or courts changed, or what the impact of such changes, if any, may be.

U.S. Biologic Products Development Process

The FDA must approve a product candidate before it may be legally marketed in the United States. The process required by the FDA before a biologic product candidate may be marketed in the United States generally involves the following:

 

•

completion of preclinical laboratory tests and in vivo studies in accordance with the FDA’s current Good Laboratory Practice, or GLP, regulations and applicable requirements for the humane use of laboratory animals or other applicable regulations;

 

•

submission to the FDA of an application for an IND exemption, which allows human clinical trials to begin unless FDA objects within 30 days;

 

•

approval by an independent institutional review board, or IRB, reviewing each clinical site before each clinical trial may be initiated;

 

•

performance of adequate and well-controlled human clinical trials according to the FDA’s GCP regulations, and any additional requirements for the protection of human research subjects and their health information, to establish the safety and efficacy of the proposed biologic product candidate for its intended use;

 

•

preparation and submission to the FDA of a biologics license application, or BLA, for marketing approval that includes substantial evidence of safety, purity and potency from results of nonclinical testing and clinical trials;

 

•

review of the product by an FDA advisory committee, if applicable;

 

•

satisfactory completion of an FDA inspection of the manufacturing facility or facilities where the biologic product candidate is produced to assess compliance with cGMP requirements and to assure that the facilities, methods and controls are adequate to preserve the biologic product candidate’s identity, safety, strength, quality, potency and purity;

 

•

potential FDA audit of the nonclinical and clinical trial sites that generated the data in support of the BLA; and

 

•

payment of user fees and FDA review and approval, or licensure, of the BLA.

Before testing any biologic product candidate in humans, including a gene therapy product candidate, the product candidate must undergo preclinical testing. Preclinical tests, also referred to as nonclinical studies, include laboratory evaluations of product chemistry, toxicity and formulation, as well as in vivo studies to assess the potential safety and activity of the product candidate and to establish a rationale for therapeutic use. The conduct of the preclinical tests must comply with federal regulations and requirements including GLPs.

 

91

---

Table of Contents

Concurrent with clinical trials, companies usually must complete some long-term preclinical testing, such as animal studies of reproductive adverse events and carcinogenicity, and must also develop additional information about the chemistry and physical characteristics of the drug and finalize a process for manufacturing the drug in commercial quantities in accordance with cGMP requirements. The manufacturing process must be capable of consistently producing quality batches of the drug candidate and, among other things, the manufacturer must develop methods for testing the identity, strength, quality and purity of the final drug product. Additionally, appropriate packaging must be selected and tested and stability studies must be conducted to demonstrate that the drug candidate does not undergo unacceptable deterioration over its shelf life.

The clinical trial sponsor must submit the results of the preclinical tests, together with manufacturing information, analytical data, any available clinical data or literature and a proposed clinical protocol, to the FDA as part of an IND. Some preclinical testing may continue even after the IND is submitted. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA places the clinical trial on a clinical hold. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. With gene therapy protocols, if the FDA allows the IND to proceed, but the RAC decides that full public review of the protocol is warranted, the FDA will request at the completion of its IND review that sponsors delay initiation of the protocol until after completion of the RAC review process. The FDA also may impose clinical holds on a biologic product candidate at any time before or during clinical trials due to safety concerns or non-compliance. If the FDA imposes a clinical hold, trials may not recommence without FDA authorization and then only under terms authorized by the FDA. Accordingly, we cannot be sure that submission of an IND will result in the FDA allowing clinical studies to begin, or that, once begun, issues will not arise that suspend or terminate such studies.

Human Clinical Trials Under an IND

Clinical trials involve the administration of the biologic product candidate to healthy volunteers or patients under the supervision of qualified investigators which generally are physicians not employed by, or under, the control of the trial sponsor. Clinical trials are conducted under written study protocols detailing, among other things, the objectives of the clinical trial, dosing procedures, subject selection and exclusion criteria and the parameters to be used to monitor subject safety, including stopping rules that assure a clinical trial will be stopped if certain adverse events should occur. Each protocol and any amendments to the protocol must be submitted to the FDA as part of the IND. An IND automatically becomes effective 30 days after receipt by the FDA, unless before that time the FDA raises concerns or questions related to a proposed clinical trial and places the trial on clinical hold, including concerns that human research subjects will be exposed to unreasonable health risks. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. Accordingly, submission of an IND may or may not result in the FDA allowing clinical trials to commence. Clinical trials must be conducted and monitored in accordance with the FDA’s regulations comprising the GCP requirements, including the requirement that all research subjects provide informed consent. Further, each clinical trial must be reviewed and approved by an IRB at or servicing each institution at which the clinical trial will be conducted. An IRB is charged with protecting the welfare and rights of trial participants and considers items such as whether the risks to individuals participating in the clinical trials are minimized and are reasonable in relation to anticipated benefits. The IRB also approves the form and content of the informed consent that must be signed by each clinical trial subject, or their legal representative, reviews and approves the study protocol, and must monitor the clinical trial until completed. Clinical trials involving recombinant DNA also must be reviewed by an institutional biosafety committee, or IBC, a local institutional committee that reviews and oversees basic and clinical research that utilizes recombinant DNA at that institution. The IBC assesses the safety of the research and identifies any potential risk to public health or the environment.

 

92

---

Table of Contents

Human clinical trials typically are conducted in three sequential phases that may overlap or be combined:

 

•

Phase 1. The biologic product candidate initially is introduced into a small number of healthy human subjects and tested for safety, dosage tolerance, absorption, metabolism, distribution and excretion and, if possible, to gain an early understanding of its effectiveness. In the case of some product candidates for severe or life-threatening diseases, especially when the product candidate may be too inherently toxic to ethically administer to healthy volunteers, the initial human testing is often conducted in patients. Phase 1 clinical trials of gene therapies are typically conducted in patients rather than healthy volunteers.

 

•

Phase 2. The biologic product candidate is evaluated in a limited patient population to identify possible adverse effects and safety risks, to preliminarily evaluate the efficacy of the product candidate for specific targeted diseases and to determine dosage tolerance, optimal dosage and dosing schedule.

 

•

Phase 3. Phase 3 clinical trials are commonly referred to as “pivotal” studies, which typically denotes a study which presents the data that the FDA or other relevant regulatory agency will use to determine whether or not to approve a biologic product. In Phase 3 studies, the biologic product candidate is administered to an expanded patient population, generally at multiple geographically dispersed clinical trial sites in adequate and well-controlled clinical trials to generate sufficient data to statistically confirm the potency and safety of the product for approval. These clinical trials are intended to establish the overall risk/benefit ratio of the product candidate and provide an adequate basis for product labeling.

 

•

Post-approval clinical trials, sometimes referred to as Phase 4 clinical trials, may be conducted after initial approval. These clinical trials are used to gain additional experience from the treatment of patients in the intended therapeutic indication, particularly for long-term safety follow-up.

During all phases of clinical development, regulatory agencies require extensive monitoring and auditing of all clinical activities, clinical data and clinical trial investigators. Annual progress reports detailing the results of the clinical trials must be submitted to the FDA.

Additional Regulation for Gene Therapy Clinical Trials

In addition to the regulations discussed above, there are a number of additional standards that apply to clinical trials involving the use of gene therapy. The FDA has issued various guidance documents regarding gene therapies, which outline additional factors that the FDA will consider at each of the above stages of development and relate to, among other things: the proper preclinical assessment of gene therapies; the CMC information that should be included in an IND application; the proper design of tests to measure product potency in support of an IND or BLA application; and measures to observe delayed adverse effects in subjects who have been exposed to investigational gene therapies when the risk of such effects is high. Further, the FDA usually recommends that sponsors observe subjects for potential gene therapy-related delayed adverse events for a 15-year period, including a minimum of five years of annual examinations followed by 10 years of annual queries, either in person or by questionnaire. The NIH and the FDA have a publicly accessible database, the Genetic Modification Clinical Research Information System, which includes information on gene therapy trials and serves as an electronic tool to facilitate the reporting and analysis of adverse events on these trials.

U.S. Review and Approval Processes

The results of the preclinical tests and clinical trials, together with detailed information relating to the product’s CMC and proposed labeling, among other things, are submitted to the FDA as part of a BLA requesting approval to market the product for one or more indications. For gene therapies, selecting patients with applicable genetic defects is a necessary condition to effective treatment. For the therapy we

 

93

---

Table of Contents

are currently developing, we believe that diagnoses based on existing genetic tests developed and administered by laboratories certified under the Clinical Laboratory Improvement Amendments, or CLIA, are sufficient to select appropriate patients and will be permitted by the FDA. Under the Prescription Drug User Fee Act, or PDUFA, as amended, each BLA must be accompanied by a significant user fee. The FDA adjusts the PDUFA user fees on an annual basis. The PDUFA also imposes an annual product fee for biologics and an annual establishment license fee on facilities used to manufacture prescription biologics. Fee waivers or reductions are available in certain circumstances, including a waiver of the application fee for the first application filed by a small business. Additionally, no user fees are assessed on BLAs for product candidates designated as orphan drugs, unless the product candidate also includes a non-orphan indication.

The FDA reviews a BLA within 60 days of submission to determine if it is substantially complete before the agency accepts it for filing. The FDA may refuse to file any BLA that it deems incomplete or not properly reviewable at the time of submission and may request additional information. In that event, the BLA must be resubmitted with the additional information. The resubmitted application also is subject to review before the FDA accepts it for filing. Once the submission is accepted for filing, the FDA begins an in-depth, substantive review of the BLA. The FDA reviews the BLA to determine, among other things, whether the proposed product candidate is safe and potent, or effective, for its intended use, has an acceptable purity profile and whether the product candidate is being manufactured in accordance with cGMP to assure and preserve the product candidate’s identity, safety, strength, quality, potency and purity. The FDA may refer applications for novel biologic products or biologic products that present difficult questions of safety or efficacy to an advisory committee, typically a panel that includes clinicians and other experts, for review, evaluation and a recommendation as to whether the application should be approved and under what conditions. The FDA is not bound by the recommendations of an advisory committee, but it considers such recommendations carefully when making decisions. During the product approval process, the FDA also will determine whether a REMS is necessary to assure the safe use of the product candidate.

REMS use risk minimization strategies beyond the professional labeling to ensure that the benefits of the product outweigh the potential risks. To determine whether a REMS is needed, the FDA will consider the size of the population likely to use the product, seriousness of the disease, expected benefit of the product, expected duration of treatment, seriousness of known or potential adverse events, and whether the product is a new molecular entity. A REMS could include medication guides, physician communication plans and elements to assure safe use, such as restricted distribution methods, patient registries and other risk minimization tools. If the FDA concludes a REMS is needed, the sponsor of the BLA must submit a proposed REMS; the FDA will not approve the BLA without a REMS, if required.

Before approving a BLA, the FDA will inspect the facilities at which the product candidate is manufactured. The FDA will not approve the product candidate unless it determines that the manufacturing processes and facilities are in compliance with cGMP requirements and adequate to assure consistent production of the product candidate within required specifications. Additionally, before approving a BLA, the FDA typically will inspect one or more clinical sites to assure that the clinical trials were conducted in compliance with IND trial requirements and GCP requirements.

On the basis of the BLA and accompanying information, including the results of the inspection of the manufacturing facilities, the FDA may issue an approval letter or a complete response letter. An approval letter authorizes commercial marketing of the biologic product with specific prescribing information for specific indications. A complete response letter generally outlines the deficiencies in the submission and may require substantial additional testing or information in order for the FDA to reconsider the application. If and when those deficiencies have been addressed to the FDA’s satisfaction in a resubmission of the BLA, the FDA will issue an approval letter.

If a product candidate receives regulatory approval, the approval may be significantly limited to specific diseases and dosages or the indications for use may otherwise be limited. Further, the FDA may require that certain contraindications, warnings or precautions be included in the product labeling. The

 

94

---

Table of Contents

FDA may impose restrictions and conditions on product distribution, prescribing or dispensing in the form of a REMS, or otherwise limit the scope of any approval. In addition, the FDA may require post-marketing clinical trials, sometimes referred to as Phase 4 clinical trials, designed to further assess a biologic product’s safety and effectiveness, and testing and surveillance programs to monitor the safety of approved products that have been commercialized.

The FDA has agreed to specified performance goals in the review of BLAs under the PDUFA. One such goal is to review standard BLAs in 10 months after the FDA accepts the BLA for filing, and priority BLAs in six months, whereupon a review decision is to be made. The FDA does not always meet its PDUFA goal dates for standard and priority BLAs and its review goals are subject to change from time to time. The review process and the PDUFA goal date may be extended by three months if the FDA requests or the BLA sponsor otherwise provides additional information or clarification regarding information already provided in the submission within the last three months before the PDUFA goal date.

Orphan Drug Designation

Under the Orphan Drug Act, the FDA may designate a biologic product as an “orphan drug” if it is intended to treat a rare disease or condition (generally meaning that it affects fewer than 200,000 individuals in the United States, or more in cases in which there is no reasonable expectation that the cost of developing and making a biologic product available in the United States for treatment of the disease or condition will be recovered from sales of the product). Orphan product designation must be requested before submitting a BLA. After the FDA grants orphan product designation, the identity of the therapeutic agent and its potential orphan use are disclosed publicly by the FDA. Orphan product designation does not convey any advantage in, or shorten the duration of, the regulatory review and approval process.

If a product with orphan status receives the first FDA approval for the disease or condition for which it has such designation, the product is entitled to orphan product exclusivity, meaning that the FDA may not approve any other applications to market the same drug or biologic product for the same indication for seven years, except in limited circumstances, such as a showing of clinical superiority to the product with orphan exclusivity or if the party holding the exclusivity fails to assure the availability of sufficient quantities of the drug to meet the needs of patients with the disease or condition for which the drug was designated. Competitors, however, may receive approval of different products for the same indication for which the orphan product has exclusivity or obtain approval for the same product but for a different indication for which the orphan product has exclusivity. Orphan medicinal product status in the European Union has similar, but not identical, benefits.

Expedited Development and Review Programs

In addition, the FDA is authorized to expedite the review of BLAs in several ways.

Fast Track Program

Under the Fast Track program, the sponsor of a biologic product candidate may request the FDA to designate the product for a specific indication as a Fast Track product concurrent with or after the filing of the IND. Biologic products are eligible for Fast Track designation if they are intended to treat a serious or life-threatening condition and demonstrate the potential to address unmet medical needs for the condition. Fast Track designation applies to the combination of the product candidate and the specific indication for which it is being studied. In addition to other benefits, such as the ability to have greater interactions with the FDA, the FDA may initiate review of sections of a Fast Track BLA before the application is complete, a process known as rolling review. Any product submitted to FDA for marketing, including under a Fast Track program, may be eligible for other types of FDA programs intended to expedite development and review, such as breakthrough therapy designation, priority review and accelerated approval.

 

95

---

Table of Contents

Breakthrough Therapy Designation

To qualify for the breakthrough therapy program, product candidates must be intended to treat a serious or life-threatening disease or condition and preliminary clinical evidence must indicate that such product candidates may demonstrate substantial improvement on one or more clinically significant endpoints over existing therapies. The FDA will seek to ensure the sponsor of a breakthrough therapy product candidate receives intensive guidance on an efficient drug development program; intensive involvement of senior managers and experienced staff on a proactive, collaborative and cross-disciplinary review; and rolling review.

Accelerated Approval

Drug or biologic products studied for their safety and effectiveness in treating serious or life-threatening illnesses and that provide meaningful therapeutic benefit over existing treatments may receive accelerated approval. Accelerated approval means that a product candidate may be approved on the basis of adequate and well-controlled clinical trials establishing that the product candidate has an effect on a surrogate endpoint that is reasonably likely to predict a clinical benefit, or on the basis of an effect on a clinical endpoint other than survival or irreversible morbidity or mortality or other clinical benefit, taking into account the severity, rarity and prevalence of the condition and the availability or lack of alternative treatments. As a condition of approval, FDA may require that a sponsor of a drug or biologic product candidate receiving accelerated approval perform adequate and well-controlled post-marketing clinical trials. In addition, FDA currently requires as a condition for accelerated approval pre-approval of promotional materials.

Fast Track designation, breakthrough therapy designation and accelerated approval do not change the standards for approval but may expedite the development or approval process.

Rare Pediatric Disease Priority Review Voucher

The FDA also offers a rare pediatric disease drug designation. If a drug receives the designation of a “rare pediatric disease” drug, it is eligible during the FDA marketing process to apply for a Rare Pediatric Disease Priority Review Voucher. According to the FDA website, under the Rare Pediatric Priority Review Voucher Program, a sponsor who receives an approval for a drug or biologic for a “rare pediatric disease” may qualify for a voucher that can be redeemed to receive a priority review of a subsequent marketing application for a different product. In December 2016, we received the designation of “rare pediatric disease” for KB103 and conditional designation of our marketing application as a “rare pediatric disease product application,” which, if granted, could qualify us to receive a Rare Pediatric Priority Review Voucher. According to the FDA website, a Rare Pediatric Priority Review Voucher can be redeemed to receive a priority review of a subsequent marketing application for a different product.

Post-Approval Requirements

Rigorous and extensive FDA regulation of biologic products continues after approval, particularly with respect to cGMP requirements. Manufacturers are required to comply with applicable requirements in the cGMP regulations, including quality control and quality assurance and maintenance of records and documentation. Other post-approval requirements applicable to biologic products include reporting of cGMP deviations that may affect the identity, potency, purity and overall safety of a distributed product; recordkeeping requirements; reporting of adverse effects; reporting updated safety and efficacy information; and complying with electronic record and signature requirements. After a BLA is approved, the product also may be subject to official lot release. If the product is subject to official release by the FDA, the manufacturer submits samples of each lot of product to the FDA, together with a release protocol, showing a summary of the history of manufacture of the lot and the results of all tests performed on the lot. The FDA also may perform certain confirmatory tests on lots of some products before releasing the lots for distribution. In addition, the FDA conducts laboratory research related to the regulatory

 

96

---

Table of Contents

standards on the safety, purity, potency and effectiveness of biologic products. A sponsor also must comply with the FDA’s advertising and promotion requirements, such as the prohibition on promoting products for uses or in patient populations that are not described in the product’s approved labeling (known as “off-label use”).

Discovery of previously unknown problems or the failure to comply with the applicable regulatory requirements may result in restrictions on the marketing of a product or withdrawal of the product from the market as well as possible civil or criminal sanctions. In addition, changes to the manufacturing process or facility generally require prior FDA approval before being implemented and other types of changes to the approved product, such as adding new indications and additional labeling claims, are also subject to further FDA review and approval.

U.S. Patent Term Restoration and Marketing Exclusivity

Depending upon the timing, duration and specifics of FDA approval of product candidates, some of a sponsor’s U.S. patents may be eligible for limited patent term extension under the Drug Price Competition and Patent Term Restoration Act of 1984. The Hatch-Waxman Amendments permit a patent restoration term of up to five years as compensation for patent term lost during product development and FDA regulatory review process. However, patent term restoration cannot extend the remaining term of a patent beyond a total of 14 years from the product’s approval date. The patent term restoration period generally is one-half the time between the effective date of an IND and the submission date of a BLA plus the time between the submission date of a BLA and the approval of that application. Only one patent applicable to an approved biologic product is eligible for the extension and the application for the extension must be submitted prior to the expiration of the patent. Moreover, a given patent may only be extended once based on a single product. The USPTO, in consultation with the FDA, reviews and approves the application for any patent term extension or restoration.

Government Regulation Outside of the United States

In addition to regulations in the United States, sponsors are subject to a variety of regulations in other jurisdictions governing, among other things, clinical trials and any commercial sales and distribution of biologic products. Because biologically sourced raw materials are subject to unique contamination risks, their use may be restricted in some countries.

Whether or not a sponsor obtains FDA approval for a product, a sponsor must obtain the requisite approvals from regulatory authorities in foreign countries prior to the commencement of clinical trials or marketing of the product in those countries. Certain countries outside of the United States have a similar process that requires the submission of a clinical trial application, much like the IND, prior to the commencement of human clinical trials. In the European Union, for example, a request for a Clinical Trial Authorization, or CTA, must be submitted to the competent regulatory authorities and the competent Ethics Committees in the European Union Member States in which the clinical trial takes place, much like FDA and the IRB, respectively. Once the CTA request is approved in accordance with the European Union and the European Union Member State’s requirements, clinical trial development may proceed. The requirements and processes governing the conduct of clinical trials, product licensing, pricing and reimbursement vary from country to country. In all cases, the clinical trials are conducted in accordance with GCPs and the applicable regulatory requirements of the country or countries in which the clinical trial is performed, as well as the ethical principles that have their origin in the Declaration of Helsinki (whichever provides the greater protection to the clinical trial participants).

Failure to comply with applicable foreign regulatory requirements may result in, among other things, fines; suspension, variation or withdrawal of regulatory approvals; product recalls; seizure of products; operating restrictions; and criminal prosecution.

 

97

---

Table of Contents

Other Healthcare Laws and Regulations

Healthcare providers, physicians and third-party payors play a primary role in the recommendation and use of pharmaceutical products that are granted marketing approval. Arrangements with third-party payors, existing or potential customers and referral sources are subject to broadly applicable fraud and abuse and other healthcare laws and regulations, and these laws and regulations may constrain the business or financial arrangements and relationships through which manufacturers market, sell and distribute the products for which they obtain marketing approval. Such restrictions under applicable federal and state healthcare laws and regulations include the following:

 

•

the federal Anti-Kickback Statute, which prohibits, among other things, persons and entities from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in cash or kind, in exchange for, or to induce, either the referral of an individual for, or the purchase, order or recommendation of, any good or service for which payment may be made under federal healthcare programs such as the Medicare and Medicaid programs. This statute has been interpreted to apply to arrangements between pharmaceutical manufacturers, on the one hand, and prescribers, purchasers and formulary managers on the other. The Patient Protection and Affordable Care Act, or PPACA, amended the intent requirement of the federal Anti-Kickback Statute. A person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it in order to commit a violation;

 

•

the federal false claims and civil monetary penalties laws, including the civil False Claims Act, or the FCA, which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid or other third-party payors that are false or fraudulent, or making a false statement to avoid, decrease, or conceal an obligation to pay money to the federal government. Certain marketing practices, including off-label promotion, also may implicate the FCA. In addition, the PPACA codified case law that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the FCA;

 

•

the federal Physician Payments Sunshine Act, which requires certain manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid, or the Children’s Health Insurance Program, with specific exceptions, to report annually to the Centers for Medicare & Medicaid Services, or the CMS, information related to payments and other transfers of value to physicians, certain other healthcare providers and teaching hospitals, and ownership and investment interests held by physicians and other healthcare providers and their immediate family members;

 

•

the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters;

 

•

HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, and its implementing regulations, which imposes obligations, including mandatory contractual terms, with respect to safeguarding the transmission, security and privacy of protected health information;

 

•

the federal false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false statement in connection with the delivery of or payment for healthcare benefits, items or services; and

 

•

state and foreign law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers; state laws that require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government or otherwise restrict payments that may be made to

 

98

---

Table of Contents

healthcare providers and other potential referral sources; state laws that require drug manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures; and state laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts.

Violation of the laws described above or any other governmental laws and regulations may result in penalties, including civil and criminal penalties, damages, fines, the curtailment or restructuring of operations, the exclusion from participation in federal and state healthcare programs, disgorgement, contractual damages, reputational harm, diminished profits and future earnings, and imprisonment. Furthermore, efforts to ensure that business activities and business arrangements comply with applicable healthcare laws and regulations can be costly.

Coverage and Reimbursement

Significant uncertainty exists as to the coverage and reimbursement status of any products for which we may obtain regulatory approval. In the United States, sales of any product candidates for which regulatory approval for commercial sale is obtained will depend in part on the availability of coverage and adequate reimbursement from third-party payors. Third-party payors include government authorities and health programs in the United States such as Medicare and Medicaid, managed care providers, private health insurers and other organizations. These third-party payors are increasingly reducing reimbursements for medical products and services. The process for determining whether a payor will provide coverage for a drug product may be separate from the process for setting the reimbursement rate that the payor will pay for the drug product. Third-party payors may limit coverage to specific drug products on an approved list, or formulary, which might not include all of FDA-approved drugs for a particular indication. Additionally, the containment of healthcare costs has become a priority of federal and state governments, and the prices of drugs have been a focus in this effort. The U.S. government, state legislatures and foreign governments have shown significant interest in implementing cost-containment programs, including price controls, restrictions on reimbursement and requirements for substitution of generic products. Coverage policies and third-party reimbursement rates may change at any time. Even if favorable coverage and reimbursement status is attained for one or more products for which we receive regulatory approval, less favorable coverage policies and reimbursement rates may be implemented in the future.

In the European Union, pricing and reimbursement schemes vary widely from country to country. Some countries provide that products may be marketed only after a reimbursement price has been agreed. Some countries may require the completion of additional studies that compare the cost-effectiveness of a particular product candidate to currently available therapies. European Union member states may approve a specific price for a product or it may instead adopt a system of direct or indirect controls on the profitability of the company placing the product on the market. Other member states allow companies to fix their own prices for products, but monitor and control company profits. The downward pressure on health care costs has become intense. As a result, increasingly high barriers are being erected to the entry of new products. In addition, in some countries, cross-border imports from low-priced markets exert competitive pressure that may reduce pricing within a country. Any country that has price controls or reimbursement limitations may not allow favorable reimbursement and pricing arrangements.

Health Reform

The United States and some foreign jurisdictions are considering or have enacted a number of reform proposals to change the healthcare system. There is significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare costs, improving quality or expanding access. In the United States, for example, the pharmaceutical industry has been a particular focus of these efforts and has been significantly affected and continues to face major uncertainty due to the status of major legislative initiatives surrounding healthcare reform.

 

99

---

Table of Contents

Additional Regulation

In addition to the foregoing, state and federal laws regarding environmental protection and hazardous substances, including the Occupational Safety and Health Act, the Resource Conservation and Recovery Act and the Toxic Substances Control Act, affect our business. These and other laws govern the use, handling and disposal of various biologic, chemical and radioactive substances used in, and wastes generated by, operations. If our operations result in contamination of the environment or expose individuals to hazardous substances, we could be liable for damages and governmental fines. Equivalent laws have been adopted in other countries that impose similar obligations.

U.S. Foreign Corrupt Practices Act

The U.S. Foreign Corrupt Practices Act, or FCPA, prohibits U.S. corporations and individuals from engaging in certain activities to obtain or retain business abroad or to influence a person working in an official capacity. It is illegal to pay, offer to pay or authorize the payment of anything of value to any foreign government official, government staff member, political party or political candidate in an attempt to obtain or retain business or to otherwise influence a person working in an official capacity. The scope of the FCPA includes interactions with certain healthcare professionals in many countries. Equivalent laws have been adopted in other foreign countries that impose similar obligations.

Employees

As of August 15, 2017, we had seven full-time employees, five of whom were primarily engaged in research and development activities and hold Masters or Ph.D., degrees in a scientific field. None of our employees is represented by a labor union and we consider our employee relations to be good.

Facilities

We lease approximately 5,065 square feet of combined laboratory and office space in Pittsburgh, Pennsylvania that we use in our research and development efforts. We established the geographic locations of our research and development operations based on proximity to the relevant market expertise and access to available talent pools. We presently plan on extending our current lease, which ends in October 2018.

Legal Proceedings

We currently are not a party to any material litigation or other material legal proceedings. We may, from time to time, be subject to legal proceedings and claims arising from the normal course of business activities.

 

100

---

Table of Contents

MANAGEMENT

Executive Officers and Directors

The following table provides information regarding our current executive officers and directors as of August 31, 2017:

 

Name		Age				Position
Executive Officers
Krish S. Krishnan			52			President and Chief Executive Officer, Chairman of the Board of Directors
Suma M. Krishnan			52			Founder, Chief Operating Officer and Director
Non-Employee Directors
Daniel S. Janney(1)(2)			51			Director
Rockford Douglas Norby(1)(2)(3)			82			Director
Dino A. Rossi(1)(2)(3)			63			Director
Kirti Ganorkar			50			Director

 

(1)	Member of the audit committee

(2)	Member of the compensation committee

(3)	Member of the nominating and corporate governance committee

Executive Officers

Krish S. Krishnan has served as our President and Chief Executive Officer and Chairman of our board of directors since our inception. Mr. Krishnan previously served as Chief Operating Officer of Intrexon Corporation (NYSE: XON) from 2011 to 2016, and as Chief Executive Officer and President of Pinnacle Pharmaceuticals, Inc. from 2009 to 2011. He also served as Chief Financial Officer and Chief Operating Officer of New River Pharmaceuticals, Inc. from 2004 to 2007 (previously listed on NASDAQ prior to its acquisition by Shire plc in 2007), and was a member of its board of directors from 2003 until 2007. He served as a Senior Managing Director of Third Security, LLC between 2001 and 2008 and as a board member of Biotie Therapies Oyj (BTH1V:Helsinki) between 2008 and 2009. He served as Managing Principal at Ariba before joining Third Security and also served with the management consulting firm A.T. Kearney, where he advised Fortune 50 companies on business strategy. Mr. Krishnan started his career as an engineer with E.I. Dupont de Nemours in Wilmington, Delaware. He received a B.S. in Mechanical Engineering from the Indian Institute of Technology, an M.S. in Engineering from the University of Toledo, and an M.B.A. in Finance from The Wharton School at the University of Pennsylvania.

Suma M. Krishnan is our founder and has served as our Chief Operating Officer and director since our inception. Ms. Krishnan has over two decades of experience in drug development. She previously served as Senior Vice President and head of the Human Therapeutics Division, as well as Senior Vice President of Regulatory Affairs at Intrexon Corporation (NYSE: XON) from 2012 to 2016. She previously served as Senior Vice President, Product Development at Pinnacle Pharmaceuticals, Inc. from 2009 to 2011. Ms. Krishnan served as Vice President, Product Development at New River Pharmaceuticals, Inc. from 2002 until 2007 (previously listed on NASDAQ prior to its acquisition by Shire plc in 2007). Prior to serving at New River Pharmaceuticals, Inc., Ms. Krishnan served in the following capacities: Director, Regulatory Affairs at Shire plc; Senior Project Manager at Pfizer, Inc. (NYSE: PFE), a multi-national pharmaceutical company; and a consultant at the Weinberg Group, a pharmaceutical and environmental consulting firm. Ms. Krishnan began her career as a discovery scientist for Janssen Pharmaceuticals, Inc., a subsidiary of Johnson & Johnson (NYSE: JNJ), in May 1991. Ms. Krishnan received an M.S. in Organic Chemistry from Villanova University, an M.B.A. from Institute of Management and Research (India) and an undergraduate degree in Organic Chemistry from Ferguson University (India).

 

101

---

Table of Contents

Non-Employee Directors

Daniel S. Janney has served as a member of our board of directors since November 2016, and is chairman of the compensation committee and a member of the audit committee. Mr. Janney is a Managing Director at Alta Partners, a life sciences venture capital firm, which he joined in 1996. Prior to joining Alta, from 1993 to 1996, he was a Vice President in Montgomery Securities’ healthcare and biotechnology investment banking group, focusing on life sciences companies. Mr. Janney is a director of a number of companies including Esperion Therapeutics (NASDAQ:ESPR), Evolve Biosystems, Inc., Prolacta Bioscience, Inc., Sutro Biopharma and Viveve Medical, Inc. (NASDAQ:VIVE). He holds a Bachelor of Arts in History from Georgetown University and an M.B.A. from the Anderson School at the University of California, Los Angeles. We believe Mr. Janney’s experience working with and serving on the boards of directors of life sciences companies and his experience working in the venture capital industry qualifies him to serve as a member of our Board.

R. Douglas Norby has served as a member of our board of directors since January 2017, and is chairman of the audit committee and a member of the compensation committee and the nominating and corporate governance committee. He also serves as lead independent director on the board of directors of Alexion Pharmaceuticals, Inc. (NASDAQ: ALXN), where he has been a board member since September 1999. Mr. Norby has held positions of responsibility at many companies, including serving as Senior Vice President and Chief Financial Officer of Tessera, Inc., a provider of intellectual property for advanced semiconductor packaging; and as Senior Vice President and Chief Financial Officer of Zambeel, Inc., a data storage systems company. Mr. Norby has also served as Senior Vice President and Chief Financial Officer of Novalux, Inc., a manufacturer of lasers for optical networks; as Executive Vice President and Chief Financial Officer of LSI Logic Corporation, a semiconductor company which was acquired by Avago Technologies in 2013; as Senior Vice President and Chief Financial Officer of Mentor Graphics Corporation, a software company; and as President and Chief Operating Officer at Lucasfilm, Ltd., an entertainment company. His pharmaceutical experience includes serving as President of Pharmetrix Corporation, a drug delivery company, and as Senior Vice President and Chief Financial Officer of Syntex Corporation, a pharmaceutical company, which was later acquired by Roche Holding Ltd. Mr. Norby received a bachelor’s degree in Economics from Harvard University and an MBA from Harvard Business School. We believe that Mr. Norby’s extensive experience in the pharmaceutical industry as both an executive officer and a director qualifies him to serve as a member of our Board.

Dino A. Rossi has served as a member of our board of directors since June 2017, and is a member of the audit committee, compensation committee and the nominating and corporate governance committee. Mr. Rossi was previously employed by Balchem Corporation (NASDAQ: BCPC), where he served as Chief Executive Officer and President from October 1997 to April 2015, Chief Financial Officer from April 1996 to January 2004 and Treasurer from June 1996 to June 2003, as well as Executive Chairman from September 2015 to December 2016. He has also previously served as Vice President, Finance & Administration of Norit Americas Inc., a wholly owned subsidiary of Norit N.V. and Vice President, finance and Administration of Oakite Products Inc. He also previously served on the board of Scientific Learning Corp. Mr. Rossi holds a BS in Accounting from West Virginia University. We believe that Mr. Rossi’s extensive leadership experience as an executive officer of a publicly traded company, as well as his financial expertise, qualifies him to serve as a member of our Board.

Kirti Ganorkar has served as a member of our board of directors since September 2017. Mr. Ganorkar is currently the Executive Vice President of Sun Pharmaceutical Industries Ltd, a multinational pharmaceutical company and the largest pharmaceutical company headquartered in India. Mr. Ganorkar joined Sun Pharma in 1996 and has worked in a number of roles during his time there, most recently as head of Global Business Development & Portfolio Management. Prior to Sun Pharma, Mr. Ganorkar worked for German Remedies as a senior product manager, and with Rallis India Ltd. and Sudarshan Chemical Industries prior to that. Mr. Ganorkar has a Bachelors of Technology degree in chemical engineering from Nagpur University and an MBA in marketing management from Poona University.

 

102

---

Table of Contents

Board Composition

Board of Directors

Our board of directors may establish the authorized number of directors from time to time by resolution. Our board of directors currently consists of six members. The primary responsibilities of our board of directors are to provide oversight, strategic guidance, counseling and direction to our management. Our board of directors meets on a regular basis and additionally as required.

Classified Board of Directors

Our second amended and restated certificate of incorporation and amended and restated bylaws that will be effective upon the closing of this offering provide for a classified board of directors consisting of three classes of directors, each serving staggered three-year terms. As a result, one class of directors will be elected at each annual meeting of our stockholders, with the other classes continuing for the remainder of their respective three-year terms. Our directors will be divided equally among the three classes as follows.

 

•

the Class I directors will be Ms. Krishnan and Mr. Norby, and their terms will expire at the first annual meeting of stockholders following this offering;

 

•

the Class II directors will be Mr. Janney and Mr. Rossi, and their terms will expire at the second annual meeting of stockholders following this offering; and

 

•

the Class III directors will be Mr. Krishnan and Mr. Ganorkar, and their terms will expire at the third annual meeting of stockholders following this offering.

Each director’s term continues until the election and qualification of his or her successor, or his or her earlier death, resignation or removal. Our second amended and restated certificate of incorporation and amended and restated bylaws that will be effective upon the closing of this offering will authorize only our board of directors to fill vacancies on our board of directors. Any increase or decrease in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the directors.

The classification of our board of directors may have the effect of delaying or preventing changes in control of our company. See “Description of Capital Stock—Anti-Takeover Provisions—Second Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws Provisions.”

Director Independence

Applicable NASDAQ rules require a majority of a listed company’s board of directors to be comprised of independent directors within one year of listing. In addition, NASDAQ rules require that, subject to specified exceptions, each member of a listed company’s audit, compensation and nominating and corporate governance committees be independent and that audit committee members also satisfy independence criteria set forth in Rule 10A-3 under the Securities Exchange Act of 1934, as amended, or the Exchange Act. The NASDAQ independence definition includes a series of objective tests, such as that the director is not, and has not been for at least three years, one of our employees and that neither the director nor any of his family members has engaged in various types of business dealings with us. In addition, under applicable NASDAQ rules, a director will only qualify as an “independent director” if, in the opinion of the listed company’s board of directors, that person does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.

Our board of directors has determined that all of our directors, except Krish S. Krishnan and Suma M. Krishnan are independent directors, as defined under applicable NASDAQ rules. In making such determination, our board of directors considered the relationships that each such non-employee director has with our company and all other facts and circumstances that our board of directors deemed relevant in determining his or her independence, including the beneficial ownership of our capital stock by each non-employee director and the transactions involving them described in the section entitled “Certain Relationships and Related-Party Transactions.”

 

103

---

Table of Contents

Audit committee members must also satisfy the independence criteria set forth in Rule 10A-3 under the Securities Exchange Act of 1934, as amended. In order to be considered independent for purposes of Rule 10A-3, a member of an audit committee of a listed company may not, other than in his or her capacity as a member of the audit committee, the board of directors or any other board committee: (i) accept, directly or indirectly, any consulting, advisory or other compensatory fee from the listed company or any of its subsidiaries; or (ii) be an affiliated person of the listed company or any of its subsidiaries.

Our executive officers are elected by, and serve at the discretion of, our board of directors. There are no family relationships among any of our non-executive directors and executive officers. With respect to executive officers, Mr. Krishnan and Ms. Krishnan are spouses and each serves on our board of directors.

Committees of Our Board of Directors

Our board of directors has an audit committee, a compensation committee and a nominating and corporate governance committee, each of which have the composition and responsibilities described below. Members serve on these committees until their resignation or until otherwise determined by our board of directors. Each committee operates under a charter approved by our board of directors. Following the closing of this offering, copies of each committee’s charter will be posted on the investor relations section of our website at www.krystalbio.com.

Audit Committee

Our audit committee is composed of Messrs. Norby, Janney and Rossi. Mr. Norby is the chairperson of our audit committee. Messrs. Norby, Janney and Rossi each meet the requirements for independence under the current NASDAQ listing standards and SEC rules and regulations. Each member of our audit committee is financially literate. In addition, our board of directors has determined that Mr. Norby is an “audit committee financial expert” as defined in Item 407(d)(5)(ii) of Regulation S-K promulgated under the Securities Act. This designation does not impose any duties, obligations or liabilities that are greater than are generally imposed on members of our audit committee and our board of directors. Our audit committee is responsible for, among other things:

 

•

our accounting and financial reporting processes, including our financial statement audits and the integrity of our financial statements;

 

•

our compliance with legal and regulatory requirements;

 

•

reviewing and approving related person transactions;

 

•

selecting and hiring our registered independent public accounting firm;

 

•

the qualifications, independence and performance of our independent auditors; and

 

•

the preparation of the audit committee report to be included in our annual proxy statement.

Compensation Committee

Our compensation committee is composed of Messrs. Norby, Janney and Rossi. Mr. Janney is the chairperson of our compensation committee. The composition of our compensation committee meets the requirements for independence under the current NASDAQ listing standards and SEC rules and regulations. Each member of this committee is: (i) an outside director, as defined pursuant to Section 162(m) of the Internal Revenue Code of 1986, as amended, or the Code; and (ii) a non-employee director, as defined in Rule 16b-3 promulgated under the Exchange Act. Our compensation committee is responsible for, among other things:

 

•

evaluating, recommending, approving and reviewing executive officer and director compensation arrangements, plans, policies and programs;

 

104

---

Table of Contents

•

administering our cash-based and equity-based compensation plans; and

 

•

making recommendations to our board of directors regarding any other board of director responsibilities relating to executive compensation.

Nominating and Corporate Governance Committee

Our nominating and corporate governance committee is composed of Messrs. Norby and Rossi. Mr. Rossi is the chairperson of our nominating and corporate governance committee. The composition of our nominating and corporate governance committee meets the requirements for independence under the current NASDAQ listing standards and SEC rules and regulations. Our nominating and corporate governance committee is responsible for, among other things:

 

•

identifying, considering and recommending candidates for membership on our board of directors;

 

•

overseeing the process of evaluating the performance of our board of directors; and

 

•

advising our board of directors on other corporate governance matters.

Compensation Committee Interlocks and Insider Participation

None of our executive officers has served as a member of our compensation committee. None of the current members of our compensation committee has ever been an executive officer or employee of ours. None of our executive officers currently serves, or has served during the last completed fiscal year, on the compensation committee or board of directors of any other entity that has one or more executive officers serving as a member of our board of directors or compensation committee.

Codes of Business Conduct and Ethics

Effective upon the closing of this offering, we will adopt a Code of Business Conduct and Ethics, or the Code of Conduct, applicable to all of our employees, executive officers and directors, which will be available on our website at www.krystalbio.com. The reference to our website address in this prospectus does not include or incorporate by reference the information on our website into this prospectus. The nominating and corporate governance committee of our board of directors will be responsible for overseeing the Code of Conduct and must approve any waivers of the Code of Conduct for employees, executive officers and directors. In addition, we intend to post on our website all disclosures that are required by law or the listing standards of the applicable stock exchange concerning any amendments to, or waivers from, any provision of the Code of Conduct, to the extent required by the applicable rules and exchange requirements.

Non-Employee Director Compensation

The following table presents the total compensation for the year ending December 31, 2016, for each person who served as a non-employee member of our board of directors in the year. Other than as set forth in the table, in the year ended December 31, 2016, we did not pay any fees to, make any equity awards or non-equity awards to or pay any other compensation to the non-employee members of our board of directors. Following the completion of this offering, our non-employee directors will receive compensation from us of $25,000 per non-employee director per annum.

 

Name		Fees Earned or Paid in Cash				Option Awards(1)				Total
Daniel S. Janney		$	—			$	65,431	(2)		$	65,431	(3)
R. Douglas Norby			—				32,719	(4)			32,719	(4)
Dino A. Rossi			—				—				—
Kirti Ganorkar(5)			—				—				—

 

(1)	The amounts reported in the Option Awards column represent the grant date fair value of the stock options granted to the directors during the year ended December 31, 2016 as computed in accordance

 

105

---

Table of Contents

with Financial Accounting Standards Board Accounting Standards Codification Topic 718. The assumptions used in calculating the grant date fair value of the stock options reported in the Option Awards column are set forth in Note 10 to our audited financial statements included in this prospectus. Note that the amounts reported in this column reflect the accounting cost for these stock options, and do not correspond to the actual economic value that may be received by our directors from the options.

(2)	As of December 31, 2016, Daniel S. Janney holds 37,894 options, issued on November 10, 2016 at an exercise price of $2.46 per share.

(3)

The total excludes two convertible promissory notes in the amount of $500,000 of principal plus accrued interest of $15,411 totaling $515,411 as of August 8, 2017. The notes were issued to Alta Bioequities, L.P., an investment entity owned and controlled by Mr. Janney, in November 2016 and May 2017, which were converted into 124,456 shares of preferred stock at a price of $4.14 per share on August 8, 2017. These preferred shares will automatically convert into 124,456 shares of common stock upon the closing of this offering.

(4)	As of December 31, 2016, R. Douglas Norby holds 18,949 options, issued on November 30, 2016 at an exercise price of $2.46 per share.

(5)	Mr. Ganorkar joined the board in September 2017.

 

106

---

Table of Contents

EXECUTIVE COMPENSATION

Our named executive officers for 2016, which consist of our principal executive officer and the next two most highly compensated executive officers, are:

 

•

Krish S. Krishnan, our Chief Executive Officer;

 

•

Suma M. Krishnan, our Chief Operating Officer; and

 

•

Pooja Agarwal, our Vice President, Product Development.

Summary Compensation Table

The following table provides information regarding the compensation of our named executive officers during the year ended December 31, 2016.

 

Name and Principal Position		Year				Salary				Bonus				Option Awards				Non-Equity Incentive Plan Compensation				All Other Compensation				Total
Krish S. Krishnan			2016			$	—			$	—			$	—			$	—			$	—			$	—
Chief Executive Officer
Suma M. Krishnan			2016				—				—				—				—				—				—
Chief Operating Officer
Pooja Agarwal,			2016	(1)		$	80,000				—			$	65,431	(2)			—				—			$	145,431
Vice President, Product Development

 

(1)	Pooja Agarwal provided services for a partial year, beginning May 1, 2016 until December 31, 2016.

(2)	Pooja Agarwal holds 37,894 options, issued on November 10, 2016, which vest ratably over four years.

Executive Employment Arrangements

Krish S. Krishnan

We entered into an “at-will” employment agreement with Krish S. Krishnan dated as of July 1, 2017. Prior to entering into this agreement, between April 15, 2016, the date we commenced operations, and June 30, 2017, Mr. Krishnan served as our President and Chief Executive Officer without compensation. Under the terms of the employment agreement, Mr. Krishnan continues to serve as President and Chief Executive Officer with a base salary of sixty thousand dollars ($60,000) per year, in addition to benefits made available by the Company to similarly-situated employees. Mr. Krishnan’s base salary will increase to $200,000 per year upon the closing of this offering. Mr. Krishnan’s employment agreement provides that he will be bound by the terms of the Company’s Proprietary Information and Inventions Agreement and that he shall not disclose to the Company any third party proprietary information or trade secrets.

Suma M. Krishnan

We entered into an “at-will” employment agreement with Suma M. Krishnan dated as of May 1, 2017. Prior to entering into this agreement, and between the dates of April 15, 2016, the date we commenced operations, and May 1, 2017, Ms. Krishnan served as the Company’s Chief Operating Officer without compensation. Under the terms of the employment agreement, Ms. Krishnan continues to serve as the Chief Operating Officer. She receives a base salary of sixty thousand dollars ($60,000) per year, in addition to benefits made available by the Company to similarly-situated employees. Ms. Krishnan’s base salary will increase to $200,000 per year upon the closing of this offering. Ms. Krishnan’s employment agreement provides that she will be bound by the terms of the Company’s Proprietary Information and Inventions Agreement and that she shall not disclose to the Company any third party proprietary information or trade secrets.

 

 

107

---

Table of Contents

Pooja Agarwal

We entered into an “at-will” employment agreement with Pooja Agarwal dated as of May 1, 2017. Prior to entering into this agreement, and between the dates of May 1, 2016 and May 1, 2017, Ms. Agarwal served as our consultant. Under the terms of the employment agreement, Ms. Agarwal serves as the Vice President of Product Development with a base salary of one hundred and sixty-five thousand dollars ($165,000) per year, in addition to benefits made available by the Company to similarly-situated employees. Ms. Agarwal’s employment agreement provides that she will be bound by the terms of the Company’s Proprietary Information and Inventions Agreement and that she shall not disclose to the Company any third-party proprietary information or trade secrets.

Key Opinion Leaders

In addition to our management and scientific teams, we are guided by key opinion leaders, or KOLs, who are generally accepted in the medical and scientific communities to be leading experts in the DEB and orphan dermatological disease space. Our senior management team consults with our KOLs on an as-needed and project basis. Our KOLs include Dr. Peter Marinkovich of the Department of Dermatology of Stanford University, Dr. Andrew South of the Department of Dermatology of Thomas Jefferson University and Dr. John McGrath of King’s College London. We entered into a consulting agreement with Dr. Marinkovich in April 2017, pursuant to which he assists us with the clinical trial design of our potential Phase 1/2 study for the treatment of DEB. Dr. Marinkovich is compensated on an hourly basis. Dr. South conducted the majority of our pre-clinical studies to date beginning in July 2016 and is compensated by us on a project by project basis, as well as on an hourly basis for participating in diligence efforts on our behalf. We entered into a consulting agreement with Dr. McGrath in July 2017, pursuant to which he assists us with the preclinical and clinical development of KB103. Dr. McGrath is compensated on an hourly basis.

Equity and Equity-Based Plans

Outstanding Equity Awards at Fiscal Year-End

The following table provides information regarding the outstanding equity awards of our named executive officers during the year ended December 31, 2016.

 

		Option Awards																				Stock Awards
Name and Principal Position		Number of Securities Underlying Unexercised Options Exercisable				Number of Securities Underlying Unexercised Options Unexercisable				Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options				Option Exercise Price				Option Expiration Date				Number of Shares or Units of Stock Unvested				Market Value of Shares of Units of Stock Unvested				Equity Incentive Plan Awards:Number of Unearned Unvested Shares				Equity Incentive Plan Awards: Market or Payout Value of Unearned Unvested Shares
Krish S. Krishnan Chief Executive Officer			—				—				—			$	—				—				—			$	—				—			$	—
Suma M. Krishnan Chief Operating Officer			—				—				—				—				—				—				—				—				—
Pooja Agarwal Vice President, Product Development			—				—				37,894	(1)		$	2.46				11/09/2026				—				—				—				—

 

(1)	Pooja Agarwal holds 37,894 options, issued on November 10, 2016, which vest ratably over four years.

 

108

---

Table of Contents

Krystal Biotech, LLC 2016 Equity Incentive Plan

The Krystal Biotech, LLC 2016 Equity Incentive Plan, or the 2016 Plan, was adopted on October 1, 2016 for the purpose of offering selected persons a proprietary interest in our success, or increasing such interest, by the grant of awards. The 2016 Plan terminated upon our conversion into a Delaware corporation on March 31, 2017, and options to purchase incentive units issued under that plan were, in accordance with the terms of the conversion and the original option awards, automatically converted into options to purchase shares of our common stock at the same exercise price per share.

Under the terms of the 2016 Plan as it was in effect, our Board of Managers was authorized to issue options to purchase up to 189,472 incentive units. The number and kind of incentive units outstanding, and made available for future grants, would have been automatically adjusted in the event of any subdivision or combination of outstanding units, a recapitalization, a spin-off, a reclassification, a merger or consolidation or any other similar occurrence. The original term of the 2016 Plan was set to expire on September 30, 2026.

Administration

The 2016 Plan was administered by our Board of Managers, which had full authority and discretion to take any actions it deems necessary or advisable for the plan’s administration. All decisions, interpretations, and other actions of the Board of Managers were final and binding on all plan participants.

Grants of Awards and Stock Options

Only service providers were eligible for the grant of incentive units, including incentive units to be issued on exercise of options, under the 2016 Plan. All awards under the plan were subject to any special forfeiture conditions, rights of repurchase, rights of first refusal, and other transfer restrictions determined by the Board of Managers in its discretion. The Board of Managers also had the sole discretion to decide the vesting schedules of awards.

Award Exercise or Purchase Price

The per incentive unit exercise price for an option, was determined by the Board of Managers in its sole discretion, and was required to equal or exceed one hundred percent (100%) of the fair market value per incentive unit on the date of grant. Any option granted under the 2016 Plan was exercisable at such times and under such conditions as determined by the Board of Managers, in accordance with the terms of the plan and the award agreement.

Corporate Transaction and Change in Control Provisions

The 2016 Plan granted us the ability to determine the treatment of outstanding options to purchase incentive units upon the occurrence of any “company event,” which included a sale of all or substantially all of the Company’s assets, an acquisition of at least fifty percent (50%) of the outstanding units of the Company, the liquidation or dissolution of the Company, or a similar transaction, subject to the terms of any option agreement requiring specific treatment in such circumstances. Option award agreements issued under the 2016 Plan provided that options granted could be exercised, even if vested, only on the earlier of a company event or an incorporation.

Krystal Biotech, Inc. 2017 Stock Incentive Plan

The Krystal Biotech, Inc. 2017 Stock Incentive Plan, or the 2017 Plan, became effective on March 31, 2017 and was approved by shareholders on March 31, 2017. The 2017 Plan will continue in effect for a term of ten (10) years unless sooner terminated. The purpose of the plan is to attract and retain the best available personnel, to provide additional incentives to employees, directors, and consultants, and to promote the success of our business. Subject to adjustment as discussed below, the 2017 Plan authorizes up

 

109

---

Table of Contents

to 193,050 shares of our common stock for issuance pursuant to the terms of the plan. If and to the extent that awards are forfeited, canceled, or expire, the shares subject to the award will again be available for grant under the 2017 Plan. Additionally, to the extent any shares covered by an award are surrendered or withheld in payment of any exercise or purchase price, or in satisfaction of tax withholding obligations associated with the award, such shares subject to the award will again be available for grant under the 2017 Plan.

In the case of any increase or decrease in the number of issued shares due to a stock split, reverse stock split, stock dividend, recapitalization, or other such transaction affecting shares, or, in the case of a corporate merger, consolidation, acquisition, reorganization, or liquidation, then proportionate adjustments shall be made for: (i) the number of shares covered by each outstanding award; (ii) the number of shares authorized for issuance but as to which no awards have been granted (or which have been returned); (iii) the exercise or purchase price of each outstanding award; the maximum number of shares which may be granted to any grantee; and (iv) any other terms that the 2017 Plan administrator determines.

Administration

The 2017 Plan is administered by our board of directors or any committees designated by the board of directors to administer the plan. The administrator has the authority, in its discretion, to select the employees, directors and consultants to whom awards may be granted and to determine whether and to what extent such awards will be granted. Subject to the terms of the 2017 Plan, the administrator shall determine the provisions, terms and conditions of each award including, but not limited to, the award vesting schedule, repurchase provisions, rights of first refusal, forfeiture provisions, form of payment upon settlement of the award, payment contingencies, the number of shares or amount of other consideration to be covered by awards and satisfaction of any performance criteria (which the administrator will establish). Our board of directors may also authorize officers to grant awards, subject to limitations under applicable law.

Grants of Awards and Stock Options

Awards granted under the 2017 Plan may include, without limitation, options (including incentive stock options or non-qualified stock options), stock appreciation rights (SARs), dividend equivalent rights, restricted stock, and restricted stock units. Awards other than incentive stock options may be granted to employees, directors, and consultants, whereas incentive stock options may be granted only to employees of the Company or its parent or subsidiary. The term of each award may not exceed ten (10) years from its date of grant (or five (5) years, in the case of an incentive stock option granted to a ten percent (10%) shareholder within the meaning of Section 422(b)(6) of the Internal Revenue Code).

Award Exercise or Purchase Price

Determination of the exercise or purchase price of any of the awards issued under the 2017 Plan is as follows:

 

•

the per share exercise price of incentive stock options must equal or exceed one hundred percent (100%) of the fair market value per share on the date of grant (unless granted to an employee who, at the time of such grant is a ten percent (10%) shareholder within the meaning of Section 422(b)(6) of the Internal Revenue Code, in which case the exercise price must exceed one hundred and ten percent (110%) of the fair market value per share on the date of grant);

 

•

the base appreciation amount of SARs must equal or exceed one hundred percent (100%) of the fair market value per share on the date of grant;

 

•

the per share exercise or purchase price, if any, of performance-based compensation awards must equal or exceed one hundred percent (100%) of the fair market value per share on the date of grant; and

 

 

110

---

Table of Contents

•

the per share exercise price of non-qualified stock options, the per share purchase price for the sale of shares, and the per share price of all other awards shall be determined by the 2017 Plan administrator.

Corporate Transaction and Change in Control Provisions

Under the 2017 Plan, a corporate transaction includes: (i) a merger or consolidation in which the Company is not the surviving entity or certain reverse mergers in which the Company is the surviving entity but all outstanding common stock is converted or more than fifty percent (50%) of the total combined voting power of the Company’s outstanding securities are transferred to a new shareholder(s); (ii) the sale of all or substantially all of the Company’s assets; the complete liquidation or dissolution of the Company; or (iii) an acquisition of securities possessing more than fifty percent (50%) of the total combined voting power of the Company’s outstanding securities. Under the 2017 Plan, a change in control is defined as either the acquisition of more than fifty percent (50%) of the total combined voting power of the Company’s outstanding securities pursuant to a hostile tender or exchange offer; or a change in the composition of the board of directors taking place over one year or less, whereby a majority of Board members cease to be continuing directors by reason of contested elections for Board membership.

Effective upon the consummation of a corporate transaction, all outstanding awards under the 2017 Plan shall terminate, unless they are assumed. The plan administrator shall have the authority, exercisable either in advance or at the time of any actual or anticipated corporate transaction or change in control, to accelerate vesting and exercisability of outstanding unvested awards, as well as the release from restrictions on transfer and repurchase or forfeiture rights of such awards on such terms and conditions as the administrator may specify, including conditioning such acceleration upon the subsequent termination of the employment of the grantee within a specified period following the effective date of the corporate transaction or change in control.

Section 162(m)

The 2017 Plan is structured so that stock options and other performance-based awards may qualify for an exemption to the deduction limitation contained in Section 162(m) of the Internal Revenue Code, to the extent applicable.

Krystal Biotech, Inc. 2017 IPO Stock Incentive Plan

The Krystal Biotech, Inc. 2017 IPO Stock Incentive Plan, or the 2017 IPO Plan, became effective on                      and was approved by shareholders on                     . It shall continue in effect for a term of ten (10) years unless sooner terminated. The purpose of this plan is to attract and retain the best available personnel, to provide additional incentives to employees, directors, and consultants, and to promote the success of the Company’s business. Subject to adjustment as discussed below, the 2017 IPO Plan initially authorizes up to 900,000 shares of Company common stock for issuance, which maximum amount shall be increased each calendar year by a number equal to four percent (4%) of the number of shares outstanding in the prior calendar year. The maximum aggregate number of shares available for incentive stock options is 900,000 and shall not be adjusted annually. If and to the extent that awards are forfeited, canceled, or expire, the shares subject to the award will again be available for grant under the 2017 IPO Plan. Additionally, to the extent any shares covered by an award are surrendered or withheld in payment of any exercise or purchase price, or in satisfaction of tax withholding obligations associated with the award, such shares subject to the award will again be available for grant under the 2017 IPO Plan.

In the case of any increase or decrease in the number of issued shares due to a stock split, reverse stock split, stock dividend, recapitalization, or other such transaction affecting shares, or, in the case of a corporate merger, consolidation, acquisition, reorganization, or liquidation, then proportionate adjustments shall be made for: the number of shares covered by each outstanding award; the number of shares authorized for issuance but as to which no awards have been granted (or which have been

 

111

---

Table of Contents

returned); the exercise or purchase price of each outstanding award; the maximum number of shares which may be granted to any grantee; and any other terms that the 2017 IPO Plan administrator determines.

Administration

The 2017 IPO Plan is administered by the Board of Directors or any committees designated by the Board of Directors to administer the plan. The administrator has the authority, in its discretion, to select the employees, directors and consultants to whom awards may be granted and to determine whether and to what extent such awards will be granted. Subject to the terms of the 2017 IPO Plan, the administrator shall determine the provisions, terms, and conditions of each award including, but not limited to: the award vesting schedule, repurchase provisions, rights of first refusal, forfeiture provisions, form of payment upon settlement of the award, payment contingencies, the number of shares or amount of other consideration to be covered by awards, and satisfaction of any performance criteria (which the administrator will establish). The Board of Directors may also authorize officers to grant awards, subject to limitations under applicable law.

Grants of Awards and Stock Options

Awards granted under the 2017 IPO Plan may include, without limitation, options (including incentive stock options or non-qualified stock options), stock appreciation rights (SARs), dividend equivalent rights, restricted stock, and restricted stock units. Awards other than incentive stock options may be granted to employees, directors, and consultants, whereas incentive stock options may be granted only to employees of the Company or its parent or subsidiary. The term of each award may not exceed ten (10) years from its date of grant (or five (5) years, in the case of an incentive stock option granted to a ten percent (10%) shareholder within the meaning of Section 422(b)(6) of the Internal Revenue Code).

Award Exercise or Purchase Price

Determination of the exercise or purchase price of any of the awards issued under the 2017 IPO Plan is as follows:

 

•

the per share exercise price of incentive stock options must equal or exceed one hundred percent (100%) of the fair market value per share on the date of grant (unless granted to an employee who, at the time of such grant is a ten percent (10%) shareholder within the meaning of Section 422(b)(6) of the Internal Revenue Code, in which case the exercise price must exceed one hundred and ten percent (110%) of the fair market value per share on the date of grant);

 

•

the base appreciation amount of SARs must equal or exceed one hundred percent (100%) of the fair market value per share on the date of grant;

 

•

the per share exercise or purchase price, if any, of performance-based compensation awards must equal or exceed one hundred percent (100%) of the fair market value per share on the date of grant;

 

•

the per share exercise price of non-qualified stock options must equal or exceed one hundred percent (100%) of the fair market value per share on the date of grant; and

 

•

the per share price of all other awards shall be determined by the 2017 IPO Plan administrator.

Corporate Transaction and Change in Control Provisions

Under the 2017 IPO Plan, a corporate transaction includes: a merger or consolidation in which the Company is not the surviving entity or certain reverse mergers in which the Company is the surviving entity but all outstanding common stock is converted or more than fifty percent (50%) of the total combined voting power of the Company’s outstanding securities are transferred to a new shareholder(s); the sale of all or substantially all of the Company’s assets; the complete liquidation or dissolution of the Company; or an acquisition of securities possessing more than fifty percent (50%) of the total combined voting power of

 

112

---

Table of Contents

the Company’s outstanding securities. Under the 2017 IPO Plan, a change in control is defined as either the acquisition of more than fifty percent (50%) of the total combined voting power of the Company’s outstanding securities pursuant to a hostile tender or exchange offer; or a change in the composition of the Board of Directors taking place over one year or less, whereby a majority of Board members cease to be continuing directors by reason of contested elections for Board membership.

Effective upon the consummation of a corporate transaction, all outstanding awards under the 2017 IPO Plan shall terminate, unless they are assumed. The plan administrator shall have the authority, exercisable either in advance or at the time of any actual or anticipated corporate transaction or change in control, to accelerate vesting and exercisability of outstanding unvested awards, as well as the release from restrictions on transfer and repurchase or forfeiture rights of such awards on such terms and conditions as the administrator may specify, including conditioning such acceleration upon the subsequent termination of the employment of the grantee within a specified period following the effective date of the corporate transaction or change in control.

Section 162(m)

The 2017 IPO Plan is structured so that stock options and other performance-based awards, including cash-based awards, may qualify for an exemption to the deduction limitation contained in Section 162(m) of the Internal Revenue Code, to the extent applicable. The maximum number of shares with respect to which options and SARs may be granted to any grantee in any calendar year shall be 700,000 shares, plus an initial grant with respect to options and SARs may be made in connection with commencement of employment of 700,000 shares. A maximum number of shares with respect to which awards of restricted stock and RSUs that are intended to be performance-based compensation for purposes of Section 162(m), may be granted to any grantee in any calendar year shall be 700,000 shares. The total amount of cash-based awards that may be granted is $5,000,000 and no more than $5,000,000 in cash-based awards that are intended to be performance-based may be made in a 12 month period. No more than eight percent (8%) of shares may be granted to a member of the Board of Directors as compensation for services as a Board member in any calendar year.

Clawback

Awards are subject to clawbacks in accordance with Company policy or as required by applicable law.

Limitation on Liability and Indemnification Matters

Our second amended and restated certificate of incorporation that will become effective in connection with the completion of this offering contains provisions that limit the liability of our directors for monetary damages to the fullest extent permitted by the Delaware General Corporation Law, or DGCL. Consequently, our directors will not be personally liable to us or our stockholders for monetary damages for any breach of fiduciary duties as directors, except liability for:

 

•

any breach of the director’s duty of loyalty to us or our stockholders;

 

•

any act or omission not in good faith or that involves intentional misconduct or a knowing violation of law;

 

•

unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the DGCL; or

 

•

any transaction from which the director derived an improper personal benefit.

Our second amended and restated certificate of incorporation and our amended and restated bylaws that will become effective in connection with the completion of this offering require us to indemnify our directors and officers to the maximum extent not prohibited by the DGCL and allow us to indemnify other employees and agents as set forth in the DGCL. Subject to certain limitations, our restated bylaws also require us to advance expenses incurred by our directors and officers for the defense of any action for which indemnification is required or permitted.

 

113

---

Table of Contents

We have entered, and intend to continue to enter, into separate indemnification agreements with our directors, officers and certain of our key employees, in addition to the indemnification provided for in our second amended and restated certificate of incorporation and amended and restated bylaws. These agreements, among other things, require us to indemnify our directors, officers and key employees for certain expenses, including attorneys’ fees, judgments, penalties, fines and settlement amounts actually incurred by these individuals in any action or proceeding arising out of their service to us or any of our subsidiaries or any other company or enterprise to which these individuals provide services at our request. Subject to certain limitations, our indemnification agreements also require us to advance expenses incurred by our directors, officers and key employees for the defense of any action for which indemnification is required or permitted.

We believe that provisions of our second amended and restated certificate of incorporation amended and, bylaws and indemnification agreements are necessary to attract and retain qualified directors, officers and key employees. We also maintain directors’ and officers’ liability insurance.

The limitation of liability and indemnification provisions in our second amended and restated certificate of incorporation and amended and restated bylaws may discourage stockholders from bringing a lawsuit against our directors and officers for breach of their fiduciary duty. They may also reduce the likelihood of derivative litigation against our directors and officers, even though an action, if successful, might benefit us and other stockholders. Further, a stockholder’s investment may be adversely affected to the extent that we pay the costs of settlement and damage awards against directors and officers as required by these indemnification provisions.

At present, there is no pending litigation or proceeding involving any of our directors or executive officers as to which indemnification is required or permitted, and we are not aware of any threatened litigation or proceeding that may result in a claim for indemnification.

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, executive officers or persons controlling us, we have been informed that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

 

114

---

Table of Contents

CERTAIN RELATIONSHIPS AND RELATED PARTY AND OTHER TRANSACTIONS

In addition to the executive officer and director compensation arrangements discussed above under “Management—Non-Employee Director Compensation” and “Executive Compensation,” below we describe transactions since our inception to which we have been or will be a participant, in which the amount involved in the transaction exceeds or will exceed $120,000 and in which any of our directors, executive officers or beneficial holders of more than 5% of any class of our capital stock, or any immediate family member of, or person sharing the household with, any of these individuals, had or will have a direct or indirect material interest.

Equity Financings

Seed Financing

On April 15, 2016, we authorized 100 member units and issued 450 member units on a split-adjusted basis in the aggregate to Krish S. Krishnan and Suma M. Krishnan for aggregate proceeds of $100 thousand. On September 30, 2016, we converted all of the member units into an aggregate of 12,771 preferred units at an issue price of $7.83 per unit plus 3,490,884 common units, and issued an additional 96,345 preferred units to Mr. Krishnan and Ms. Krishnan at the same price for aggregate proceeds of $754 thousand. On December 27, 2016, we issued an additional 70,497 preferred units in the aggregate to Mr. Krishnan and Ms. Krishnan at the same price for aggregate proceeds of $552 thousand.

We converted from a California limited liability company to a Delaware corporation on March 31, 2017, and upon such entity conversion, all preferred units were converted to preferred stock on a 1:1 basis and all common units were converted to common stock on a 1:1 basis. Each share of preferred stock will automatically convert into one share of our common stock immediately prior to the completion of this offering.

The following table summarizes the preferred stock and common stock purchased by our directors, executive officers and beneficial holders of more than 5% of our capital stock:

 

Name of Stockholder		Shares of Common Stock				Shares of Preferred Stock				Total Purchase Price
Krish S. Krishnan(1)			1,745,442				145,888			$	935,456
Suma M. Krishnan(2)			1,745,442				145,888				935,456
Daniel S. Janney(3)			130,590				124,456			$	1,515,440
Sun Pharma (Netherlands) B.V.(4)			—				914,107			$	7,000,032

 

(1)

Mr. Krishnan is our President and Chief Executive Officer and Chairman of our board of directors. This table reflects the beneficial ownership by Mr. Krishnan of 112,162 shares of preferred stock held by the Krishnan Family Trust , which will automatically convert into 112,162 shares of common stock upon the closing of this offering. Mr. and Ms. Krishnan are each joint beneficial owners of the trust, and the 112,162 preferred shares held by the trust have been divided equally between Mr. and Ms. Krishnan for purposes of this disclosure. The Krishnan Family Trust was issued a convertible promissory note in the aggregate amount of $448,000, due June 2018 and bearing an interest rate of 6% per annum. In accordance with its terms, the principal and accrued interest on the note converted into 112,162 shares of Series A preferred stock at $4.14 per share on August 8, 2017. These preferred shares will automatically convert on a one-to-one basis into 112,162 shares of common stock upon the closing of this offering. The aggregate purchase price of the promissory note issued to the Krishnan Family Trust has also been divided equally between Mr. and Ms. Krishnan for purposes of this disclosure.

(2)

Ms. Krishnan is our Chief Operating Officer and member of our board of directors. This table reflects the beneficial ownership by Ms. Krishnan of 112,162 shares of preferred stock held by the Krishnan Family Trust, which will automatically convert into 112,162 shares of common stock upon the closing of this offering. Mr. and Ms. Krishnan are each joint beneficial owners of the trust, and the 112,162 preferred shares held by the trust have been divided equally between Mr. and Ms. Krishnan for

 

115

---

Table of Contents

purposes of this disclosure. The Krishnan Family Trust was issued a convertible promissory note in the aggregate amount of $448,000, due June 2018 and bearing an interest rate of 6% per annum. In accordance with its terms, the principal and accrued interest on the note converted into 112,162 shares of Series A preferred stock at $4.14 per share on August 8, 2017. These preferred shares will automatically convert on a one-to-one basis into 112,162 shares of common stock upon the closing of this offering. The aggregate purchase price of the promissory note issued to the Krishnan Family Trust has also been divided equally between Mr. and Ms. Krishnan for purposes of this disclosure.

(3)

Mr. Janney is a member of our board of directors and is chairman of the compensation committee and a member of the audit committee. The table reflects ownership of common stock and preferred stock held by an investment entity owned and controlled by Mr. Janney, including the conversion of two convertible promissory notes in the aggregate amount of $500,000, due May 2018 and bearing an interest rate of 6% per annum, that were issued to an investment entity owned and controlled by Mr. Janney and which, in accordance with its terms, were converted into 124,457 shares of Series A preferred stock at $4.14 per share on August 8, 2017. These preferred shares will automatically convert on a one-to-one basis into 124,457 shares of common stock upon the closing of this offering.

(4)

The table reflects the purchase by Sun Pharma (Netherlands) B.V., of 914,107 shares of preferred stock, which convert into 914,107 shares of common stock as of the closing of this offering. Sun Pharma (Netherlands) B.V. is a wholly-owned subsidiary of Sun Pharmaceuticals Industries Ltd., a public company listed on the National Stock Exchange of India and Bombay Stock Exchange. Mr. Garnorkar, who serves as a director on our board of directors, disclaims all beneficial ownership of these shares, and all shares indicated as owned by Mr. Ganorkar are included because of his affiliation with Sun Pharmaceuticals Industries Ltd., of which he is an employee.

Convertible Notes Financing

In November 2016 and May 2017, we issued two convertible promissory notes in the aggregate amount of $500,000 to Alta Bioequities, L.P., an investment entity owned and controlled by a member of our board of directors, Daniel S. Janney. The notes were due in May 2018 and bore interest at a rate of 6% per annum. In accordance with their terms, the principal and accrued interest on the notes converted into 124,456 shares of Series A preferred stock at $4.14 per share on August 8, 2017. These preferred shares will automatically convert on a one-to-one basis into 124,456 shares of common stock on a one-to-one basis upon the closing of this offering.

In December 2016, we issued a convertible promissory note in the aggregate amount of $448,000 to the Krishnan Family Trust, a trust jointly controlled by our President, Chief Executive Officer and Chairman of the board of directors, Krish S. Krishnan, and our founder, Chief Operating Officer and director, Suma M. Krishnan. The note was due in June 2018 and bore interest at a rate of 6% per annum. In accordance with its terms, the principal and accrued interest on the note converted into 112,162 shares of Series A preferred stock at $4.14 per share on August 8, 2017. These preferred shares will automatically convert on a one-to-one basis into 112,162 shares of common stock upon the closing of this offering.

In June 2017, we issued a convertible promissory note to Dino A. Rossi, a member of our board of directors, in the amount of $750,000. The note was due in May 2018 and bore interest at a rate of 6% per annum. In accordance with its terms, the principal and accrued interest on the note converted into 123,691 shares of Series A preferred stock at a price of $6.13 per share on August 8, 2017. These preferred shares will automatically convert on a one-to-one basis into 123,691 shares of common stock upon the closing of this offering.

Sun Pharma Private Placement

In August 2017, we issued 914,107 shares of Series A Preferred Stock, or Series A Preferred, to Sun Pharma (Netherlands) B.V., or Sun Pharma, an indirect subsidiary of Sun Pharmaceutical Industries Limited pursuant to a stock purchase agreement, for aggregate proceeds to us of approximately $7.0 million. For so long as it is a holder of Series A Preferred, Sun Pharma has a right to designate and have

 

116

---

Table of Contents

elected a single representative to our board of directors and accordingly, in September 2017, Kirti Ganorkan was elected to our board of directors. Each share of Series A Preferred will convert into a share of common stock upon the closing of this offering on a one-to-one basis. Sun Pharma is a 5% holder of our capital stock.

Subsequently, in August, following the completion of the Sun Pharma investment, Daniel S. Janney, a member of our board of directors, purchased 130,590 shares of our common stock at the same price per share paid by Sun Pharma, $7.66 per share, through an investment entity owned and controlled by Mr. Janney for total consideration of approximately $1.0 million.

Investors’ Rights Agreement

We are party to an investors’ rights agreement which provides that the holders of common stock issuable upon conversion of our convertible preferred stock and our two founders and executive officers have the right to demand that we file a registration statement or request that their shares of common stock be covered by a registration statement that we are otherwise filing. For a description of these registration rights, see the section titled “Description of Capital Stock—Registration Rights.” In addition to the registration rights, the investors’ rights agreement provides for certain information rights and rights of first refusal. The provisions of the investors’ rights agreement, other than those relating to registration rights, will terminate upon the completion of this offering.

Equity Grants to Executive Officers and Directors

We have granted stock options to certain of our executive officers and certain directors, as more fully described in the sections entitled “Executive Compensation” and “Management—Non-Employee Director Compensation,” respectively. In addition, following the completion of our initial public offering, our non-employee directors will receive compensation from us of $25,000 per non-employee director per annum.

Participation in this Offering

Certain of our existing stockholders and members of management, including Krish S. Krishnan, our President and Chief Executive Officer, have indicated an interest in purchasing up to an aggregate of $5.0 million of shares of our common stock in this offering at the public offering price. However, because indications of interest are not binding agreements or commitments to purchase, the underwriters may determine to sell more, fewer, or no shares in this offering to these persons or entities, or these persons or entities may determine to purchase more, fewer, or no shares of common stock in this offering. The underwriters will receive the same underwriting discounts and commissions on any shares of common stock purchased by these persons or entities as they will on any other shares of common stock sold to the public in this offering.

Indemnification Agreements

In connection with this offering, we intend to enter into indemnification agreements with each of our directors and executive officers. The indemnification agreements, our second amended and restated certificate of incorporation and our amended and restated bylaws will require us to indemnify our directors to the fullest extent not prohibited by Delaware law. Subject to certain limitations, our restated bylaws also require us to advance expenses incurred by our directors and officers. For more information regarding these agreements, see “Executive Compensation—Limitations on Liability and Indemnification Matters.”

 

117

---

Table of Contents

Review, Approval or Ratification of Transactions with Related Parties

In connection with this offering, we adopted a written related-person transactions policy that provides that our executive officers, directors, nominees for election as a director, beneficial owners of more than 5% of our common stock and any members of the immediate family of the foregoing persons, are not permitted to enter into a material related-person transaction with us without the review and approval of our audit committee, or a committee composed solely of independent directors in the event it is inappropriate for our audit committee to review such transaction due to a conflict of interest. The policy provides that any request for us to enter into a transaction with an executive officer, director, nominee for election as a director, beneficial owner of more than 5% of our common stock or with any of their immediate family members or affiliates, in which the amount involved exceeds $120,000 will be presented to our audit committee for review, consideration and approval. In approving or rejecting any such proposal, we expect that our audit committee will consider the relevant facts and circumstances available and deemed relevant to the audit committee, including, but not limited to, whether the transaction is on terms no less favorable than terms generally available to an unaffiliated third party under the same or similar circumstances and the extent of the related person’s interest in the transaction.

 

118

---

Table of Contents

PRINCIPAL STOCKHOLDERS

The following table sets forth information regarding beneficial ownership of our common stock as of August 15, 2017, as adjusted to reflect the shares of common stock to be issued and sold by us in this offering, by:

 

•

each person or group of affiliated persons known by us to be the beneficial owner of more than 5% of our common stock;

 

•

each of our named executive officers;

 

•

each of our directors; and

 

•

all of our executive officers and directors as a group.

We have determined beneficial ownership in accordance with the rules of the SEC and the information is not necessarily indicative of beneficial ownership for any other purpose. Unless otherwise indicated below, to our knowledge, the persons and entities named in the table have sole voting and sole investment power with respect to all shares that they beneficially own, subject to community property laws where applicable. In computing the number of shares of our common stock beneficially owned by a person and the percentage ownership of that person, we deemed outstanding shares of our common stock subject to options or warrants held by that person that are currently exercisable or exercisable within 60 days of August 31, 2017. We did not deem these shares outstanding, however, for the purpose of computing the percentage ownership of any other person.

We have based percentage ownership of our common stock prior to this offering on 5,683,247 shares of our common stock outstanding as of August 31, 2017, which includes (i) 130,590 shares of common stock issued to an entity owned and controlled by Daniel S. Janney, a member of our board of directors in August 2017; (ii) 2,061,773 shares of our preferred stock which automatically convert to our common stock on a one-to-one basis immediately prior to the completion of this offering, and which includes 179,613 shares of our Series Seed preferred stock, 968,053 shares of our preferred stock issued on August 8, 2017 upon conversion of our outstanding convertible promissory notes and accrued interest thereon, and 914,107 shares of Series A preferred stock issued on August 8, 2017 to Sun Pharma (Netherlands) B.V.; and (iii) the 1-to-4.5 forward stock split, in the form of a dividend, which occurred on September 14, 2017. Percentage ownership of our common stock after this offering assumes the sale by us of 3,000,000 shares of common stock in this offering. Certain of our existing stockholders and members of management, including Krish S. Krishnan, our President and Chief Executive Officer, have indicated an interest in purchasing up to an aggregate of $5.0 million of shares of our common stock in this offering at the public offering price. The information set forth in the table below does not reflect any such purchases.

Unless otherwise indicated, the address of each beneficial owner listed on the table below is c/o Krystal Biotech, Inc., 2100 Wharton Street, Suite 701, Pittsburgh, Pennsylvania 15203.

 

		Shares Beneficially Owned Prior to this Offering								Shares Beneficially Owned After this Offering
Name of Beneficial Owner		Number				Percentage				Number				Percentage
Named Executive Officers and Directors
Krish S. Krishnan			1,891,330	(1)			33.3	%			1,891,330	(1)			21.8	%
Suma M. Krishnan			1,891,330	(1)			33.3	%			1,891,330	(1)			21.8	%
Pooja Agarwal			—				—				—				—
Daniel S. Janney			255,046				4.5	%			255,046	(2)			2.9	%
R. Douglas Norby			—				—				—				—
Dino A. Rossi			123,691				2.2	%			123,691	(3)			1.4	%
Kirti Ganorkar			914,107	(4)			16.1	%			914,107	(4)			10.5	%
5% Stockholders
Krish S. Krishnan			1,891,330	(1)			33.3	%			1,891,330	(1)			21.8	%
Suma M. Krishnan			1,891,330	(1)			33.3	%			1,891,330	(1)			21.8	%
Sun Pharma (Netherlands) B.V.			914,107	(5)			16.1	%			914,107	(5)			10.5	%

 

119

---

Table of Contents

 

(1)

Reflects conversion of 112,162 shares of preferred stock held by the Krishnan Family Trust as of the closing of this offering. Mr. and Ms. Krishnan are each joint beneficial owners of the trust with point voting and investment control of the entity, and accordingly, the total number of shares held by the trust are divided equally between Mr. and Ms. Krishnan for purposes of this disclosure.

(2)	Reflects conversion of 124,456 shares of preferred stock, held by an investment entity owned and controlled by Mr. Janney, into 124,456 shares of common stock as of the closing of this offering.

(3)	Reflects conversion of 123,691 shares of preferred stock, into 123,691 shares of common stock immediately prior to the closing of this offering.

(4)

Mr. Ganorkar is a member of our board of directors. The table reflects ownership by Sun Pharma (Netherlands) B.V., of 914,107 shares of preferred stock, which convert into 914,107 shares of common stock as of the closing of this offering. Sun Pharma (Netherlands) B.V. is a wholly-owned subsidiary of Sun Pharmaceuticals Industries Ltd., a public company listed on the National Stock Exchange of India and Bombay Stock Exchange. Mr. Garnorkar disclaims all beneficial ownership of these shares, and all shares indicated as owned by Mr. Ganorkar are included because of his affiliation with Sun Pharmaceuticals Industries Ltd., of which he is an employee. The address of Sun Pharma (Netherlands) B.V. is Sun House, 201-B/1, Western Express Highway, Goregaon East, Mumbai - 400063, India.

(5)	Reflects conversion of 914,107 shares of preferred stock into 914,107 shares of common stock immediately prior to the closing of this offering.

 

120

---

Table of Contents

DESCRIPTION OF CAPITAL STOCK

Upon the completion of this offering and the filing of our second amended and restated certificate of incorporation, our authorized capital stock will consist of 80,000,000 shares of common stock, $0.00001 par value per share. The following description summarizes the most important terms of our capital stock. Because it is only a summary, it does not contain all the information that may be important to you. For a complete description, you should refer to our second amended and restated certificate of incorporation and amended and restated bylaws, which are included as exhibits to the registration statement of which this prospectus forms a part.

Pursuant to the provisions of our second amended and restated certificate of incorporation and the terms of the preferred stock and note purchase agreements, as amended, all of our outstanding preferred stock and convertible promissory notes convertible into common stock will automatically convert into common stock effective immediately prior to the completion of this offering. Reflecting the 130,590 shares of common stock issued to an entity owned and controlled by Daniel S. Janney, a member of our board of directors, in August 2017, and assuming the conversion of all our outstanding shares of our preferred stock into 2,061,773 shares of common stock, including 179,613 shares of Series Seed preferred stock, 968,053 shares of preferred stock we issued in August 2017 upon conversion of our outstanding convertible promissory notes and accrued interest thereon, and including 914,107 shares of Series A Preferred issued to Sun Pharma in August 2017, there were 5,683,247 shares of our common stock issued and outstanding, held by approximately 18 stockholders of record, and no shares of our preferred stock outstanding.

Common Stock

Dividend Rights

The holders of our common stock are entitled to receive dividends out of funds legally available if our board of directors, in its discretion, determines to issue dividends and then only at the times and in the amounts that our board of directors may determine. See “Dividend Policy” above.

Voting Rights

Holders of our common stock are entitled to one vote for each share held on all matters submitted to a vote of stockholders. We have not provided for cumulative voting for the election of directors in our second restated certificate of incorporation. Accordingly, holders of a majority of the shares of our common stock will be able to elect all of our directors. Our second restated certificate of incorporation will establish a classified board of directors, divided into three classes with staggered three-year terms. Only one class of directors will be elected at each annual meeting of our stockholders, with the other classes continuing for the remainder of their respective three-year terms.

No Preemptive or Similar Rights

Our common stock is not entitled to preemptive rights, and is not subject to conversion, redemption or sinking fund provisions.

Right to Receive Liquidation Distributions

Upon our liquidation, dissolution or winding-up, the assets legally available for distribution to our stockholders would be distributable ratably among the holders of our common stock at that time, subject to prior satisfaction of all outstanding debt and liabilities.

Preferred Stock

As of August 8, 2017, we had three series of preferred stock outstanding (Series Seed, Series A-1 Preferred and Series A-2 Preferred). Pursuant to the provisions of our second amended and restated certificate of incorporation which will become effective in connection with the completion of this offering,

 

121

---

Table of Contents

each currently outstanding share of preferred stock will automatically be converted into one share of common stock effective immediately prior to the completion of this offering. Following this offering, no shares of preferred stock will be outstanding.

Pursuant to our second amended and restated certificate of incorporation that will become effective in connection with the completion of this offering, our board of directors will be authorized, subject to limitations prescribed by Delaware law, to issue from time to time up to 20,000,000 shares of preferred stock in one or more series, to establish from time to time the number of shares to be included in each series and to fix the designation, powers, preferences and rights of the shares of each series and any of their qualifications, limitations or restrictions, in each case without further vote or action by our stockholders. Our board of directors will also be able to increase or decrease the number of shares of any series of preferred stock, but not below the number of shares of that series then outstanding, without any further vote or action by our stockholders. Our board of directors may be able to authorize the issuance of preferred stock with voting or conversion rights that could adversely affect the voting power or other rights of the holders of our common stock. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could, among other things, have the effect of delaying, deferring or preventing a change in control of our company and might adversely affect the market price of our common stock and the voting and other rights of the holders of our common stock. We have no current plan to issue any shares of preferred stock.

Stock Options

As of June 30, 2017, we had outstanding options to purchase an aggregate of 159,633 shares of our common stock, with a weighted-average exercise price of $3.21 per share. Subsequent to June 30, 2017 and before August 15, 2017, we issued options to purchase an aggregate of 18,949 shares of our common stock, with an exercise price of $7.66 per share.

Convertible Promissory Notes

As of June 30, 2017 we had outstanding 16 convertible promissory notes in an aggregate principal amount of approximately $4.1 million, each due May 2018 at an interest rate of 6% per annum. In accordance with their terms, as amended in July 2017, the principal and accrued interest under these notes were converted into 844,362 shares of preferred stock at $4.14 per share upon our closing of the sale of $7 million of preferred stock to Sun Pharma on August 8, 2017. These preferred shares will convert into common stock on a share for share basis upon closing of this offering.

We also issued a note for $750,000 in June 2017, due in May 2018 and bearing interest at 6% per annum. In accordance with its terms, as amended in July 2017, the principal and accrued interest under this note was converted into 123,691 shares of preferred stock at $6.13 per share upon our closing of the sale of $7 million of preferred stock to Sun Pharma on August 8, 2017. These preferred shares will convert into common stock on a share for share basis upon closing of this offering.

Registration Rights

Demand Registration Rights

After the completion of this offering, the holders of 2,061,773 shares of our common stock will be entitled to certain demand registration rights. At any time, the holders of more than 50% of these shares can, on not more than one occasion, request that we register all or a portion of their shares. Such request for registration must cover that number of shares with an anticipated aggregate offering price of at least $5 million. Additionally, we will not be required to effect a demand registration during the period beginning 90 days prior to our good faith estimate of the date of filing and 180 days following the effectiveness of a company-initiated registration statement relating to a public offering of our securities.

 

122

---

Table of Contents

Piggyback Registration Rights

After the completion of this offering, in the event that we propose to register any of our securities under the Securities Act, either for our own account or for the account of other security holders, the holders of approximately 5,683,247 shares of our common stock, including shares of our common stock issuable pursuant to options, will be entitled to certain “piggyback” registration rights allowing such holders to include their shares in such registration, subject to certain marketing and other limitations. As a result, whenever we propose to file a registration statement under the Securities Act, other than with respect to a registration related to employee benefit plans, debt securities or corporate reorganizations, the holders of these shares are entitled to notice of the registration and have the right, subject to limitations that the underwriters may impose on the number of shares included in the registration, to include their shares in the registration.

Form S-3 Registration Rights

After the completion of this offering, the holders of approximately 2,061,773 shares of our common stock will be entitled to certain Form S-3 registration rights. The holders of these shares can make a written request that we register their shares of common stock on Form S-3 if we are eligible to file a registration statement on Form S-3 and if the aggregate price to the public of the shares offered is at least $2 million. These holders may make an unlimited number of requests for registration on Form S-3. However, we will not be required to effect a registration on Form S-3 if we have previously effected two such registrations in the 12-month period preceding the request for registration.

We will pay the registration expenses of the holders of the shares registered pursuant to the demand, piggyback and Form S-3 registrations described above. In an underwritten offering, the managing underwriter, if any, has the right, subject to specified conditions, to limit the number of shares such holders may include.

The demand, piggyback and Form S-3 registration rights described above will expire upon the earlier of (i) five years after the completion of this offering, (ii) with respect to any particular stockholder, the date on which such stockholder can sell all of its shares under Rule 144 of the Securities Act during any 90 day period, or (iii) the time at which such stockholder holds registrable securities constituting less than 1% of our outstanding voting stock.

Anti-Takeover Provisions

The provisions of Delaware law, our second restated certificate of incorporation and our restated bylaws, as we expect they will be in effect immediately prior to the completion of this offering, could have the effect of delaying, deferring or discouraging another person from acquiring control of our company. These provisions, which are summarized below, may have the effect of discouraging takeover bids. They are also designed, in part, to encourage persons seeking to acquire control of us to negotiate first with our board of directors. We believe that the benefits of increased protection of our potential ability to negotiate with an unfriendly or unsolicited acquirer outweigh the disadvantages of discouraging a proposal to acquire us because negotiation of these proposals could result in an improvement of their terms.

Delaware Law

We are subject to the provisions of Section 203 of the Delaware General Corporation Law, or DGCL, regulating corporate takeovers. In general, DGCL Section 203 prohibits a publicly held Delaware corporation from engaging in a business combination with an interested stockholder for a period of three years following the date on which the person became an interested stockholder unless:

 

•

prior to the date of the transaction, the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder;

 

123

---

Table of Contents

•

the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the voting stock outstanding, but not the outstanding voting stock owned by the interested stockholder: (i) shares owned by persons who are directors and also officers; and (ii) shares owned by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or

 

•

at or subsequent to the date of the transaction, the business combination is approved by the board of directors of the corporation and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66.67% of the outstanding voting stock that is not owned by the interested stockholder.

Generally, a business combination includes a merger, asset or stock sale, or other transaction or series of transactions together resulting in a financial benefit to the interested stockholder. An interested stockholder is a person who, together with affiliates and associates, owns or, within three years prior to the determination of interested stockholder status, did own 15% or more of a corporation’s outstanding voting stock. We expect the existence of this provision to have an anti-takeover effect with respect to transactions our board of directors does not approve in advance. We also anticipate that DGCL Section 203 may also discourage attempts that might result in a premium over the market price for the shares of common stock held by stockholders.

Second Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws Provisions

Our second amended and restated certificate of incorporation and our amended and restated bylaws, as we expect they will be in effect immediately prior to the completion of this offering, include a number of provisions that could deter hostile takeovers or delay or prevent changes in control of our company, including the following:

 

•

Board of Directors Vacancies.    Our second amended and restated certificate of incorporation and amended and restated bylaws will authorize only our board of directors to fill vacant directorships, including newly created seats. In addition, the number of directors constituting our board of directors will be permitted to be set only by a resolution adopted by a majority vote of our entire board of directors. These provisions would prevent a stockholder from increasing the size of our board of directors and then gaining control of our board of directors by filling the resulting vacancies with its own nominees. This makes it more difficult to change the composition of our board of directors but promotes continuity of management.

 

•

Classified Board.    Our second amended and restated certificate of incorporation and amended and restated bylaws will provide that our board of directors will be classified into three classes of directors, each with staggered three-year terms. A third party may be discouraged from making a tender offer or otherwise attempting to obtain control of us as it is more difficult and time consuming for stockholders to replace a majority of the directors on a classified board of directors. See “Management—Board of Directors.”

 

•

Stockholder Action; Special Meetings of Stockholders.    Our second amended and restated certificate of incorporation will provide that our stockholders may not take action by written consent, but may only take action at annual or special meetings of our stockholders. As a result, a holder controlling a majority of our capital stock would not be able to amend our restated bylaws or remove directors without holding a meeting of our stockholders called in accordance with our restated bylaws. Further, our amended and restated bylaws and second amended and restated certificate of incorporation will provide that special meetings of our stockholders may be called only by a majority of our board of directors, the chairman of our board of directors, or our Chief Executive Officer, thus prohibiting a stockholder from calling a special meeting. These provisions might delay the ability of our stockholders to force consideration of a proposal or for stockholders controlling a majority of our capital stock to take any action, including the removal of directors.

 

124

---

Table of Contents

•

Advance Notice Requirements for Stockholder Proposals and Director Nominations.    Our amended and restated bylaws will provide advance notice procedures for stockholders seeking to bring business before our annual meeting of stockholders or to nominate candidates for election as directors at our annual meeting of stockholders. Our restated bylaws also will specify certain requirements regarding the form and content of a stockholder’s notice. These provisions might preclude our stockholders from bringing matters before our annual meeting of stockholders or from making nominations for directors at our annual meeting of stockholders if the proper procedures are not followed. We expect that these provisions might also discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of our company.

 

•

No Cumulative Voting.    The Delaware General Corporation Law provides that stockholders are not entitled to the right to cumulate votes in the election of directors unless a corporation’s certificate of incorporation provides otherwise. Our second amended and restated certificate of incorporation will not provide for cumulative voting.

 

•

Directors Removed Only for Cause.    Our second amended and restated certificate of incorporation will provide that stockholders may remove directors only for cause and only by the affirmative vote of the holders of at least two-thirds of our outstanding common stock.

 

•

Amendment of Charter Provisions.    Any amendment of the above expected provisions in our second amended and restated certificate of incorporation would require approval by holders of at least two-thirds of our outstanding common stock.

 

•

Issuance of Undesignated Preferred Stock.    Our board of directors has the authority, without further action by the stockholders, to issue up to 20,000,000 shares of undesignated preferred stock with rights and preferences, including voting rights, designated from time to time by our board of directors. The existence of authorized but unissued shares of preferred stock would enable our board of directors to render more difficult or to discourage an attempt to obtain control of us by means of a merger, tender offer, proxy contest or other means.

 

•

Choice of Forum.    Our second amended and restated certificate of incorporation will provide that the Court of Chancery of the State of Delaware will be the exclusive forum for: any derivative action or proceeding brought on our behalf; any action asserting a breach of fiduciary duty; any action asserting a claim against us arising pursuant to the Delaware General Corporation Law, our second amended and restated certificate of incorporation or our amended and restated bylaws; any action to interpret, apply, enforce or determine the validity of our second amended and restated certificate of incorporation or our amended and restated bylaws; or any action asserting a claim against us that is governed by the internal affairs doctrine. The enforceability of similar choice of forum provisions in other companies’ certificates of incorporation has been challenged in legal proceedings, and it is possible that a court could find these types of provisions to be inapplicable or unenforceable.

Transfer Agent and Registrar

Upon the completion of this offering, the transfer agent and registrar for our common stock will be Computershare. The transfer agent’s address is 250 Royall Street Canton, Massachusetts 02021, and its telephone number is 1-800-962-4284. Our shares of common stock will be issued in uncertificated form only, subject to limited circumstances.

Market Listing

We have applied to list our common stock on the NASDAQ Capital Market under the symbol “KRYS.”

 

125

---

Table of Contents

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has not been a public market for shares of our common stock, and we cannot predict the effect, if any, that market sales of shares of our common stock or the availability of shares of our common stock for sale will have on the market price of our common stock prevailing from time to time. Nevertheless, sales of substantial amounts of our common stock, including shares issued upon exercise of outstanding options, in the public market following this offering could adversely affect market prices prevailing from time to time and could impair our ability to raise capital through the sale of our equity securities.

Upon the completion of this offering, assuming no exercise of the underwriters’ option to purchase additional shares, we will have a total of 8,683,247 shares of our common stock outstanding, assuming and reflecting: (i) 130,590 shares of common stock issued to an entity owned and controlled by Daniel S. Janney, a member of our board of directors, in August 2017; (ii) the automatic conversion of shares of our preferred stock outstanding as of June 30, 2017, into 2,061,773 shares of our common stock effective immediately prior to the completion of this offering; (iii) the sale and issuance of shares of our common stock in this offering at an initial public offering price of $10.00 per share; (iv) a a 1-to-4.5 forward stock split, in the form of a dividend, which occurred on September 14, 2017; and (v) no outstanding options are exercised. Of these outstanding shares, all of the shares of common stock sold in this offering will be freely tradable, except that any shares purchased in this offering by our affiliates, as that term is defined in Rule 144 under the Securities Act, would only be able to be sold in compliance with the Rule 144 limitations described below.

The remaining outstanding shares of our common stock will be deemed “restricted securities” as defined in Rule 144. Restricted securities may be sold in the public market only if they are registered under the Securities Act or if they qualify for an exemption from registration under Rule 144 or Rule 701 promulgated under the Securities Act, which rules are summarized below. In addition, all of our security holders have entered into lock-up agreements with the underwriters under which they have agreed, subject to specific exceptions, not to sell any of our stock for at least 180 days following the date of this prospectus, as described below. As a result of these agreements, subject to the provisions of Rule 144 or Rule 701, shares will be available for sale in the public market as follows:

 

•

beginning on the date of this prospectus, all of the shares sold in this offering will be immediately available for sale in the public market (except as described above); and

 

•

beginning 181 days after the date of this prospectus, 5,683,247 additional shares will become eligible for sale in the public market, of which 5,075,504 shares will be held by affiliates and subject to the volume and other restrictions of Rule 144 and Rule 701 as described below.

Lock-Up Agreements

All of our directors, executive officers and our security holders are subject to lock-up agreements that, subject to certain exceptions, prohibit them from directly or indirectly offering, pledging, selling, contracting to sell, selling any option or contract to purchase, purchasing any option or contract to purchase, granting any option, right or warrant to purchase or otherwise transferring or disposing of any shares of our common stock, options to acquire shares of our common stock or any securities convertible into or exercisable or exchangeable for common stock, whether now owned or hereafter acquired, or entering into any swap or any other agreement or any transaction that transfer, in whole or in part, directly or indirectly, the economic consequence of ownership, for a period of 180 days following the date of this prospectus, without the prior written consent of Ladenburg Thalmann & Co. Inc. These agreements are described in the section entitled “Underwriting.”

Rule 144

In general, under Rule 144 as currently in effect, once we have been subject to public company reporting requirements for at least 90 days, a person who is not deemed to have been one of our affiliates

 

126

---

Table of Contents

for purposes of the Securities Act at any time during the 90 days preceding a sale and who has beneficially owned the shares proposed to be sold for at least six months, including the holding period of any prior owner other than our affiliates, is entitled to sell those shares without complying with the manner of sale, volume limitation or notice provisions of Rule 144, subject to compliance with the public information requirements of Rule 144. If such a person has beneficially owned the shares proposed to be sold for at least one year, including the holding period of any prior owner other than our affiliates, then that person would be entitled to sell those shares without complying with any of the requirements of Rule 144.

In general, under Rule 144, as currently in effect, our affiliates or persons selling shares on behalf of our affiliates are entitled to sell upon expiration of the lock-up agreements described above, within any three-month period, a number of shares that does not exceed the greater of:

 

•

1% of the number of shares of our common stock then outstanding, which will equal approximately shares immediately after this offering; or

 

•

the average weekly trading volume of our common stock during the four calendar weeks preceding the filing of a notice on Form 144 with respect to that sale.

Sales under Rule 144 by our affiliates or persons selling shares on behalf of our affiliates are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about us.

Rule 701

Rule 701 generally allows a stockholder who purchased shares of our common stock pursuant to a written compensatory plan or contract and who is not deemed to have been an affiliate of our company during the immediately preceding 90 days to sell these shares in reliance upon Rule 144, but without being required to comply with the public information, holding period, volume limitation or notice provisions of Rule 144. Rule 701 also permits affiliates of our company to sell their Rule 701 shares under Rule 144 without complying with the holding period requirements of Rule 144. All holders of Rule 701 shares, however, are required by that rule to wait until 90 days after the date of this prospectus before selling those shares pursuant to Rule 701 and are subject to the lock-up agreements described above.

Equity Incentive Options

In connection with this offering, we intend to file a registration statement on Form S-8 under the Securities Act covering all of the shares of our common stock subject to outstanding options and the shares of our common stock reserved for issuance under our stock plans. We expect to file this registration statement as soon as permitted under the Securities Act. However, the shares registered on Form S-8 may be subject to the volume limitations and the manner of sale, notice and public information requirements of Rule 144 and will not be eligible for resale until expiration of the lock-up agreements to which they are subject.

 

127

---

Table of Contents

MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS TO NON-U.S. HOLDERS

The following is a summary of the material U.S. federal income tax consequences applicable to non-U.S. holders (as defined below) with respect to the acquisition, ownership and disposition of shares of our common stock, but does not purport to be a complete analysis of all potential tax considerations related thereto. This summary is based on current provisions of the Internal Revenue Code of 1986, as amended, or the Code, final, temporary or proposed Treasury regulations promulgated thereunder, administrative rulings and judicial opinions, all of which are subject to change, possibly with retroactive effect. We have not sought any ruling from the U.S. Internal Revenue Service, or the IRS, with respect to the statements made and the conclusions reached in the following summary, and there can be no assurance that the IRS will agree with such statements and conclusions.

This summary is limited to non-U.S. holders who purchase shares of our common stock issued pursuant to this offering and who hold such shares of our common stock as capital assets (within the meaning of Section 1221 of the Code).

This discussion does not address all aspects of U.S. federal income taxation that may be important to a particular non-U.S. holder in light of that non-U.S. holder’s individual circumstances, nor does it address the potential application of the Medicare contribution tax, any aspects of U.S. federal estate or gift tax laws, or tax considerations arising under the laws of any non-U.S., state or local jurisdiction. This discussion also does not address tax considerations applicable to a non-U.S. holder subject to special treatment under the U.S. federal income tax laws, including without limitation:

 

•

banks, insurance companies or other financial institutions;

 

•

partnerships or other pass-through entities;

 

•

tax-exempt organizations;

 

•

tax-qualified retirement plans;

 

•

dealers in securities or currencies;

 

•

traders in securities that elect to use a mark-to-market method of accounting for their securities

•

holdings;

 

•

U.S. expatriates and certain former citizens or long-term residents of the United States;

 

•

controlled foreign corporations;

 

•

passive foreign investment companies;

 

•

persons that own, or have owned, actually or constructively, more than 5% of our common stock; and

 

•

persons that will hold common stock as a position in a hedging transaction, “straddle” or “conversion transaction” for tax purposes.

If a partnership (or entity classified as a partnership for U.S. federal income tax purposes) is a beneficial owner of shares of our common stock, the tax treatment of a partner in the partnership (or member in such other entity) will generally depend upon the status of the partner and the activities of the partnership. Any partner in a partnership holding shares of our common stock (and such partnership) should consult their own tax advisors.

PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE APPLICATION OF THE U.S. FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR SITUATIONS AS WELL AS ANY TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF SHARES OF OUR COMMON STOCK ARISING UNDER THE U.S. FEDERAL ESTATE OR GIFT TAX RULES OR UNDER THE LAWS OF ANY STATE, LOCAL, NON-U.S. OR OTHER TAXING JURISDICTION OR UNDER ANY APPLICABLE TAX TREATY.

 

128

---

Table of Contents

Definition of Non-U.S. Holder

For purposes of this summary, a “non-U.S. holder” is any beneficial owner of shares of our common stock (other than a partnership or other entity treated as a partnership for U.S. federal income tax purposes) that is not a U.S. person. A “U.S. person” is any of the following:

 

•

an individual citizen or resident of the United States;

 

•

a corporation created or organized in or under the laws of the United States, any state thereof or the District of Columbia(or entity treated as such for U.S. federal income tax purposes);

 

•

an estate, the income of which is includible in gross income for U.S. federal income tax purposes regardless of its source; or

 

•

a trust if: (i) a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust; or (ii) it has a valid election in effect under applicable Treasury regulations to be treated as a U.S. person.

Distributions on Our Common Stock

As described in the section titled “Dividend Policy,” we currently do not anticipate paying dividends on our common stock in the foreseeable future. If, however, we make cash or other property distributions on our common stock (other than certain pro rata distributions of shares of our common stock), such distributions will constitute dividends for U.S. federal income tax purposes to the extent paid from our current earnings and profits for that taxable year or accumulated earnings and profits, as determined under U.S. federal income tax principles. Amounts not treated as dividends for U.S. federal income tax purposes will constitute a return of capital and will first be applied against and reduce a holder’s adjusted tax basis in the shares of our common stock, but not below zero. Any excess will be treated as gain realized on the sale or other disposition of shares of our common stock and will be treated as described under the section titled “—Gain on Sale or Other Disposition of Shares of Our Common Stock” below.

Dividends paid to a non-U.S. holder of our common stock generally will be subject to U.S. federal withholding tax at a rate of 30% of the gross amount of the dividends, or such lower rate specified by an applicable income tax treaty. To receive the benefit of a reduced treaty rate, a non-U.S. holder must furnish to us or our paying agent a valid IRS Form W-8BEN or W-8BEN-E (or applicable successor form) certifying, under penalties of perjury, such holder’s qualification for the reduced rate. This certification must be provided to us or our paying agent prior to the payment of dividends and must be updated periodically.

If a non-U.S. holder holds shares of our common stock in connection with the conduct of a trade or business in the United States, and dividends paid on shares of our common stock are effectively connected with such holder’s U.S. trade or business (and, if required by an applicable income tax treaty, are attributable to a permanent establishment maintained by the non-U.S. holder in the United States), the non-U.S. holder will be exempt from the aforementioned U.S. federal withholding tax. To claim the exemption, the non-U.S. holder must furnish to us or our paying agent a properly executed IRS Form W-8ECI (or applicable successor form).

Such effectively connected dividends generally will be subject to U.S. federal income tax on a net income basis at the regular graduated U.S. federal income tax rates in the same manner as if such holder were a resident of the United States. A non-U.S. holder that is a non-U.S. corporation also may be subject to an additional branch profits tax equal to 30% (or such lower rate specified by an applicable income tax treaty) of a portion of its effectively connected earnings and profits for the taxable year. Non-U.S. holders should consult any applicable income tax treaties that may provide for different rules.

A non-U.S. holder that claims exemption from withholding or the benefit of an applicable income tax treaty generally will be required to satisfy applicable certification and other requirements prior to the

 

129

---

Table of Contents

distribution date. Non-U.S. holders that do not timely provide us or our paying agent with the required certification, may obtain a refund of any excess amounts withheld by timely filing an appropriate claim for refund with the IRS. Non-U.S. holders should consult their tax advisors regarding their entitlement to benefits under a relevant income tax treaty or applicability of other exemptions from withholding.

Gain on Sale or Other Disposition of Shares of Our Common Stock

Subject to the discussion below regarding backup withholding, a non-U.S. holder generally will not be subject to U.S. federal income tax on any gain realized upon the sale or other disposition of shares of our common stock unless:

 

•

the gain is effectively connected with a trade or business carried on by the non-U.S. holder in the United States and, if required by an applicable income tax treaty, the gain is attributable to a permanent establishment of the non-U.S. holder maintained in the United States;

 

•

the non-U.S. holder is an individual present in the United States for 183 days or more in the taxable year of disposition and certain other requirements are met; or

 

•

we are or have been a U.S. real property holding corporation, or a USRPHC, for U.S. federal income tax purposes at any time within the shorter of the five-year period preceding the disposition and the non-U.S. holder’s holding period for the shares of our common stock, and our common stock has ceased to be traded on an established securities market prior to the beginning of the calendar year in which the sale or other disposition occurs. The determination of whether we are a USRPHC depends on the fair market value of our U.S. real property interests relative to the fair market value of our other trade or business assets and our foreign real property interests.

We believe we currently are not, and we do not anticipate becoming, a USRPHC for U.S. federal income tax purposes.

Gain described in the first bullet point above will be subject to U.S. federal income tax on a net income basis at regular graduated U.S. federal income tax rates generally in the same manner as if such holder were a resident of the United States. A non-U.S. holder that is a non-U.S. corporation also may be subject to an additional branch profits tax equal to 30% (or such lower rate specified by an applicable income tax treaty) of a portion of its effectively connected earnings and profits for the taxable year. Non-U.S. holders should consult any applicable income tax treaties that may provide for different rules.

Gain described in the second bullet point above will be subject to U.S. federal income tax at a flat 30% rate (or such lower rate specified by an applicable income tax treaty) but may be offset by U.S. source capital losses (even though the individual is not considered a resident of the United States), provided that the non-U.S. holder has timely filed U.S. federal income tax returns with respect to such losses. Non-U.S. holders should consult any applicable income tax treaties that may provide for different rules.

Backup Withholding and Information Reporting

Generally, we must report annually to the IRS and to each non-U.S. holder the amount of dividends paid to, and the tax withheld with respect to, each non-U.S. holder. This information also may be made available under a specific treaty or agreement with the tax authorities in the country in which the non-U.S. holder resides or is established. Backup withholding, currently at a 28% rate, generally will not apply to distributions to a non-U.S. holder of shares of our common stock provided the non-U.S. holder furnishes to us or our paying agent the required certification as to its non-U.S. status, such as by providing a valid IRS Form W-8BEN, IRS Form W-8BEN-E, or IRS Form W-8ECI, or certain other requirements are met. Notwithstanding the foregoing, backup withholding may apply if either we or our paying agent has actual knowledge, or reason to know, that the holder is a U.S. person that is not an exempt recipient.

Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be allowed as a refund or a credit against a non-U.S. holder’s U.S. federal income tax liability, provided the required information is timely furnished to the IRS.

 

130

---

Table of Contents

Foreign Account Tax Compliance Act

Legislation and administrative guidance, commonly referred to as “FATCA”, may impose a 30% withholding tax on any dividends paid after July 1, 2014 and the proceeds of a sale of our common stock paid after December 31, 2018 to a “foreign financial institution”, as specially defined under such rules, and certain other foreign entities, unless various information reporting and due diligence requirements (generally relating to ownership by U.S. persons of interests in, or accounts with, those entities) have been met or an exemption applies. If FATCA withholding is imposed, a beneficial owner that is not a foreign financial institution generally will be entitled to a refund of any amounts withheld by filing a U.S. federal income tax return (which may entail significant administrative burden). Prospective investors should consult their tax advisors regarding FATCA.

 

131

---

Table of Contents

UNDERWRITING

We have entered into an underwriting agreement dated             , 2017, with Ladenburg Thalmann & Co. Inc., as the underwriter and the sole book-running manager of this offering. Subject to the terms and conditions of the underwriting agreement, the underwriter has agreed to purchase the number of our securities set forth opposite its name below.

 

Underwriter		Number of shares
Ladenburg Thalmann & Co. Inc.

We have been advised by the underwriter that it proposes to offer the shares directly to the public at the public offering price set forth on the cover page of this prospectus. Any shares sold by the underwriter to securities dealers will be sold at the public offering price less a selling concession not in excess of             per share. The underwriter may allow, and these selected dealers may re-allow, a concession of not more than             per share to other brokers and dealers.

The underwriting agreement provides that the underwriter’s obligation to purchase the shares we are offering is subject to the terms and conditions described therein.

No action has been taken by us or the underwriter that would permit a public offering of the shares in any jurisdiction where action for that purpose is required. None of our shares included in this offering may be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements in connection with the offer and sales of any of the shares offered hereby be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of that jurisdiction. Persons who receive this prospectus are advised to inform themselves about and to observe any restrictions relating to this offering of shares and the distribution of this prospectus. This prospectus is neither an offer to sell nor a solicitation of any offer to buy the shares in any jurisdiction where that would not be permitted or legal.

The underwriter has advised us that they do not intend to confirm sales to any accounts over which they exercise discretionary authority.

Certain of our existing stockholders and members of management, including Krish S. Krishnan, our President and Chief Executive Officer, have indicated an interest in purchasing up to an aggregate of $5.0 million of shares of our common stock in this offering at the public offering price. However, because indications of interest are not binding agreements or commitments to purchase, the underwriters may determine to sell more, fewer, or no shares in this offering to these persons or entities, or these persons or entities may determine to purchase more, fewer, or no shares of common stock in this offering. The underwriters will receive the same underwriting discounts and commissions on any shares of common stock purchased by these persons or entities as they will on any other shares of common stock sold to the public in this offering.

Over-Allotment Option

We have granted to the underwriter an option, exercisable for 30 days from the date of this prospectus, to purchase up to                  additional shares from us at the public offering price set forth on the cover page of this prospectus, less the underwriting discount and commission. The underwriter may exercise this option solely for the purpose of covering over-allotments, if any, made in connection with the offering of the shares offered by this prospectus.

 

132

---

Table of Contents

Underwriting Discount and Expenses

The following table shows the public offering price, underwriting discount and commission, and proceeds before expenses to us. The information assumes either no exercise or full exercise of the option we granted to the underwriter to purchase additional shares.

 

Total

Per share

No exercise

Full exercise

Public offering price

$

$

$

Underwriting discounts and commissions

Proceeds, before expenses, to us

We estimate expenses payable by us in connection with this offering, other than the underwriting discounts and commissions referred to above, will be approximately $            . We have agreed to reimburse the underwriter for fees and disbursements related to its legal counsel in an amount not to exceed $50,000 in the aggregate.

Determination of Offering Price

Prior to the completion of this offering, there has been no public market for our common stock. The initial public offering price will be determined by negotiations between us and the underwriter. Among the factors considered in determining the initial public offering price will be the history and prospects of other companies in the industry in which we compete; our financial information; an assessment of our management and their experience; an assessment of our business potential and earning prospects; the prevailing securities markets at the time of this offering; the recent market prices of, and the demand for, publicly traded shares of generally comparable companies; and other factors deemed relevant. Neither we nor the underwriter can assure investors that an active trading market will develop for our common shares, or that the shares will trade in the public market at or above the initial public offering price.

Lock-up Agreements

We, all of our officers and directors, and holders of all of our outstanding shares of common stock have agreed, that for a period of 180 days after the date of this prospectus, or the lock-up period, subject to certain limited exceptions described below, we and they will not directly or indirectly, without the prior written consent of the underwriter offer for sale, contract to sell, sell, distribute, grant any option, right or warrant to purchase, pledge, hypothecate or otherwise dispose of, directly or indirectly, any shares of our common stock or any securities convertible into, or exercisable or exchangeable for, shares of our common stock. Certain limited transfers are permitted during the lock-up period if the transferee agrees to these lock-up restrictions. We have also agreed, in the underwriting agreement, to similar lock-up restrictions on the issuance and sale of our securities for 180 days following the closing of this offering, although we will be permitted to issue stock options or stock awards to directors, officers and employees under our existing equity incentive plans. The underwriter may, in its sole discretion and without notice, waive the terms of any of these lock-up agreements.

Stabilization

In connection with this offering, the underwriter may engage in stabilizing transactions and syndicate covering transactions and purchases to cover positions created by short sales.

 

•

Stabilizing transactions permit bids to purchase shares of common stock so long as the stabilizing bids do not exceed a specified maximum, and are engaged in for the purpose of preventing or retarding a decline in the market price of the common stock while the offering is in progress.

 

•

Syndicate covering transactions involve purchases of common stock in the open market after the distribution has been completed in order to cover syndicate short positions. Since there is no over-allotment option, if the underwriter would have a naked short position, it can be closed out only by

 

133

---

Table of Contents

buying shares in the open market. A naked short position is more likely to be created if the underwriter is concerned that after pricing there could be downward pressure on the price of the shares in the open market that could adversely affect investors who purchase in the offering.

Penalty bids permit the underwriter to reclaim a selling concession from a syndicate member when the security originally sold by the syndicate member is purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions. These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of our common stock. As a result, the price of our common stock in the open market may be higher than it would otherwise be in the absence of these transactions. Neither we nor the underwriter makes any representation or prediction as to the effect that the transactions described above may have on the price of our common stock. These transactions may be effected on the NASDAQ Capital Market, in the over-the-counter market or otherwise and, if commenced, may be discontinued at any time.

Indemnification

We have agreed to indemnify the underwriter and selected dealers against certain liabilities, including certain liabilities arising under the Securities Act, or to contribute to payments that the underwriter or selected dealers may be required to make for these liabilities.

Listing on the NASDAQ Capital Market

We have applied to list our common stock on the NASDAQ Capital Market under the symbol “KRYS.”

Electronic Distribution

A prospectus in electronic format may be made available on websites maintained by the underwriter, or selling group members, if any, participating in this offering. The underwriter may agree to allocate a number of shares of our common stock for sale to its online brokerage account holders.

Other Relationships

The underwriter and its affiliates are full service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, investment research, principal investment, hedging, financing, and brokerage activities. The underwriter and its affiliates may in the future perform various financial advisory, investment banking, and other services for us, for which they may receive customary fees and commissions. In addition, in the ordinary course of their various business activities, the underwriter and its affiliates may effect transactions for their own account or the accounts of customers, and hold on behalf of themselves or their customers long or short positions in our debt or equity securities or loans, and may do so in the future. The underwriter and its affiliates may also make investment recommendations or publish or express independent research views in respect of such securities or instruments and may at any time hold, or recommend to their customers that they acquire, long or short positions in such securities and instruments.

Selling Restrictions

European Economic Area

In relation to each Member State of the European Economic Area that has implemented the Prospectus Directive (each a Relevant Member State), an offer to the public of any shares of our common stock may not be made in that Relevant Member State, except that an offer to the public in that Relevant Member State of any shares of our common stock may be made at any time under the following

 

134

---

Table of Contents

exemptions under the Prospectus Directive, if they have been implemented in that Relevant Member State:

 

•

to any legal entity which is a qualified investor as defined in the Prospectus Directive;

 

•

to fewer than 150 natural or legal persons (other than qualified investors as defined in the Prospectus Directive), as permitted under the Prospectus Directive, subject to obtaining the prior consent of the representatives for any such offer; or

 

•

in any other circumstances falling within Article 3(2) of the Prospectus Directive, provided that no such offer of shares of our common stock shall result in a requirement for the publication by us or the underwriter of a prospectus pursuant to Article 3 of the Prospectus Directive, or supplement a prospectus pursuant to Article 16 of the Prospectus Directive.

For the purposes of this provision: (i) the expression an “offer to the public” in relation to any shares of our common stock in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and any shares of our common stock to be offered so as to enable an investor to decide to purchase any shares of our common stock, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State; (ii) the expression “Prospectus Directive” means Directive 2003/71/EC (and amendments thereto, including the 2010 PD Amending Directive, to the extent implemented in the Relevant Member State), and includes any relevant implementing measure in the Relevant Member State; and (iii) the expression “2010 PD Amending Directive” means Directive 2010/73/EU.

United Kingdom

The underwriter has represented and agreed that:

 

•

it has only communicated or caused to be communicated, and will only communicate or cause to be communicated, an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the Financial Services and Markets Act 2000 (FSMA)) received by it in connection with the issue or sale of the shares of our common stock in circumstances in which Section 21(1) of the FSMA does not apply to us; and

 

•

it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the shares of our common stock in, from, or otherwise involving the United Kingdom.

 

135

---

Table of Contents

LEGAL MATTERS

The validity of the shares of common stock offered hereby will be passed upon for us by Morrison & Foerster LLP, San Francisco, California. The underwriters are being represented by Goodwin Procter LLP, New  York, New York, in connection with this offering.

EXPERTS

The financial statements of Krystal Biotech, Inc. as of and for the year ended December 31, 2016 included in this prospectus and in the registration statement have been audited by Mayer Hoffman McCann P.C., independent registered public accounting firm, and are included in reliance on their report given on their authority as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the shares of common stock offered by this prospectus. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement, some of which is contained in exhibits to the registration statement as permitted by the rules and regulations of the SEC. For further information with respect to us and our common stock, we refer you to the registration statement, including the exhibits filed as a part of the registration statement. Statements contained in this prospectus concerning the contents of any contract or any other document is not necessarily complete. If a contract or document has been filed as an exhibit to the registration statement, please see the copy of the contract or document that has been filed. Each statement in this prospectus relating to a contract or document filed as an exhibit is qualified in all respects by the filed exhibit. You may obtain copies of this information by mail from the Public Reference Section of the SEC, 100 F Street, N.E., Room 1580, Washington, D.C. 20549, at prescribed rates. You may obtain information on the operation of the public reference rooms by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website that contains reports, proxy statements and other information about issuers, like us, that file electronically with the SEC. The address of that website is www.sec.gov.

As a result of this offering, we will become subject to the information and reporting requirements of the Securities Exchange Act of 1934 and, in accordance with this law, will file periodic reports, proxy statements and other information with the SEC. These periodic reports, proxy statements and other information will be available for inspection and copying at the SEC’s public reference facilities and the website of the SEC referred to above. We also maintain a website at www.krystalbio.com. Upon completion of this offering, you may access these materials free of charge as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. Information contained on our website is not a part of this prospectus and the inclusion of our website address in this prospectus is an inactive textual reference only.

 

136

---

Table of Contents

Krystal Biotech, Inc. (formerly Krystal Biotech, LLC)

Index to Financial Statements

 

		Page
Report of Independent Registered Public Accounting Firm			F-2
Balance Sheets as of December 31, 2016 and June  30, 2017 (unaudited) and June 30, 2017 Pro Forma (unaudited)			F-3
Statements of Operations for the Year Ended December  31, 2016 and the Six Months Ended June 30, 2016 and 2017 (unaudited) and June 30, 2017 Pro Forma (unaudited)			F-4
Statements of Convertible Preferred Stock and Stockholders’ and Members’ Equity (Deficit) for the Year Ended December 31, 2016 and the Six Months Ended June 30, 2017 (unaudited) and June 30, 2017 Pro Forma (unaudited)			F-5
Statements of Cash Flows for the Year Ended December  31, 2016 and the Six Months Ended June 30, 2016 and 2017 (unaudited)			F-6
Notes to Financial Statements			F-7

 

F-1

---

Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

Krystal Biotech, Inc.

We have audited the accompanying balance sheet of Krystal Biotech, Inc. (the “Company”) as of December 31, 2016, and the related statements of operations, convertible preferred stock and stockholders’ and members’ equity (deficit), and cash flows for the year ended December 31, 2016. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Krystal Biotech, Inc. as of December 31, 2016, and the results of its operations and its cash flows for the year ended December 31, 2016, in conformity with U.S. generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has experienced losses since inception and is dependent on future financing to fund its planned operations. These conditions raise substantial doubt about its ability to continue as a going concern. Management’s plans regarding these matters are also described in Note 1. The accompanying financial statements do not include any adjustments that might result should the Company be unable to continue as a going concern.

/s/ Mayer Hoffman McCann P.C.

San Diego, California

July 14, 2017 (except for subsequent events noted in Note 13, as to which the date is September 14, 2017)

 

F-2

---

Table of Contents

Krystal Biotech, Inc. (formerly Krystal Biotech, LLC)

Balance Sheets

 

(In thousands, except per share and per unit data)		December 31, 2016				June 30, 2017				Pro Forma June 30, 2017
						(unaudited)
Assets
Current assets
Cash		$	1,923			$	3,518			$	3,518
Prepaid research and development expenses			246				121				121
Other current assets			—				3				3
Deferred offering costs			—				287				287
Total current assets			2,169				3,929				3,929
Property and equipment, net			13				48				48
Total assets		$	2,182			$	3,977			$	3,977
Liabilities, Convertible Preferred Stock and Stockholders’ and Members’ Equity (Deficit)
Current liabilities
Accounts payable		$	42			$	260			$	260
Accrued expenses and other current liabilities			1				324				324
Related party convertible promissory notes			—				1,698				—
Convertible promissory notes			—				2,444				—
Accrued interest			—				80				—
Total current liabilities			43				4,806				584
Accrued interest			7				—				—
Related party convertible promissory notes			698				—				—
Convertible promissory notes			1,145				—				—
Total liabilities			1,893				4,806				584
Commitments and contingencies (Note 7)
Convertible preferred stock
Convertible preferred stock; $0.00001 par value; no shares authorized, issued, and outstanding at December 31, 2016, and 100,000 shares authorized, 179,613 shares issued and outstanding at June 30, 2017 (unaudited) (aggregate liquidation preference of $1,406), and no shares issued and outstanding pro forma June 30, 2017 (unaudited)			—				1,406				—
Total convertible preferred stock			—				1,406				—
Stockholders’ and members’ equity (deficit)
Common stock; $0.00001 par value; no shares authorized, issued or outstanding at December 31, 2016, and 10,000,000 shares authorized, 3,490,884 shares issued and outstanding at June 30, 2017 (unaudited), and 10,000,000 shares authorized, 4,631,130 shares issued and outstanding pro forma June 30, 2017 (unaudited)			—				—				—
Common units; no par value; 3,490,884 units authorized, issued, and outstanding at December 31, 2016, no common units authorized, issued, and outstanding at June 30, 2017 (unaudited), or pro forma June 30, 2017 (unaudited)			—				—				—
Preferred units; no par value; 179,613 units authorized, issued, and outstanding at December 31, 2016 (aggregate liquidation preference of $1,406), no preferred units authorized, issued, and outstanding at June 30, 2017 (unaudited), or pro forma June 30, 2017 (unaudited)			1,406				—				—
Additional paid-in capital			33				168				8,929
Accumulated deficit			(1,150	)			(2,403	)			(5,536	)
Total stockholders’ and members’ equity (deficit)			289				(2,235	)			3,393
Total liabilities, convertible preferred stock and stockholders’ and members’ equity (deficit)		$	2,182			$	3,977			$	3,977

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

 

F-3

---

Table of Contents

Krystal Biotech, Inc. (formerly Krystal Biotech, LLC)

Statements of Operations

 

		Year Ended December 31,				Six Months Ended June 30,
(In thousands, except shares, units, and per share and per unit data)		2016				2016				2017				2017
						(unaudited)								(unaudited, pro forma)
Revenues
Revenues		$	—			$	—			$	—			$	—
Total revenues			—				—				—				—
Expenses
Research and development			741				98				765				765
General and administrative			402				103				415				415
Total operating expenses			1,143				201				1,180				1,180
Loss from operations			(1,143	)			(201	)			(1,180	)			(1,180	)
Other Expense
Interest expense, net			(7	)			—				(73	)			(3,206	)
Total other expense			(7	)			—				(73	)			(3,206	)
Net loss			(1,150	)			(201	)			(1,253	)			(4,386	)
Net loss applicable to stockholders and members		$	(1,150	)		$	(201	)		$	(1,253	)		$	(4,386	)
Basic and diluted net loss per common share and common unit		$	(1.31	)		$	(447.03	)		$	(0.36	)		$	—
Weighted-average basic and diluted common shares and common units (Note 2)			877,490				450				3,490,884				—
Pro forma basic and diluted net loss per common share and common unit (unaudited) (Note 2)						$	—			$	—			$	(1.01	)
Pro forma weighted-average basic and diluted common shares and common units (unaudited) (Note 2)							—				—				4,275,455

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

 

F-4

---

Table of Contents

Krystal Biotech, Inc. (formerly Krystal Biotech, LLC)

Statements of Convertible Preferred Stock and Stockholders' and Members’ Equity (Deficit)

(In thousands, except units and shares)

 

												Stockholders' and Members’ Equity (Deficit)																																Total Stockholders' and Members’ Equity (Deficit)
		Convertible Preferred Stock										Common Stock								Common Units								Preferred Units								Additional Paid-in Capital				Accumulated Deficit
		Shares				Amount						Shares				Amount				Units				Amount				Units				Amount
Balances at January 1, 2016			—			$	—						—			$	—				—			$	—				—			$	—			$	—			$	—			$	—
Issuance of common units			—				—						—				—				450				100				—				—				—				—				100
Conversion from common units to preferred units			—				—						—				—				(450	)			(100	)			12,771				100				—				—				—
Issuance of preferred and common units			—				—						—				—				3,490,884				—				166,842				1,306				—				—				1,306
Stock-based compensation expense			—				—						—				—				—				—				—				—				33				—				33
Net loss			—				—						—				—				—				—				—				—				—				(1,150	)			(1,150	)
Balances at December 31, 2016			—			$	—						—			$	—				3,490,884			$	—				179,613			$	1,406			$	33			$	(1,150	)		$	289
Conversion of preferred units to preferred stock (unaudited)			179,613				1,406						—				—				—				—				(179,613	)			(1,406	)			—				—				(1,406	)
Conversion of common units to common stock (unaudited)			—				—						3,490,884				—				(3,490,884	)			—				—				—				—				—				—
Stock-based compensation expense (unaudited)			—				—						—				—				—				—				—				—				135				—				135
Net loss (unaudited)			—				—						—				—				—				—				—				—				—				(1,253	)			(1,253	)
Balances at June 30, 2017 (unaudited)			179,613			$	1,406						3,490,884			$	—				—			$	—				—			$	—			$	168			$	(2,403	)		$	(2,235	)
Conversion of convertible preferred stock to common stock (unaudited)			(179,613	)			(1,406	)					179,613				—				—				—				—				—				1,406				—				1,406
Conversion of convertible promissory notes to common stock (unaudited)			—				—						960,633				—				—				—				—				—				7,355				(3,133	)			4,222
Pro Forma Balances at June 30, 2017 (unaudited)			—			$	—						4,631,130			$	—				—			$	—				—			$	—			$	8,929			$	(5,536	)		$	3,393

 

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

 

F-5

---

Table of Contents

Krystal Biotech, Inc. (formerly Krystal Biotech, LLC)

Statements of Cash Flows

 

		Year Ended December 31,				Six Months Ended June 30,
(In thousands)		2016				2016				2017
						(unaudited)
Operating Activities
Net loss		$	(1,150	)		$	(201	)		$	(1,253	)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation			2				1				4
Stock-based compensation expense			33				3				135
Non-cash interest expense			7				—				73
(Increase) decrease in
Prepaid research and development expenses			(246	)			(9	)			125
Other current assets			—				—				(3	)
Increase (decrease) in
Accounts payable			42				57				181
Accrued expenses and other liabilities			1				10				73
Net cash used in operating activities			(1,311	)			(139	)			(665	)
Investing Activities
Purchases of property and equipment			(15	)			(5	)			(39	)
Net cash used in investing activities			(15	)			(5	)			(39	)
Financing Activities
Proceeds from the issuance of convertible promissory notes			1,145				—				1,299
Proceeds from the issuance of related party convertible promissory notes			698				—				1,000
Issuance of common stock and common units			100				100				—
Issuance of preferred stock and preferred units			1,306				754				—
Net cash provided by financing activities			3,249				854				2,299
Net increase in cash			1,923				710				1,595
Cash at beginning of period			—				—				1,923
Cash at end of period		$	1,923			$	710			$	3,518
Supplemental Disclosures of Non-Cash Operating, Investing and Financing Activities
Conversion of common units to preferred units		$	100			$	—			$	—
Conversion of preferred units to preferred stock		$	—			$	—			$	1,306
Cash paid for interest		$	—			$	—			$	—
Cash paid for taxes		$	—			$	—			$	—
Unpaid deferred offering costs		$	—			$	—			$	287

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

 

F-6

---

Table of Contents

Krystal Biotech, Inc. (formerly Krystal Biotech, LLC)

Notes to Financial Statements

(In thousands, except per share data)

 

1.	Nature of Business

Krystal Biotech, Inc. (the “Company”) was formed on December 20, 2015 in the State of California as Krystal Biotech, LLC, but began operations on April 15, 2016. On March 31, 2017, the Company converted from a limited liability company (“LLC”) to a C-corporation in the state of Delaware, and changed its name to Krystal Biotech, Inc. The Company seeks to use gene therapy to develop novel treatments for patients suffering from dermatological diseases. The Company is currently conducting preclinical studies evaluating its lead product candidate, KB103, which is intended to treat dystrophic epidermolysis bullosa, or DEB, a rare and severe genetic disease for which there is currently no approved treatment.

Liquidity and Risks

As of December 31, 2016, the Company generated an accumulated deficit of $1.2 million since inception and will require substantial additional capital to fund its research and development. As of June 30, 2017, the accumulated deficit was $2.4 million. The Company believes that its cash of approximately $3.5 million as of June 30, 2017 plus the proceeds of approximately $7.0 million from the issuance of preferred stock in August 2017 will be sufficient to allow the Company to fund its operations into at least the second quarter of 2018. 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, such as partnerships. Management intends to fund future operations through the sale of equity and debt financings and may also seek additional capital through arrangements with strategic partners or other sources. There can be no assurances, however, that additional funding will be available on terms acceptable to the Company, or at all. The Company is seeking to complete an initial public offering (“IPO”) of its common stock. Upon the closing of a qualified public offering, the Company’s outstanding convertible promissory notes and convertible preferred stock will automatically convert into shares of common stock (Note 8).

In the event the Company does not complete an IPO, the Company expects to seek additional funding through private financings, debt financing, collaboration agreements, or government grants. The Company may not be able to obtain financing on acceptable terms, or at all, and the Company may not be able to enter into collaboration arrangements or obtain government grants. The terms of any financing may adversely affect the holdings or the rights of the Company’s stockholders. If the Company is unable to obtain funding, the Company could be forced to delay, reduce, or eliminate its research and development programs, product candidate expansion, or commercialization efforts, which could adversely affect its business prospects. Although management continues to pursue these plans, there is no assurance that the Company will be successful in obtaining sufficient funding on terms acceptable to the Company to fund continuing operations, if at all.

The foregoing matters give rise to substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

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.

 

F-7

---

Table of Contents

2.	Summary of Significant Accounting Policies

Basis of Presentation

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Any reference in these notes to applicable guidance is meant to refer to the authoritative United States generally accepted accounting principles as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Update (“ASU”) of the Financial Accounting Standards Board (“FASB”).

Unaudited Interim Financial Information

The accompanying balance sheet as of June 30, 2017, the statements of operations and statements of cash flows for the six months ended June 30, 2016 and 2017, the statement of convertible preferred stock and stockholders’ and members equity (deficit) for the six months ended June 30, 2017 and the related information contained within the notes to the financial statements are unaudited. The interim financial statements have been prepared on the same basis as the annual audited financial statements and, in the opinion of management, reflect all adjustments, consisting of normal and recurring adjustments, necessary for the fair presentation of the Company’s financial position at June 30, 2017 and results of its operations and its cash flows for the six months ended June 30, 2016 and 2017. The results for the six months ended June 30, 2017 are not necessarily indicative of results to be expected for the year ending December 31, 2017 or any other interim or future period.

Unaudited Pro Forma Information

On July 13, 2017, the Company’s board of directors authorized the Company to file a registration statement with the Securities and Exchange Commission (“SEC”) permitting the Company to sell shares of its common stock to the public. Upon the closing of a qualified (as defined in the Company’s Articles of Incorporation) initial public offering (“IPO”) or otherwise upon the election of the holders of the specified percentage of Preferred Stock, all of the Company’s outstanding convertible preferred stock will automatically convert into common stock and will meet the GAAP criteria for equity classification. The unaudited pro forma balance sheet and statement of convertible preferred stock and stockholders’ and member’s equity (deficit) as of June 30, 2017 reflect the assumed conversion of all of the outstanding shares of convertible preferred stock (“Preferred Stock”), the convertible promissory notes (the “Notes”) and accrued interest into shares of common stock upon the completion of this proposed offering.

Unaudited pro forma net loss per share attributable to common stockholders is computed using the weighted-average number of common shares outstanding after giving effect to the conversion of all the outstanding Preferred Stock and the convertible promissory notes, plus accrued interest, into shares of common stock as if such conversion had occurred at the beginning of the period presented, or the date of original issuance, if later. As the year ended December 31, 2016 and the six months ended June 30, 2016 and 2017 resulted in net losses, there is no income allocation required under the two-class method or dilution attributed to pro forma weighted average shares outstanding in the calculation of pro forma diluted loss per share attributable to common stockholders.

As noted above, the unaudited pro forma information reflects the automatic conversion, at the closing of an IPO of the Company’s common stock, of all outstanding shares of Preferred Stock and the Notes into 1,140,246 shares of common stock. The conversion has been reflected assuming a 1-to-1 conversion ratio for the Preferred Stock and the conversion of the Notes plus accrued interest as of June 30, 2017, into 179,613 shares and 960,633 shares of the company’s common stock, respectively and excludes 914,107 shares of Series A preferred issued on August 8, 2017 to Sun Pharma (Netherlands) B.V (Note 13). See Note 8 for further discussion of the Preferred Stock conversion feature, as well as a discussion of the rights and preferences of the Preferred Stock and see Note 5 for further discussion of the conversion features of the Notes.

 

F-8

---

Table of Contents

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the 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, among others: stock-based compensation expense, accrued research and development expenses, the fair value of financial instruments, and the valuation allowance included in the 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. The Company operates in only one geographic segment.

Concentrations of Credit Risk and Off-Balance Sheet Risk

The financial instrument that potentially subjects the Company to concentrations of credit risk is cash held in a depository account. The Company’s cash is held with a financial institution that management believes is creditworthy. These amounts at times may exceed federally 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.

Deferred Issuance Costs

Deferred public offering costs, which primarily consist of direct, incremental legal and accounting fees relating to the IPO, are capitalized within other assets. The deferred issuance costs will be offset against IPO proceeds upon the consummation of the offering. In the event the offering is terminated, deferred offering costs will be expensed. The Company has incurred $287 thousand in IPO costs as of June 30, 2017.

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

 

F-9

---

Table of Contents

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 unobservable.

To the extent that 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 in 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 year ended December 31, 2016 and the six months ended June 30, 2017. The Company evaluates transfers between levels at the end of each reporting period. There were no transfers of financial instruments between levels during the year ended December 31, 2016 and the six months ended June 30, 2017.

The carrying amounts of financial instruments consisting of cash, prepaid expenses, accounts payable and accrued expenses, related party convertible promissory notes and convertible promissory notes included in the Company’s financial statements are reasonable estimates of fair value due to their short maturities.

Property and Equipment

Property and equipment 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			3 years

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 has not recognized any impairment losses through June 30, 2017.

Convertible Preferred Stock

In accordance with the guidance in FASB ASC Topic 480, Distinguishing Liabilities from Equity, outstanding shares of Preferred Stock (Note 8), were classified outside of permanent equity and within temporary equity, as of June 30, 2017 due to their associated redemption features and liquidation preferences.

 

F-10

---

Table of Contents

The Company evaluated its Preferred Stock and determined that they are considered equity hosts under ASC 815. In making this determination, the Company’s analysis followed the whole instrument approach which compares an individual feature against the entire Preferred Stock instrument which includes that feature. The Company’s analysis was based on a consideration of the economic characteristics and risks of the Preferred Stock. More specifically, the Company evaluated all of the stated and implied substantive terms and features, including: (i) whether the Preferred Stock included redemption features; (ii) how and when any redemption features could be exercised; (iii) whether the holders of the Preferred Stock were entitled to dividends and how those dividends were calculated; (iv) the voting rights of the Preferred Stock; and (v) the existence and nature of any conversion rights. As a result of the Company’s conclusion that the Preferred Stock both represent an equity host, the redemption features of the Preferred Stock are considered to be clearly and closely related to the associated equity host instruments. Accordingly, the redemption features of the Preferred Stock are not considered embedded derivatives that require bifurcation. The Company also concluded that the conversion rights under the Preferred Stock are clearly and closely related to the equity host instruments and are not considered embedded derivatives that require bifurcation.

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. Share-based payments issued to non-employees are recorded at their fair values, and are periodically revalued as the equity instruments vest and are recognized as expense over the related service period in accordance with the provisions of ASC 718 and ASC Topic 505, Equity, and are expensed using an accelerated attribution model.

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 a public market for the trading 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

 

F-11

---

Table of Contents

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 average of the vesting term and the original contractual term of the option. The expected term for non-employee awards is 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 revise those estimates in subsequent periods if actual forfeitures differ from its estimates. The Company uses historical data to estimate forfeitures and records stock-based compensation expense only for those awards that are expected to vest. 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.

Income Taxes

For the year ended December 31, 2016, the Company was organized in the State of California as a limited liability corporation and was taxed as a partnership for United States income tax purposes and therefore files federal and state flow through income tax returns. As a result, no U.S. current or deferred income tax assets or liabilities are reflected in December 31, 2016 financial statements. The Company’s members are obligated to report that member’s proportionate share of the Company’s taxable income or loss.

For the six months ended June 30, 2017 income taxes are recorded in accordance with FASB ASC Topic 740, Income Taxes (“ASC 740”), which provides for deferred taxes using an asset and liability approach. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and the tax reporting basis of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. The Company provides a valuation allowance against net deferred tax assets unless, based upon the available evidence, it is more likely than not that the deferred tax assets will be realized. The Company has evaluated available evidence and concluded that the Company may not realize the benefit of its deferred tax assets; therefore a valuation allowance has been established for the full amount of the deferred tax assets.

The Company accounts for uncertain tax positions in accordance with the provisions of ASC 740. When uncertain tax positions exist, the Company recognizes the tax benefit of tax positions to the extent that the benefit will more likely than not be realized. The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position as well as consideration of the available facts and circumstances. As of June 30, 2017, the Company does not have any significant uncertain tax positions.

The Company may recognize interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2016 and June 30, 2017, the Company had no accrued interest or penalties related to uncertain tax positions and no amounts have been recognized in the Company’s statements of operations.

 

F-12

---

Table of Contents

Net Loss Per Share Attributable to Common Stockholders

On March 31, 2017, the Company converted from an LLC to a C-corporation. Upon the conversion, each common unit and each preferred unit (Note 8) held were converted into one share of common stock and Preferred Stock, respectively. Common units of the LLC had similar rights and characteristics of common stock issued upon the conversion. In calculating net loss per share, the Company retrospectively applied the effects of the conversion to the number of common units outstanding prior to the conversion. Net loss per share for periods prior to the conversion to a C-corporation refers to net loss per common unit.

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. During periods of income, the Company allocates participating securities a proportional share of income determined by dividing total weighted average participating securities by the sum of the total weighted average common shares and participating securities (the “two-class method”). The Company’s convertible preferred stock participate in any dividends declared by the Company and are therefore considered to be participating securities. Participating securities have the effect of diluting both basic and diluted earnings per share during periods of income. During periods of loss, the Company allocates no loss to participating securities because they have no contractual obligation to share in the losses of the Company. Diluted net loss per share attributable to common stockholders is calculated by adjusting weighted average shares outstanding for the dilutive effect of common stock equivalents outstanding for the period, determined using the treasury-stock and if-converted methods. For purposes of the diluted net loss per share attributable to common stockholders calculation, preferred stock, and stock options are considered to be common stock equivalents but 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. Therefore, basic and diluted net loss per share were the same for all periods presented.

 

(In thousands, except share and per share data)		December 31, 2016				June 30, 2016				June 30, 2017
						(unaudited)				(unaudited)
Numerator:
Net loss applicable to common stockholders and members		$	(1,150	)		$	(201	)		$	(1,253	)
Denominator:
Weighted-average basic and diluted common shares			877,490				450				3,490,884
Basic and diluted net loss per common shares		$	(1.31	)		$	(447.03	)		$	(0.36	)
Pro forma basic and diluted net loss per common share and common unit										$	(1.01	)

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 loss are reported, net of their related tax effect, to arrive at a comprehensive loss. For the year ended December 31, 2016, the six months ended June 30, 2016 and the six months ended June 30, 2017 and the six months ended June 30, 2017 (pro forma), comprehensive loss was equal to the net loss.

 

F-13

---

Table of Contents

Recent Accounting Pronouncements

In August 2014, the FASB issued ASU 2014-15 Disclosures of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). The standard requires an evaluation of whether there are conditions or events, considered in the aggregate, that raise substantial doubt about an entity’s ability to continue as a going concern. Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued. ASU 2014-15 is effective for annual periods ending after December 15, 2016 and for interim periods within annual periods beginning after December 15, 2016. The Company has adopted this standard as of December 31, 2016 and the adoption did not have a material impact, refer to Note 1 for future details regarding the Company’s liquidity.

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 will result in the lessee recognizing a right-of-use asset and 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. ASU 2016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company generally does not finance purchases of equipment but it does lease office and lab facilities. The Company is in the process of evaluating the effect that this ASU will have on its financial statements and related disclosures.

Subsequent Events

The Company considers events or transactions that occur after the balance sheet date but prior to the date the financial statements are available to be issued for potential recognition or disclosure in the financial statements.

 

3.

Cash

As of December 31, 2016 and June 30, 2017, cash balances consist of a single depository account. Cash balances at December 31, 2016 and June 30, 2017 were $1.9 million and $3.5 million, respectively.

 

4.	Property and Equipment, Net

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

 

		December 31, 2016				June 30, 2017
						(unaudited)
Computer equipment and software		$	8			$	9
Laboratory equipment			7				45
Total property and equipment			15				54
Accumulated depreciation			(2	)			(6	)
Property and equipment, net		$	13			$	48

Depreciation expense was $2 thousand, $1 and $4 thousand for the year ended December 31, 2016 and the six months ended June 30, 2016 and 2017, respectively.

 

5.	Convertible Promissory Notes

General

On November 16, 2016, the Company executed a Note Purchase Agreement (the “Agreement”) for the issuance of convertible promissory notes (the “Notes”). The Notes bear interest at a rate of 6% per

 

F-14

---

Table of Contents

annum, which is accrued based on a 365 day year and mature, unless sooner paid or converted, principal plus unpaid accrued interest 18 months following the date of the Agreement or May 14, 2018. The Notes become immediately due and payable in the event of an occurrence of default by the Company.

Conversion Features

In the event the Company sells, merges, consolidates or reorganizes, where the equity owners of the Company own less than 50% of the voting shares post acquisition, then all the outstanding Notes, at the option of the Note holders, either: (i) become immediately due and payable, or (ii) convert into a number of shares of common stock or common units (rounded down to the nearest share), obtained by dividing the outstanding Notes converted by dividing the target valuation of $16.0 million by the fully diluted shares.

In the event that the Company shall issue and sell preferred units in the Company, or if the Company has converted into corporate form, shares of the preferred stock of the Company (in either case, the “Financing Securities”), to investors for aggregate proceeds to the Company of not less than $5.0 million, including amounts outstanding under the Notes, then the Notes shall be automatically converted, at the initial closing of the financing event, into a number of units of Financing Securities equal to the quotient by dividing the balance of the outstanding Notes so converted by a price per unit or share that is the lesser of: (i) 80% of the per unit or share price of the Financing Securities; or (ii) the target valuation of $16.0 million divided by the fully diluted units or shares immediately prior to closing of the financing event.

In July 2017, the Notes were amended so that they would also automatically convert upon the closing of an initial public offering into common stock.

As of December 31, 2016 and June 30, 2017, the Company had outstanding balances related to the Notes of $1.8 million and $4.1 million, respectively. Additionally, as of December 31, 2016 and June 30, 2017, the Company had accrued interest related to the Notes of $7 thousand and $80 thousand, respectively.

Interest expense related to the Notes was $7 thousand, $0 and $73 thousand for the year ended December 31, 2016 and the six months ended June 30, 2016 and 2017, respectively.

On August 8, 2017, the Notes plus accrued interest, were converted into Preferred Stock, which was the result of the sale of Preferred Stock for aggregate proceeds of $7.0 million (Note 13).

 

6.	Related Party Convertible Promissory Notes

On November 14, 2016, the Company issued a convertible promissory note, in the amount of $250 thousand, under the Agreement (Note 5) to a party related to a director of the Company. The terms of the Notes issued to the related party were at an arms-length and identical to the Notes issued and fully disclosed in Note 5.

On December 27, 2016, the Company issued a convertible promissory note, in the amount of $448 thousand, under the Agreement (Note 5) to a party related to two executive officers and directors of the Company. The terms of the Notes issued to the related party were at an arms-length and identical to the Notes issued and fully disclosed in Note 5.

On May 17, 2017, the Company issued a convertible promissory note, in the amount of $250 thousand, under the Agreement (Note 5) to a party related to a director of the Company. The terms of the Notes issued to the related party were at an arms-length and identical to the Notes issued and fully disclosed in Note 5.

On June 6, 2017, the Company executed a Second Note Purchase Agreement (the “Second Agreement”) for the issuance of a convertible promissory note to a director of the Company (the “June Note”) in the amount of $750 thousand. The convertible promissory note bears interest at a rate of 6% per annum, which is accrued based on a 365 day year and mature, unless sooner paid or converted, principal plus unpaid accrued interest on May 14, 2018. The convertible promissory note becomes immediately due and payable in the event of an occurrence of default by the Company.

 

F-15

---

Table of Contents

Conversion Features

In the event the Company sells, merges, consolidates or reorganizes, where the equity owners of the Company own less than 50% of the voting shares post acquisition, then all the outstanding Notes, at the option of the Note holders, either (a) become immediately due and payable, or (b) convert into a number of shares of Common Stock rounded to the nearest whole share, obtained by dividing the outstanding balance of the convertible promissory notes by the consideration received per share by holders of Common stock in the acquisition.

In addition, the June Note is convertible into Preferred Stock automatically upon our closing of a Preferred Stock financing of at least $5.0 million, or into Common Stock upon the closing of an initial public offering. The conversion price of the June Note is 80% of the sales price of the Preferred Stock or 80% of the price at which our Common Stock is offered to the public in an initial public offering.

As of December 31, 2016 and June 30, 2017, accrued interest on related party convertible promissory notes was $2 thousand and $28 thousand, respectively.

Interest expense related to the related party convertible promissory notes was $2 thousand, $0 and $26 thousand for the year ended December 31, 2016, and the six months ended June 30, 2016 and 2017, respectively.

On August 8, 2017, the related party convertible promissory notes plus accrued interest, were converted into Preferred Stock, which was the result of the sale of Preferred Stock for aggregate proceeds of $7.0 million (Note 13).

 

7.	Commitments and Contingencies

Significant Contracts and Agreements

Lease Agreements

In May 2016, the Company signed an operating lease for laboratory and office space that commenced in June 2016 and expires on October 31, 2017 (the “2016 Lease”). In June 2016, the Company entered into a lease amendment (the “First Amendment to the 2016 Lease”) for office and laboratory space currently occupied under the 2016 Lease. The First Amendment to the 2016 Lease did not change the Company’s overall obligation under the lease, but did change the timing of the payment of the obligation from one single payment to 17 equal monthly installments. On February 27, 2017, the Company entered into the second amendment to the lease (the “Second Amendment to the 2016 Lease”), which extended the expiration date of the lease to October 31, 2018.

As of June 30, 2017, future minimum operating lease payments and future minimum payments to be received from under non-cancelable subleases were as follows (in thousands):

 

		Operating Leases
2017 (remainder of year)		$	55
2018			102
2019			—
2020			—
2021			—
Thereafter			—
Future minimum operating lease payments			157
Less: minimum payments to be received from non-cancelable subleases			(28	)
Total minimum lease payments, net		$	129

The Company recorded $54 thousand, $12 and $38 thousand in rent expense for the year ended December 31, 2016 and the six months ended June 30, 2016 and 2017, respectively.

 

F-16

---

Table of Contents

8.	Capitalization

Conversion to C-Corporation

On March 31, 2017, the Company converted from an LLC to a C-Corporation. Upon the conversion, the preferred units and the common units were converted on a one-for-one basis into preferred stock and common stock, respectively. After the conversion, the Company had authorized 100,000 shares of Preferred Stock, $0.00001 par value per share, of which 179,613 shares were issued and outstanding and 10,000,000 authorized shares of common stock, par value $0.00001 per share, of which 3,490,884 shares were issued and outstanding.

General

As of June 30, 2017, the authorized capital stock of the Company included 10,000,000 shares of common stock, par value $0.00001 per share, 3,490,884 shares issued and outstanding and 100,000 shares of Preferred Stock par value $0.00001 per share, of which, 179,613 shares were issued and outstanding.

As of December 31, 2016, the Company was an LLC and had issued 179,613 preferred units and 3,490,884 common units.

Preferred Units and Preferred Stock

On April 15, 2016, the Company authorized 100 Member Units and issued 450 member units for aggregate proceeds of $100 thousand. On September 30, 2016, the Company converted all of the Member Units into 12,771 Preferred Units at an issue price of $7.83 (the “Original Issue Price”) per share plus 3,490,884 Common Units, and issued an additional 96,345 Preferred Units at the Original Issue Price for aggregate proceeds of $754 thousand. On December 27, 2016, the Company issued an additional 70,497 Preferred Units at the Original Issue Price for aggregate proceeds of $552 thousand. On March 31, 2017, all of the Preferred Units were converted into Preferred Stock on a one-for-one basis. As of December 31, 2016 and June 30, 2017, the Company had balances of Preferred Units and Preferred Stock of $1.4 million and $1.4 million, respectively.

The rights, preferences and privileges of the Preferred Stock consisted of the following:

Conversion.    Each share of Preferred Stock shall be convertible at the option of the holder at any point in time into fully paid and non-assessable shares of common stock. Upon conversion, the Preferred Stock would be fully settled. Each share of Preferred Stock was convertible into that number of shares of common stock as determined by dividing the Original Issue Price of such share by the applicable conversion price. As of December 31, 2016, the conversion rate was 1:1, but was subject to future adjustments to the conversion price upon the occurrence of certain events including: (i) certain issuances of common stock at a price less than the conversion price in effect on the date of such issuance; and (ii) future stock splits, subdivisions, or combinations of outstanding common stock.

Each share of Preferred Stock shall automatically be converted into shares of common stock at the conversion price at the time in effect for such series of preferred upon the earlier of: (i) a qualified public offering, as defined in the Certificate of Incorporation; or (ii) the majority vote of the holders of Preferred Stock on a per share and as-converted to common stock basis.

Voting Rights.    The holders of shares of Preferred Stock are entitled to one vote for each share of Preferred Stock held at all meetings of stockholders and written actions in lieu of meetings. The Board of Directors shall be elected by vote of the Common Stock and the Preferred Stock voting together as a single class on an as-converted basis.

Dividends.    The holders of the Preferred Stock are entitled to receive dividends, if and when declared by the Board of Directors, and all dividends shall be paid pro rata on the Common Stock and the Preferred Stock, without preference, based on the number of shares of the Common Stock of the holders. From inception through June 30, 2017, no dividends have been declared or paid by the Company.

 

F-17

---

Table of Contents

Liquidation Preference.    In the event of any liquidation, dissolution, winding up, consolidation or merger of the Company, the holders of the Preferred Stock shall be entitled to receive out of the assets of the Company, prior and in preference to any distribution to the holders of Common Stock, an amount equal to the Original Issue Price per share, plus all declared and unpaid dividends.

The Preferred Units have the same rights, preferences and privileges as the Preferred Stock with the exception of conversion rights or liquidation preferences in the event of a merger or consolidation.

Common Units and Common Stock

On September 30, 2016, in connection with the conversion of the Member Units into Preferred Units, the Company also issued 3,490,884 Common Units. On March 31, 2017, in connection with the conversion of the LLC to a C-Corporation, all of the Common Units were converted, on a one-for-one basis, into common stock.

The voting, dividend and liquidation rights of the holders of the common stock are subject to and qualified by the rights, powers and privileges of the holders of the preferred stock and are as follows:

Voting Rights.    The holders of shares of common stock are entitled to one vote for each share of Common Stock held at all meetings of stockholders and written actions in lieu of meetings. The Board of Directors shall be elected by vote of the Common Stock and the Preferred Stock voting together as a single class on an as-converted basis.

Dividends.    The holders of the common stock are entitled to receive dividends, if and when declared by the Board of Directors, and all dividends shall be paid pro rata on the common stock and the preferred stock, without preference, based on the number of shares of the common stock of the holders. From inception through June 30, 2017, no dividends have been declared or paid by the Company.

Liquidation Preference.    After payment to the holders of shares of preferred stock of their liquidation preferences, the holders of the common stock are entitled to share ratably in the Company’s assets available for distribution to stockholders, in the event of any voluntary or involuntary liquidation, dissolution, winding up, consolidation or merger of the Company or upon the occurrence of a deemed liquidation event.

 

9.	Significant Agreements

Clinical Supply Agreement

In December 2016, the Company entered into a product manufacturing and clinical supply agreement with a Contract Manufacturing Organization (the “CMO”). The product manufacturing and clinical supply agreement provides the terms and conditions under which the CMO will formulate, fill, inspect, package, label and test our lead product, KB103 for clinical supply. The Company is obligated to pay the CMO for each batch of KB103 manufactured. Additionally, certain raw material and supplies and outsourced testing and other services for the purposes of batch production will be invoiced separately by the CMO. The estimated remaining commitment under this agreement for the manufacturing of drug product is approximately $2.0 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 this agreement of $11 thousand, $0 and $159 thousand for the year ended December 31, 2016 and the six months ended June 30, 2016 and 2017 respectively.

 

10.	Stock-Based Compensation

On October 1, 2016, the Board of Managers adopted the 2016 Equity Incentive Plan (the “2016 Plan”), which authorizes the issuance of up to 189,472 incentive units to purchase common units.

The 2016 Plan provides for the issuance of incentive units to employees, members of the Board of Managers, and consultants of the Company. The incentive units generally expire ten years following the date of grant. The incentive units typically vest over a period of four years, but vesting provisions can vary

 

F-18

---

Table of Contents

by award based on the discretion of the Board of Managers. Incentive units to purchase common units carry an exercise price equal to the estimated fair value of the Company’s common units on the date of grant. Generally incentive units to purchase common units of the Company are exercised by payment of the exercise price in cash. Upon the termination of service, except by death or disability, of a holder of incentive units awarded under the 2016 Plan, all unvested units are forfeited and vested incentive units may be exercised within three months of termination by the holder. Common units issued as a result of awards under the 2016 Plan may be subject to repurchase provisions as designated in each individual award agreement.

On March 31, 2017, the Board of Directors adopted the 2017 Stock Incentive Plan (the “2017 Plan”) which authorized the issuance of up to 193,050 shares of the Company’s common stock under the plan. Commensurate with the opening of the 2017 Plan, all 113,683 outstanding incentive units granted under the 2016 Plan were converted into 113,683 options to purchase the Company’s common stock under the 2017 Plan. Commensurate with the adoption of the 2017 Plan, the 2016 Plan was closed and there were no incentive units outstanding.

The 2017 Plan provides for the issuance of stock options, restricted stock awards and unrestricted stock awards to employees, members of the Board of Directors, and consultants of the Company. The Company has not granted restricted or unrestricted stock awards under the 2017 Plan since its inception. Options generally expire ten years following the date of grant. Options typically vest over a period of four years, but vesting provisions can vary by award based on the discretion of the Board of Directors. Options to purchase common stock carry an exercise price equal to the estimated fair value of the Company’s common stock on the date of grant. Generally options to purchase shares of the Company’s common stock are exercised by payment of the exercise price in cash. Upon the termination of service, except by death or disability, of a holder of stock options awarded under the 2017 Plan, all unvested options are forfeited and vested options may be exercised within three months of termination by the holder. Shares of common stock issued as a result of awards under the 2017 Plan may be subject to repurchase provisions as designated in each individual award agreement.

Shares of common stock underlying awards previously issued under the 2017 Plan which are reacquired by the Company, withheld by the Company in payment of the purchase price, exercise price, or withholding taxes; expired; cancelled due to forfeiture, or otherwise terminated other than by exercise, are added to the number of shares of common stock available for issuance under the 2017 Plan. Shares available for issuance under the 2017 Plan may be authorized but unissued shares of the Company’s common stock or common stock reacquired by the Company and held in treasury. The 2017 Plan expires in March 31, 2027, 10 years from the date it was approved by the Board of Directors.

The Company granted 142,105 and 45,949 stock options through December 31, 2016 and during the six months ended June 30, 2017, respectively, to employees, consultants and board members, which are included in the following table. The options generally vest over a four-year period, and have a life of ten years. Stock options issued to non-employees are accounted for using the fair value method of accounting, and are periodically revalued as the options vest, and are recognized as expense over the related service period.

 

F-19

---

Table of Contents

The following table summarizes stock option activity under the 2016 Plan:

 

		Shares				Weighted- average Exercise Price				Weighted- average Remaining Contractual Life (Years)				Aggregate Intrinsic Value(1)
Outstanding at January 1, 2016			—
Granted			142,105			$	2.46				9.7			$	—
Exercised			—
Cancelled or forfeited			—
Outstanding at December 31, 2016			142,105			$	2.46				9.7			$	338
Granted (unaudited)			45,949			$	5.07
Exercised (unaudited)			—				—
Cancelled or forfeited (unaudited)			(28,421	)		$	2.46
Outstanding at June 30, 2017 (unaudited)			159,633			$	3.21				9.4			$	891
Exercisable at December 31, 2016			—			$	—				—			$	—
Vested at December 31, 2016			—			$	—				—			$	—
Exercisable at June 30, 2017 (unaudited)			18,945			$	2.46				9.1			$	120
Vested at June 30, 2017 (unaudited)			18,945			$	2.46				9.1			$	120

 

(1)	The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying options and the estimated fair value of the common stock for the options that were in the money at December 31, 2016 and June 30, 2017 (unaudited).

As of December 31, 2016 and June 30, 2017, 47,367 and 33,417 shares of common stock, respectively, were available for future grants under the Plan. The weighted-average grant date fair value of options granted to employees and non-employees during the year ended December 31, 2016 was $1.73. There were 45,949 options granted to employees and a board member during the six months ended June 30, 2017. The weighted-average grant date fair value of options granted to employees during the six months ended June 30, 2017 was $6.77. There were no options granted to non-employees during the six months ended June 30, 2017. During the year ended December 31, 2016 and the six months ended June 30, 2017, there were no stock options exercised.

Stock-based compensation expense for the year ended December 31, 2016 and the six months ended June 30, 2016 and 2017 relates solely to stock options granted under the Plan. The Company has recorded aggregate stock-based compensation expense related to the issuance of stock option awards to non-employees in the statement of operations for the year ended December 31, 2016 and six months ended June 30, 2016 and 2017 as follows (in thousands):

 

		December 31, 2016				June 30, 2016				June 30, 2017
						(unaudited)				(unaudited)
Research and development		$	25			$	3			$	67
General and administrative			8				—				68
Total stock-based compensation		$	33			$	3			$	135

 

F-20

---

Table of Contents

Stock Options Granted to Employees.    For the year ended December 31, 2016 and the six months June 30, 2016 and 2017, the Company recorded $3 thousand, $0 and $31 thousand, respectively, of stock-based compensation expense related to employees’ stock options. The fair value of options granted to employees was estimated at the date of grant using the Black-Scholes valuation model with the following weighted-average assumptions for the year ended December 31, 2016 and the six months ended June 30, 2017:

 

		December 31, 2016				June 30, 2017
Expected stock price volatility			80	%			80	%
Expected term of the award (years)			6.25				6.25
Risk-free interest rate			1.97	%			1.91	%
Exercise price		$	2.46			$	5.07

There was $95 thousand and $569 thousand of unrecognized stock-based compensation expense related to employees’ awards that is expected to be recognized over a weighted-average period of 4 years and 3.4 years as of December 31, 2016 and June 30, 2017, respectively.

Stock Options Granted to Non-Employees.    Stock-based compensation expense related to stock options granted to non-employees is recognized as the stock options are earned. The Company believes that the estimated fair value of the stock options is more readily measurable than the fair value of the services rendered. For the year ended December 31, 2016 and the six months ended June 30, 2016 and 2017, the Company recorded $30 thousand, $0 and $103 thousand, respectively, of stock-based compensation expense related to non-employees’ stock options, which is included in research and development expense in the statements of operations.

The Company used the following weighted-average assumptions in estimating non-employees stock-based compensation expense:

 

		December 31, 2016
Expected stock price volatility			80	%
Expected time to maturity (years)			6.25
Risk-free interest rate			1.97	%
Exercise price		$	2.46

There were no options granted to non-employees in the six months ended June 30, 2017.

 

11.	Income Taxes

From inception through December 31, 2016, the Company was a California LLC for federal and state income tax purposes, and therefore, all items of income or loss through December 31, 2016 flowed through to the members of the LLC. Effective January 1, 2017, the Company converted from an LLC to a C-corporation for federal and state income tax purposes. Prior to the conversion to a C-corporation, the Company did not record deferred tax assets or liabilities or have any net operating loss (“NOL”) carryforwards for federal income tax purposes. Effective upon the conversion to a C-corporation, the Company became subject to income tax at the federal and state levels. Accordingly, as of June 30, 2017, the Company recorded a deferred tax asset for federal and state income taxes, which consists primarily of NOL carryforwards and a research & development credit, as defined by the Internal Revenue Service.

 

F-21

---

Table of Contents

The Company did not record a current or deferred income tax expense or benefit for the year ended December 31, 2016 and the six months ended June 30, 2017. Since the Company was an LLC for the year ended December 31, 2016, the Company was not subject to federal income tax. A reconciliation of income tax expense (benefit) computed at the statutory federal income tax rate of 40 percent for the year to income tax expense (benefit) as reflected in the financial statements for the six months ended June 30, 2017 is as follows:

 

		June 30, 2017
		(unaudited)
Federal income tax expense (benefit) at statutory rate		$	(501	)
Change in valuation allowance			515
Other non-deductible expenses			6
Research & development credit			(20	)
Others			—
Total tax expense (benefit)		$	—

The significant components of the Company’s deferred tax assets for the six months ended June 30, 2017 are as follows:

 

		June 30, 2017
		(unaudited)
Deferred tax assets:
Net operating loss carryforwards		$	449
Non-qualified option			51
Research & development credit			20
Depreciation			(6	)
Accrued bonus			1
Total deferred tax assets			515
Valuation allowance			(515	)
Net deferred tax assets		$	—

The Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets. Based on the Company’s history of operating losses, the Company has concluded that it is more likely than not that the benefit of its deferred tax assets will not be realized. Accordingly, the Company has provided a full valuation allowance for deferred tax assets as of June 30, 2017.

As of December 31, 2016, the Company had U.S. federal NOL carryforwards of approximately $0 as the company was a flow-through entity. As of June 30, 2017, the Company had U.S. federal NOL carryforwards of approximately $1.1 million which may be available to offset future income tax liabilities and expire at various dates through 2037.

Under the provisions of the Internal Revenue Code, the NOL carryforwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities. NOL carryforwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant shareholders over a three-year period in excess of 50 percent, as defined under Sections 382 and 383 of the Internal Revenue Code, respectively, as well as similar state provisions. This could limit the amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities. The amount of the annual limitation is determined based on the value of the Company immediately prior to the ownership change. Subsequent ownership changes may further affect the limitation in future years. The Company has completed several financings since its inception which may have resulted in a change in control as defined by Sections 382 and 383 of the Internal Revenue Code, or could result in a change in control in the future.

The Company files income tax returns in the United States at the federal level and in states in which the Company conducts business activities. The federal and state income tax returns are generally subject to

 

F-22

---

Table of Contents

tax examinations for the tax year ended December 31, 2016. To the extent the Company has tax attribute carryforwards, the tax years in which the attribute was generated may still be adjusted upon examination by the Internal Revenue Service or state tax authorities to the extent utilized in a future period.

 

12.	Related Party Transactions

As of December 31, 2016 and June 30, 2017, the Company had balances of $698 thousand and $1.7 million, respectively, in related party convertible promissory notes. The details of the related parties are fully disclosed in Note 6.

Additionally, as of December 31, 2016 and June 30, 2017, the Company had outstanding balances of $1.4 million and $0 of Preferred Units, which were all held by the Chief Executive Officer and Chief Operating Officer of the Company. As of December 31, 2016 and June 30, 2017, the Company had outstanding balances of Preferred Stock of $0 and $1.4 million, respectively, which were all held by the Chief Executive Officer and Chief Operating Officer of the Company. The details of Preferred Units and the Preferred Stock are fully disclosed in Note 8.

 

13.	Subsequent Events

The Company considers events or transactions that occur after the balance sheet date but prior to the issuance of the financial statements to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. For its financial statements as of December 31, 2016 and for the year then ended, the Company has completed an evaluation of all subsequent events through September 14, 2017, the date these financial statements were available to be issued, to ensure that the financial statements include appropriate disclosure of events both recognized in the financial statements as of December 31, 2016, and events which occurred subsequently but were not recognized in the financial statements.

Issuance of Preferred Stock and Conversion of Convertible Promissory Notes and Related Party Convertible Promissory Notes

On August 4, 2017, the Company amended its articles of incorporation changing the authorized capital stock of the Company to include 1,500,000 shares of common stock, par value $0.00001 per share and 1,500,000 shares of Preferred Stock, par value $0.00001 per share, of which, 179,613 shares were designated as Series Seed Preferred Stock (the “Series Seed”) (see Note 8), 210,000 shares were designated as Series A Preferred Shares (the “Series A”), 200,000 shares were designated as Series A-1 Preferred Shares (the “Series A-1”) and 30,000 shares were designated as Series A-2 Preferred Shares (the “Series A-2”) shares. The Series Seed, Series A-1 and Series A-2 shares are collectively known as the Preferred Stock.

On August 8, 2017, the Company issued 914,107 shares Series A at $7.66 per share for aggregate proceeds of approximately $7.0 million to a single investor. Commensurate with the issuance of the Series A shares and in accordance with the conversion features of the Notes (Note 5), the Notes plus accrued interest were automatically converted into Preferred Stock.

 

F-23

---

Table of Contents

The following table outlines the mandatory conversion on August 8, 2017 of the Notes into Preferred Stock (in thousands except share and per share amounts):

 

		Principal				Accrued Interest				Total				Conversion Price Per Share(1)				Shares of Series A-1				Shares of Series A-2				Fair Value Date of Conversion				Fair Value Series A-1				Fair Value Series A-2				Loss on Extinguishment of Convertible Promissory Notes
Convertible promissory notes		$	2,444			$	72			$	2,516			$	4.14	(1)			607,743				—			$	7.66			$	4,654			$	—			$	(2,138	)
Related party convertible promissory notes			948				32				980			$	4.14	(1)			236,619				—			$	7.66				1,812				—				(832	)
Related party convertible promissory notes—June Note			750				8				758			$	6.13	(2)			—				123,691			$	7.66				—				947				(189	)
Total related party promissory notes			1,698				40				1,738								236,619				123,691								1,812				947				(1,021	)
Total		$	4,142			$	112			$	4,254								844,362				123,691							$	6,466			$	947			$	(3,159	)

 

(1)	The conversion price was determined by dividing the target valuation of $16 million by the outstanding shares of 3,863,547 immediately prior to the issuance of the Series A on August 8, 2017 (Note 5).

(2)	The conversion price was determined to be 80% of the $7.66 sales price per share of the Series A shares issued on August 8, 2017 (Note 6).

On August 25, 2017, the Company closed the sale of 130,590 shares of Common Stock with a related party director of the board for aggregate proceeds of $1.0 million.

On September 5, 2017, in connection with the filing of a registration statement for an IPO, the Company’s board of directors approved a 1-to-4.5 forward stock split, in the form of a dividend, of all outstanding shares of common stock and preferred stock, which occurred on September 14, 2017. Except as otherwise noted, all references to share and per share amounts related to common stock, common units, preferred stock, preferred units and stock options in these financial statements have been restated to reflect the stock split. The stock split has been retroactively applied to the Company’s financial statements included in this document. Additionally, the Company’s board of directors approved for the increase in authorized shares of common stock and preferred stock to 80,000,000 shares and 20,000,000 shares, respectively. The increase in the number of common and preferred shares will occur prior to the effectiveness of the registration statement.

On September 5, 2015, the Company’s board of directors approved the establishment of the Krystal Biotech, Inc. 2017 IPO Plan (the “2017 IPO Plan”), which will be adopted prior to the effectiveness of the registration statement. 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 to purchase up to 900,000 shares of the Company’s Common Stock.

 

F-24

---

Table of Contents

 

 

 

3,000,000 Shares

 

COMMON STOCK

Ladenburg Thalmann

 

 

 

 

---

Table of Contents

PART II

INFORMATION NOT REQUIRED IN THE PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution.

The following table sets forth the costs and expenses, other than the underwriting discounts and commissions, payable by the registrant in connection with the sale of our common stock being registered. All amounts are estimates except for the Securities and Exchange Commission, or SEC, registration fee, the Financial Industry Regulatory Authority, or FINRA, filing fee and the NASDAQ Capital Market, or NASDAQ, listing fee.

 

		Amount Paid or to be Paid
SEC registration fee		$	4,399
FINRA filing fee			6,193
NASDAQ listing fee			50,000
Printing and engraving expenses			275,000
Legal fees and expenses			900,000
Accounting fees and expenses			195,000
Transfer agent and registrar fees and expenses			3,500
Miscellaneous expenses			408
Total		$	1,434,500

Item 14. Indemnification of Directors and Officers.

We are incorporated under the laws of the State of Delaware. Section 102 of the Delaware General Corporation Law permits a corporation to eliminate the personal liability of directors of a corporation to the corporation or its stockholders for monetary damages for a breach of fiduciary duty as a director, except where the director breached his duty of loyalty, failed to act in good faith, engaged in intentional misconduct or knowingly violated a law, authorized the payment of a dividend or approved a stock repurchase in violation of Delaware corporate law or obtained an improper personal benefit.

Section 145 of the Delaware General Corporation Law provides that a corporation has the power to indemnify a director, officer, employee or agent of the corporation and certain other persons serving at the request of the corporation in related capacities against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlements actually and reasonably incurred by the person in connection with an action, suit or proceeding to which he is or is threatened to be made a party by reason of such position, if such person acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, in any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful, except that, in the case of actions brought by or in the right of the corporation, no indemnification shall be made with respect to any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or other adjudicating court determines that, despite the adjudication of liability but in view of all of the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper.

As permitted by the Delaware General Corporation Law, our second amended and restated certificate of incorporation and amended and restated bylaws to be in effect upon the closing of this offering provide that: (i) we are required to indemnify our directors and officers to the fullest extent permitted by the Delaware General Corporation Law; (ii) we may, in our discretion, indemnify our employees and agents as set forth in the Delaware General Corporation Law; (iii) we are required, upon satisfaction of certain

 

II-1

---

Table of Contents

conditions, to advance all expenses incurred by our directors and officers in connection with certain legal proceedings; (iv) the rights conferred in the bylaws are not exclusive; and (v) we are authorized to enter into indemnification agreements with our directors, officers, employees and agents.

We intend to enter into indemnification agreements with our directors and executive officers that require us to indemnify them against expenses, judgments, fines, settlements and other amounts that any such person becomes legally obligated to pay (including with respect to a derivative action) in connection with any proceeding, whether actual or threatened, to which such person may be made a party by reason of the fact that such person is or was a director or officer of us or any of our affiliates, provided such person acted in good faith and in a manner such person reasonably believed to be in, or not opposed to, our best interests. We maintain a directors’ and officers’ liability insurance policy. The policy insures directors and officers against unindemnified losses arising from certain wrongful acts in their capacities as directors and officers and reimburses us for those losses for which we have lawfully indemnified the directors and officers. The policy contains various exclusions.

In addition, the underwriting agreement to be filed as Exhibit 1.1 to this Registration Statement provides for indemnification by the underwriters of us and our officers and directors for certain liabilities arising under the Securities Act of 1933, as amended, or the Securities Act, or otherwise.

Item 15. Recent Sales of Unregistered Securities.

Set forth below is information regarding all unregistered securities issued by us since inception.

 

1)

In April 2016, Krystal Biotech, LLC issued 450 member units to two investors for aggregate consideration of $100,000.

 

2)

In September 2016, Krystal Biotech, LLC converted all of the outstanding member units into 12,771 preferred units at an issue price of $7.83 per unit.

 

3)

In September 2016, Krystal Biotech, LLC issued 96,345 preferred units to two investors for aggregate consideration of $754,000.

 

4)

On December 27, 2016, Krystal Biotech, LLC issued 70,497 preferred units to two investors for aggregate consideration of $552,000.

 

5)

In November 2016, Krystal Biotech, LLC granted to five of its directors, officers and consultants options to purchase an aggregate of 142,105 common units under the Krystal Biotech, LLC 2016 Equity Incentive Plan with a per share exercise price of $2.46. We have issued no shares of common stock upon exercise of such options.

 

6)

In November 2016, Krystal Biotech, LLC issued two notes convertible into preferred units to three investors for aggregate consideration of $410,000.

 

7)

In December 2016, Krystal Biotech, LLC issued seven notes convertible into preferred units to eight investors for aggregate consideration of $1,433,000.

 

8)

In February 2017, Krystal Biotech, LLC issued two notes convertible into preferred units to two investors for aggregate consideration of $300,000.

 

9)

On March 31, 2017, Krystal Biotech, LLC, a California limited liability company, converted into Krystal Biotech, Inc., a Delaware corporation. As a result, 3,490,884 common units of Krystal Biotech, LLC were converted into 3,490,884 shares of common stock, $0.00001 par value per share, of Krystal Biotech, Inc., and 179,613 preferred units of Krystal Biotech, LLC were converted into 179,613 shares of preferred stock, $0.00001 par value per share of Krystal Biotech, Inc.

 

10)

In May 2017, we granted to four of our employees options to purchase an aggregate of 27,000 shares of common stock under the Krystal Biotech, Inc. 2017 Stock Incentive Plan with a per share exercise price of $2.46 and have issued no shares of common stock upon exercise of such options.

 

II-2

---

Table of Contents

11)

In June 2017, we granted to one of our directors options to purchase an aggregate of 18,949 shares of common stock under the Krystal Biotech, Inc. 2017 Stock Incentive Plan with a per share exercise prices of $8.79 and have issued no shares of common stock upon exercise of such options.

 

12)

In May 2017, we issued four notes convertible into shares of preferred stock to four investors for aggregate consideration of $1,249,000.

 

13)

In June 2017, we issued a note convertible into shares of preferred stock to one investor for consideration of $750,000.

 

14)

In June 2017, we granted to two of our employees options to purchase an aggregate of 13,500 shares of common stock under the Krystal Biotech, Inc. 2017 Stock Incentive Plan with a per share exercise price of $2.46 and have issued no shares of common stock upon exercise of such options.

 

15)

In August 2017, we issued 914,107 shares of Series A preferred stock to one investor for consideration of $7,000,032.

 

16)

In August 2017, we issued 130,590 shares of common stock to one investor for consideration of $1,000,029.

On September 14, 2017, we effected a 1-for-4.5 forward stock split, in the form of a dividend, of all outstanding shares of common and preferred stock. Except as otherwise noted, all references to common stock, common units, preferred stock, preferred units and stock options in this registration statement reflect the forward stock split.

Each of the foregoing issuances was made in a transaction not involving a public offering pursuant to an exemption from the registration requirements of the Securities Act in reliance upon Section 4(a)(2) of the Securities Act, or Regulation D or Rule 701 promulgated under the Securities Act.

Item 16. Exhibits and Financial Statement Schedules.

(a) Exhibits:

We have filed the exhibits listed on the accompanying Exhibit Index of this registration statement, which Exhibit Index is incorporated herein by reference.

(b) Financial Statement Schedules.

All other schedules have been omitted because the information required to be presented in them is not applicable or is shown in the financial statements or notes.

Item 17. Undertakings.

The undersigned Registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act, may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer, or controlling person of the registrant in the successful defense of any action, suit, or proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

The undersigned Registrant hereby undertakes that:

 

1)

For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to

 

II-3

---

Table of Contents

Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective.

 

2)

For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

 

II-4

---

Table of Contents

EXHIBIT INDEX

 

Exhibit No.		Description
1.1		Form of Underwriting Agreement
3.1#		Amended and Restated Certificate of Incorporation, as currently in effect
3.2#		Form of Second Amended and Restated Certificate of Incorporation to be effective upon the closing of this offering
3.3#		Bylaws, as currently in effect
3.4		Form of Amended and Restated Bylaws to be effective upon the closing of this offering
4.1		Form of Common Stock Certificate
5.1#		Opinion of Morrison & Foerster LLP
10.1		Form of Indemnification Agreement by and between Krystal Biotech, Inc. and each of its directors and officers listed on Schedule A thereto
10.2†#		Executive Employment Agreement, effective July 1, 2017, by and between Krystal Biotech, Inc. and Krish S. Krishnan
10.3†#		Executive Employment Agreement, effective May 1, 2017, by and between Krystal Biotech, Inc. and Suma M. Krishnan
10.4†#		Executive Employment Agreement, effective May 1, 2017, by and between Krystal Biotech, Inc. and Pooja Agarwal
10.5†		Krystal Biotech, LLC 2016 Equity Incentive Plan
10.6†		Krystal Biotech, Inc. 2017 Stock Incentive Plan
10.7†		Krystal Biotech, Inc. 2017 IPO Stock Incentive Plan.
10.8†		Form of Krystal Biotech, Inc. 2017 Stock Incentive Plan Notice of Stock Option Award.
10.9†		Form of Krystal Biotech, Inc. 2017 IPO Stock Incentive Plan Notice of Stock Option Award.
10.10#		Lease Agreement, dated as of May 26, 2016, by and between Wharton Lender Associates, L.P. and Krystal Biotech, LLC
10.11#		Second Amendment to Lease Agreement, dated as of February 27, 2017, by and between Wharton Lender Associates, L.P. and Krystal Biotech, LLC
10.12#		Investors’ Rights Agreement, dated as of August 7, 2017, by and among Krystal Biotech, Inc. and the investors listed on Schedule  A thereto
23.1		Consent of Mayer Hoffman McCann P.C., independent registered public accounting firm
23.2#		Consent of Morrison & Foerster LLP (included in Exhibit 5.1)
24.1#		Power of Attorney (included on signature page) (see page II-5 to the filing of this registration statement on Form S-1 filed on August 21, 2017)

 

†	Indicates management contract or compensatory plan

#	Previously filed.

---

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Pittsburgh, State of Pennsylvania, on September 14, 2017.

 

Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities indicated below:

 

Signature		Title		Date
/s/ Krish S. Krishnan Krish S. Krishnan		President and Chief Executive Officer and Director (Principal Executive Officer)		September 14, 2017
/s/ Michael C. Sheahan Michael C. Sheahan, CPA		Interim Chief Financial Officer (Principal Financial Officer)		September 14, 2017
/s/ Suma M. Krishnan Suma M. Krishnan		Chief Operating Officer and Director		September 14, 2017
* Daniel S. Janney		Director		September 14, 2017
* R. Douglas Norby		Director		September 14, 2017
* Dino A. Rossi		Director		September 14, 2017
Kirti Ganorkar		Director		September 14, 2017

 

*By		/s/ Krish S. Krishnan
		Krish S. Krishnan As Attorney-In-Fact

Exhibit 1.1

Krystal Biotech, Inc.

[●] Shares

Common Stock

($0.00001 par value)

Underwriting Agreement

New York, New York

[●], 2017

Ladenburg Thalmann & Co. Inc.

277 Park Avenue, 26th Floor

New York, NY 10172

As Representative of the several Underwriters,

c/o Ladenburg Thalmann & Co. Inc.

277 Park Avenue, 26th Floor

New York, NY 10172

Ladies and Gentlemen:

Krystal Biotech, Inc., a corporation organized under the laws of Delaware (the “Issuer”), proposes to issue and sell to the several underwriters named in Schedule I hereto (the “Underwriters”), for whom Ladenburg Thalmann & Co. Inc. is acting as representative (the “Representative”), [●] shares of common stock, $0.00001 par value per share (“Common Stock”) of the Issuer (said shares to be issued and sold by the Issuer being hereinafter called the “Underwritten Securities”). The Issuer also proposes to grant to the Underwriters an option to purchase up to [●] additional shares of Common Stock to cover over-allotments, if any (the “Option Securities;” the Option Securities, together with the Underwritten Securities, hereinafter called the “Securities”). To the extent there are no additional Underwriters listed on Schedule I other than you, the term Representative as used herein shall mean you, as Underwriter, and the terms Representative and Underwriter shall mean either the singular or plural as the context requires. The offering and sale of the Securities contemplated by this Agreement is referred to herein as the “Offering.”

1. Representations and Warranties. The Issuer represents and warrants to, and agrees with, each Underwriter as set forth below:

(a) The Issuer has prepared and filed with the Securities and Exchange Commission (the “SEC”) a registration statement (file number 333-220085) on Form S-1 including exhibits and financial statements and any prospectus supplement relating to the Securities that is filed with the SEC pursuant to Rule 424(b) under the Securities Act and deemed part of such registration statement pursuant to Rule 430A under the Securities

---

Act, as amended at the Execution Time and, in the event any post-effective amendment thereto or any registration statement and any amendments thereto filed pursuant to Rule 462(b) under the Securities Act (as defined herein) relating to the Offering (the “Rule 462(b) Registration Statement”) becomes effective prior to the Closing Date, shall also mean such registration statement as so amended or such Rule 462(b) Registration Statement, as the case may be (the “Registration Statement”), including a related preliminary prospectus, for registration under the Securities Act of 1933, as amended, and the rules and regulations of the SEC promulgated thereunder (the “Securities Act”) of the Offering. Such Registration Statement, including any amendments thereto filed prior to the date and time that this agreement (the “Underwriting Agreement”) is executed and delivered by the parties hereto (the “Execution Time”), has become effective. The Issuer may have filed one or more amendments thereto, including a related preliminary prospectus relating to the Securities which is used prior to the filing of the Prospectus (the “Preliminary Prospectus”), each of which has previously been furnished to you. The Issuer will file with the SEC a final prospectus relating to the Securities in accordance with Rule 424(b) after the Execution Time (the “Prospectus”). As filed, such Prospectus shall contain all information required by the Securities Act and the rules thereunder and, except to the extent the Representative shall agree in writing to a modification, shall be in all substantive respects in the form furnished to you prior to the Execution Time or, to the extent not completed at the Execution Time, shall contain only such specific additional information and other changes (beyond that contained in the latest Preliminary Prospectus) as the Issuer has advised you, prior to the Execution Time, will be included or made therein;

(b) On each date and time that the Registration Statement, any post-effective amendment or amendments thereto and any Rule 462(b) Registration Statement became or becomes effective (the “Effective Date”), the Registration Statement did, and when the Prospectus is first filed in accordance with Rule 424(b) under the Securities Act and on the Closing Date (as defined herein) and on any date on which Option Securities are purchased, if such date is not the Closing Date (a “settlement date”), the Prospectus (and any supplement thereto) will, comply in all material respects with the applicable requirements of the Securities Act and the rules thereunder; on the Effective Date, at the Execution Time and on the Closing Date, the Registration Statement did not and will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading; and on the date of any filing pursuant to Rule 424(b) and on the Closing Date and any settlement date, the Prospectus (together with any supplement thereto) will not include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the Issuer makes no representations or warranties as to the information contained in or omitted from the Registration Statement, or the Prospectus (or any supplement thereto) in reliance upon and in conformity with information furnished in writing to the Issuer by or on behalf of any Underwriter through the Representative specifically for inclusion in the Registration Statement or the Prospectus (or any supplement thereto), it being understood and agreed that the only such information furnished by any Underwriter consists of the information described as such in Section 8 hereof;

 

2

---

(c) The “Disclosure Package” shall mean (i) the Preliminary Prospectus that is generally distributed to investors and used to offer the Securities, (ii) any issuer free writing prospectus, as defined in Rule 433 under the Securities Act (the “Issuer Free Writing Prospectuses”), if any, identified in Schedule II hereto and (iii) any other free writing prospectus, as defined in Rule 405 under the Securities Act (a “Free Writing Prospectus”) that the parties hereto shall hereafter expressly agree in writing to treat as part of the Disclosure Package. None of the (i) Disclosure Package, (ii) each electronic road show, when taken together as a whole with the Disclosure Package, (iii) any individual Written Testing-the-Waters Communication, when taken together as a whole with the Disclosure Package and (iv) the price to the public, the number of Underwritten Securities and the number of Option Securities to be included on the cover page of the Prospectus, contains any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The preceding sentence does not apply to statements in or omissions from the Disclosure Package based upon and in conformity with written information furnished to the Issuer by any Underwriter through the Representative specifically for use therein, it being understood and agreed that the only such information furnished by or on behalf of any Underwriter consists of the information described as such in Section 8 hereof;

(d) (i) At the time of filing the Registration Statement and (ii) as of the Execution Time (with such date being used as the determination date for purposes of this clause (ii)), the Issuer was not and is not an ineligible issuer, as defined in Rule 405 under the Securities Act (an “Ineligible Issuer”), without taking account of any determination by the SEC pursuant to Rule 405 that it is not necessary that the Issuer be considered an Ineligible Issuer;

(e) From the time of initial confidential submission of the Registration Statement to the SEC (or, if earlier, the first date on which the Issuer engaged directly or through any Person authorized to act on its behalf in any Testing-the-Waters Communication) through the Execution Time, the Issuer has been and is an “emerging growth company,” as defined in Section 2(a) of the Securities Act (an “Emerging Growth Company”). “Testing-the-Waters Communication” means any oral or written communication with potential investors undertaken in reliance on Section 5(d) of the Securities Act;

(f) The Issuer (i) has not alone engaged in any Testing-the-Waters Communication other than Testing-the-Waters Communications with the consent of the Representative with entities that are qualified institutional buyers within the meaning of Rule 144A under the Securities Act or institutions that are accredited investors within the meaning of Rule 501 under the Securities Act and (ii) has not authorized anyone other than the Representative to engage in Testing-the-Waters Communications. The Issuer reconfirms that the Representative have been authorized to act on its behalf in undertaking Testing-the-Waters Communications. The Issuer has not distributed any Written Testing-the-Waters Communications other than those listed on Schedule III hereto. “Written Testing-the-Waters Communication” means any Testing-the-Waters Communication that is a written communication within the meaning of Rule 405 under the Securities Act;

 

3

---

(g) Each Issuer Free Writing Prospectus does not include any information that conflicts with the information contained in the Registration Statement. The foregoing sentence does not apply to statements in or omissions from any Issuer Free Writing Prospectus based upon and in conformity with written information furnished to the Issuer by any Underwriter through the Representative specifically for use therein, it being understood and agreed that the only such information furnished by or on behalf of any Underwriter consists of the information described as such in Section 8 hereof;

(h) The Issuer has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction in which it is chartered or organized with full corporate power and authority to own or lease, as the case may be, and to operate its properties and conduct its business as described in the Registration Statement, Disclosure Package and the Prospectus, and is duly qualified to do business as a foreign corporation and is in good standing under the laws of each jurisdiction which requires such qualification, except where the failure to so qualify would not reasonably be expected to have a material adverse effect on (i) the financial condition, business or properties of the Issuer, taken as a whole or (ii) the Company’s performance of this Underwriting Agreement or any of the transactions contemplated hereby (clauses (i) and (ii), each a “Material Adverse Effect”), except as set forth in or contemplated in the Registration Statement, Disclosure Package and the Prospectus (exclusive of any supplement thereto);

(i) The Issuer has an authorized capitalization as set forth in the Disclosure Package and Prospectus, and all of the issued and outstanding shares of capital stock of the Issuer have been duly and validly authorized and issued, are fully-paid and non-assessable and conform to the descriptions thereof contained in the Disclosure Package and the Prospectus;

(j) There is no franchise, contract or other document of a character required to be described in the Registration Statement, Disclosure Package or Prospectus, or to be filed as an exhibit thereto, which is not described or filed as required;

(k) This Underwriting Agreement has been duly authorized, executed and delivered by the Issuer;

(l) The Issuer is not and, after giving effect to the offering and sale of the Securities and the application of the proceeds thereof as described in the Disclosure Package and the Prospectus, will not be an “investment company” as defined in the Investment Company Act of 1940, as amended;

(m) No consent, approval, authorization, filing with or order of any court or governmental agency or regulatory body with jurisdiction over the Issuer is required in connection with the transactions contemplated herein, except (i) such as have been obtained under the Securities Act, (ii) such as may be required under the blue sky laws of

 

4

---

any jurisdiction in connection with the purchase and distribution of the Securities by the Underwriters in the manner contemplated herein and in the Registration Statement, Disclosure Package and the Prospectus, (iii) such as may be required by the applicable rules of the Financial Industry Regulatory Authority, Inc. (“FINRA”), (iv) such as may be required by the listing rules of the Nasdaq Capital Market; and (v) such consents, approvals, authorizations, filings or orders as shall have been obtained or made prior to the Closing Date;

(n) Neither the issue and sale of the Securities nor the consummation of any other of the transactions herein contemplated nor the fulfillment of the terms hereof will conflict with, result in a breach or violation of, or imposition of any lien, charge or encumbrance upon any property or assets of the Issuer pursuant to (i) the charter or by-laws of the Issuer; (ii) the terms of any indenture, contract, lease, mortgage, deed of trust, note agreement, loan agreement or other agreement, obligation, condition, covenant or instrument to which the Issuer is a party or bound or to which its property is subject; or (iii) any statute, law, rule, regulation, judgment, order or decree applicable to the Issuer of any court, regulatory body, administrative agency, governmental body, arbitrator or other authority having jurisdiction over the Issuer, except, in the cases of clauses (ii) and (iii) above, for any such conflict, breach, violation or default that would not reasonably expected to have, individually or in the aggregate, a Material Adverse Effect;

(o) No holders of securities of the Issuer have rights to the registration of such securities under the Registration Statement except for such as have been effectively waived;

(p) The financial statements of the Issuer included in the Registration Statement, Disclosure Package and Prospectus present fairly the financial condition, results of operations and cash flows of the Issuer as of the dates and for the periods indicated, comply as to form in all material respects with the applicable accounting requirements of the Securities Act and have been prepared in conformity with generally accepted accounting principles applied on a consistent basis throughout the periods involved (except as otherwise noted therein including with respect to the unaudited financial statements and the related notes thereby); The selected financial data set forth under the caption “Selected Financial Information” in the Registration Statement, Disclosure Package and Prospectus fairly present, in all material respects, on the basis stated in the Registration Statement, Disclosure Package and Prospectus, the information included therein;

(q) No action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving the Issuer or its property is pending or, to the knowledge of the Issuer, threatened that would reasonably be expected to have a Material Adverse Effect, except as set forth in or contemplated in the Registration Statement, Disclosure Package and the Prospectus (exclusive of any supplement thereto);

(r) The Issuer owns or leases all such properties as are necessary to the conduct of its operations as presently conducted;

 

5

---

(s) The Issuer is not in violation or default of (i) any provision of its charter or bylaws; (ii) the terms of any indenture, contract, lease, mortgage, deed of trust, note agreement, loan agreement or other agreement, obligation, condition, covenant or instrument to which it is a party or bound or to which its property is subject; or (iii) any statute, law, rule, regulation, judgment, order or decree of any court, regulatory body, administrative agency, governmental body, arbitrator or other authority having jurisdiction over the Issuer or any of its properties, as applicable, except, in the cases of clauses (ii) and (iii) above, for any such conflict, breach, violation or default that would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect;

(t) Mayer Hoffman McCann P.C., who has certified certain financial statements of the Issuer and delivered their report with respect to the audited financial statements included in the Disclosure Package and the Prospectus, are independent public accountants with respect to the Issuer within the meaning of the Securities Act and the applicable published rules and regulations thereunder;

(u) The Issuer has filed all tax returns that are required to be filed or has requested extensions thereof (except in any case in which the failure so to file would not reasonably be expected to have a Material Adverse Effect), and has paid all taxes required to be paid by it and any other assessment, fine or penalty levied against it, to the extent that any of the foregoing is due and payable, except for any such assessment, fine or penalty that is currently being contested in good faith or as would not reasonably be expected to have Material Adverse Effect;

(v) No labor problem or dispute with the employees of the Issuer exists or is threatened or imminent, and the Issuer is not aware of any existing or imminent labor disturbance by the employees of any of its principal suppliers, contractors or customers, would reasonably be expected to have a Material Adverse Effect;

(w) The Issuer is insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as the Issuer reasonably believes are prudent and customary in the businesses in which they are engaged; all policies of insurance insuring the Issuer or its businesses, assets, employees, officers and directors are in full force and effect; the Issuer is in compliance with the terms of such policies and instruments in all material respects; and there are no claims by the Issuer under any such policy or instrument as to which any insurance company is denying liability or defending under a reservation of rights clause; the Issuer has not been refused any insurance coverage sought or applied for; and the Issuer has no reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not reasonably be expected to have a Material Adverse Effect, except as set forth in or contemplated in the Disclosure Package and the Prospectus;

(x) The Issuer possesses all licenses, certificates, permits and other authorizations required to be issued by all applicable authorities necessary to conduct its business, except where the failure to possess such licenses, permits and other

 

6

---

authorizations would individually or in the aggregate, reasonably be expected to have a Material Adverse Effect, and the Issuer has not received any notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would not reasonably be expected to have a Material Adverse Effect;

(y) The Issuer maintains a system of internal accounting controls designed to provide reasonable assurances that (i) transactions are executed in accordance with management’s general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with United States generally accepted accounting principles and to maintain asset accountability; (iii) access to assets is permitted only in accordance with management’s general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. Except as described in the Registration Statement, Disclosure Package and the Prospectus, the Issuer’s internal controls over financial reporting are effective and the Issuer is not aware of any material weakness in their internal controls over financial reporting (it being understood that, as of the date hereof, the Issuer is not required to comply with Section 404 of the Sarbanes-Oxley Act (as defined herein);

(z) The Issuer maintains “disclosure controls and procedures” (as such term is defined in Rule 13a-15(e) under the Securities and Exchange Act 1934, as amended and the rules and regulations of the SEC promulgated thereunder (the “Exchange Act”)); such disclosure controls and procedures are effective at the reasonable assurance level;

(aa) The Issuer has not taken, directly or indirectly, any action designed to or that would constitute or that might reasonably be expected to cause or result in, under the Exchange Act or otherwise, stabilization or manipulation of the price of any security of the Issuer to facilitate the sale or resale of the Securities;

(bb) The Issuer is (i) in compliance with any and all applicable foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants (“Environmental Laws”), (ii) have received and is in compliance with all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses and (iii) has not received notice of any actual or potential liability under any environmental law, except in the case of (i), (ii) and (iii), where such non-compliance with Environmental Laws, failure to receive required permits, licenses or other approvals, or liability would not, individually or in the aggregate, be reasonably expected to have a Material Adverse Effect. Except as set forth in the Disclosure Package and the Prospectus, the Issuer has not been named as a “potentially responsible party” under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended;

(cc) In the ordinary course of its business, the Issuer periodically reviews the effect of Environmental Laws on the business, operations and properties of the Issuer, in the course of which it identifies and evaluates associated costs and liabilities (including,

 

7

---

without limitation, any capital or operating expenditures required for clean-up, closure of properties or compliance with Environmental Laws, or any permit, license or approval, any related constraints on operating activities and any potential liabilities to third parties). On the basis of such review, the Issuer has reasonably concluded that such associated costs and liabilities would not, singly or in the aggregate, have a Material Adverse Effect;

(dd) None of the following events has occurred or exists: (i) a failure to fulfill the obligations, if any, under the minimum funding standards of Section 302 of the United States Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and the regulations and published interpretations thereunder with respect to a Plan, determined without regard to any waiver of such obligations or extension of any amortization period; (ii) an audit or investigation by the Internal Revenue Service, the U.S. Department of Labor, the Pension Benefit Guaranty Corporation or any other federal or state governmental agency or any foreign regulatory agency with respect to the employment or compensation of employees by any of the Issuer that could have a Material Adverse Effect; (iii) any breach of any contractual obligation, or any violation of law or applicable qualification standards, with respect to the employment or compensation of employees by the Issuer that would reasonably be expected to have a Material Adverse Effect. None of the following events has occurred or is reasonably likely to occur: (i) a material increase in the aggregate amount of contributions required to be made to all Plans in the current fiscal year of the Issuer compared to the amount of such contributions made in the most recently completed fiscal year of the Issuer; (ii) a material increase in the “accumulated post-retirement benefit obligations” (within the meaning of Statement of Financial Accounting Standards 106) of the Issuer compared to the amount of such obligations in the most recently completed fiscal year of the Issuer; (iii) any event or condition giving rise to a liability under Title IV of ERISA that could have a Material Adverse Effect; or (iv) the filing of a claim by one or more employees or former employees of the Issuer related to their employment that could have a Material Adverse Effect. For purposes of this paragraph, the term “Plan” means a plan (within the meaning of Section 3(3) of ERISA) subject to Title IV of ERISA with respect to which the Issuer may have any liability;

(ee) There is and has been no failure on the part of the Issuer and any of the Issuer’s directors or officers, in their capacities as such, to comply with any provision of the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated in connection therewith (the “Sarbanes-Oxley Act”) in effect as of the Effective Date, including Section 402 relating to loans and Sections 302 and 906 relating to certifications;

(ff) Neither the Issuer nor, to the knowledge of the Issuer, any director, officer, agent, employee, affiliate or other person acting on behalf of the Issuer is aware of or has taken any action, directly or indirectly, that could result in a violation or a sanction for violation by such persons of the Foreign Corrupt Practices Act of 1977 or the U.K. Bribery Act 2010, each as may be amended, or similar law of any other relevant jurisdiction, or the rules or regulations thereunder; and the Issuer has instituted and maintains policies and procedures to ensure compliance therewith. No part of the proceeds of the offering will be used, directly or indirectly, in violation of the Foreign Corrupt Practices Act of 1977 or the U.K. Bribery Act 2010, each as may be amended, or similar law of any other relevant jurisdiction, or the rules or regulations thereunder;

 

8

---

(gg) The operations of the Issuer is and have been conducted at all times in compliance with applicable financial recordkeeping and reporting requirements and the money laundering statutes and the rules and regulations thereunder and any related or similar rules, regulations or guidelines, issued, administered or enforced by any governmental agency (collectively, the “Money Laundering Laws”) and no action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving the Issuer with respect to the Money Laundering Laws is pending or, to the knowledge of the Issuer, threatened;

(hh) Neither the Issuer nor, to the knowledge of the Issuer, any director, officer, agent, employee or affiliate of the Issuer (i) is, or is controlled or 50% or more owned in the aggregate by or is acting on behalf of, one or more individuals or entities that are currently the subject of any sanctions administered or enforced by the United States (including any administered or enforced by the Office of Foreign Assets Control of the U.S. Department of the Treasury, the U.S. Department of State or the Bureau of Industry and Security of the U.S. Department of Commerce), the United Nations Security Council, the European Union, a member state of the European Union (including sanctions administered or enforced by Her Majesty’s Treasury of the United Kingdom) or other relevant sanctions authority (collectively, “Sanctions” and such persons, “Sanctioned Persons” and each such person, a “Sanctioned Person”) or (ii) is located, organized or resident in a country or territory that is, or whose government is, the subject of Sanctions that broadly prohibit dealings with that country or territory (collectively, “Sanctioned Countries” and each, a “Sanctioned Country”). The Issuer will not, directly or indirectly, use the proceeds of this offering, or lend, contribute or otherwise make available such proceeds to any subsidiary, joint venture partner or other individual or entity in any manner that would result in a violation of any Sanctions by, or could result in the imposition of Sanctions against, any individual or entity (including any individual or entity participating in the offering, whether as underwriter, advisor, investor or otherwise);

(ii) The Issuer has not engaged in any dealings or transactions with or for the benefit of a Sanctioned Person, or with or in a Sanctioned Country, in the preceding 3 years, nor does the Issuer have any plans to engage in dealings or transactions with or for the benefit of a Sanctioned Person, or with or in a Sanctioned Country;

(jj) As of the Effective Date, the Issuer does not have any subsidiaries;

(kk) Except as described in the Registration Statement, the Disclosure Package and the Prospectus, as applicable, the Issuer (i) is and at all times has been in compliance in all respects with all applicable statutes, rules and regulations applicable to the ownership, testing, development, manufacture, packaging, processing, use, distribution, marketing, advertising, labeling, promotion, sale, offer for sale, storage, import, export or disposal of any product manufactured or distributed by the Issuer including, without limitation the Federal Food, Drug and Cosmetic Act (21 U.S.C. §301 et seq.), the federal

 

9

---

Anti-Kickback Statute (42 U.S.C. §1320a-7b(b)), the Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, and the Patient Protection and Affordable Care Act of 2010, as amended by the Health Care and Education Affordability Reconciliation Act of 2010, the regulations promulgated pursuant to such laws, and any successor government programs and comparable state laws, regulations relating to Good Clinical Practices and Good Laboratory Practices and all other applicable local, state, federal, national, supranational and foreign laws relating to the regulation of the Issuer (collectively, the “Applicable Laws”); (ii) has not received any notice from any court or arbitrator or governmental or regulatory authority or third party alleging or asserting noncompliance with any Applicable Laws or any licenses, exemptions, certificates, approvals, clearances, authorizations, permits, registrations and supplements or amendments thereto required by any such Applicable Laws (“Authorizations”); (iii) possesses all Authorizations and such Authorizations are valid and in full force and effect in all respects and are not in violation of any term of any such Authorizations; (iv) has not received written notice of any claim, action, suit, proceeding, hearing, enforcement, investigation arbitration or other action from any court or arbitrator or governmental or regulatory authority or third party alleging that any product operation or activity is in violation of any Applicable Laws or Authorizations nor is any such claim, action, suit, proceeding, hearing, enforcement, investigation, arbitration or other action threatened; (v) has received any written notice that any court or arbitrator or governmental or regulatory authority has taken, is taking or intends to take, action to limit, suspend, materially modify or revoke any Authorizations nor is any such limitation, suspension, modification or revocation threatened; (vi) has filed, obtained, maintained or submitted all reports, documents, forms, notices, applications, records, claims, submissions and supplements or amendments as required by any Applicable Laws or Authorizations and that all such reports, documents, forms, notices, applications, records, claims, submissions and supplements or amendments were complete and accurate on the date filed (or were corrected or supplemented by a subsequent submission); and (vii) is not a party to any corporate integrity agreements, monitoring agreements, consent decrees, settlement orders, or similar agreements with or imposed by any governmental or regulatory authority, except in each of (i), (iii) and (vi), where such noncompliance would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.

(ll) The clinical and pre-clinical studies and trials conducted by or, to the knowledge of the Issuer, on behalf of or sponsored by the Issuer, or in which the Issuer has participated, that are described in the Registration Statement, the Disclosure Package and the Prospectus or the results of which are referred to in the Registration Statement, the Disclosure Package and the Prospectus, as applicable, were and, if still pending, are being conducted in all material respects in accordance with standard medical and scientific research procedures and all applicable statutes, rules and regulations of the FDA and comparable drug regulatory agencies outside of the United States to which it is subject (collectively, the “Regulatory Authorities”), including, without limitation, 21 C.F.R. Parts 50, 54, 56, 58, and 312, and current Good Clinical Practices and Good Laboratory Practices; the descriptions in the Registration Statement, the Disclosure Package or the Prospectus of the results of such studies and trials are accurate and

 

10

---

complete in all material respects and fairly present the data derived from such studies and trials; the Issuer has no knowledge of any other trials the results of which are inconsistent with or otherwise call into question the results described or referred to in the Registration Statement, Disclosure Package and the Prospectus; the Issuer has operated and is currently in compliance in all material respects with all applicable statutes, rules and regulations of the Regulatory Authorities; the Issuer has not received any written notices, correspondence or other communication from the Regulatory Authorities or any applicable governmental authority requiring or threatening the termination or suspension of any clinical or pre-clinical trials that are described in the Registration Statement, the Disclosure Package and the Prospectus or the results of which are referred to in the Registration Statement, Disclosure Package or the Prospectus, other than ordinary course communications with respect to pending clinical trials, and, to the Issuer’s knowledge, there are no reasonable grounds for same.

(mm) Except as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect, the Issuer owns, possesses, licenses or has other rights to use or can acquire on reasonable terms, all patents, patent applications, trade and service marks, trade and service mark registrations, trade names, copyrights, licenses, inventions, trade secrets, technology, know-how and other intellectual property (collectively, the “Intellectual Property”) necessary for the conduct of the Issuer’s business as now conducted or as proposed in the Registration Statement, Disclosure Package and Prospectus to be conducted. To the Issuer’s knowledge, (a) there are no rights of third parties to any such Intellectual Property; (b) there is no infringement by third parties of any such Intellectual Property; (c) there is no pending or to the Issuer’s knowledge, threatened action, suit, proceeding or claim by others challenging the Issuer’s rights in or to any such Intellectual Property, and the Issuer is unaware of any facts which would form a reasonable basis for any such claim; (d) there is no pending or to the Issuer’s knowledge, threatened action, suit, proceeding or claim by others challenging the validity or scope of any such Intellectual Property, and the Issuer is unaware of any facts which would form a reasonable basis for any such claim; (e) there is no pending or to the Issuer’s knowledge, threatened action, suit, proceeding or claim by others that the Issuer infringes or otherwise violates any patent, trademark, copyright, trade secret or other proprietary rights of others, and the Issuer is unaware of any other fact which would form a reasonable basis for any such claim; (f) there is no U.S. patent or published U.S. patent application which contains claims that dominate or may dominate any Intellectual Property described in the Disclosure Package and the Prospectus as being owned by or licensed to the Issuer or that interferes with the issued or pending claims of any such Intellectual Property; and (g) there is no prior art of which the Issuer is aware that may render any U.S. patent held by the Issuer invalid or any U.S. patent application held by the Issuer un-patentable which has not been disclosed to the U.S. Patent and Trademark Office, except in the cases of (a) through (g), as would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect,

(nn) Except as disclosed in the Registration Statement, the Disclosure Package and the Prospectus, the Issuer (i) does not have any material lending or other relationship with any bank or lending affiliate of the Representative and (ii) does not intend to use any of the proceeds from the sale of the Securities hereunder to repay any outstanding debt owed to any affiliate of the Representative; and

 

11

---

(oo) Any certificate signed by any officer of the Issuer and delivered to the Representative or counsel for the Underwriters in connection with the offering of the Securities shall be deemed a representation and warranty by the Issuer, as to matters covered thereby, to each Underwriter.

2. Purchase and Sale.

(a) Subject to the terms and conditions and in reliance upon the representations and warranties herein set forth, the Issuer agrees to sell to each Underwriter, and each Underwriter agrees, severally and not jointly, to purchase from the Issuer, at a purchase price of $[●] per share, the amount of the Underwritten Securities set forth opposite such Underwriter’s name in Schedule I hereto; and

(b) Subject to the terms and conditions and in reliance upon the representations and warranties herein set forth, the Issuer hereby grants an option to the several Underwriters to purchase, severally and not jointly, up to [●] Option Securities at the same purchase price per share as the Underwriters shall pay for the Underwritten Securities, less an amount per share equal to any dividends or distributions declared by the Issuer and payable on the Underwritten Securities but not payable on the Option Securities. Said option may be exercised only to cover over-allotments in the sale of the Underwritten Securities by the Underwriters. Said option may be exercised in whole or in part at any time on or before the 30th day after the date of the Prospectus upon written or telegraphic notice by the Representative to the Issuer setting forth the number of shares of the Option Securities as to which the several Underwriters are exercising the option and the settlement date. The number of Option Securities to be purchased by each Underwriter shall be the same percentage of the total number of shares of the Option Securities to be purchased by the several Underwriters as such Underwriter is purchasing of the Underwritten Securities, subject to such adjustments as you in your absolute discretion shall make to eliminate any fractional shares.

3. Delivery and Payment. Delivery of and payment for the Underwritten Securities and the Option Securities (if the option provided for in Section 2(b) hereof shall have been exercised on or before the third (3^rd) Business Day immediately preceding the Closing Date) shall be made at 10:00 AM, Eastern Standard Time, on September 22, 2017, or at such time on such later date not more than three (3) Business Days after the foregoing date as the Representative shall designate, which date and time may be postponed by agreement between the Representative and the Issuer or as provided in Section 9 hereof (such date and time of delivery and payment for the Securities being herein called the “Closing Date”). For purposes herein, “Business Day” shall mean any day other than a Saturday, a Sunday or a legal holiday or a day on which banking institutions or trust companies are authorized or obligated by law to close in New York, New York. Delivery of the Securities shall be made to the Representative for the respective accounts of the several Underwriters against payment by the several Underwriters through the Representative of the purchase price thereof to or upon the order of the Issuer by wire transfer payable in same-day funds to an account specified by the Issuer. Delivery of the Underwritten Securities and the Option Securities shall be made through the facilities of The Depository Trust Issuer unless the Representative shall otherwise instruct.

 

12

---

If the option provided for in Section 2(b) hereof is exercised after the third (3^rd) Business Day immediately preceding the Closing Date, the Issuer will deliver the Option Securities (at the expense of the Issuer) to the Representative, at 620 Eighth Avenue, New York, New York, 10018 on the date specified by the Representative (which shall be within three (3) Business Days after exercise of said option) for the respective accounts of the several Underwriters, against payment by the several Underwriters through the Representative of the purchase price thereof to or upon the order of the Issuer by wire transfer payable in same-day funds to an account specified by the Issuer. If settlement for the Option Securities occurs after the Closing Date, the Issuer will deliver to the Representative on the settlement date for the Option Securities, and the obligation of the Underwriters to purchase the Option Securities shall be conditioned upon receipt of, supplemental opinions, certificates and letters confirming as of such date the opinions, certificates and letters delivered on the Closing Date pursuant to Section 6 hereof.

4. Offering by Underwriters. It is understood that the several Underwriters propose to offer the Securities for sale to the public as set forth in the Prospectus.

5. Agreements. The Issuer agrees with the several Underwriters that:

(a) Prior to the termination of the offering of the Securities, the Issuer will not file any amendment of the Registration Statement or supplement to the Prospectus or any Rule 462(b) Registration Statement unless the Issuer has furnished you a copy for your review prior to filing and will not file any such proposed amendment or supplement to which you reasonably and in good faith object. The Issuer will cause the Prospectus, properly completed, and any supplement thereto to be filed in a form approved by the Representative with the SEC pursuant to the applicable paragraph of Rule 424(b) under the Securities Act within the time period prescribed and will provide evidence satisfactory to the Representative of such timely filing. The Issuer will promptly advise the Representative (i) when the Prospectus, and any supplement thereto, shall have been filed (if required) with the SEC pursuant to Rule 424(b) or when any Rule 462(b) Registration Statement shall have been filed with the SEC, (ii) when, prior to termination of the offering of the Securities, any amendment to the Registration Statement shall have been filed or become effective, (iii) of any request by the SEC or its staff for any amendment of the Registration Statement, or any Rule 462(b) Registration Statement, or for any supplement to the Prospectus or for any additional information, (iv) of the issuance by the SEC of any stop order suspending the effectiveness of the Registration Statement or of any notice objecting to its use or the institution or threatening of any proceeding for that purpose and (v) of the receipt by the Issuer of any notification with respect to the suspension of the qualification of the Securities for sale in any jurisdiction or the institution or threatening of any proceeding for such purpose. The Issuer will use its reasonable best efforts to prevent the issuance of any such stop order or the occurrence of any such suspension or objection to the use of the Registration Statement and, upon such issuance, occurrence or notice of objection, to obtain as soon as possible the withdrawal of such stop order or relief from such occurrence or objection, including, if necessary, by filing an amendment to the Registration Statement or a new registration statement and using its reasonable best efforts to have such amendment or new registration statement declared effective as soon as practicable;

 

13

---

(b) If, at any time prior to the filing of the Prospectus pursuant to Rule 424(b) under the Securities Act, any event occurs as a result of which the Disclosure Package would include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein in the light of the circumstances under which they were made at such time not misleading, the Issuer will (i) notify promptly the Representative so that any use of the Disclosure Package may cease until it is amended or supplemented; (ii) amend or supplement the Disclosure Package to correct such statement or omission; and (iii) supply any amendment or supplement to you in such quantities as you may reasonably request;

(c) If, at any time when a prospectus relating to the Securities is required to be delivered under the Securities Act (including in circumstances where such requirement may be satisfied pursuant to Rule 172), any event occurs as a result of which the Prospectus as then supplemented would include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein in the light of the circumstances under which they were made or the circumstances then prevailing not misleading, or if it shall be necessary to amend the Registration Statement or supplement the Prospectus to comply with the Securities Act or the rules thereunder, the Issuer promptly will (i) notify the Representative of any such event; (ii) prepare and file with the SEC, subject to the second sentence of paragraph (a) of this Section 5, an amendment or supplement which will correct such statement or omission or effect such compliance; and (iii) supply any supplemented Prospectus to you in such quantities as you may reasonably request;

(d) As soon as practicable, the Issuer will make generally available to its security holders and to the Representative an earnings statement or statements of the Issuer which will satisfy the provisions of Section 11(a) of Rule 158 under the Securities Act;

(e) The Issuer will furnish to the Representative and counsel for the Underwriters, without charge, signed copies of the Registration Statement (including exhibits thereto) and to each other Underwriter a copy of the Registration Statement (without exhibits thereto) and, so long as delivery of a prospectus by an Underwriter or dealer may be required by the Securities Act (including in circumstances where such requirement may be satisfied pursuant to Rule 172), as many copies of each Preliminary Prospectus, the Prospectus and each Issuer Free Writing Prospectus and any supplement thereto as the Representative may reasonably request in writing. The Issuer will pay the reasonable and documented expenses of printing or other production of all documents relating to the offering;

(f) The Issuer will arrange, if necessary, for the qualification of the Securities for sale under the laws of such jurisdictions as the Representative may designate and will maintain such qualifications in effect so long as required for the distribution of the Securities; provided that in no event shall the Issuer be obligated to qualify to do business in any jurisdiction where it is not now so qualified or to take any action that would subject it to service of process in suits, other than those arising out of the offering or sale of the Securities, in any jurisdiction where it is not now so subject.

 

14

---

(g) The Issuer will not, without the prior written consent of the Representative offer, sell, contract to sell, pledge, or otherwise dispose of, (or enter into any transaction which is designed to, or might reasonably be expected to, result in the disposition (whether by actual disposition or effective economic disposition due to cash settlement or otherwise) by the Issuer or any affiliate of the Issuer or any person in privity with the Issuer or any affiliate of the Issuer) directly or indirectly, including the filing (or participation in the filing) of a registration statement with the SEC in respect of, or establish or increase a put equivalent position or liquidate or decrease a call equivalent position within the meaning of Section 16 of the Exchange Act, any other shares of Common Stock or any securities convertible into, or exercisable, or exchangeable for, shares of Common Stock; or publicly announce an intention to effect any such transaction, for a period of 180 days after the date of the Underwriting Agreement, provided, however, that the Issuer may issue and sell Common Stock or any securities convertible into, or exercisable, or exchangeable for, shares of Common Stock, pursuant to any employee stock option plan, stock ownership plan or dividend reinvestment plan of the Issuer in effect at the Execution Time and the Issuer may issue Common Stock issuable upon the conversion of securities or the exercise of warrants outstanding at the Execution Time.

(h) If the Representative, in the sole discretion, agree to release or waive the restrictions set forth in a lock-up letter described in Section 6(j) hereof for an officer or director of the Issuer and provides the Issuer with notice of the impending release or waiver at least three (3) Business Days before the effective date of the release or waiver, the Issuer agrees to announce the impending release or waiver by a press release substantially in the form of Exhibit B hereto through a major news service at least two (2) Business Days before the effective date of the release or waiver;

(i) The Issuer will not take, directly or indirectly, any action designed to or that would constitute or that might reasonably be expected to cause or result in, under the Exchange Act or otherwise, stabilization or manipulation of the price of any security of the Issuer to facilitate the sale or resale of the Securities;

(j) The Issuer agrees to pay the costs and expenses relating to the following matters: (i) the preparation, printing or reproduction and filing with the SEC of the Registration Statement (including financial statements and exhibits thereto), each Preliminary Prospectus, the Prospectus and each Issuer Free Writing Prospectus, and each amendment or supplement to any of them; (ii) the printing (or reproduction) and delivery (including postage, air freight charges and charges for counting and packaging) of such copies of the Registration Statement, each Preliminary Prospectus, the Prospectus and each Issuer Free Writing Prospectus, and all amendments or supplements to any of them, as may, in each case, be reasonably requested for use in connection with the offering and sale of the Securities; (iii) the preparation, printing, authentication, issuance and delivery of certificates for the Securities, including any stamp or transfer taxes in

 

15

---

connection with the original issuance and sale of the Securities; (iv) the printing (or reproduction) and delivery of this Underwriting Agreement, any blue sky memorandum and all other agreements or documents printed (or reproduced) and delivered in connection with the offering of the Securities; (v) the registration of the Securities under the Exchange Act and the listing of the Securities on the Nasdaq Capital Market; (vi) any registration or qualification of the Securities for offer and sale under the securities or blue sky laws of the several states (including filing fees and the reasonable fees and expenses of counsel for the Underwriters relating to such registration and qualification); (vii) any filings required to be made with the Financial Industry Regulatory Authority, Inc. (“FINRA”) (including filing fees and the reasonable fees and expenses of counsel for the Underwriters relating to such filings); (viii) the reasonable and documented legal fees of Underwriters’ counsel incurred in connection with transactions contemplated hereunder, provided, however the amount reimbursement to the Underwriters pursuant to clauses (vi) through (viii) shall not exceed $50,000 in the aggregate; (ix) the transportation and other expenses incurred by or on behalf of Issuer representatives in connection with presentations to prospective purchasers of the Securities provided however, that the Issuer and Underwriter shall each pay 50% of the cost of chartering any aircraft to be used in connection with the roadshow; (x) the fees and expenses of the Issuer’s accountants and the fees and expenses of counsel (including local and special counsel) for the Issuer; and (xi) all other costs and expenses incident to the performance by the Issuer of its obligations hereunder;

(k) The Issuer agrees that, unless it has or shall have obtained the prior written consent of the Representative, and each Underwriter, severally and not jointly, agrees with the Issuer that, unless it has or shall have obtained, as the case may be, the prior written consent of the Issuer, it has not made and will not make any offer relating to the Securities that would constitute an Issuer Free Writing Prospectus or that would otherwise constitute a Free Writing Prospectus required to be filed by the Issuer with the SEC or retained by the Issuer under Rule 433 under the Securities Act. Any such free writing prospectus consented to by the Representative or the Issuer is hereinafter referred to as a “Permitted Free Writing Prospectus.” The Issuer agrees that (x) it has treated and will treat, as the case may be, each Permitted Free Writing Prospectus as an Issuer Free Writing Prospectus and (y) it has complied and will comply, as the case may be, with the requirements of Rules 164 and 433 applicable to any Permitted Free Writing Prospectus, including in respect of timely filing with the SEC, legending and record keeping;

(l) The Issuer will promptly notify the Representative if the Issuer ceases to be an Emerging Growth Company at any time prior to the later of (a) completion of the distribution of the Securities within the meaning of the Securities Act and (b) completion of the 180-day restricted period referred to in Section 5(g) hereof; and

(m) If at any time following the distribution of any Written Testing-the-Waters Communication, any event occurs as a result of which such Written Testing-the-Waters Communication would include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein in the light of the circumstances under which they were made at such time not misleading, the Issuer will

 

16

---

(i) notify promptly the Representative so that use of the Written Testing-the-Waters Communication may cease until it is amended or supplemented; (ii) amend or supplement the Written Testing-the-Waters Communication to correct such statement or omission; and (iii) supply any amendment or supplement to the Representative in such quantities as may be reasonably requested.

6. Conditions to the Obligations of the Underwriters. The obligations of the Underwriters to purchase the Underwritten Securities and the Option Securities, as the case may be, shall be subject to the accuracy of the representations and warranties on the part of the Issuer contained herein as of the Execution Time, the Closing Date and any settlement date pursuant to Section 3 hereof, to the accuracy of the statements of the Issuer made in any certificates pursuant to the provisions hereof, to the performance by the Issuer of its obligations hereunder and to the following additional conditions:

(a) The Prospectus, and any supplement thereto, have been filed in the manner and within the time period required by Rule 424(b) under the Securities Act; any material required to be filed by the Issuer pursuant to Rule 433(d) under the Securities Act shall have been filed with the SEC within the applicable time periods prescribed for such filings by Rule 433; and no stop order suspending the effectiveness of the Registration Statement or any notice objecting to its use shall have been issued and no proceedings for that purpose shall have been instituted or threatened;

(b) The Issuer shall have requested and caused Morrison & Foerster LLP, counsel for the Issuer, to have furnished to the Representative their opinion, dated the Closing Date and addressed to the Representative, in form and substance reasonably satisfactory to the Representative.

(c) The Issuer shall have requested and caused Morrison & Foerster LLP, intellectual property counsel for the Issuer, to have furnished to the Representative their opinion, dated the Closing Date and addressed to the Representative, in form and substance reasonably satisfactory to the Representative.

(d) The Representative shall have received from Goodwin Procter LLP, counsel for the Underwriters, such opinion or opinions, dated the Closing Date and addressed to the Representative, with respect to the issuance and sale of the Securities, the Registration Statement, the Disclosure Package, the Prospectus (together with any supplement thereto) and other related matters as the Representative may reasonably require, and the Issuer shall have furnished to such counsel such documents as they request for the purpose of enabling them to pass upon such matters;

(e) The Issuer shall have furnished to the Representative a certificate of the Issuer, signed by any of the Chairman of the Board and the President or the principal financial or accounting officer of the Issuer, dated the Closing Date, to the effect that the signers of such certificate have carefully examined the Registration Statement, the Disclosure Package, the Prospectus and any amendment or supplement thereto, as well as each electronic road show used in connection with the offering of the Securities, and this Underwriting Agreement and that:

(i) the representations and warranties of the Issuer in this Underwriting Agreement are true and correct on and as of the Closing Date with the same effect as if made on the Closing Date and the Issuer has complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied at or prior to the Closing Date;

 

17

---

(ii) no stop order suspending the effectiveness of the Registration Statement or any notice objecting to its use has been issued and no proceedings for that purpose have been instituted or, to the Issuer’s knowledge, threatened; and

(iii) since the date of the most recent financial statements included in the Disclosure Package and the Prospectus (exclusive of any amendment or supplement thereto), there has been no material adverse change in the financial condition, business or properties of the Issuer, except as set forth in or contemplated in the Disclosure Package and the Prospectus (exclusive of any amendment or supplement thereto).

(f) The Issuer shall have requested and caused Mayer Hoffman McCann P.C. to have furnished to the Representative, at the Execution Time and at the Closing Date, letters, dated respectively as of the Execution Time and as of the Closing Date, in form and substance satisfactory to the Representative, containing statements and information of the type ordinarily included in accountant’s “comfort letters” to underwriters, delivered according to Statement of Auditing Standards No. 72 (or any successor bulletin), with respect to the audited and unaudited financial statements and certain financial information contained in the Registration Statement, the Disclosure Package, and each free writing prospectus, if any.

(g) Subsequent to the Execution Time or, if earlier, the dates as of which information is given in the Registration Statement (exclusive of any amendment thereof) and the Prospectus (exclusive of any amendment or supplement thereto), there shall not have been (i) any change or decrease specified in the letter or letters referred to in paragraph (e) of this Section 6 or (ii) any change in the financial condition, business or properties of the Issuer, except as set forth in or contemplated in the Disclosure Package and the Prospectus (exclusive of any supplement thereto) the effect of which, in any case referred to in clause (i) or (ii) above, is, in the sole judgment of the Representative, so material and adverse as to make it impractical or inadvisable to proceed with the offering or delivery of the Securities as contemplated by the Registration Statement (exclusive of any amendment thereof), the Disclosure Package and the Prospectus (exclusive of any amendment or supplement thereto).

(h) The Issuer shall have to have furnished to the Representative, at the Execution Time and at the Closing Date, letters, dated respectively as of the Execution Time and as of the Closing Date, in form and substance satisfactory to the Representative, a certificate of the Issuer’s chief financial officer or interim chief financial officer, as applicable, with respect to certain financial information contained in the Registration Statement, the Disclosure Package, and each free writing prospectus, if any.

 

18

---

(i) Prior to the Closing Date, the Issuer shall have furnished to the Representative such further information, certificates and documents as the Representative may reasonably request.

(i) The Securities shall have been listed and admitted and authorized for trading on the Nasdaq Capital Market, and satisfactory evidence of such actions shall have been provided to the Representative.

(j) At the Execution Time, the Issuer shall have furnished to the Representative a letter substantially in the form of Exhibit A hereto from each officer and director of the Issuer substantially all of the stockholders of the Issuer as of the Effective Date, addressed to the Representative.

If any of the conditions specified in this Section 6 shall not have been fulfilled when and as provided in this Underwriting Agreement, or if any of the opinions and certificates mentioned above or elsewhere in this Underwriting Agreement shall not be reasonably satisfactory in form and substance to the Representative and counsel for the Underwriters, this Underwriting Agreement and all obligations of the Underwriters hereunder may be canceled at, or at any time prior to, the Closing Date by the Representative. Notice of such cancellation shall be given to the Issuer in writing or by telephone or facsimile confirmed in writing.

The documents required to be delivered by this Section 6 shall be delivered at the office of Goodwin Procter LLP, counsel for the Underwriters, at 620 Eighth Avenue, New York, New York 10018, on the Closing Date.

7. Reimbursement of Underwriters’ Expenses. If the sale of the Securities provided for herein is not consummated because any condition to the obligations of the Underwriters set forth in Section 6 hereof is not satisfied, because of any termination pursuant to Section 10 hereof or because of any refusal, inability or failure on the part of the Issuer to perform any agreement herein or comply with any provision hereof other than by reason of a default by any of the Underwriters, the Issuer will reimburse the Underwriters severally through the Representative on demand for all reasonable and documented expenses (including reasonable fees and disbursements of counsel) that shall have been incurred by them in connection with the proposed purchase and sale of the Securities.

8. Indemnification and Contribution.

(a) The Issuer agrees to indemnify and hold harmless each Underwriter, the directors, officers, employees, affiliates (within the meaning of Rule 405 of the Securities Act) and authorized agents of each Underwriter and each person who controls any Underwriter within the meaning of either the Securities Act or the Exchange Act against any and all losses, claims, damages or liabilities, joint or several, to which they or any of them may become subject under the Securities Act, the Exchange Act or other Federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon

 

19

---

any untrue statement or alleged untrue statement of a material fact contained in the registration statement for the registration of the Securities as originally filed or in any amendment thereof, or in any Preliminary Prospectus, or the Prospectus, any Issuer Free Writing Prospectus, or any Written Testing-the-Waters Communication or in any amendment thereof or supplement thereto or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and agrees to reimburse each such indemnified party, as incurred, for any legal or other expenses reasonably and actually incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Issuer will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon any such untrue statement or alleged untrue statement or omission or alleged omission made therein in reliance upon and in conformity with information furnished in writing to the Issuer by or on behalf of any Underwriter through the Representative specifically for inclusion therein. This indemnity agreement will be in addition to any liability which the Issuer may otherwise have.

(b) Each Underwriter severally and not jointly agrees to indemnify and hold harmless the Issuer, each of its directors, each of its officers who signs the Registration Statement, each of its affiliates (within the meaning of Rule 405 of the Securities Act) and authorized agents, and each person who controls the Issuer within the meaning of either the Securities Act or the Exchange Act, to the same extent as the foregoing indemnity from the Issuer to each Underwriter, but only with reference to written information relating to such Underwriter furnished to the Issuer by or on behalf of such Underwriter through the Representative specifically for inclusion in the documents referred to in the foregoing indemnity. This indemnity agreement will be in addition to any liability which any Underwriter may otherwise have. The Issuer acknowledges that the statements set forth (i) in the last paragraph of the cover page regarding delivery of the Securities and, under the heading “Underwriting”, (ii) the list of Underwriters and their respective participation in the sale of the Securities, (iii) the sentences related to concessions and reallowances and (iv) the paragraph related to stabilization, syndicate covering transactions and penalty bids in the Registration Statement, Disclosure Package and the Prospectus constitute the only information furnished in writing by or on behalf of the several Underwriters for inclusion in the Registration Statement, Disclosure Package and the Prospectus.

(c) Promptly after receipt by an indemnified party under this Section 8 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section 8, notify the indemnifying party in writing of the commencement thereof; but the failure so to notify the indemnifying party (i) will not relieve it from liability under paragraph (a) or (b) above unless and to the extent it did not otherwise learn of such action and such failure results in the forfeiture by the indemnifying party of substantial rights and defenses and (ii) will not, in any event, relieve the indemnifying party from any obligations to any indemnified party other than the indemnification obligation provided in paragraph (a) or (b) above. The indemnifying party shall be entitled to appoint counsel of the indemnifying party’s choice at the indemnifying party’s expense to represent the indemnified party in any action for which indemnification is sought (in which case the indemnifying party shall not thereafter be responsible for the fees and expenses of any separate counsel retained by the indemnified party or parties except as set forth below); provided, however, that such counsel shall be reasonably satisfactory to the indemnified party. Notwithstanding the indemnifying party’s election to appoint counsel to represent the

 

20

---

indemnified party in an action, the indemnified party shall have the right to employ separate counsel at its own expense; provided, however, that the indemnifying party shall bear the reasonable fees, costs and expenses of such separate counsel only if (i) the use of counsel chosen by the indemnifying party to represent the indemnified party would present such counsel with a conflict of interest, (ii) the actual or potential defendants in, or targets of, any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, (iii) the indemnifying party shall not have employed counsel satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of the institution of such action, (iv) the indemnifying party shall give written authorization to the indemnified party to employ separate counsel at the expense of the indemnifying party. An indemnifying party will not, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified parties are actual or potential parties to such claim or action) unless such settlement, compromise or consent (i) includes an unconditional release of each indemnified party from all liability arising out of such claim, action, suit or proceeding and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of any indemnified party.

(d) In the event that the indemnity provided in paragraph (a), (b) or (c) of this Section 8 is unavailable to or insufficient to hold harmless an indemnified party for any reason, the Issuer and the Underwriters severally agree to contribute to the aggregate losses, claims, damages and liabilities (including legal or other expenses reasonably and actually incurred in connection with investigating or defending the same) (collectively “Losses”) to which the Issuer and one or more of the Underwriters may be subject in such proportion as is appropriate to reflect the relative benefits received by the Issuer on the one hand and by the Underwriters on the other from the offering of the Securities. If the allocation provided by the immediately preceding sentence is unavailable for any reason, the Issuer and the Underwriters severally shall contribute in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Issuer on the one hand and of the Underwriters on the other in connection with the statements or omissions which resulted in such Losses as well as any other relevant equitable considerations. Benefits received by the Issuer shall be deemed to be equal to the total net proceeds from the offering (before deducting expenses) received by it, and benefits received by the Underwriters shall be deemed to be equal to the total underwriting discounts and commissions, in each case as set forth on the cover page of the Prospectus. Relative fault shall be determined by reference to, among other things, whether any untrue or any alleged untrue statement of a material fact or the omission or

 

21

---

alleged omission to state a material fact relates to information provided by the Issuer on the one hand or the Underwriters on the other, the intent of the parties and their relative knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The Issuer and the Underwriters agree that it would not be just and equitable if contribution were determined by pro rata allocation or any other method of allocation which does not take account of the equitable considerations referred to above. Notwithstanding the provisions of this paragraph (d), in no event shall an Underwriter be required to contribute any amount in excess of the amount by which the total underwriting discounts and commissions received by such Underwriter with respect to the offering of the Securities exceeds the amount of any damages that such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. Notwithstanding the provisions of this paragraph (d), no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 8, each person who controls an Underwriter within the meaning of either the Securities Act or the Exchange Act and each director, officer, employee, affiliate and agent of an Underwriter shall have the same rights to contribution as such Underwriter, and each person who controls the Issuer within the meaning of either the Securities Act or the Exchange Act, each officer of the Issuer who shall have signed the Registration Statement and each director of the Issuer shall have the same rights to contribution as the Issuer, subject in each case to the applicable terms and conditions of this paragraph (d).

(e) The remedies provided for in this Section 8 are not exclusive and shall not limit any rights or remedies which may otherwise be available to any indemnified party at law or in equity.

9. Default by an Underwriter. If any one or more Underwriters shall fail to purchase and pay for any of the Securities agreed to be purchased by such Underwriter or Underwriters hereunder and such failure to purchase shall constitute a default in the performance of its or their obligations under this Underwriting Agreement, the remaining Underwriters shall be obligated severally to take up and pay for (in the respective proportions which the amount of Securities set forth opposite their names in Schedule I hereto bears to the aggregate amount of Securities set forth opposite the names of all the remaining Underwriters) the Securities which the defaulting Underwriter or Underwriters agreed but failed to purchase; provided, however, that in the event that the aggregate amount of Securities which the defaulting Underwriter or Underwriters agreed but failed to purchase shall exceed 10% of the aggregate amount of Securities set forth in Schedule I hereto, the remaining Underwriters shall have the right to purchase all, but shall not be under any obligation to purchase any, of the Securities, and if such non-defaulting Underwriters do not purchase all the Securities, this Underwriting Agreement will terminate without liability to any non-defaulting Underwriter or the Issuer. In the event of a default by any Underwriter as set forth in this Section 9, the Closing Date shall be postponed for such period, not exceeding five (5) Business Days, as the Representative shall determine in order that the required changes in the Registration Statement and the Prospectus or in any other documents or arrangements may be effected. Nothing contained in this Underwriting Agreement shall relieve any defaulting Underwriter of its liability, if any, to the Issuer and any non-defaulting Underwriter for damages occasioned by its default hereunder.

 

22

---

10. Termination. This Underwriting Agreement shall be subject to termination in the absolute discretion of the Representative, by notice given to the Issuer prior to delivery of and payment for the Securities, if at any time prior to such delivery and payment (i) trading in the Issuer’s Common Stock shall have been suspended by the SEC, the Nasdaq Capital Market or trading in securities generally on the New York Stock Exchange shall have been suspended or limited or minimum prices shall have been established on either of such exchanges, (ii) a banking moratorium shall have been declared either by Federal or New York State authorities, (iii) there shall have occurred a material disruption in commercial banking or securities settlement or clearance services or (iv) there shall have occurred any outbreak or escalation of hostilities, declaration by the United States of a national emergency or war, or other calamity or crisis the effect of which on financial markets is such as to make it, in the sole judgment of the Representative, is material and adverse and makes it impractical or inadvisable to proceed with the offering or delivery of the Securities as contemplated by the Preliminary Prospectus or the Prospectus (exclusive of any supplement thereto).

11. Representations and Indemnities to Survive. The respective agreements, representations, warranties, indemnities and other statements of the Issuer or its officers and of the Underwriters set forth in or made pursuant to this Underwriting Agreement will remain in full force and effect, regardless of any investigation made by or on behalf of any Underwriter or the Issuer or any of the officers, directors, employees, agents, affiliates or controlling persons referred to in Section 8 hereof, and will survive delivery of and payment for the Securities. The provisions of Sections 7 and 8 hereof shall survive the termination or cancellation of this Underwriting Agreement.

12. Notices. All communications hereunder will be in writing and effective only on receipt, and, if sent to the Representative, will be mailed, delivered or telefaxed to Ladenburg Thalmann & Co. Inc., 277 Park Avenue, 26^th Floor, New York, New York General Counsel (fax no.: 212-409-2169) attention Joseph Giovanniello or, if sent to Krystal Biotech, Inc., will be mailed, delivered or telefaxed to 2100 Wharton Street, Suite 701, Pittsburgh, Pennsylvania, 15203, Attention: Krish S. Krishnan.

13. Successors. This Underwriting Agreement will inure to the benefit of and be binding upon the parties hereto and their respective successors and the officers, directors, employees, agents and controlling persons referred to in Section 8 hereof, and no other person will have any right or obligation hereunder.

14. Jurisdiction. The Issuer agrees that any suit, action or proceeding against the Issuer brought by any Underwriter, the directors, officers, employees, affiliates and agents of any Underwriter, or by any person who controls any Underwriter, arising out of or based upon this Underwriting Agreement or the transactions contemplated hereby may be instituted in any State or U.S. federal court in The City of New York and County of New York, and waives any objection which it may now or hereafter have to the laying of venue of any such proceeding, and irrevocably submits to the non-exclusive jurisdiction of such courts in any suit, action or proceeding. The Issuer hereby appoints Krish S. Krishnan, 2100 Wharton Street, Suite 701, Pittsburgh, Pennsylvania, 15203, as its authorized agent (the “Authorized Agent”) upon whom process may be served in any suit, action or proceeding arising out of or based upon this Underwriting Agreement or the transactions contemplated herein that may be instituted in any

 

23

---

State or U.S. federal court in The City of New York and County of New York, by any Underwriter, the directors, officers, employees, affiliates and agents of any Underwriter, or by any person who controls any Underwriter, and expressly accepts the non-exclusive jurisdiction of any such court in respect of any such suit, action or proceeding. The Issuer hereby represents and warrants that the Authorized Agent has accepted such appointment and has agreed to act as said agent for service of process, and the Issuer agrees to take any and all action, including the filing of any and all documents that may be necessary to continue such appointment in full force and effect as aforesaid. Service of process upon the Authorized Agent shall be deemed, in every respect, effective service of process upon the Issuer.

15. No Fiduciary Duty. The Issuer hereby acknowledges that (a) the purchase and sale of the Securities pursuant to this Underwriting Agreement is an arm’s-length commercial transaction between the Issuer, on the one hand, and the Underwriters and any affiliate through which it may be acting, on the other, (b) the Underwriters are acting as principal and not as an agent or fiduciary of the Issuer and (c) the Issuer’s engagement of the Underwriters in connection with the offering and the process leading up to the offering is as independent contractors and not in any other capacity. Furthermore, the Issuer agrees that it is solely responsible for making its own judgments in connection with the offering (irrespective of whether any of the Underwriters has advised or is currently advising the Issuer on related or other matters). The Issuer agrees that it will not claim that the Underwriters have rendered advisory services of any nature or respect, or owe an agency, fiduciary or similar duty to the Issuer, in connection with such transaction or the process leading thereto.

16. Integration. This Underwriting Agreement supersedes all prior agreements and understandings (whether written or oral) between the Issuer and the Underwriters, or any of them, with respect to the subject matter hereof.

17. Applicable Law. This Underwriting Agreement will be governed by and construed in accordance with the laws of the State of New York applicable to contracts made and to be performed within the State of New York.

18. Waiver of Jury Trial. The Issuer hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Underwriting Agreement or the transactions contemplated hereby.

19. Counterparts. This Underwriting Agreement may be signed in one or more counterparts, each of which shall constitute an original and all of which together shall constitute one and the same agreement.

20. Headings. The section headings used herein are for convenience only and shall not affect the construction hereof.

 

24

---

If the foregoing is in accordance with your understanding of our agreement, please sign and return to us the enclosed duplicate hereof, whereupon this letter and your acceptance shall represent a binding agreement among the Issuer and the several Underwriters.

 

 

25

---

The foregoing Underwriting Agreement is hereby

confirmed and accepted as of the

date first above written.

 

Ladenburg Thalmann & Co. Inc.
By:
		Name:
		Title:

For itself and the other

several Underwriters named in

Schedule I to the foregoing

Underwriting Agreement.

 

26

---

SCHEDULE I

 

Underwriters		Number of Underwritten Securities to be Purchased
Ladenburg Thalmann & Co. Inc.
Total

---

SCHEDULE II

 

2

---

SCHEDULE III

Written Testing-the-Waters Communications

 

•

Testing-the-Water presentation 1 and 2 which have been previously provided by the Underwriter to the Issuer, used in meetings with potential investors on July 25, 2017, July 26, 2017, August 7, 2017, August 9, 2017, August 10, 2017 and August 16, 2017

---

EXHIBIT A

[Form of Lock-Up Agreement]

                    , 2017

Ladenburg Thalmann & Co. Inc.

570 Lexington Avenue

11^th Floor

New York, New York 10022

 

Re:

Public Offering of Krystal Biotech, Inc.

Ladies and Gentlemen:

The undersigned, an officer, director or holder of common stock, par value $0.00001 per share (“Common Stock”), or rights to acquire Common Stock, of Krystal Biotech, Inc. (the “Company”), understands that Ladenburg Thalmann & Co. Inc., as the underwriter (“you” or “your”), propose to enter into an Underwriting Agreement (the “Underwriting Agreement”) with the Company, providing for the public offering (the “Offering”) of shares of Common Stock (the “Securities”), pursuant to a registration statement on Form S-1 (as amended, the “Registration Statement”) to be filed with the Securities and Exchange Commission (the “SEC”).

In consideration of the Company and your intention to enter into the Underwriting Agreement and to proceed with the Offering of the Securities, and for other good and valuable consideration, receipt of which is hereby acknowledged, the undersigned hereby agrees for the benefit of the Company and you that, without your prior written consent, the undersigned will not, during the period commencing from the date of the preliminary prospectus and ending one hundred eighty (180) days (the “Lock-Up Period”) after the date of the final prospectus relating to the Offering (the “Prospectus”), directly or indirectly: (1) offer, pledge, assign, encumber, announce the intention to sell, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock owned either of record or beneficially or may be deemed to be beneficially owned (as defined in Rule 13d-3(a)(2) of the Securities Exchange Act of 1934, as amended, and the rules and regulations of the SEC promulgated thereunder (the “Exchange Act”)) by the undersigned on the date hereof or hereafter acquired or (2) enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of the Common Stock, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise, or (3) make any demand for or exercise any right with respect to, the registration of any shares of Common Stock or any security convertible into or exercisable or exchangeable for Common Stock, or (4) publicly announce an intention to do any of the foregoing.

---

The restrictions in the immediately preceding paragraph shall not apply to:

(a) the sale of the Securities to be sold pursuant to the Underwriting Agreement;

(b) transfers of shares of Common Stock or any security convertible into or exercisable or exchangeable for Common Stock (i) as a bona fide gift, or gifts, (ii) to an immediate family member or a trust for the direct or indirect benefit of the undersigned or such immediate family member of the undersigned, (iii) by will or intestacy, or (iv) pursuant to a qualified domestic order or in connection with a divorce settlement; provided, that the transferee shall sign and deliver a letter agreement substantially in the form of this letter agreement prior to such transfer;

(c) equity securities issued pursuant to the Company’s equity incentive plans in effect as of the date hereof or pursuant to bona fide equity incentive plans hereafter established, and the exercise of options granted under the Company’s equity incentive plans; provided that the shares of Common Stock delivered upon such exercise are subject to the restrictions set forth in the immediately preceding paragraph;

(d) transfers of shares of Common Stock to the Company (i) as forfeitures to satisfy tax withholding and remittance obligations of the undersigned in connection with the vesting or exercise of equity awards granted pursuant to the Company’s equity incentive plans, or (ii) pursuant to a net exercise or cashless exercise by the stockholder of outstanding equity awards pursuant to the Company’s equity incentive plans;

(e) the establishment of a trading plan that complies with Rule 10b5-1 under the Exchange Act; provided, however, that (i) the restrictions shall apply in full force to sales or other dispositions pursuant to such Rule 10b5-1 plan during the Lock-Up Period and (ii) no public announcement or disclosure of entry into such Rule 10b5-1 plan is made or required to be made, including any filing with the SEC under Section 13 or Section 16 of the Exchange Act;

(f) transfers of shares of Common Stock to a charity or education institution;

(g) if the undersigned is or, directly or indirectly, controls a corporation, partnership, limited liability company or other business entity, any transfers of Common Stock to any shareholder, partner or member of, or owner of similar equity interests in, the undersigned, as the case may be;

(h) transactions relating to the Common Stock acquired in open market transactions after the completion of the Offering; and

(i) the transfer of Common Stock pursuant to a change of control of the Company after the Offering, that has been approved by the independent members of the Company’s board of directors, provided, that in the event that such change of control is not completed, the Securities owned by the undersigned shall remain subject to the restrictions herein. For purposes of this clause (i), “change of control” shall mean the consummation of any bona fide third party tender offer, merger, consolidation or other similar transaction made to all holders of Securities the result of which is that any “person” (as defined in Section 13(d)(3) of the Exchange Act), or group of persons, becomes the beneficial owner (as defined in Rules 13d-3 and 13d-5 of the Exchange Act) of more than 50% of the voting capital stock of the Company.

---

provided that, in the case of clauses (b), (f), (g), (h) and (i), no filing under Section 13 or Section 16(a) of the Exchange Act reporting a reduction in beneficial ownership of shares of Common Stock or other public announcement shall be required or voluntarily made by the undersigned or the recipient during the Lock-Up Period (other than a filing on Form 5 and any required Schedule 13G (or 13G/A) or Form 13F filing); provided further that, in the case of any transfer or distribution pursuant to clauses (b), (f), (g), (h) and (i), (1) the recipient agrees to be bound in writing by the same restrictions set forth herein for the duration of the Lock-Up Period and (2) any such transfer shall not involve a disposition for value.

In furtherance of the foregoing, the Company and any duly appointed transfer agent for the registration or transfer of the securities described herein, are hereby authorized to decline to make any transfer of securities if such transfer would constitute a violation or breach of this letter agreement.

The undersigned hereby represents and warrants that the undersigned has full power and authority to enter into this letter agreement. All authority herein conferred or agreed to be conferred and any obligations of the undersigned shall be binding upon the successors, assigns, heirs or personal representatives of the undersigned.

The undersigned understands that the undersigned shall be released from all obligations under this letter agreement upon the earlier to occur of: (i) the Registration Statement does not become effective and the Company files with the SEC a notice of withdrawal of the Registration Statement pursuant to Rule 477 of the Securities Act of 1933, as amended, (ii) the Underwriting Agreement does not become effective by December 31, 2017, or, if after becoming effective, the Underwriting Agreement (other than the provisions thereof which survive termination) shall terminate or be terminated prior to payment for and delivery of the Common Stock to be sold thereunder, or (iii) the Company provides written notice to you that the Company does not intend to proceed with the Offering.

The undersigned, whether or not participating in the Offering, understands that you are entering into the Underwriting Agreement and proceeding with the Offering in reliance upon this letter agreement.

If the undersigned is an officer or director of the Company, (i) you agree that, at least three (3) business days before the effective date of any release or waiver of the foregoing restrictions in connection with a transfer of shares of Common Stock, you will notify the Company of the impending release or waiver, and (ii) the Company shall agree in the Underwriting Agreement to announce the impending release or waiver by press release through a major news service at least two (2) business days before the effective date of the release or waiver. Any release or waiver granted by you hereunder to any such officer or director shall only be effective two (2) business days after the publication date of such press release. The provisions of this paragraph will not apply if (a) the release or waiver is effected solely to permit a transfer not for consideration and (b) the transferee has agreed in writing to be bound by the same terms described in this letter to the extent and for the duration that such terms remain in effect at the time of the transfer.

---

This letter agreement shall be governed by and construed in accordance with the laws of the State of New York, without regard to the conflict of laws principles thereof.

 

 

 

---

EXHIBIT B

Krystal Biotech, Inc.

Public Offering of Common Stock

[insert date], 20__

[insert name receiving waiver]

[insert address]

Dear Mr./Ms. [insert name]:

This letter is being delivered to you in connection with the offering by Krystal Biotech, Inc. (the “Issuer”) of [●] shares of common stock, $0.00001 par value per share (the “Common Stock”), of the Issuer and the lock-up letter dated [●], 2017 (the “Lock-up Letter”), executed by you in connection with such offering, and your request for a [waiver] [release] dated [insert date], 20[●], with respect to [●] shares of Common Stock (the “Shares”).

Ladenburg Thalmann & Co. Inc. hereby agrees to [waive] [release] the transfer restrictions set forth in the Lock-up Letter, but only with respect to the Shares, effective [insert date], 20[●]; provided, however, that such [waiver] [release] is conditioned on the Issuer announcing the impending [waiver] [release] by press release through a major news service at least two business days before effectiveness of such [waiver] [release]. This letter will serve as notice to the Issuer of the impending [waiver] [release].

Except as expressly [waived] [released] hereby, the Lock-up Letter shall remain in full force and effect.

 

Exhibit 3.4

AMENDED AND RESTATED BYLAWS

OF

KRYSTAL BIOTECH, INC.

ARTICLE 1

OFFICES

Section 1.1 Registered Office.

The registered office of the Corporation in the State of Delaware shall be set forth in the Certificate of Incorporation of the Corporation, as may be amended and restated from time to time (the “Certificate of Incorporation”).

Section 1.2 Other Offices.

The Corporation may also have offices at such other places, either within or without the State of Delaware, as the Board of Directors may from time to time determine or the business of the Corporation may require.

ARTICLE 2

STOCKHOLDERS’ MEETINGS

Section 2.1 Place of Meetings.

Meetings of the stockholders of the Corporation shall be held at such place, either within or without the State of Delaware, as may be designated by or in the manner provided in these Bylaws, or, if not so designated, as determined from time to time by the Board of Directors.

Section 2.2 Annual Meetings.

The annual meetings of the stockholders of the Corporation, for the purpose of election of directors and for such other business as may lawfully come before it, shall be held on such date and at such time as may be designated from time to time by the Board of Directors.

Section 2.3 Special Meetings.

Special meetings of the stockholders of the Corporation may be called, for any purpose or purposes, by (i) the Board of Directors pursuant to a resolution adopted by a majority of the Whole Board (as defined in the Certificate of Incorporation of the Corporation, as amended); (ii) the Chairman of the Board; or (iii) the President of the Corporation. Only such business shall be brought before a special meeting of stockholders as shall have been specified in the notice of such meeting.

Section 2.4 Notice of Meetings.

(a) Except as otherwise provided by law or the Certificate of Incorporation, written notice of each meeting of stockholders, specifying the place, if any, date and hour and purpose or purposes of the meeting, and the means of remote communication, if any, by which stockholders and

---

proxyholders may be deemed to be present in person and vote at such meeting, and the record date for determining the stockholders entitled to vote at the meeting, if such date is different from the record date for determining stockholders entitled to notice of the meeting, shall be given not less than 10 nor more than 60 days before the date of the meeting to each stockholder entitled to vote thereat, directed to such stockholder’s address as it appears upon the books of the Corporation. If the Board of Directors fixes a date for determining the stockholders entitled to notice of a meeting of stockholders, such date shall also be the record date for determining the stockholders entitled to vote at such meeting, unless the Board of Directors determines, at the time it fixes such record date, that a later date on or before the date of the meeting shall be the date for making such determination.

(b) If at any meeting action is proposed to be taken which, if taken, would entitle stockholders fulfilling the requirements of Section 262(d) of the Delaware General Corporation Law to an appraisal of the fair value of their shares, the notice of such meeting shall contain a statement to that effect and shall be accompanied by a copy of that statutory section.

(c) When a meeting is adjourned to another time or place, notice need not be given of the adjourned meeting if the time, place, if any, thereof, and the means of remote communication, if any, by which stockholders and proxyholders may be deemed to be present in person and vote at such adjourned meeting, are announced at the meeting at which the adjournment is taken unless the adjournment is for more than 30 days, or unless after the adjournment a new record date is fixed for the adjourned meeting, in which event a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting; provided, however, that the Board of Directors may fix a new record date for determination of stockholders entitled to vote at the adjourned meeting, and in such case shall also fix as the record date for stockholders entitled to notice of such adjourned meeting the same or an earlier date as that fixed for determination of stockholders entitled to vote at the adjourned meeting.

(d) Notice of the time, place and purpose of any meeting of stockholders may be waived in writing, either before or after such meeting, and, to the extent permitted by law, will be waived by any stockholder by such stockholder’s attendance thereat, in person or by proxy.

(e) Without limiting the manner by which notice otherwise may be given effectively to stockholders, any notice to stockholders given by the Corporation under any provision of Delaware General Corporation Law, the Certificate of Incorporation, or these Bylaws shall be effective if given by a form of electronic transmission consented to by the stockholder to whom the notice is given. Any such consent shall be revocable by the stockholder by written notice to the Corporation. Any such consent shall be deemed revoked if (i) the Corporation is unable to deliver by electronic transmission two consecutive notices given by the Corporation in accordance with such consent, and (ii) such inability becomes known to the Secretary or an Assistant Secretary of the Corporation or to the transfer agent or other person responsible for the giving of notice; provided, however, the inadvertent failure to treat such inability as a revocation shall not invalidate any meeting or other action. Notice given pursuant to this subparagraph (e) shall be deemed given: (1) if by facsimile telecommunication, when directed to a number at which the stockholder has consented to receive notice; (2) if by electronic mail, when directed to an electronic mail address at which the stockholder has consented to receive notice; (3) if by a posting on an electronic network together with separate notice to the stockholder of such specific posting, upon the later of (A) such posting and (B) the giving of such separate notice; and (4) if

---

by any other form of electronic transmission, when directed to the stockholder. An affidavit of the Secretary or an Assistant Secretary or of the transfer agent or other agent of the Corporation that the notice has been given by a form of electronic transmission shall, in the absence of fraud, be prima facie evidence of the facts stated therein. For purposes of these Bylaws, “electronic transmission” means any form of communication, not directly involving the physical transmission of paper, that creates a record that may be retained, retrieved and reviewed by a recipient thereof, and that may be directly reproduced in paper form by such a recipient through an automated process.

Section 2.5 Quorum and Voting.

(a) At all meetings of stockholders except where otherwise provided by law, the Certificate of Incorporation or these Bylaws, the presence, in person or by proxy duly authorized, of the holders of a majority of the outstanding shares of stock entitled to vote shall constitute a quorum for the transaction of business. Shares, the voting of which at said meeting have been enjoined, or which for any reason cannot be lawfully voted at such meeting, shall not be counted to determine a quorum at said meeting. In the absence of a quorum, any meeting of stockholders may be adjourned, from time to time, by vote of the holders of a majority of the shares represented thereat, but no other business shall be transacted at such meeting. At such adjourned meeting at which a quorum is present or represented, any business may be transacted which might have been transacted at the original meeting. The stockholders present at a duly called or convened meeting at which a quorum is present may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum.

(b) Except as otherwise provided by law, the Certificate of Incorporation or these Bylaws, and except as otherwise required by the rules of any stock exchange upon which the Corporation’s securities are listed, all action taken by the holders of a majority of the votes cast on a matter affirmatively or negatively shall be valid and binding upon the Corporation. For purposes of these Bylaws, a share present at a meeting, but for which there is an abstention or as to which a stockholder gives no authority or direction as to a particular proposal or director nominee, shall be counted as present for the purpose of establishing a quorum but shall not be counted as a vote cast.

Section 2.6 Voting Rights.

(a) Except as otherwise provided by law, only persons in whose names shares entitled to vote stand on the stock records of the Corporation on the record date for determining the stockholders entitled to vote at said meeting shall be entitled to vote at such meeting. Shares standing in the names of two or more persons shall be voted or represented in accordance with the determination of the majority of such persons, or, if only one of such persons is present in person or represented by proxy, such person shall have the right to vote such shares and such shares shall be deemed to be represented for the purpose of determining a quorum.

(b) Every person entitled to vote or to execute consents shall have the right to do so either in person or by an agent or agents authorized by a written proxy executed by such person or such person’s duly authorized agent, which proxy shall be filed with the Secretary of the Corporation at or before the meeting at which it is to be used. Said proxy so appointed need not be a stockholder. No proxy shall be voted on after three (3) years from its date unless the proxy

---

provides for a longer period. Unless and until voted, every proxy shall be revocable at the pleasure of the person who executed it or of such person’s legal representatives or assigns, except in those cases where an irrevocable proxy permitted by statute has been given.

(c) Without limiting the manner in which a stockholder may authorize another person or persons to act for him or her as proxy pursuant to subsection (b) of this section, the following shall constitute a valid means by which a stockholder may grant such authority:

(1) A stockholder may execute a writing authorizing another person or persons to act for him or her as proxy. Execution may be accomplished by the stockholder or such stockholder’s authorized officer, director, employee or agent signing such writing or causing his or her signature to be affixed to such writing by any reasonable means including, but not limited to, by facsimile signature.

(2) A stockholder may authorize another person or persons to act for him or her as proxy by transmitting or authorizing the transmission of an electronic transmission to the person who will be the holder of the proxy or to a proxy solicitation firm, proxy support service organization or like agent duly authorized by the person who will be the holder of the proxy to receive such transmission, provided that any such transmission must either set forth or be submitted with information from which it can be determined that the transmission was authorized by the stockholder. Such authorization can be established by the signature of the stockholder on the proxy, either in writing or by a signature stamp or facsimile signature, or by a number or symbol from which the identity of the stockholder can be determined, or by any other procedure deemed appropriate by the inspectors or other persons making the determination as to due authorization.

(d) Any copy, facsimile telecommunication or other reliable reproduction of the writing or transmission created pursuant to subsection (c) of this section may be substituted or used in lieu of the original writing or transmission for any and all purposes for which the original writing or transmission could be used, provided that such copy, facsimile telecommunication or other reproduction shall be a complete reproduction of the entire original writing or transmission.

Section 2.7 Voting Procedures and Inspectors of Elections.

(a) The Corporation shall, in advance of any meeting of stockholders, appoint one or more inspectors to act at the meeting and make a written report thereof. The Corporation may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of stockholders, the person presiding at the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before entering upon the discharge of his or her duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his or her ability.

(b) The inspectors shall (i) ascertain the number of shares outstanding and the voting power of each, (ii) determine the shares represented at a meeting and the validity of proxies and ballots, (iii) count all votes and ballots, (iv) determine and retain for a reasonable period a record of the disposition of any challenges made to any determination by the inspectors, and (v) certify their determination of the number of shares represented at the meeting and their count of all votes and ballots. The inspectors may appoint or retain other persons or entities to assist the inspectors in the performance of the duties of the inspectors.

---

(c) The date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at a meeting shall be announced at the meeting. No ballot, proxies or votes, nor any revocations thereof or changes thereto, shall be accepted by the inspectors after the closing of the polls unless the Court of Chancery shall determine otherwise upon application by a stockholder.

(d) In determining the validity and counting of proxies and ballots, the inspectors shall be limited to an examination of the proxies, any envelopes submitted with those proxies, any information provided in accordance with Sections 211(e) or 212(c)(2) of the Delaware General Corporation Law, or any information provided pursuant to Section 211(a)(2)(B)(i) or (iii) thereof, ballots and the regular books and records of the Corporation, except that the inspectors may consider other reliable information for the limited purpose of reconciling proxies and ballots submitted by or on behalf of banks, brokers, their nominees or similar persons which represent more votes than the holder of a proxy is authorized by the record owner to cast or more votes than the stockholder holds of record. If the inspectors consider other reliable information for the limited purpose permitted herein, the inspectors at the time they make their certification pursuant to subsection (b)(v) of this section shall specify the precise information considered by them including the person or persons from whom they obtained the information, when the information was obtained, the means by which the information was obtained and the basis for the inspectors’ belief that such information is accurate and reliable.

Section 2.8 List of Stockholders.

The officer who has charge of the stock ledger of the Corporation shall prepare and make, or direct to be prepared, at least 10 days before every meeting of stockholders, a complete list of the stockholders entitled to vote at said meeting, (or, if the record date for determining the stockholders entitled to vote is less than 10 days before the meeting date, the list shall reflect the stockholders entitled to vote on the tenth day before the meeting date), arranged in alphabetical order, showing the address of and the number of shares registered in the name of each stockholder. The Corporation need not include electronic mail addresses or other electronic contact information on such list. Such list shall be open to the examination of any stockholder for any purpose germane to the meeting for a period of at least 10 days prior to the meeting: (i) on a reasonably accessible electronic network, provided that the information required to gain access to such list is provided with the notice of the meeting, or (ii) during ordinary business hours at the principal place of business of the Corporation. In the event that the Corporation determines to make the list available on an electronic network, the Corporation may take reasonable steps to ensure that such information is available only to stockholders of the Corporation. If the meeting is to be held at a place, then the list shall be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. If the meeting is to be held solely by means of remote communication, then the list shall also be open to the examination of any stockholder during the whole time of the meeting on a reasonably accessible electronic network, and the information required to access such list shall be provided with the notice of the meeting.

---

Section 2.9 Stockholder Proposals at Annual Meetings; Nominations of Persons for Election to the Board of Directors.

(a) Nominations of persons for election to the Board of Directors and the proposal of business to be transacted by the stockholders may be made at an annual meeting of stockholders (i) pursuant to the Corporation’s proxy materials with respect to such meeting, (ii) by or at the direction of the Board of Directors, or (iii) by any stockholder who is a stockholder of record of the Corporation (the “Record Stockholder”) at the time of the giving of the notice required in the following paragraph, who is entitled to vote at the meeting and who has complied with the notice procedures set forth in this section. For the avoidance of doubt, the foregoing clause (iii) shall be the exclusive means for a stockholder to make nominations or propose business (other than business included in the Corporation’s proxy materials pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as amended (such act, and the rules and regulations promulgated thereunder, the “Exchange Act”)) at an annual meeting of stockholders.

(b) For nominations or business to be properly brought before an annual meeting by a Record Stockholder pursuant to clause (iii) of the foregoing paragraph, (i) the Record Stockholder must have given timely notice thereof in writing to the Secretary of the Corporation, (ii) any such business must be a proper matter for stockholder action under Delaware law and (iii) the Record Stockholder and the beneficial owner, if any, on whose behalf any such proposal or nomination is made, must have acted in accordance with the representations set forth in the Solicitation Statement required by these Bylaws. To be timely, a Record Stockholder’s notice shall be received by the Secretary at the principal executive offices of the Corporation not less than 90 or more than 120 days prior to the one-year anniversary of the date on which the Corporation first mailed its proxy materials for the preceding year’s annual meeting of stockholders; provided, however, that, subject to the last sentence of this Section 2.9(b), if the meeting is convened more than 30 days prior to or delayed by more than 30 days after the anniversary of the preceding year’s annual meeting, or if no annual meeting was held in the preceding year, notice by the Record Stockholder to be timely must be so received not later than the close of business on the later of (i) the 90th day before such annual meeting or (ii) the 10th day following the day on which public announcement of the date of such meeting is first made. Notwithstanding anything in the preceding sentence to the contrary, in the event that the number of directors to be elected to the Board of Directors is increased and there has been no public announcement naming all of the nominees for director or indicating the increase in the size of the Board of Directors made by the Corporation at least 10 days before the last day a Record Stockholder may deliver a notice of nomination in accordance with the preceding sentence, a Record Stockholder’s notice required by this bylaw shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be received by the Secretary at the principal executive offices of the Corporation not later than the close of business on the 10th day following the day on which such public announcement is first made by the Corporation. In no event shall an adjournment, or postponement of an annual meeting for which notice has been given, commence a new time period for the giving of a Record Stockholder’s notice.

(c) Such Record Stockholder’s notice shall set forth:

(i) if such notice pertains to the nomination of directors, as to each person whom the Record Stockholder proposes to nominate for election or reelection as a director all information relating to such person as would be required to be disclosed in solicitations of proxies for the election of such nominees as directors pursuant to Regulation 14A under the Exchange Act, and such person’s written consent to serve as a director if elected;

---

(ii) as to any business that the Record Stockholder proposes to bring before the meeting, a brief description of such business, the reasons for conducting such business at the meeting and any material interest in such business of such Record Stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and

(iii) as to the Record Stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (each, a “party”): (1) the name and address of each such party; (2) (A) the class, series, and number of shares of the Corporation that are owned, directly or indirectly, beneficially and of record by each such party, (B) any option, warrant, convertible security, stock appreciation right, or similar right with an exercise or conversion privilege or a settlement payment or mechanism at a price related to any class or series of shares of the Corporation or with a value derived in whole or in part from the value of any class or series of shares of the Corporation, whether or not such instrument or right shall be subject to settlement in the underlying class or series of capital stock of the Corporation or otherwise (a “Derivative Instrument”) directly or indirectly owned beneficially by each such party, and any other direct or indirect opportunity to profit or share in any profit derived from any increase or decrease in the value of shares of the Corporation, (C) any proxy, contract, arrangement, understanding, or relationship pursuant to which either party has a right to vote, directly or indirectly, any shares of any security of the Corporation, (D) any short interest in any security of the Corporation held by each such party (for purposes of this Section 2.9(c)(iii), a person shall be deemed to have a short interest in a security if such person directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, has the opportunity to profit or share in any profit derived from any decrease in the value of the subject security), (E) any rights to dividends on the shares of the Corporation owned beneficially directly or indirectly by each such party that are separated or separable from the underlying shares of the Corporation, (F) any proportionate interest in shares of the Corporation or Derivative Instruments held, directly or indirectly, by a general or limited partnership in which either party is a general partner or, directly or indirectly, beneficially owns an interest in a general partner and (G) any performance-related fees (other than an asset-based fee) that each such party is directly or indirectly entitled to based on any increase or decrease in the value of shares of the Corporation or Derivative Instruments, if any, as of the date of such notice, including without limitation any such interests held by members of each such party’s immediate family sharing the same household (which information set forth in this paragraph shall be supplemented by such stockholder or such beneficial owner, as the case may be, not later than 10 days after the record date for determining the stockholders entitled to vote at the meeting; provided, that if such date is after the date of the meeting, not later than the day prior to the meeting); (3) any other information relating to each such party that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for, as applicable, the proposal and/or the election of directors in a contested election pursuant to Section 14 of the Exchange Act; and (4) a statement whether or not each such party will deliver a proxy statement and form of proxy to holders of, in the case of a proposal, at least the percentage of voting power of all of the shares of capital stock of the Corporation required under applicable law to carry the proposal or, in the case of a nomination or nominations, at least the percentage of voting power of all of the shares of capital stock of the Corporation reasonably believed by the Record Stockholder or beneficial holder, as the case may be, to be sufficient to elect the nominee or nominees proposed to be nominated by the Record Stockholder (such statement, a “Solicitation Statement”).

---

(d) A person shall not be eligible for election or re-election as a director at an annual meeting unless (i) the person is nominated by a Record Stockholder in accordance with Section 2.9(c) or (ii) the person is nominated by or at the direction of the Board of Directors. Only such business shall be conducted at an annual meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this section. The chairman of the meeting shall have the power and the duty to determine whether a nomination or any business proposed to be brought before the meeting has been made in accordance with the procedures set forth in these Bylaws and, if any proposed nomination or business is not in compliance with these Bylaws, to declare that such defectively proposed business or nomination shall not be presented for stockholder action at the meeting and shall be disregarded.

(e) For purposes of these Bylaws, “public announcement” shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or a comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act.

(f) Notwithstanding the foregoing provisions of this Section 2.9, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to matters set forth in this Section 2.9. Nothing in this Section 2.9 shall be deemed to affect any rights of stockholders to request inclusion of proposals in the Corporation’s proxy statement pursuant to Rule 14a-8 under the Exchange Act.

Section 2.10 Action Without Meeting.

Unless otherwise provided in the Certificate of Incorporation, the stockholders of the Corporation may not act by written consent.

ARTICLE 3

DIRECTORS

Section 3.1 Number and Term of Office.

(a) The number of directors of the Corporation shall be fixed by resolutions adopted by a majority of the authorized number of directors constituting the Board of Directors until changed by amendment of the Certificate of Incorporation or a Bylaw amending this Section 3.1 duly adopted by the vote or written consent of holders of a majority of the outstanding shares or by the Board of Directors. Subject to the foregoing provisions for changing the number of directors, the number of directors of the Corporation has been fixed at six (6). Elected directors shall hold office until the next annual meeting for the year in which their terms expire, as provided in Section 3.1(b), and until their successors shall be duly elected and qualified. Directors need not be stockholders. If, for any cause, the Board of Directors shall not have been elected at an annual meeting, they may be elected as soon as convenient at a special meeting of the stockholders called for that purpose in the manner provided in these Bylaws. In no case will a decrease in the number of directors shorten the term of any incumbent director.

---

(b) The directors shall be divided into three classes, designated Class I, Class II, and Class III, as nearly equal in number as the then total number of directors permits. The term of office of the initial Class I directors shall expire at the first regularly-scheduled annual meeting of the stockholders following the effectiveness of these Bylaws, the term of office of the initial Class II directors shall expire at the second annual meeting of the stockholders following the effectiveness of these Bylaws and the term of office of the initial Class III directors shall expire at the third annual meeting of the stockholders following the effectiveness of these Bylaws. At each annual meeting of stockholders, commencing with the first regularly scheduled annual meeting of stockholders following the effectiveness of these Bylaws, each of the successors elected to replace the directors of a Class whose term shall have expired at such annual meeting shall be elected to hold office until the third annual meeting next succeeding his or her election and until his or her respective successor shall have been duly elected and qualified. If the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible, and any additional directors of any class elected to fill a vacancy resulting from an increase in such class shall hold office for a term that shall coincide with the remaining term of that class. Notwithstanding the foregoing, whenever the holders of any one or more classes or series of Preferred Stock issued by the Corporation shall have the right, voting separately by class or series, to elect directors at an annual or special meeting of stockholders, the election, term of office, filling of vacancies and other features of such directorships shall be governed by the applicable terms of these Bylaws and any certificate of designation creating such class or series of Preferred Stock, and such directors so elected shall not be divided into classes pursuant to this Section 3.1 unless expressly provided by such terms.

Any amendment, change or repeal of this Section 3.1, or any other amendment to these Bylaws that will have the effect of permitting circumvention of or modifying this Section 3.1, shall require the favorable vote, at a stockholders’ meeting, of the holders of at least eighty percent (80%) of the then-outstanding shares of stock of the Corporation entitled to vote.

(c) Except as provided in Section 3.3 of this Article 3, the directors shall be elected by a plurality vote of the votes cast and entitled to vote on the election of directors at any meeting for the election of directors at which a quorum is present.

Section 3.2 Powers.

The powers of the Corporation shall be exercised, its business conducted and its property controlled by or under the direction of the Board of Directors.

Section 3.3 Vacancies.

Vacancies and newly created directorships resulting from any increase in the authorized number of directors shall be filled only by a majority of the directors then in office, although less than a quorum, or by a sole remaining director, and not by the stockholders. A person elected to fill a vacancy or newly created directorship shall be assigned to a class as determined by the Board of Directors and shall hold office until the next election of the class to which such director shall have been assigned and until his or her successor shall be duly elected and qualified. A vacancy in the Board of Directors shall be deemed to exist under this section in the case of the death, removal or resignation of any director, or if the stockholders fail at any meeting of stockholders at which directors are to be elected (including any meeting referred to in Section 3.4 below) to elect the number of directors then constituting the Whole Board.

---

Section 3.4 Resignations and Removals.

(a) Any director may resign at any time by delivering his or her resignation to the Secretary in writing or by electronic transmission, such resignation to specify whether it will be effective at a particular time, upon receipt by the Secretary or at the pleasure of the Board of Directors. If no such specification is made it shall be deemed effective at the pleasure of the Board of Directors. When one or more directors shall resign from the Board of Directors effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each director so chosen shall be assigned to a class as determined by the Board of Directors and shall hold office until the next election of the class to which such director shall have been assigned and until his or her successor shall be duly elected and qualified.

(b) At a special meeting of stockholders called for the purpose in the manner hereinabove provided, the Board of Directors or any individual director may be removed from office only for cause, and a new director shall be elected by a majority of the directors then in office, although less than a quorum, or by a sole remaining director, and not by the stockholders. Each director so elected shall be assigned to a class as determined by the Board of Directors and shall hold office until the next election of the class to which such director shall have been assigned and until his or her successor shall be duly elected and qualified.

Section 3.5 Meetings.

(a) The annual meeting of the Board of Directors shall be held immediately after the annual stockholders’ meeting and at the place where such meeting is held or at the place announced by the chairman at such meeting. No notice of an annual meeting of the Board of Directors shall be necessary, and such meeting shall be held for the purpose of electing officers and transacting such other business as may lawfully come before it.

(b) Except as hereinafter otherwise provided, regular meetings of the Board of Directors shall be held at the principal executive office of the Corporation. Regular meetings of the Board of Directors may also be held at any place, within or without the State of Delaware, which has been designated by resolutions of the Board of Directors or the written consent of all directors.

(c) Special meetings of the Board of Directors may be held at any time and place within or without the State of Delaware whenever called by (i) the Board of Directors pursuant to a resolution adopted by a majority of the Whole Board; (ii) the Chairman of the Board; or (iii) the President of the Corporation.

(d) Written notice of the time and place of all regular and special meetings of the Board of Directors shall be delivered personally to each director or sent by any form of electronic transmission at least 48 hours before the start of the meeting, or sent by first class mail at least 120 hours before the start of the meeting. Notice of any meeting may be waived in writing at any time before or after the meeting and will be waived by any director by attendance thereat.

---

Section 3.6 Quorum and Voting.

(a) A quorum of the Board of Directors shall consist of a majority of the exact number of directors fixed from time to time in accordance with Section 3.1 of Article 3 of these Bylaws, but not less than one; provided, however, at any meeting, whether a quorum be present or otherwise, a majority of the directors present may adjourn from time to time until the time fixed for the next regular meeting of the Board of Directors, without notice other than by announcement at the meeting.

(b) At each meeting of the Board of Directors at which a quorum is present, all questions and business shall be determined by a vote of a majority of the directors present, unless a different vote be required by law, the Certificate of Incorporation, or these Bylaws.

(c) Any member of the Board of Directors, or of any committee thereof, may participate in a meeting by means of conference telephone or other communication equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting by such means shall constitute presence in person at such meeting.

(d) The transactions of any meeting of the Board of Directors, or any committee thereof, however called or noticed, or wherever held, shall be as valid as though had at a meeting duly held after regular call and notice if a quorum be present and if, either before or after the meeting, each of the directors not present shall sign a written waiver of notice, or a consent to holding such meeting, or an approval of the minutes thereof. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting.

Section 3.7 Action Without Meeting.

Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board of Directors or of such committee, as the case may be, consent thereto in writing or by electronic transmission, and such writing or writings or electronic transmission or transmissions are filed with the minutes of proceedings of the Board of Directors or committee. Such filing shall be in paper form if the minutes are maintained in paper form and shall be in electronic form if the minutes are maintained in electronic form.

Section 3.8 Fees and Compensation.

Directors and members of committees may receive such compensation, if any, for their services, and such reimbursement for expenses, as may be fixed or determined by resolution of the Board of Directors.

Section 3.9 Committees.

(a) Executive Committee: The Board of Directors may, by resolution passed by a majority of the Whole Board, appoint an Executive Committee of not less than one member, each of whom shall be a director. To the extent permitted by law, the Executive Committee shall have and may exercise when the Board of Directors is not in session all powers of the Board of Directors in the management of the business and affairs of the Corporation, except such committee shall not have the power or authority to amend these Bylaws or to approve or recommend to the stockholders any action which must be submitted to stockholders for approval under the General Corporation Law.

---

(b) Other Committees: The Board of Directors may, by resolution passed by a majority of the Whole Board, from time to time appoint such other committees as may be permitted by law. Such other committees appointed by the Board of Directors shall have such powers and perform such duties as may be prescribed by the resolution or resolutions creating such committee, but in no event shall any such committee have the powers denied to the Executive Committee in these Bylaws.

(c) Term: The terms of members of all committees of the Board of Directors shall expire on the date of the next annual meeting of the Board of Directors following their appointment; provided that they shall continue in office until their successors are appointed. Subject to the provisions of subsections (a) or (b) of this Section 3.9, the Board of Directors may at any time increase or decrease the number of members of a committee or terminate the existence of a committee; provided that no committee shall consist of less than one member. The membership of a committee member shall terminate on the date of such member’s death or voluntary resignation, but the Board of Directors may at any time for any reason remove any individual committee member and the Board of Directors may fill any committee vacancy created by death, resignation, removal or increase in the number of members of the committee. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee, and, in addition, in the absence or disqualification of any member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member.

(d) Meetings: Unless the Board of Directors shall otherwise provide, regular meetings of the Executive Committee or any other committee appointed pursuant to this Section 3.9 shall be held at such times and places as are determined by the Board of Directors, or by any such committee, and when notice thereof has been given to each member of such committee, no further notice of such regular meetings need be given thereafter; special meetings of any such committee may be held at the principal executive office of the Corporation or at any place which has been designated from time to time by resolution of such committee or by written consent of all members thereof, and may be called by any director who is a member of such committee upon written notice to the members of such committee of the time and place of such special meeting given in the manner provided for the giving of written notice to members of the Board of Directors of the time and place of special meetings of the Board of Directors. Notice of any special meeting of any committee may be waived in writing at any time after the meeting and will be waived by any director by attendance thereat. A majority of the authorized number of members of any such committee shall constitute a quorum for the transaction of business, and the act of a majority of those present at any meeting at which a quorum is present shall be the act of such committee.

ARTICLE 4

OFFICERS

Section 4.1 Officers Designated.

The officers of the Corporation shall be a President, a Secretary and a Treasurer. The Board of Directors or the President may also appoint a Chairman of the Board, one or more Vice-

---

Presidents, Assistant Secretaries, Assistant Treasurers, and such other officers and agents with such powers and duties as it or he shall deem necessary. The order of the seniority of the Vice-Presidents shall be in the order of their nomination unless otherwise determined by the Board of Directors. The Board of Directors may assign such additional titles to one or more of the officers as they shall deem appropriate. Any one person may hold any number of offices of the Corporation at any one time unless specifically prohibited therefrom by law. The salaries and other compensation of the officers of the Corporation shall be fixed by or in the manner designated by the Board of Directors.

Section 4.2 Tenure and Duties of Officers.

(a) General: All officers shall hold office at the pleasure of the Board of Directors and until their successors shall have been duly elected and qualified, unless sooner removed. Any officer elected or appointed by the Board of Directors may be removed at any time by the Board of Directors. If the office of any officer becomes vacant for any reason, the vacancy may be filled by the Board of Directors. Nothing in these Bylaws shall be construed as creating any kind of contractual right to employment with the Corporation.

(b) Duties of the Chairman of the Board of Directors: The Chairman of the Board of Directors (if there be such an officer appointed) when present shall preside at all meetings of the stockholders and the Board of Directors. The Chairman of the Board of Directors shall perform such other duties and have such other powers as the Board of Directors shall designate from time to time.

(c) Duties of President: The President shall be the chief executive officer of the Corporation and shall preside at all meetings of the stockholders and at all meetings of the Board of Directors, unless the Chairman of the Board of Directors has been appointed and is present. The President shall perform such other duties and have such other powers as the Board of Directors shall designate from time to time.

(d) Duties of Vice-Presidents: The Vice-Presidents, in the order of their seniority, may assume and perform the duties of the President in the absence or disability of the President or whenever the office of the President is vacant. The Vice-President shall perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time.

(e) Duties of Secretary: The Secretary shall attend all meetings of the stockholders and of the Board of Directors and any committee thereof, and shall record all acts and proceedings thereof in the minute book of the Corporation, which may be maintained in either paper or electronic form. The Secretary shall give notice, in conformity with these Bylaws, of all meetings of the stockholders and of all meetings of the Board of Directors and any Committee thereof requiring notice. The Secretary shall perform such other duties and have such other powers as the Board of Directors shall designate from time to time. The President may direct any Assistant Secretary to assume and perform the duties of the Secretary in the absence or disability of the Secretary, and each Assistant Secretary shall perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time.

(f) Duties of Treasurer: The Treasurer shall keep or cause to be kept the books of account of the Corporation in a thorough and proper manner, and shall render statements of the financial

---

affairs of the Corporation in such form and as often as required by the Board of Directors or the President. The Treasurer, subject to the order of the Board of Directors, shall have the custody of all funds and securities of the Corporation. The Treasurer shall perform all other duties commonly incident to his or her office and shall perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. The President may direct any Assistant Treasurer to assume and perform the duties of the Treasurer in the absence or disability of the Treasurer, and each Assistant Treasurer shall perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time.

ARTICLE 5

EXECUTION OF CORPORATE INSTRUMENTS, AND

VOTING OF SECURITIES OWNED BY THE CORPORATION

Section 5.1 Execution of Corporate Instruments.

(a) The Board of Directors may in its discretion determine the method and designate the signatory officer or officers, or other person or persons, to execute any corporate instrument or document, or to sign the corporate name without limitation, except where otherwise provided by law, and such execution or signature shall be binding upon the Corporation.

(b) Unless otherwise specifically determined by the Board of Directors or otherwise required by law, formal contracts of the Corporation, promissory notes, deeds of trust, mortgages and other evidences of indebtedness of the Corporation, and other corporate instruments or documents requiring the corporate seal, and certificates of shares of stock owned by the Corporation, shall be executed, signed or endorsed by the Chairman of the Board (if there be such an officer appointed), the President, any Vice-President, the Secretary, Treasurer, any Assistant Secretary or any Assistant Treasurer. All other instruments and documents requiring the corporate signature but not requiring the corporate seal may be executed as aforesaid or in such other manner as may be directed by the Board of Directors.

(c) All checks and drafts drawn on banks or other depositaries on funds to the credit of the Corporation or in special accounts of the Corporation shall be signed by such person or persons as the Board of Directors shall authorize so to do.

(d) Execution of any corporate instrument may be effected in such form, either manual, facsimile or electronic signature, as may be authorized by the Board of Directors.

Section 5.2 Voting of Securities Owned by Corporation.

All stock and other securities of other corporations, joint ventures, trusts, partnerships, limited liability companies or any other form of business entity owned or held by the Corporation for itself or for other parties in any capacity shall be voted, and all proxies with respect thereto shall be executed, by the person authorized so to do by resolution of the Board of Directors or, in the absence of such authorization, by the Chairman of the Board (if there be such an officer appointed), or by the President, or by any Vice-President.

---

ARTICLE 6

SHARES OF STOCK

Section 6.1 Form and Execution of Certificates.

The shares of the Corporation shall be represented by certificates, provided that the Board of Directors may provide by resolution or resolutions that some or all of any or all classes or series of its stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the Corporation. Certificates for the shares of stock of the Corporation shall be in such form as is consistent with the Certificate of Incorporation and applicable law. Every holder of stock in the Corporation shall be entitled to have a certificate signed by, or in the name of the Corporation by, the Chairman of the Board (if there be such an officer appointed), or by the President or any Vice-President and by the Treasurer or Assistant Treasurer or the Secretary or Assistant Secretary, certifying the number of shares owned by him or her in the Corporation. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued with the same effect as if he were such officer, transfer agent, or registrar at the date of issue. If the Corporation shall be authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the Corporation shall issue to represent such class or series of stock, provided that, except as otherwise provided in Section 202 of the Delaware General Corporation Law, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate which the Corporation shall issue to represent such class or series of stock, a statement that the Corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights.

Section 6.2 Lost Certificates.

The Board of Directors may direct a new certificate or certificates (or uncertificated shares in lieu of a new certificate) to be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost or destroyed. When authorizing such issue of a new certificate or certificates (or uncertificated shares in lieu of a new certificate), the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost or destroyed certificate or certificates, or his or her legal representative, to indemnify the Corporation in such manner as it shall require and/or to give the Corporation a surety bond in such form and amount as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost or destroyed.

Section 6.3 Transfers.

Transfers of record of shares of stock of the Corporation shall be made only upon its books by the holders thereof, in person or by attorney duly authorized, who shall furnish proper evidence of authority to transfer, and in the case of stock represented by a certificate, upon the surrender of a certificate or certificates for a like number of shares, properly endorsed.

---

Section 6.4 Fixing Record Dates.

(a) In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than 60 nor less than 10 days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the date on which the meeting is held. A determination of stockholders of record entitled notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting.

(b) In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than 60 days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto.

Section 6.5 Registered Stockholders.

The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends and to vote as such owner, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware.

ARTICLE 7

OTHER SECURITIES OF THE CORPORATION

All bonds, debentures and other corporate securities of the Corporation, other than stock certificates, may be signed by the Chairman of the Board (if there be such an officer appointed), or the President or any Vice-President or such other person as may be authorized by the Board of Directors and the corporate seal impressed thereon or a facsimile of such seal imprinted thereon and attested by the signature of the Secretary or an Assistant Secretary, or the Treasurer or an Assistant Treasurer; provided, however, that where any such bond, debenture or other corporate security shall be authenticated by the manual signature of a trustee under an indenture pursuant to which such bond, debenture or other corporate security shall be issued, the signature of the persons signing and attesting the corporate seal on such bond, debenture or other corporate security may be the imprinted facsimile of the signatures of such persons. Interest coupons

---

appertaining to any such bond, debenture or other corporate security, authenticated by a trustee as aforesaid, shall be signed by the Treasurer or an Assistant Treasurer of the Corporation, or such other person as may be authorized by the Board of Directors, or bear imprinted thereon the facsimile signature of such person. In case any officer who shall have signed or attested any bond, debenture or other corporate security, or whose facsimile signature shall appear thereon has ceased to be an officer of the Corporation before the bond, debenture or other corporate security so signed or attested shall have been delivered, such bond, debenture or other corporate security nevertheless may be adopted by the Corporation and issued and delivered as though the person who signed the same or whose facsimile signature shall have been used thereon had not ceased to be such officer of the Corporation.

ARTICLE 8

INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS

Section 8.1 Right to Indemnification.

(a) Indemnification of Directors and Officers – The Corporation shall indemnify and hold harmless, to the fullest extent permitted by the General Corporation Law of Delaware as it presently exists or may hereafter be amended, any director or officer of the Corporation who was or is made or is threatened to be made a party or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative, arbitrative, or investigative (a “Proceeding”) by reason of the fact that he or she, or a person for whom he or she is the legal representative, is or was a director or officer of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust, or enterprise including service with respect to employee benefit plans, against all liability and loss suffered and expenses (including attorneys’ fees) reasonably incurred by such person in connection with any such Proceeding (“Expenses”); provided, however, that the Corporation may modify the extent of such indemnification by individual contracts with its directors and officers; and, provided, further, that the Corporation shall not be required to indemnify any director or officer in connection with any proceeding (or part thereof), initiated by such person unless the proceeding was authorized by the Board of Directors.

(b) Indemnification of Others – The Corporation shall have the power to indemnify its other officers, employees and other agents (together with its directors and officers, the “Agents”), as set forth in the General Corporation Law of Delaware or any other applicable law. The Board of Directors shall have the power to delegate the determination of whether indemnification shall be given to any such person except officers to such officers or other persons as the Board of Directors shall determine.

Section 8.2 Authority to Advance Expenses.

Expenses incurred by an officer or director (acting in his or her capacity as such) in defending a Proceeding shall be paid by the Corporation in advance of the final disposition of such Proceedings, provided, however, that if required by the Delaware General Corporation Law, as amended, such Expenses shall be advanced only upon delivery to the Corporation of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation as authorized under this Article or otherwise. Expenses incurred by other Agents of the Corporation (or by the

---

directors or officers not acting in their capacity as such, including service with respect to employee benefit plans) may be advanced on such terms and conditions as the Board of Directors deems appropriate. Any obligation to reimburse the Corporation for Expense advances shall be unsecured and no interest shall be charged thereon.

Section 8.3 Right of Claimant to Bring Suit.

If a claim under Section 8.1 or 8.2 of this Article is not paid in full by the Corporation within 90 days after a written claim has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense (including attorneys’ fees) of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending a Proceeding in advance of its final disposition where the required undertaking has been tendered to the Corporation) that the claimant has not met the standards of conduct that make it permissible under the Delaware General Corporation Law for the Corporation to indemnify the claimant for the amount claimed. The burden of proving such a defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper under the circumstances because he has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the claimant had not met such applicable standard of conduct, shall be a defense to the action or create a presumption that claimant has not met the applicable standard of conduct.

Section 8.4 Provisions Nonexclusive.

The rights conferred on any person by this Article shall not be exclusive of any other rights that such person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, agreement, vote of stockholders or disinterested directors, or otherwise, both as to action in an official capacity and as to action in another capacity while holding such office. To the extent that any provision of the Certificate of Incorporation, agreement or vote of the stockholders or disinterested directors is inconsistent with these Bylaws, the provision, agreement or vote shall take precedence. The Corporation may, to the extent fully permissible under the Delaware General Corporation Law or other applicable law, enter into individual contracts with any or all of its Agents with respect to indemnification and advancement of expenses.

Section 8.5 Authority to Insure.

The Corporation may purchase and maintain insurance to protect itself and any Agent against any Expense, whether or not the Corporation would have the power to indemnify the Agent against such Expense under applicable law or the provisions of this Article.

Section 8.6 Survival of Rights.

The rights provided by this Article shall continue as to a person who has ceased to be an Agent and shall inure to the benefit of the heirs, executors, and administrators of such a person.

---

Section 8.7 Settlement of Claims.

The Corporation shall not be liable to indemnify any Agent under this Article (a) for any amounts paid in settlement of any action or claim effected without the Corporation’s written consent, which consent shall not be unreasonably withheld; or (b) for any judicial award if the Corporation was not given a reasonable and timely opportunity, at its expense, to participate in the defense of such action.

Section 8.8 Effect of Amendment.

Any amendment, repeal or modification of this Article shall only be prospective and shall not affect the rights under these Bylaws in effect at the time of the alleged occurrence of any action or omission to act that is the cause of any proceeding against any agent of the Corporation.

Section 8.9 Subrogation.

In the event of payment under this Article, the Corporation shall be subrogated to the extent of such payment to all of the rights of recovery of the Agent (other than against the Other Indemnitors), who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable the Corporation effectively to bring suit to enforce such rights.

Section 8.10 No Duplication of Payments.

The Corporation shall not be liable under this Article to make any payment in connection with any claim made against the Agent to the extent the Agent has otherwise actually received payment (under any insurance policy, agreement, vote, or otherwise) of the amounts otherwise indemnifiable hereunder.

Section 8.11 Saving Clause.

If this Article or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify each Agent to the fullest extent not prohibited by any applicable portion of this Article that shall not have been invalidated, or by any other applicable law.

ARTICLE 9

NOTICES

Whenever, under any provisions of these Bylaws, notice is required to be given to any stockholder, the same shall be given either (1) in writing, timely and duly deposited in the United States Mail, postage prepaid, and addressed to his or her last known post office address as shown by the stock record of the Corporation or its transfer agent, or (2) by a means of electronic transmission that satisfies the requirements of Section 2.4(e) of these Bylaws, and has been consented to by the stockholder to whom the notice is given. Any notice required to be given to any director may be given by either of the methods hereinabove stated, except that such notice other than one which is delivered personally, shall be sent to such address or (in the case of electronic communication) such e-mail address, facsimile telephone number or other form of electronic address as such director shall have filed in writing or by electronic communication with the Secretary of the Corporation, or, in the absence of such filing, to the last known post

---

office address of such director. If no address of a stockholder or director be known, such notice may be sent to the principal executive office of the Corporation. An affidavit of mailing, executed by a duly authorized and competent employee of the Corporation or its transfer agent appointed with respect to the class of stock affected, specifying the name and address or the names and addresses of the stockholder or stockholders, director or directors, to whom any such notice or notices was or were given, and the time and method of giving the same, shall be conclusive evidence of the statements therein contained. All notices given by mail, as above provided, shall be deemed to have been given as at the time of mailing and all notices given by means of electronic transmission shall be deemed to have been given as at the sending time recorded by the electronic transmission equipment operator transmitting the same. It shall not be necessary that the same method of giving notice be employed in respect of all directors, but one permissible method may be employed in respect of any one or more, and any other permissible method or methods may be employed in respect of any other or others. The period or limitation of time within which any stockholder may exercise any option or right, or enjoy any privilege or benefit, or be required to act, or within which any director may exercise any power or right, or enjoy any privilege, pursuant to any notice sent him or her in the manner above provided, shall not be affected or extended in any manner by the failure of such a stockholder or such director to receive such notice. Whenever any notice is required to be given under the provisions of the statutes or of the Certificate of Incorporation, or of these Bylaws, a waiver thereof in writing signed by the person or persons entitled to said notice, or a waiver by electronic transmission by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent thereto. Whenever notice is required to be given, under any provision of law or of the Certificate of Incorporation or Bylaws of the Corporation, to any person with whom communication is unlawful, the giving of such notice to such person shall not be required and there shall be no duty to apply to any governmental authority or agency for a license or permit to give such notice to such person. Any action or meeting which shall be taken or held without notice to any such person with whom communication is unlawful shall have the same force and effect as if such notice had been duly given. In the event that the action taken by the Corporation is such as to require the filing of a certificate under any provision of the Delaware General Corporation Law, the certificate shall state, if such is the fact and if notice is required, that notice was given to all persons entitled to receive notice except such persons with whom communication is unlawful.

ARTICLE 10

AMENDMENTS

Except as otherwise provided in Section 8.8 above, these Bylaws may be repealed, altered or amended or new Bylaws adopted at any meeting of the stockholders, either annual or special, by the affirmative vote of sixty six and two thirds percent (66 2/3%) of the stock entitled to vote at such meeting, unless a larger vote is required by these Bylaws or the Certificate of Incorporation. Except as otherwise provided in Section 8.8 above, the Board of Directors shall also have the authority to repeal, alter or amend these Bylaws or adopt new Bylaws (including, without limitation, the amendment of any Bylaws setting forth the number of directors who shall constitute the Board of Directors) by unanimous written consent of the Whole Board or at any annual, regular or special meeting by the affirmative vote of a majority of the Whole Board, subject to the power of the stockholders to change or repeal such Bylaws.

---

ARTICLE 11

FORUM FOR CERTAIN ACTIONS

Unless the Corporation consents in writing to the selection of an alternative forum, to the fullest extent permitted by law, all Internal Corporate Claims shall be brought solely and exclusively in the Court of Chancery of the State of Delaware (or, if such court does not have jurisdiction, the Superior Court of the State of Delaware, or, if such other court does not have jurisdiction, the United States District Court for the District of Delaware). “Internal Corporate Claims” means claims, including claims in the right of the Corporation, brought by a stockholder (including a beneficial owner) (i) that are based upon a violation of a duty by a current or former director, officer, stockholder, employee or agent in such capacity or (ii) as to which the Delaware General Corporation Law confers jurisdiction upon the Court of Chancery of the State of Delaware.

---

CERTIFICATE OF SECRETARY

The undersigned, Secretary of Krystal Biotech, Inc., a Delaware corporation, hereby certifies that the foregoing is a full, true and correct copy of the Bylaws of said corporation, with all amendments to date of this Certificate.

WITNESS the signature of the undersigned this          day of September, 2017.

 

Exhibit 4.1

 

ZQ|CERT#|COY|CLS|RGSTRY|ACCT#|TRANSTYPE|RUN#|TRANS# COMMON STOCK PAR VALUE $0.00001 Certificate Number ZQ00000000 COMMON STOCK KRYSTAL BIOTECH, INC. INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE Shares * * 000000 ****************** * * * 000000 ***************** **** 000000 **************** ***** 000000 *************** ****** 000000 ************** THIS CERTIFIES THAT ** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. MR. Alexander David SAMPLE Sample **** Mr. Alexander David &Sample MRS. **** Mr. Alexander SAMPLE David Sample **** Mr. Alexander & David    Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander MR. David Sample SAMPLE **** Mr. Alexander David Sample **** &Mr. Alexander MRS. David Sample SAMPLE **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Sample **** Mr. Sample **000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares*** *000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares**** 000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****0 00000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****00 ***ZERO HUNDRED THOUSAND 0000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000 000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****0000 00**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****00000 0**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000 ZERO HUNDRED AND ZERO*** **Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000* *Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000** Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**S is the owner of SEE REVERSE FOR CERTAIN DEFINITIONS CUSIP 501147 10 2 THIS CERTIFICATE IS TRANSFERABLE IN CITIES DESIGNATED BY THE TRANSFER AGENT, AVAILABLE ONLINE AT www.computershare.com FULLY-PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK OF Krystal Biotech, Inc. (hereinafter called the “Company”), transferable only on the share register of the Company by the holder hereof, in person or by duly authorized attorney, upon surrender of this Certificate properly endorsed. This Certificate and the shares represented hereby, are issued and shall be held subject to all of the provisions of the Certificate of Incorporation, as amended, and the Bylaws of the Company (copies of which are on file with the Company and with the Transfer Agent) and any amendments thereto, to all of which each holder of this certificate, by acceptance hereof, assents. This Certificate is not valid unless countersigned and registered by the Transfer Agent and Registrar. Witness the facsimile seal of the Company and the facsimile signatures of its duly authorized officers. FACSIMILE SIGNATURE TO COME President FACSIMILE SIGNATURE TO COME Secretary DATED DD-MMM-YYYY COUNTERSIGNED AND REGISTERED: COMPUTERSHARE TRUST COMPANY, N.A. TRANSFER AGENT AND REGISTRAR, By AUTHORIZED SIGNATURE PO BOX 43004, Providence, RI 02940-3004 MR A SAMPLE DESIGNATION (IF ANY) ADD 1 ADD 2 ADD 3 ADD 4 CUSIP XXXXXX XX X Holder ID XXXXXXXXXX Insurance Value 00.1,000,000 Number of Shares 123456 DTC 12345678901234512345678     Certificate Numbers Num/No Denom. Total. 1234567890/1234567890 111 1234567890/1234567890 222 1234567890/1234567890 333 1234567890/1234567890 444 1234567890/1234567890 555 1234567890/1234567890 666 Total Transaction 7

---

 

KRYSTAL BIOTECH, INC.

A statement of the number of shares constituting each class or series of stock and the designation thereof; and a statement of all of the rights, preferences, privileges and restrictions granted to or imposed upon the respective classes and/or series of shares of stock of the corporation and upon the holders thereof may be obtained by any stockholder upon request and without charge, at the principal office of the corporation, and the corporation will furnish any stockholder, upon request and without charge, a copy of such statement.

 

PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE

For value received, ____________________________ hereby sell, assign and transfer unto

 

 

(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING POSTAL ZIP CODE, OF ASSIGNEE)

 

 

 

 

                                                                                                                                                                                                                                                          Shares

of the common stock represented by the within Certificate, and do hereby irrevocably constitute and appoint

                                                                                                                                                                                                                                                     Attorney

to transfer the said stock on the books of the within-named Company with full power of substitution in the premises.

 

Dated:				20						Signature(s) Guaranteed: Medallion Guarantee Stamp THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (Banks, Stockbrokers, Savings and Loan Associations and Credit Unions) WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM, PURSUANT TO S.E.C. RULE 17Ad-15.
Signature:
Signature:
		Notice: The signature to this assignment must correspond with the name as written upon the face of the certificate, in every particular, without alteration or enlargement, or any change whatever.

 

		The IRS requires that the named transfer agent (“we”) report the cost basis of certain shares or units acquired after January 1, 2011. If your shares or units are covered by the legislation, and you requested to sell or transfer the shares or units using a specific cost basis calculation method, then we have processed as you requested. If you did not specify a cost basis calculation method, then we have defaulted to the first in, first out (FIFO) method. Please consult your tax advisor if you need additional information about cost basis.   If you do not keep in contact with the issuer or do not have any activity in your account for the time period specified by state law, your property may become subject to state unclaimed property laws and transferred to the appropriate state.

 

Exhibit 10.1

FORM OF INDEMNIFICATION AGREEMENT (DIRECTORS)

This Indemnification Agreement (Directors) (this “Agreement”) is made and entered into on [                ], by and between Krystal Biotech, Inc., a Delaware corporation with a principal business address of 2100 Wharton Street, Suite 701, Pittsburg, PA 15203 (the “Company”), and [                ], an individual resident of the State of [                ] with a residential address as set forth on the signature page hereto (“Indemnitee”), to be effective as of [                ], 20[    ] (the “Effective Date”).

Recitals

A. Section 141 of the Delaware General Corporation Law provides that the business and affairs of a corporation shall be managed by or under the direction of its board of directors.

B. Under Delaware law, a director’s right to be reimbursed for the costs of defense of criminal actions, whether such claims are asserted under state or federal law, does not depend upon the merits of the claims asserted against the director and is separate and distinct from any right to indemnification the director may be able to establish, and indemnification of the director against criminal fines and penalties is permitted if the director satisfies the applicable standard of conduct.

C. Indemnitee is a director of the Company and his/her willingness to serve in such capacity is predicated, in substantial part, upon the Company’s willingness to indemnify him/her in accordance with the principles reflected above, to the fullest extent permitted by the laws of the state of Delaware, and upon the other undertakings set forth in this Agreement.

D. Therefore, in recognition of the need to provide Indemnitee with substantial protection against personal liability, in order to procure Indemnitee’s continued service as a director of the Company and to enhance Indemnitee’s ability to serve the Company in an effective manner, and in order to provide such protection pursuant to express contract rights (intended to be enforceable irrespective of, among other things, any amendment to the Company’s certificate of incorporation or bylaws (collectively, the “Constituent Documents”), any change in the composition of the Company’s Board of Directors (the “Board”) or any change-in-control or business combination transaction relating to the Company), the Company wishes to provide in this Agreement for the indemnification of and the advancement of Expenses (as defined in Section 1(d)) to Indemnitee as set forth in this Agreement and for the continued coverage of Indemnitee under the Company’s directors’ and officers’ liability insurance policies.

E. In light of the considerations referred to in the preceding recitals, it is the Company’s intention and desire that the provisions of this Agreement be construed liberally, subject to their express terms, to maximize the protections to be provided to Indemnitee hereunder.

Agreement

NOW, THEREFORE, in consideration of the foregoing and other good and valuable consideration the receipt and sufficiency of which is acknowledged, the parties hereby agree as follows:

1. Certain Definitions. In addition to terms defined elsewhere herein, the following terms have the following meanings when used in this Agreement with initial capital letters:

(a) “Change in Control” means the occurrence after the date of this Agreement of any of the following events:

(i) the consummation of a reorganization, merger or consolidation, or sale or other disposition of all or substantially all of the assets of the Company or the acquisition of assets of another corporation, or other transaction (each, a “Business Combination”), unless, in each case, immediately following such Business

---

Combination A) all or substantially all of the beneficial owners of voting stock of the Company immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60% of the combined voting power of the then outstanding shares of voting stock of the entity resulting from such Business Combination; or

(ii) approval by the stockholders of the Company of a complete liquidation or dissolution of the Company.

(b) “Claim” means (i) any threatened, asserted, pending or completed claim, demand, action, suit or proceeding, whether civil, criminal, administrative, arbitrative, investigative or other, and whether made pursuant to federal, state or other law; and (ii) any inquiry or investigation, whether made, instituted or conducted by the Company or any other party, including without limitation any federal, state or other governmental entity, that Indemnitee determines might lead to the institution of any such claim, demand, action, suit or proceeding.

(c) “Disinterested Director” means a director of the Company who is not and was not a party to the Claim in respect of which indemnification is sought by Indemnitee.

(d) “Expenses” means attorneys’ and experts’ fees and expenses and all other costs and expenses paid or payable in connection with investigating, defending, being a witness in or participating in (including on appeal), or preparing to investigate, defend, be a witness in or participate in (including on appeal), any Claim.

(e) “Incumbent Directors” means the individuals who, as of the Effective Date, are Directors of the Company and any individual becoming a Director subsequent to the Effective Date whose election, nomination for election by the Company’s stockholders, or appointment, was approved by a vote of at least two-thirds of the then Incumbent Directors (either by a specific vote or by approval of the proxy statement of the Company in which such person is nominated for director, without objection to such nomination).

(f) “Indemnifiable Claim” means any Claim based upon, arising out of or resulting from (i) any actual, alleged or suspected act or failure to act by Indemnitee in his or her capacity as a director, officer, employee or agent of the Company or as a director, officer, employee, member, manager, trustee or agent of any other corporation, limited liability company, partnership, joint venture, trust or other entity or enterprise, whether or not for profit, as to which Indemnitee is or was serving at the request of the Company as a director, officer, employee, member, manager, trustee or agent, (ii) any actual, alleged or suspected act or failure to act by Indemnitee in respect of any business, transaction, communication, filing, disclosure or other activity of the Company or any other entity or enterprise referred to in clause (i) of this sentence, or (iii) Indemnitee’s status as a current or former director, officer, employee or agent of the Company or as a current or former director, officer, employee, member, manager, trustee or agent of the Company or any other entity or enterprise referred to in clause (i) of this sentence or any actual, alleged or suspected act or failure to act by Indemnitee in connection with any obligation or restriction imposed upon Indemnitee by reason of such status.

(g) “Indemnifiable Losses” means any and all Losses relating to, arising out of or resulting from any Indemnifiable Claim.

(h) “Independent Counsel” means a law firm, or a member of a law firm, that is experienced in matters of corporation law and neither presently is, nor in the past five years has been, retained to represent: (i) the Company or Indemnitee in any matter material to either such party (other than with respect to matters concerning the Indemnitee under this Agreement, or of other indemnitees under similar indemnification agreements), or (ii) any other party to the Indemnifiable Claim giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term “Independent Counsel” shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee’s rights under this Agreement.

(i) “Losses” means any and all Expenses, damages, losses, liabilities, judgments, fines, penalties (whether civil, criminal or other), amounts paid in settlement, and arbitration awards, including without limitation all interest, assessments and other charges paid or payable in connection with or in respect of any of the foregoing.

---

(l) “Voting Stock” means securities entitled to vote generally in the election of directors (or similar governing bodies).

2. Indemnification Obligation. Subject to Section 7, the Company shall indemnify, defend and hold harmless Indemnitee, to the fullest extent permitted by the laws of the State of Delaware in effect on the Effective Date or as such laws may from time to time hereafter be amended to increase the scope of such permitted indemnification, against any and all Indemnifiable Claims and Indemnifiable Losses; provided, however, that, except as provided in Sections 5 and 21, Indemnitee shall not be entitled to indemnification pursuant to this Agreement in connection with any Claim initiated by Indemnitee against the Company or any director or officer of the Company unless the Company has joined in or consented to the initiation of such Claim.

3. Advancement of Expenses. Indemnitee shall have the right to advancement by the Company prior to the final disposition of any Indemnifiable Claim of any and all Expenses relating to any Indemnifiable Claim paid or incurred by Indemnitee or which Indemnitee determines are reasonably likely to be paid or incurred by Indemnitee. Indemnitee’s right to such advancement is not subject to the satisfaction of any standard of conduct. Without limiting the generality or effect of the foregoing, within fifteen (15) business days after any request by Indemnitee, the Company shall, in accordance with such request, (a) pay such Expenses on behalf of Indemnitee, (b) advance to Indemnitee funds in an amount sufficient to pay such Expenses, or (c) reimburse Indemnitee for such Expenses; provided that Indemnitee shall repay, without interest, any amounts actually advanced to Indemnitee that, at the final disposition of the Indemnifiable Claim to which the advance related, were in excess of amounts paid or payable by Indemnitee in respect of Expenses relating to from such Indemnifiable Claim. In connection with any such payment, advancement or reimbursement, Indemnitee shall execute and deliver to the Company an undertaking, which need not be secured and shall be accepted without reference to Indemnitee’s ability to repay the Expenses, by or on behalf of the Indemnitee, to repay any Expenses to the extent that amounts paid, advanced or reimbursed by the Company following the final disposition of such Indemnifiable Claim. Indemnitee shall have been determined, pursuant to Section 7, not to be entitled to indemnification hereunder.

4. Indemnification for Additional Expenses. The Company shall also indemnify against and, if requested by Indemnitee, shall reimburse Indemnitee for, or advance to Indemnitee, within fifteen (15) business days of such request, any Expenses paid or incurred by Indemnitee or which Indemnitee determines he or she is reasonably likely to pay or incur in connection with any Claim by Indemnitee for (a) indemnification or reimbursement or advance payment of Expenses by the Company under any provision of this Agreement, or under any other agreement or provision of the Constituent Documents now or hereafter in effect relating to Indemnifiable Claims, and/or (b) recovery under any directors’ and officers’ liability insurance policies maintained by the Company, regardless in each case of whether Indemnitee ultimately is determined to be entitled to such indemnification, reimbursement, advance or insurance recovery, as the case may be; provided, however, that Indemnitee shall return, without interest, any such advance of Expenses (or portion thereof) which remains unspent at the final disposition of the Claim to which the advance related. In connection with any such payment, advancement or reimbursement, Indemnitee shall execute and deliver to the Company an undertaking to repay the Expenses, which need not be secured and shall be accepted without reference to Indemnitee’s ability, to repay, to the extent that for any amounts paid, advanced or reimbursed by the Company, Indemnitee shall have been determined, pursuant to Section 7, not to be entitled to indemnification hereunder.

5. Partial Indemnity. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of any Indemnifiable Loss but not for all of the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion thereof to which Indemnitee is entitled.

6. Procedure for Notification. To obtain indemnification under this Agreement in respect of an Indemnifiable Claim or Indemnifiable Loss, Indemnitee shall submit to the Company a written request therefor, including a brief description (based upon information then available to Indemnitee) of such Indemnifiable Claim or Indemnifiable Loss. If, at the time of the receipt of such request, the Company has directors’ and officers’ liability insurance in effect under which coverage for such Indemnifiable Claim or Indemnifiable Loss is potentially available, the Company shall give prompt written notice of such Indemnifiable Claim or Indemnifiable Loss to the applicable insurers in accordance with the procedures set forth in the applicable policies. The Company shall provide to Indemnitee a copy of such notice delivered to the applicable insurers, and copies of all subsequent correspondence between the Company and such insurers regarding the Indemnifiable Claim or Indemnifiable Loss,

---

in each case substantially concurrently with the delivery or receipt thereof by the Company. The failure by Indemnitee to timely notify the Company of any Indemnifiable Claim or Indemnifiable Loss shall not relieve the Company from any liability hereunder unless, and only to the extent that, the Company did not otherwise learn of such Indemnifiable Claim or Indemnifiable Loss and such failure results in forfeiture by the Company of substantial defenses, rights or insurance coverage.

7. Determination of Right to Indemnification.

(a) To the extent that Indemnitee shall have been successful on the merits or otherwise in defense of any Indemnifiable Claim or any portion thereof or in defense of any issue or matter therein, including without limitation dismissal without prejudice, Indemnitee shall be indemnified against all Indemnifiable Losses relating to such Indemnifiable Claim in accordance with Section 2 and no Standard of Conduct Determination (as defined in Section 7(b)) shall be required.

(b) To the extent that the provisions of Section 7(a) are inapplicable to an Indemnifiable Claim that shall have been finally disposed of, any determination of whether Indemnitee has satisfied any applicable standard of conduct under Delaware law that is a legally required condition to indemnification of Indemnitee hereunder against Indemnifiable Losses relating to such Indemnifiable Claim (a “Standard of Conduct Determination”) shall be made as follows: (i) unless a Change of Control has occurred, or (A) by a majority vote of the Disinterested Directors, even if less than a quorum of the Board, (B) if there are no such Disinterested Directors, by Independent Counsel in a written opinion addressed to the Board, a copy of which shall be delivered to Indemnitee; and (ii) if a Change in Control shall has occurred by Independent Counsel in a written opinion addressed to the Board, a copy of which shall be delivered to Indemnitee. The Company shall indemnify and hold harmless Indemnitee against and, if requested by Indemnitee, shall reimburse Indemnitee for, or advance to Indemnitee, within fifteen (15) business days of such request, any and all costs and expenses (including attorneys’ and experts’ fees and expenses) incurred by Indemnitee in cooperating with the person or persons making such Standard of Conduct Determination.

(c) The Company shall use its reasonable best efforts to cause any Standard of Conduct Determination required under Section 7(b) to be made as promptly as practicable. If the person or persons determined under Section 7 to make the Standard of Conduct Determination shall not have made a determination within 30 days after the later of (A) receipt by the Company of written notice from Indemnitee advising the Company of the final disposition of the applicable Indemnifiable Claim (the date of such receipt being the “Notification Date”) and (B) the selection of an Independent Counsel, if such determination is to be made by Independent Counsel, then Indemnitee shall be deemed to have satisfied the applicable standard of conduct; provided that such 30-day period may be extended for a reasonable time, not to exceed an additional 30 days, if the person or persons making such determination in good faith requires such additional time to obtain or evaluate information relating thereto.

(d) If (i) Indemnitee shall be entitled to indemnification pursuant to Section 7(a), (ii) no determination of whether Indemnitee has satisfied any applicable standard of conduct under Delaware law is a legally required condition to indemnification of Indemnitee hereunder against any Indemnifiable Losses, or (iii) Indemnitee has been determined or deemed pursuant to Section 7(b) or (c) to have satisfied any applicable standard of conduct under Delaware law which is a legally required condition to indemnification of Indemnitee then the Company shall pay to Indemnitee, within fifteen (15) business days after the later of (x) the Notification Date regarding the Indemnifiable Claim giving rise to the Indemnifiable Losses and (y) the earliest date on which the applicable criterion specified in clause (i), (ii) or (iii) is satisfied, an amount equal to such Indemnifiable Losses.

(e) If a Standard of Conduct Determination is to be made by Independent Counsel pursuant to Section 7(b)(i), the Independent Counsel shall be selected by the Board of Directors, and the Company shall give written notice to Indemnitee advising him or her of the identity of the Independent Counsel so selected. If a Standard of Conduct Determination is to be made by Independent Counsel pursuant to Section 7(b)(ii), the Independent Counsel shall be selected by Indemnitee, and Indemnitee shall give written notice to the Company advising it of the identity of the Independent Counsel so selected. In either case, Indemnitee or the Company, as applicable, may, within five (5) business days after receiving written notice of selection from the other, deliver to the other a written objection to such selection; provided, however, that such objection may be asserted only on the ground that the Independent Counsel so selected does not satisfy the criteria set forth in the definition of “Independent Counsel” in Section 1(h), and the objection shall set forth with particularity the factual basis of such assertion. Absent a proper

---

and timely objection, the person or firm so selected shall act as Independent Counsel. If such written objection is properly and timely made and substantiated, (i) the Independent Counsel so selected may not serve as Independent Counsel unless and until such objection is withdrawn or a court has determined that such objection is without merit and (ii) the non-objecting party may, at its option, select an alternative Independent Counsel and give written notice to the other party advising such other party of the identity of the alternative Independent Counsel so selected, in which case the provisions of the two immediately preceding sentences and clause (i) of this sentence shall apply to such subsequent selection and notice. If applicable, the provisions of clause (ii) of the immediately preceding sentence shall apply to successive alternative selections. If no Independent Counsel that is permitted under the foregoing provisions of this Section 7(e) to make the Standard of Conduct Determination shall have been selected within thirty (30) business days after the Company gives its initial notice pursuant to the first sentence of this Section 7(e) or Indemnitee gives its initial notice pursuant to the second sentence of this Section 7(e), as the case may be, either the Company or Indemnitee may petition the Court of Chancery of the State of Delaware for resolution of any objection which shall have been made by the Company or Indemnitee to the other’s selection of Independent Counsel and/or for the appointment as Independent Counsel of a person selected by the Court or by such other person as the Court shall designate, and the person or firm with respect to whom all objections are so resolved or the person or firm so appointed will act as Independent Counsel. In all events, the Company shall pay all of the reasonable fees and expenses of the Independent Counsel incurred in connection with the Independent Counsel’s determination pursuant to Section 7(b). In the event of a proper and timely objection to the Independent Counsel selected by either the Indemnitee or the Board of Directors, the deadlines provided under Section 7(c) shall be stayed until such objection is resolved pursuant to this Section 7.

8. Presumption of Entitlement. In making any Standard of Conduct Determination, the person or persons making such determination shall presume that Indemnitee has satisfied the applicable standard of conduct, and the Company may overcome such presumption only by its adducing clear and convincing evidence to the contrary. Any Standard of Conduct Determination that is adverse to Indemnitee may be challenged by the Indemnitee in the Court of Chancery of the State of Delaware. No determination by the Company (including by its directors or any Independent Counsel) that Indemnitee has not satisfied any applicable standard of conduct shall be a defense to any Claim by Indemnitee for indemnification or reimbursement or advance payment of Expenses by the Company hereunder or create a presumption that Indemnitee has not met any applicable standard of conduct.

9. No Other Presumption. For purposes of this Agreement, the termination of any Claim by judgment, order, settlement (whether with or without court approval) or conviction, or upon a plea of nolo contendere or its equivalent, will not create a presumption that Indemnitee did not meet any applicable standard of conduct or that indemnification hereunder is otherwise not permitted.

10. Non-Exclusivity. The rights of Indemnitee hereunder will be in addition to any other rights Indemnitee may have under the Constituent Documents, or the substantive laws of the Company’s jurisdiction of incorporation, any other contract or otherwise (collectively, “Other Indemnity Provisions”); provided, however, that (a) to the extent that Indemnitee otherwise would have any greater right to indemnification under any Other Indemnity Provision, Indemnitee will be deemed to have such greater right hereunder and (b) to the extent that any change is made to any Other Indemnity Provision which permits any greater right to indemnification than that provided under this Agreement as of the Effective Date, Indemnitee will be deemed to have such greater right hereunder. The Company will not adopt any amendment to any of the Constituent Documents the effect of which would be to deny, diminish or encumber Indemnitee’s right to indemnification under this Agreement or any Other Indemnity Provision.

11. Liability Insurance and Funding. For the duration of Indemnitee’s service as a director and/or officer of the Company, and for not less than five (5) years thereafter, the Company shall use commercially reasonable efforts (taking into account the scope and amount of coverage available relative to the cost thereof) to cause to be maintained in effect policies of directors’ and officers’ liability insurance providing coverage for directors and/or officers of the Company that is at least substantially comparable in scope and amount to that provided by the Company’s current policies of directors’ and officers’ liability insurance. The Company shall provide Indemnitee with a copy of all applicable directors’ and officers’ insurance applications, binders, policy forms, declarations, endorsements and other related materials for all such policies upon request by Indemnitee, and shall provide Indemnitee with a reasonable opportunity to review and comment on the same. Without limiting the generality or effect of the two immediately preceding sentences, the Company shall not discontinue or substantially reduce the

---

scope or amount of coverage from one policy period to the next (i) without the prior approval thereof by a majority vote of the Incumbent Directors, even if less than a quorum, or (ii) if at the time that any such discontinuation or significant reduction in the scope or amount of coverage is proposed there are no Incumbent Directors, without the prior written consent of Indemnitee (which consent shall not be unreasonably withheld or delayed). In all policies of insurance required to be procured and maintained by the Company under this Agreement, Indemnitee shall be named as an insured in such a manner as to provide Indemnitee the same rights and benefits, subject to the same limitations, as are accorded to the Company’s directors and officers most favorably insured by such policy. The Company may, but shall not be required to, create a trust fund, grant a security interest, pay a retainer, or use other means, including without limitation a letter of credit, to ensure the payment of such amounts as may be necessary to satisfy its obligations to indemnify and advance expenses pursuant to this Agreement.

12. Subrogation. Except as provided in Section 14, in the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the related rights of recovery of Indemnitee against other persons or entities (other than against the Fund Indemnitors, as defined below), including any entity or enterprise referred to in clause (i) of the definition of “Indemnifiable Claim” in Section 1(f). Indemnitee shall execute all papers reasonably required to evidence such rights (all of Indemnitee’s reasonable Expenses, including attorneys’ fees and charges, related thereto to be reimbursed by or, at the option of Indemnitee, advanced by the Company).

13. No Duplication of Payments. Except as provided in Section 14, the Company shall not be liable under this Agreement to make any payment to Indemnitee in respect of any Indemnifiable Losses to the extent Indemnitee has otherwise actually received payment (net of Expenses incurred in connection therewith) under any insurance policy, the Constituent Documents and Other Indemnity Provisions or otherwise.

14. Primacy of Indemnification. The Company hereby acknowledges that Indemnitee may have certain rights to indemnification, advancement of expenses and/or insurance provided by a third party and certain of its affiliates (collectively, the “Fund Indemnitors”). The Company hereby agrees (a) that it is the indemnitor of first resort (i.e., its obligations to Indemnitee are primary and any obligation of the Fund Indemnitors to advance expenses or to provide indemnification for the same expenses or liabilities incurred by Indemnitee are secondary), (c) that it shall be required to advance the full amount of expenses incurred by Indemnitee and shall be liable for the full amount of all Expenses and Indemnifiable Losses to the extent legally permitted and as required by the Constituent Documents (or any agreement between the Company and Indemnitee), without regard to any rights Indemnitee may have against the Fund Indemnitors, and (c) that it irrevocably waives, relinquishes and releases the Fund Indemnitors from any and all claims against the Fund Indemnitors for contribution, subrogation or any other recovery of any kind in respect thereof. The Company further agrees that no advancement or payment by the Fund Indemnitors on behalf of Indemnitee with respect to any claim for which Indemnitee has sought indemnification from the Company shall affect the foregoing and the Fund Indemnitors shall have a right of contribution and/or be subrogated to the extent of such advancement or payment to all of the rights of recovery of Indemnitee against the Company. The Company and Indemnitee agree that the Fund Indemnitors are express third party beneficiaries of the terms hereof.

15. Defense of Claims. The Company shall be entitled to participate in the defense of any Indemnifiable Claim or to assume the defense thereof, with counsel reasonably satisfactory to the Indemnitee; provided that if Indemnitee believes, after consultation with counsel selected by Indemnitee, that (a) the use of counsel chosen by the Company to represent Indemnitee would present such counsel with an actual or potential conflict, (b) the named parties in any such Indemnifiable Claim (including any impleaded parties) include both the Company and Indemnitee and that there may be one or more legal defenses available to Indemnitee that are different from or in addition to those available to the Company, or (c) any such representation by such counsel would be precluded under the applicable standards of professional conduct then prevailing, then Indemnitee shall be entitled to retain separate counsel (but not more than one law firm plus, if applicable, local counsel in respect of any particular Indemnifiable Claim) at the Company’s expense. The Company shall not be liable to Indemnitee under this Agreement for any amounts paid in settlement of any threatened or pending Indemnifiable Claim effected without the Company’s prior written consent. The Company shall not, without the prior written consent of the Indemnitee, effect any settlement of any threatened or pending Indemnifiable Claim which the Indemnitee is or could have been a party unless such settlement solely involves the payment of money and includes a complete and unconditional release of the Indemnitee from all liability on any claims that are the subject matter of such Indemnifiable Claim. Neither the Company nor Indemnitee shall unreasonably withhold its consent to any proposed settlement; provided that Indemnitee may withhold consent to any settlement that does not provide a complete and unconditional release of Indemnitee.

---

16. Successors and Binding Agreement.

(a) The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise) to all or substantially all of the business or assets of the Company, by agreement in form and substance satisfactory to Indemnitee and his or her counsel, expressly to assume and agree to perform this Agreement in the same manner and to the same extent the Company would be required to perform if no such succession had taken place. This Agreement shall be binding upon and inure to the benefit of the Company and any successor to the Company, including without limitation any person acquiring directly or indirectly all or substantially all of the business or assets of the Company whether by purchase, merger, consolidation, reorganization or otherwise (and such successor will thereafter be deemed the “Company” for purposes of this Agreement), but shall not otherwise be assignable or delegable by the Company.

(b) This Agreement shall inure to the benefit of and be enforceable by the Indemnitee’s personal or legal representatives, executors, administrators, heirs, distributees, legatees and other successors.

(c) This Agreement is personal in nature and neither of the parties hereto shall, without the consent of the other, assign or delegate this Agreement or any rights or obligations hereunder except as expressly provided in Sections 16(a) and 16(b). Without limiting the generality or effect of the foregoing, Indemnitee’s right to receive payments hereunder shall not be assignable, whether by pledge, creation of a security interest or otherwise, other than by a transfer by the Indemnitee’s will or by the laws of descent and distribution, and, in the event of any attempted assignment or transfer contrary to this Section 16(c), the Company shall have no liability to pay any amount so attempted to be assigned or transferred.

17. Notices. For all purposes of this Agreement, all communications, including without limitation notices, consents, requests or approvals, required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given when hand delivered or dispatched by electronic facsimile transmission (with receipt thereof orally confirmed), or five (5) business days after having been mailed by United States registered or certified mail, return receipt requested, postage prepaid or one business day after having been sent for next-day delivery by a nationally recognized overnight courier service, addressed to the Company (to the attention of the Secretary of the Company) and to Indemnitee at the addresses shown on the signature page hereto, or to such other address as any party may have furnished to the other in writing and in accordance herewith, except that notices of changes of address will be effective only upon receipt.

18. Governing Law. The validity, interpretation, construction and performance of this Agreement shall be governed by and construed in accordance with the substantive laws of the State of Delaware, without giving effect to the principles of conflict of laws of such State. The Company and Indemnitee each hereby irrevocably consent to the jurisdiction of the Chancery Court of the State of Delaware for all purposes in connection with any action or proceeding which arises out of or relates to this Agreement and agree that any action instituted under this Agreement shall be brought only in the Chancery Court of the State of Delaware.

19. Validity. If any provision of this Agreement or the application of any provision hereof to any person or circumstance is held invalid, unenforceable or otherwise illegal, the remainder of this Agreement and the application of such provision to any other person or circumstance shall not be affected, and the provision so held to be invalid, unenforceable or otherwise illegal shall be reformed to the extent, and only to the extent, necessary to make it enforceable, valid or legal. In the event that any court or other adjudicative body shall decline to reform any provision of this Agreement held to be invalid, unenforceable or otherwise illegal as contemplated by the immediately preceding sentence, the parties thereto shall take all such action as may be necessary or appropriate to replace the provision so held to be invalid, unenforceable or otherwise illegal with one or more alternative provisions that effectuate the purpose and intent of the original provisions of this Agreement as fully as possible without being invalid, unenforceable or otherwise illegal.

---

20. Miscellaneous. No provision of this Agreement may be waived, modified or discharged unless such waiver, modification or discharge is agreed to in writing signed by Indemnitee and the Company. No waiver by either party hereto at any time of any breach by the other party hereto or compliance with any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, expressed or implied with respect to the subject matter hereof have been made by either party that are not set forth expressly in this Agreement. References to Sections are to references to Sections of this Agreement.

21. Legal Fees and Expenses. It is the intent of the Company that Indemnitee not be required to incur legal fees and or other Expenses associated with the interpretation, enforcement or defense of Indemnitee’s rights under this Agreement by litigation or otherwise because the cost and expense thereof would substantially detract from the benefits intended to be extended to Indemnitee hereunder. Accordingly, without limiting the generality or effect of any other provision hereof, if it should appear to Indemnitee that the Company has failed to comply with any of its obligations under this Agreement or in the event that the Company or any other person takes or threatens to take any action to declare this Agreement void or unenforceable, or institutes any litigation or other action or proceeding designed to deny, or to recover from, Indemnitee the benefits provided or intended to be provided to Indemnitee hereunder, the Company irrevocably authorizes the Indemnitee from time to time to retain counsel of Indemnitee’s choice, at the expense of the Company as hereafter provided, to advise and represent Indemnitee in connection with any such interpretation, enforcement or defense, including without limitation the initiation or defense of any litigation or other legal action, whether by or against the Company or any director, officer, stockholder or other person affiliated with the Company, in any jurisdiction. Notwithstanding any existing or prior attorney-client relationship between the Company and such counsel, the Company irrevocably consents to Indemnitee’s entering into an attorney-client relationship with such counsel, and in that connection the Company and Indemnitee agree that a confidential relationship shall exist between Indemnitee and such counsel. Without respect to whether Indemnitee prevails, in whole or in part, in connection with any of the foregoing, the Company will pay and be solely financially responsible for any and all attorneys’ and related fees and expenses incurred by Indemnitee in connection with any of the foregoing.

22. Certain Interpretive Matters. No provision of this Agreement shall be interpreted in favor of, or against, either of the parties hereto by reason of the extent to which any such party or its counsel participated in the drafting thereof or by reason of the extent to which any such provision is inconsistent with any prior draft hereof or thereof.

23. Signatures. This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original but all of which together shall constitute one and the same agreement. Signatures received by facsimile, PDF file or other electronic format shall be deemed to be original signatures.

<signature page follows>

---

IN WITNESS WHEREOF, Indemnitee has executed and delivered and the Company has caused its duly authorized representative to execute and deliver this Agreement to be effective on and as of the Effective Date.

 

---

FORM OF INDEMNIFICATION AGREEMENT (EXECUTIVES AND KEY EMPLOYEES)

This Indemnification Agreement (Executives and Key Employees) (this “Agreement”) is made and entered into on [                ], by and between Krystal Biotech, Inc., a Delaware corporation with a principal business address of 2100 Wharton Street, Suite 701, Pittsburg, PA 15203 (the “Company”), and [                ], an individual resident of the State of    [                ] with a residential address as set forth on the signature page hereto (“Indemnitee”), to be effective as of [                ], 20[    ] (the “Effective Date”).

Recitals

A. Under Delaware law, an officer’s or employee’s right to be reimbursed for the costs of defense of any Claims, whether such Claims are asserted under state or federal law, does not depend upon the merits of the Claims asserted against the officer or employee and is separate and distinct from any right to indemnification the officer or employee may be able to establish, and indemnification of the officer or employee against civil or criminal fines and penalties is permitted if the officer or employee satisfies the applicable standard of conduct.

B. Indemnitee is an officer or employee of the Company and his/her willingness to serve in such capacity is predicated, in substantial part, upon the Company’s willingness to indemnify him/her in accordance with the principles reflected above, to the fullest extent permitted by the laws of the state of Delaware, and upon the other undertakings set forth in this Agreement.

C. Therefore, in recognition of the need to provide Indemnitee with substantial protection against personal liability, in order to procure Indemnitee’s continued service as an officer or employee of the Company and to enhance Indemnitee’s ability to serve the Company in an effective manner, and in order to provide such protection pursuant to express contract rights (intended to be enforceable irrespective of, among other things, any amendment to the Company’s certificate of incorporation or bylaws (collectively, the “Constituent Documents”), any change in the composition of the Company’s Board of Directors (the “Board”) or any change-in-control or business combination transaction relating to the Company), the Company wishes to provide in this Agreement for the indemnification of and the advancement of Expenses (as defined in Section 1(d)) to Indemnitee as set forth in this Agreement and for the continued coverage of Indemnitee under the Company’s directors’ and officers’ liability insurance policies.

D. In light of the considerations referred to in the preceding recitals, it is the Company’s intention and desire that the provisions of this Agreement be construed liberally, subject to their express terms, to maximize the protections to be provided to Indemnitee hereunder.

Agreement

NOW, THEREFORE, in consideration of the foregoing and other good and valuable consideration the receipt and sufficiency of which is acknowledged, the parties hereby agree as follows:

1. Certain Definitions. In addition to terms defined elsewhere herein, the following terms have the following meanings when used in this Agreement with initial capital letters:

(a) “Change in Control” means the occurrence after the Effective Date of this Agreement of any of the following events:

(i) the consummation of a reorganization, merger, consolidation or sale or other disposition of all or substantially all of the assets of the Company or the acquisition of assets of another corporation, or other transaction (each, a “Business Combination”), unless, in each case, immediately following such Business Combination) all or substantially all of the beneficial owners of voting stock of the Company immediately prior to

---

such Business Combination beneficially own, directly or indirectly, more than 60% of the combined voting power of the then outstanding shares of voting stock of the entity resulting from such Business Combination; or

(ii) approval by the stockholder of the Company of a complete liquidation or dissolution of the Company.

(b) “Claim” means (i) any threatened, asserted, pending or completed claim, demand, action, suit or proceeding, whether civil, criminal, administrative, arbitrative, investigative or other, and whether made pursuant to federal, state or other law; and (ii) any inquiry or investigation, whether made, instituted or conducted by the Company or any other party, including without limitation any federal, state or other governmental entity, that Indemnitee determines might lead to the institution of any such claim, demand, action, suit or proceeding.

(c) “Disinterested Director” means a director of the Company who is not and was not a party to the Claim in respect of which indemnification is sought by Indemnitee.

(d) “Expenses” means attorneys’ and experts’ fees and expenses and all other costs and expenses paid or payable in connection with investigating, defending, being a witness in or participating in (including on appeal), or preparing to investigate, defend, be a witness in or participate in (including on appeal), any Claim.

(e) “Incumbent Directors” means the individuals who, as of the Effective Date, are Directors of the Company and any individual becoming a Director subsequent to the Effective Date whose election, nomination for election by the Company’s stockholders, or appointment, was approved by a vote of at least two-thirds of the then Incumbent Directors (either by a specific vote or by approval of the proxy statement of the Company in which such person is nominated for director, without objection to such nomination).

(f) “Indemnifiable Claim” means any Claim based upon, arising out of or resulting from (i) any actual, alleged or suspected act or failure to act by Indemnitee in his or her capacity as a director, officer, employee, executive or agent of the Company or as a director, officer, employee, executive member, manager, trustee or agent of any other corporation, limited liability company, partnership, joint venture, trust or other entity or enterprise, whether or not for profit, as to which Indemnitee is or was serving at the request of the Company as a director, officer, employee, executive, member, manager, trustee or agent, (ii) any actual, alleged or suspected act or failure to act by Indemnitee in respect of any business, transaction, communication, filing, disclosure or other activity of the Company or any other entity or enterprise referred to in clause (i) of this sentence, or (iii) Indemnitee’s status as a current or former director, officer, employee or agent of the Company or as a current or former director, officer, employee, executive, member, manager, trustee or agent of the Company or any other entity or enterprise referred to in clause (i) of this sentence of any actual, alleged or suspected act or failure to act by Indemnitee in connection with any obligation or restriction imposed upon Indemnitee by reason of such status.

(g) “Indemnifiable Losses” means any and all Losses relating to, arising out of or resulting from any Indemnifiable Claim.

(i) “Independent Counsel” means a law firm, or a member of a law firm, that is experienced in matters of corporation law and neither presently is, nor in the past five years has been, retained to represent: (i) the Company or Indemnitee in any matter material to either such party (other than with respect to matters concerning the Indemnitee under this Agreement, or of other indemnitees under similar indemnification agreements), or (ii) any other party to the Indemnifiable Claim giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term “Independent Counsel” shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee’s rights under this Agreement.

(j) “Losses” means any and all Expenses, damages, losses, liabilities, judgments, fines, penalties (whether civil, criminal or other), amounts paid in settlement, and arbitration awards, including without limitation all interest, assessments and other charges paid or payable in connection with or in respect of any of the foregoing.

(m) “Voting Stock” means securities entitled to vote generally in the election of directors (or similar governing bodies).

---

2. Indemnification Obligation. Subject to Section 7, the Company shall indemnify, defend and hold harmless Indemnitee, to the fullest extent permitted by the laws of the State of Delaware in effect on the Effective Date or as such laws may from time to time hereafter be amended to increase the scope of such permitted indemnification, against any and all Indemnifiable Claims and Indemnifiable Losses; provided, however, that, except as provided in Sections 5 and 20, Indemnitee shall not be entitled to indemnification pursuant to this Agreement in connection with any Claim initiated by Indemnitee against the Company or any director, officer or executive of the Company unless the Company has joined in or consented to the initiation of such Claim.

3. Advancement of Expenses. Indemnitee shall have the right to advancement by the Company prior to the final disposition of any Indemnifiable Claim of any and all Expenses relating to any Indemnifiable Claim paid or incurred by Indemnitee or which Indemnitee determines are reasonably likely to be paid or incurred by Indemnitee. Indemnitee’s right to such advancement is not subject to the satisfaction of any standard of conduct. Without limiting the generality or effect of the foregoing, within fifteen (15) business days after any request by Indemnitee, the Company shall, in accordance with such request, (a) pay such Expenses on behalf of Indemnitee, (b) advance to Indemnitee funds in an amount sufficient to pay such Expenses, or (c) reimburse Indemnitee for such Expenses; provided that Indemnitee shall repay, without interest, any amounts actually advanced to Indemnitee that, at the final disposition of the Indemnifiable Claim to which the advance related, were in excess of amounts paid or payable by Indemnitee in respect of Expenses relating to such Indemnifiable Claim. In connection with any such payment, advancement or reimbursement, Indemnitee shall execute and deliver to the Company an undertaking, which need not be secured and shall be accepted without reference to Indemnitee’s ability to repay the Expenses, to repay any Expenses to the extent that for any amounts paid, advanced or reimbursed by the Company, Indemnitee shall have been determined, pursuant to Section 7, not to be entitled to indemnification hereunder.

4. Indemnification for Additional Expenses. The Company shall also indemnify against and, if requested by Indemnitee, shall reimburse Indemnitee for, or advance to Indemnitee, within fifteen (15) business days of such request, any Expenses paid or incurred by Indemnitee or which Indemnitee determines he or she is reasonably likely to pay or incur in connection with any Claim by Indemnitee for (a) indemnification or reimbursement or advance payment of Expenses by the Company under any provision of this Agreement, or under any other agreement or provision of the Constituent Documents now or hereafter in effect relating to Indemnifiable Claims, and/or (b) recovery under any directors’ and officers’ liability insurance policies maintained by the Company, regardless in each case of whether Indemnitee ultimately is determined to be entitled to such indemnification, reimbursement, advance or insurance recovery, as the case may be; provided, however, that Indemnitee shall return, without interest, any such advance of Expenses (or portion thereof) which remains unspent at the final disposition of the Claim to which the advance related. In connection with any such payment, advancement or reimbursement, Indemnitee shall execute and deliver to the Company an undertaking to repay the Expenses, which need not be secured and shall be accepted without reference to Indemnitee’s ability, to repay, to the extent that for any amounts paid, advanced or reimbursed by the Company, Indemnitee shall have been determined, pursuant to Section 7, not to be entitled to indemnification hereunder.

5. Partial Indemnity. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of any Indemnifiable Loss but not for all of the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion thereof to which Indemnitee is entitled.

6. Procedure for Notification. To obtain indemnification under this Agreement in respect of an Indemnifiable Claim or Indemnifiable Loss, Indemnitee shall submit to the Company a written request therefor, including a brief description (based upon information then available to Indemnitee) of such Indemnifiable Claim or Indemnifiable Loss. If, at the time of the receipt of such request, the Company has directors’ and officers’ liability insurance in effect under which coverage for such Indemnifiable Claim or Indemnifiable Loss is potentially available, the Company shall give prompt written notice of such Indemnifiable Claim or Indemnifiable Loss to the applicable insurers in accordance with the procedures set forth in the applicable policies. The Company shall provide to Indemnitee a copy of such notice delivered to the applicable insurers, and copies of all subsequent correspondence between the Company and such insurers regarding the Indemnifiable Claim or Indemnifiable Loss, in each case substantially concurrently with the delivery or receipt thereof by the Company. The failure by Indemnitee to timely notify the Company of any Indemnifiable Claim or Indemnifiable Loss shall not relieve the Company from any liability hereunder unless, and only to the extent that, the Company did not otherwise learn of

---

such Indemnifiable Claim or Indemnifiable Loss and such failure results in forfeiture by the Company of substantial defenses, rights or insurance coverage.

7. Determination of Right to Indemnification.

(a) To the extent that Indemnitee shall have been successful on the merits or otherwise in defense of any Indemnifiable Claim or any portion thereof or in defense of any issue or matter therein, including without limitation dismissal without prejudice, Indemnitee shall be indemnified against all Indemnifiable Losses relating to such Indemnifiable Claim in accordance with Section 2 and no Standard of Conduct Determination (as defined in Section 7(b)) shall be required.

(b) To the extent that the provisions of Section 7(a) are inapplicable to an Indemnifiable Claim that shall have been finally disposed of, any determination of whether Indemnitee has satisfied any applicable standard of conduct under Delaware law that is a legally required condition to indemnification of Indemnitee hereunder against Indemnifiable Losses relating to such Indemnifiable Claim (a “Standard of Conduct Determination”) shall be made as follows: (i) unless a Change of Control has occurred, (A) by a majority vote of the Disinterested Directors, even if less than a quorum of the Board or (B) if there are no such Disinterested Directors, by Independent Counsel in a written opinion addressed to the Board, a copy of which shall be delivered to Indemnitee; and (ii) if a Change in Control shall has occurred by Independent Counsel in a written opinion addressed to the Board, a copy of which shall be delivered to Indemnitee. The Company shall indemnify and hold harmless Indemnitee against and, if requested by Indemnitee, shall reimburse Indemnitee for, or advance to Indemnitee, within fifteen (15) business days of such request, any and all costs and expenses (including attorneys’ and experts’ fees and expenses) incurred by Indemnitee in cooperating with the person or persons making such Standard of Conduct Determination.

(c) The Company shall use its reasonable best efforts to cause any Standard of Conduct Determination required under Section 7(b) to be made as promptly as practicable. If the person or persons determined under Section 7 to make the Standard of Conduct Determination shall not have made a determination within thirty (30) days after the later of (A) receipt by the Company of written notice from Indemnitee advising the Company of the final disposition of the applicable Indemnifiable Claim (the date of such receipt being the “Notification Date”) and (B) the selection of an Independent Counsel, if such determination is to be made by Independent Counsel, then Indemnitee shall be deemed to have satisfied the applicable standard of conduct; provided that such thirty (30) day period may be extended for a reasonable time, not to exceed an additional thirty (30) days, if the person or persons making such determination in good faith requires such additional time to obtain or evaluate information relating thereto.

(d) If (i) Indemnitee shall be entitled to indemnification pursuant to Section 7(a), (ii) no determination of whether Indemnitee has satisfied any applicable standard of conduct under Delaware law is a legally required condition to indemnification of Indemnitee hereunder against any Indemnifiable Losses, or (iii) Indemnitee has been determined or deemed pursuant to Section 7(b) or (c) to have satisfied any applicable standard of conduct under Delaware law which is a legally required condition to indemnification of Indemnitee, then the Company shall pay to Indemnitee, within fifteen (15) business days after the later of (y) the Notification Date regarding the Indemnifiable Claim giving rise to the Indemnifiable Losses and (z) the earliest date on which the applicable criterion specified in clause (i), (ii) or (iii) is satisfied, an amount equal to such Indemnifiable Losses.

(e) If a Standard of Conduct Determination is to be made by Independent Counsel pursuant to Section 7(b)(i), the Independent Counsel shall be selected by the Board of Directors, and the Company shall give written notice to Indemnitee advising him or her of the identity of the Independent Counsel so selected. If a Standard of Conduct Determination is to be made by Independent Counsel pursuant to Section 7(b)(ii), the Independent Counsel shall be selected by Indemnitee, and Indemnitee shall give written notice to the Company advising it of the identity of the Independent Counsel so selected. In either case, Indemnitee or the Company, as applicable, may, within five (5) business days after receiving written notice of selection from the other, deliver to the other a written objection to such selection; provided, however, that such objection may be asserted only on the ground that the Independent Counsel so selected does not satisfy the criteria set forth in the definition of “Independent Counsel” in Section 1(i), and the objection shall set forth with particularity the factual basis of such assertion. Absent a proper and timely objection, the person or firm so selected shall act as Independent Counsel. If such written objection is properly and timely made and substantiated, (i) the Independent Counsel so selected may not serve as Independent

---

Counsel unless and until such objection is withdrawn or a court has determined that such objection is without merit and (ii) the non-objecting party may, at its option, select an alternative Independent Counsel and give written notice to the other party advising such other party of the identity of the alternative Independent Counsel so selected, in which case the provisions of the two immediately preceding sentences and clause (i) of this sentence shall apply to such subsequent selection and notice. If applicable, the provisions of clause (ii) of the immediately preceding sentence shall apply to successive alternative selections. If no Independent Counsel that is permitted under the foregoing provisions of this Section 7(e) to make the Standard of Conduct Determination shall have been selected within thirty (30) business days after the Company gives its initial notice pursuant to the first sentence of this Section 7(e) or Indemnitee gives its initial notice pursuant to the second sentence of this Section 7(e), as the case may be, either the Company or Indemnitee may petition the Court of Chancery of the State of Delaware for resolution of any objection which shall have been made by the Company or Indemnitee to the other’s selection of Independent Counsel and/or for the appointment as Independent Counsel of a person selected by the Court or by such other person as the Court shall designate, and the person or firm with respect to whom all objections are so resolved or the person or firm so appointed will act as Independent Counsel. In all events, the Company shall pay all of the reasonable fees and expenses of the Independent Counsel incurred in connection with the Independent Counsel’s determination pursuant to Section 7(b). In the event of a proper and timely objection to the Independent Counsel selected by either the Indemnitee or the Board of Directors, the deadlines provided under Section 7(c) shall be stayed until such objection is resolved pursuant to this Section 7.

8. Presumption of Entitlement. In making any Standard of Conduct Determination, the person or persons making such determination shall presume that Indemnitee has satisfied the applicable standard of conduct, and the Company may overcome such presumption only by its adducing clear and convincing evidence to the contrary. Any Standard of Conduct Determination that is adverse to Indemnitee may be challenged by the Indemnitee in the Court of Chancery of the State of Delaware. No determination by the Company (including by its directors or any Independent Counsel) that Indemnitee has not satisfied any applicable standard of conduct shall be a defense to any Claim by Indemnitee for indemnification or reimbursement or advance payment of Expenses by the Company hereunder or create a presumption that Indemnitee has not met any applicable standard of conduct.

9. No Other Presumption. For purposes of this Agreement, the termination of any Claim by judgment, order, settlement (whether with or without court approval) or conviction, or upon a plea of nolo contendere or its equivalent, will not create a presumption that Indemnitee did not meet any applicable standard of conduct or that indemnification hereunder is otherwise not permitted.

10. Non-Exclusivity. The rights of Indemnitee hereunder will be in addition to any other rights Indemnitee may have under the Constituent Documents, or the substantive laws of the Company’s jurisdiction of incorporation, any other contract or otherwise (collectively, “Other Indemnity Provisions”); provided, however, that (a) to the extent that Indemnitee otherwise would have any greater right to indemnification under any Other Indemnity Provision, Indemnitee will be deemed to have such greater right hereunder and (b) to the extent that any change is made to any Other Indemnity Provision which permits any greater right to indemnification than that provided under this Agreement as of the Effective Date, Indemnitee will be deemed to have such greater right hereunder. The Company will not adopt any amendment to any of the Constituent Documents the effect of which would be to deny, diminish or encumber Indemnitee’s right to indemnification under this Agreement or any Other Indemnity Provision.

11. Liability Insurance and Funding. For the duration of Indemnitee’s service as a director and/or officer of the Company, and for not less than five (5) years thereafter, the Company shall use commercially reasonable efforts (taking into account the scope and amount of coverage available relative to the cost thereof) to cause to be maintained in effect policies of directors’ and officers’ liability insurance providing coverage for directors and/or officers of the Company that is at least substantially comparable in scope and amount to that provided by the Company’s current policies of directors’ and officers’ liability insurance. The Company shall provide Indemnitee with a copy of all applicable directors’ and officers’ insurance applications, binders, policy forms, declarations, endorsements and other related materials for all such policies upon request by Indemnitee, and shall provide Indemnitee with a reasonable opportunity to review and comment on the same. Without limiting the generality or effect of the two immediately preceding sentences, the Company shall not discontinue or substantially reduce the scope or amount of coverage from one policy period to the next (i) without the prior approval thereof by a majority vote of the Incumbent Directors, even if less than a quorum, or (ii) if at the time that any such discontinuation or

---

significant reduction in the scope or amounts of coverage is proposed there are no Incumbent Directors, without the prior written consent of Indemnitee (which consent shall not be unreasonably withheld or delayed). In all policies of insurance required to be procured and maintained by the Company under this Agreement, Indemnitee shall be named as an insured in such a manner as to provide Indemnitee the same rights and benefits, subject to the same limitations, as are accorded to the Company’s directors, officers and employees most favorably insured by such policy. The Company may, but shall not be required to, create a trust fund, grant a security interest, pay a retainer, or use other means, including without limitation a letter of credit, to ensure the payment of such amounts as may be necessary to satisfy its obligations to indemnify and advance expenses pursuant to this Agreement. In no event shall the Company’s compliance with the terms of this Section 11 or the maintenance of any insurance of any kind be construed to relieve the Company of its obligations to indemnify or advance Expenses to Indemnitee as required by this Agreement. In the event of a Change in Control or the Company’s becoming insolvent (including being placed into receivership or entering the federal bankruptcy process and the like), the Company shall maintain in force any and all insurance policies then maintained by the Company in providing insurance (directors’ and officers’ liability, fiduciary, employment practices or otherwise) in respect of Indemnitee, for a period of six years thereafter.

12. Subrogation. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the related rights of recovery of Indemnitee against other persons or entities, including any entity or enterprise referred to in clause (i) of the definition of “Indemnifiable Claim” in Section 1(f). Indemnitee shall execute all papers reasonably required to evidence such rights (all of Indemnitee’s reasonable Expenses, including attorneys’ fees and charges, related thereto to be reimbursed by or, at the option of Indemnitee, advanced by the Company).

13. No Duplication of Payments. The Company shall not be liable under this Agreement to make any payment to Indemnitee in respect of any Indemnifiable Losses to the extent Indemnitee has otherwise actually received payment (net of Expenses incurred in connection therewith) under any insurance policy, the Constituent Documents and Other Indemnity Provisions or otherwise.

14. Defense of Claims. The Company shall be entitled to participate in the defense of any Indemnifiable Claim or to assume the defense thereof, with counsel reasonably satisfactory to the Indemnitee; provided that if Indemnitee believes, after consultation with counsel selected by Indemnitee, that (a) the use of counsel chosen by the Company to represent Indemnitee would present such counsel with an actual or potential conflict, (b) the named parties in any such Indemnifiable Claim (including any impleaded parties) include both the Company and Indemnitee and that there may be one or more legal defenses available to Indemnitee that are different from or in addition to those available to the Company, or (c) any such representation by such counsel would be precluded under the applicable standards of professional conduct then prevailing, then Indemnitee shall be entitled to retain separate counsel (but not more than one law firm plus, if applicable, local counsel in respect of any particular Indemnifiable Claim) at the Company’s expense. The Company shall not be liable to Indemnitee under this Agreement for any amounts paid in settlement of any threatened or pending Indemnifiable Claim effected without the Company’s prior written consent. The Company shall not, without the prior written consent of the Indemnitee, effect any settlement of any threatened or pending Indemnifiable Claim which the Indemnitee is or could have been a party unless such settlement solely involves the payment of money and includes a complete and unconditional release of the Indemnitee from all liability on any claims that are the subject matter of such Indemnifiable Claim. Neither the Company nor Indemnitee shall unreasonably withhold its consent to any proposed settlement; provided that Indemnitee may withhold consent to any settlement that does not provide a complete and unconditional release of Indemnitee.

15. Successors and Binding Agreement.

(a) The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise) to all or substantially all of the business or assets of the Company, by agreement in form and substance satisfactory to Indemnitee and his or her counsel, expressly to assume and agree to perform this Agreement in the same manner and to the same extent the Company would be required to perform if no such succession had taken place. This Agreement shall be binding upon and inure to the benefit of the Company and any successor to the Company, including without limitation any person acquiring directly or indirectly all or substantially all of the business or assets of the Company whether by purchase, merger, consolidation,

---

reorganization or otherwise (and such successor will thereafter be deemed the “Company” for purposes of this Agreement), but shall not otherwise be assignable or delegable by the Company.

(b) This Agreement shall inure to the benefit of and be enforceable by the Indemnitee’s personal or legal representatives, executors, administrators, heirs, distributees, legatees and other successors.

(c) This Agreement is personal in nature and neither of the parties shall, without the consent of the other, assign or delegate this Agreement or any rights or obligations hereunder except as expressly provided in Sections 15(a) and 15(b). Without limiting the generality or effect of the foregoing, Indemnitee’s right to receive payments hereunder shall not be assignable, whether by pledge, creation of a security interest or otherwise, other than by a transfer by the Indemnitee’s will or by the laws of descent and distribution, and, in the event of any attempted assignment or transfer contrary to this Section 15(c), the Company shall have no liability to pay any amount so attempted to be assigned or transferred.

16. Notices. For all purposes of this Agreement, all communications, including without limitation notices, consents, requests or approvals, required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given when hand delivered or dispatched by electronic facsimile transmission (with receipt thereof orally confirmed), or five (5) business days after having been mailed by United States registered or certified mail, return receipt requested, postage prepaid or one (1) business day after having been sent for next-day delivery by a nationally recognized overnight courier service, addressed to the Company (to the attention of the Secretary of the Company) and to Indemnitee at the addresses shown on the signature page hereto, or to such other address as any party may have furnished to the other in writing and in accordance herewith, except that notices of changes of address will be effective only upon receipt.

17. Governing Law. The validity, interpretation, construction and performance of this Agreement shall be governed by and construed in accordance with the substantive laws of the State of Delaware, without giving effect to the principles of conflict of laws of such State. The Company and Indemnitee each hereby irrevocably consent to the jurisdiction of the Chancery Court of the State of Delaware for all purposes in connection with any action or proceeding which arises out of or relates to this Agreement and agree that any action instituted under this Agreement shall be brought only in the Chancery Court of the State of Delaware.

18. Validity. If any provision of this Agreement or the application of any provision hereof to any person or circumstance is held invalid, unenforceable or otherwise illegal, the remainder of this Agreement and the application of such provision to any other person or circumstance shall not be affected, and the provision so held to be invalid, unenforceable or otherwise illegal shall be reformed to the extent, and only to the extent, necessary to make it enforceable, valid or legal. In the event that any court or other adjudicative body shall decline to reform any provision of this Agreement held to be invalid, unenforceable or otherwise illegal as contemplated by the immediately preceding sentence, the parties shall take all such action as may be necessary or appropriate to replace the provision so held to be invalid, unenforceable or otherwise illegal with one or more alternative provisions that effectuate the purpose and intent of the original provisions of this Agreement as fully as possible without being invalid, unenforceable or otherwise illegal.

19. Miscellaneous. No provision of this Agreement may be waived, modified or discharged unless such waiver, modification or discharge is agreed to in writing signed by Indemnitee and the Company. No waiver by either party at any time of any breach by the other party or compliance with any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, expressed or implied with respect to the subject matter hereof have been made by either party that are not set forth expressly in this Agreement. References to Sections are to references to Sections of this Agreement.

20. Legal Fees and Expenses. It is the intent of the Company that Indemnitee not be required to incur legal fees and or other Expenses associated with the interpretation, enforcement or defense of Indemnitee’s rights under this Agreement by litigation or otherwise because the cost and expense thereof would substantially detract from the benefits intended to be extended to Indemnitee hereunder. Accordingly, without limiting the generality or effect of any other provision hereof, if it should appear to Indemnitee that the Company has failed to comply with any of its obligations under this Agreement or in the event that the Company or any other person takes or threatens to take any

---

action to declare this Agreement void or unenforceable, or institutes any litigation or other action or proceeding designed to deny, or to recover from, Indemnitee the benefits provided or intended to be provided to Indemnitee hereunder, the Company irrevocably authorizes the Indemnitee from time to time to retain counsel of Indemnitee’s choice, at the expense of the Company as hereafter provided, to advise and represent Indemnitee in connection with any such interpretation, enforcement or defense, including without limitation the initiation or defense of any litigation or other legal action, whether by or against the Company or any director, officer, executive, stockholder or other person affiliated with the Company, in any jurisdiction. Notwithstanding any existing or prior attorney-client relationship between the Company and such counsel, the Company irrevocably consents to Indemnitee’s entering into an attorney-client relationship with such counsel, and in that connection the Company and Indemnitee agree that a confidential relationship shall exist between Indemnitee and such counsel. Without respect to whether Indemnitee prevails, in whole or in part, in connection with any of the foregoing, the Company will pay and be solely financially responsible for any and all attorneys’ and related fees and expenses incurred by Indemnitee in connection with any of the foregoing.

21. Certain Interpretive Matters. No provision of this Agreement shall be interpreted in favor of, or against, either of the parties by reason of the extent to which any such party or its counsel participated in the drafting thereof or by reason of the extent to which any such provision is inconsistent with any prior draft hereof or thereof.

22. Signatures. This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original but all of which together shall constitute one and the same agreement. Signatures received by facsimile, PDF file or other electronic format shall be deemed to be original signatures.

<signature page follows>

---

IN WITNESS WHEREOF, Indemnitee has executed and delivered and the Company has caused its duly authorized representative to execute and deliver this Agreement to be effective on and as of the Effective Date.

 

Table of Contents

Exhibit 10.5

KRYSTAL BIOTECH, LLC

2016 Equity Incentive Plan

Adopted on October 1, 2016

---

Table of Contents

TABLE OF CONTENTS

 

						Page
SECTION 1		ESTABLISHMENT AND PURPOSE.					1
SECTION 2		ADMINISTRATION.					1
SECTION 3		ELIGIBILITY.					1
SECTION 4		AWARDS SUBJECT TO PLAN.					1
		(a)		Initial Authorization.			1
		(b)		Additional Incentive Units.			1
SECTION 5		TERMS AND CONDITIONS OF AWARDS.					2
		(a)		Award Agreement.			2
		(b)		Number of Incentive Units.			2
		(c)		Vesting.			2
		(d)		Profits Interest Hurdle.			2
		(e)		Restrictions on Transfer of Incentive Units.			2
		(f)		Non-vested Awards.			2
		(g)		Withholding Taxes.			2
		(h)		No Rights as an Incentive Unit Member.			3
		(i)		IRS Form W-8 or Form W-9			3
		(j)		LLC Agreement.			3
		(k)		Modification and Assumption of Incentive Units.			3
SECTION 6		ADJUSTMENT OF UNITS; COMPANY EVENTS.					3
		(a)		General.			3
		(b)		Company Events with respect to Units			4
		(c)		Company Event with respect to Options			5
		(d)		Reservation of Rights.			5
SECTION 7		OPTION EXERCISE.					5
		(a)		Exercise Price			5
		(b)		Consideration			5
		(c)		Taxes			6
		(d)		Procedure for Exercise; Rights as a Member.			6
SECTION 8		CONDITIONS TO ISSUANCE.					6
		(a)		Compliance with Law			6
		(b)		Other			6
SECTION 9		NO RETENTION RIGHTS.					6
SECTION 10		DURATION AND AMENDMENTS.					7
		(a)		Term of the Plan			7
		(b)		Right to Amend or Terminate the Plan			7
		(c)		Effect of Amendment or Termination			7
SECTION 11		DISTRIBUTIONS AND ALLOCATIONS.					7
SECTION 12		INCORPORATION.					7
SECTION 13		NO EFFECT ON RETIREMENT AND OTHER BENEFIT PLANS.					7
SECTION 14		INFORMATION TO PARTICIPANTS.					7
SECTION 15		UNFUNDED OBLIGATION.					8
SECTION 16		CONSTRUCTION.					8
SECTION 17		NONEXCLUSIVITY OF THE PLAN.					8
SECTION 18		INFORMATION TO PARTICIPANTS.					8
SECTION 19		DEFINITIONS.					9

 

-i-

---

Table of Contents

Krystal Biotech, LLC 2016 Equity Incentive Plan

Adopted on October     , 2016

SECTION 1 ESTABLISHMENT AND PURPOSE.

The purpose of the Plan is to offer selected persons a proprietary interest in the success of the Company, or to increase such interest, by the grant of Awards. In the event any term or provision of this Plan conflicts with the LLC Agreement, the terms and provisions of the LLC Agreement shall govern.

Capitalized terms are defined in Section 19.

SECTION 2 ADMINISTRATION.

The Plan will be administered by the Board of Managers, who shall have full authority and discretion to take any actions it deems necessary or advisable for the administration of the Plan. All decisions, interpretations and other actions of the Board of Managers shall be final and binding on all Participants.

SECTION 3 ELIGIBILITY.

Only Service Providers shall be eligible for the grant of Awards pursuant to this Plan.

SECTION 4 AWARDS SUBJECT TO PLAN.

(a) Initial Authorization. The Board is authorized to issue a number of Incentive Units under the Plan (subject to Section 6 below), including Incentive Units to be issued on exercise of Options, equal to twenty percent (20%) or less of the aggregate total of Common Units outstanding on a Fully Diluted Basis as of the date of the proposed grant. The Board of Managers may, in its sole discretion, issue such Incentive Units as Profits Interests hereunder. A Profits Interest shall be any Incentive Unit that, at the time it is issued, is designated as such by the Board of Managers. The Company, during the term of the Plan, shall at all times reserve and keep available sufficient Incentive Units to satisfy the requirements of the Plan.

(b) Additional Incentive Units. In the event that Incentive Units issued under the Plan are reacquired by the Company, or in the event an Option expires or becomes unexercisable without having been exercised in full, such reacquired Incentive Units or the Incentive Units that underlie such expired or unexerciseable Options shall be added to the number of Incentive Units then available for issuance under the Plan. In addition, the Company may authorize and issue under this Plan additional Incentive Units, or authorize and issue new classes of Incentive Units in the Company, in such amounts and with such rights, preferences and privileges, and may authorize and issue Options to acquire such Incentive Units, in each case as the Board of Managers determines in its sole discretion. The Board of Managers shall be authorized to, and shall, amend this Plan and the LLC Agreement to the extent necessary to provide for such additional Incentive Units or classes of Incentive Units.

---

Table of Contents

SECTION 5 TERMS AND CONDITIONS OF AWARDS.

(a) Award Agreement. Each grant of an Award under the Plan shall be evidenced by an Award Agreement between the Participant and the Company. Such Award shall be subject to all applicable terms and conditions of the Plan and LLC Agreement and may be subject to any other terms and conditions that are not inconsistent with the Plan and LLC Agreement and that the Board of Managers deems appropriate for inclusion in an Award Agreement. The provisions of the various Award Agreements entered into under the Plan need not be identical. No Award shall be granted unless the Participant has delivered an executed copy of the Award Agreement to the Company.

(b) Number of Incentive Units. Each Award Agreement shall specify the number of Incentive Units that are being granted, or the number of Incentive Units for which an Option is exercisable.

(c) Vesting. Each Award Agreement shall specify the vesting schedule applicable to the Award addressed thereby. The Board of Managers shall determine the vesting provisions of any Award Agreement in its sole discretion.

(d) Profits Interest Hurdle. Each Award Agreement shall specify an appropriate Profits Interest Hurdle for the Incentive Units being issued on the basis of the Incentive Liquidation Value immediately prior to the issuance of such Incentive Units.

(e) Restrictions on Transfer of Incentive Units. Any Award granted under the Plan shall be subject to (i) the terms of the LLC Agreement and any other agreement among the Members and (ii) such special forfeiture conditions, rights of repurchase, rights of first refusal and other transfer restrictions as the Board of Managers may determine. Such special restrictions shall be set forth in the applicable Award Agreement and shall apply in addition to the restrictions that apply to holders of Units generally under the LLC Agreement or otherwise. For the avoidance of doubt, Incentive Units issuable on exercise of an Option shall be subject to the foregoing provisions.

(f) Non-vested Awards. If a Participant’s Service is terminated by the Participant or by the Company for any reason before an Award has fully vested, unless otherwise determined by the Board of Managers or unless otherwise provided in the Participant’s Award Agreement, the Participant will forfeit all non-vested Incentive Units, or all non-vested rights to acquire Incentive Units, to the Company for no consideration without further action by the Company.

(g) Withholding Taxes. As a condition to a grant of, and distributions or deliveries with respect to, any Award, the Participant shall make such arrangements as the Board of Managers may require for the satisfaction of any federal, state, local or foreign withholding tax obligations that may arise in connection with such grant, distributions or deliveries. The Participant shall also make such arrangements as the Board of Managers may require for the satisfaction of any federal, state, local or foreign withholding tax obligations that may arise in connection with the disposition of an Award.

 

2

---

Table of Contents

(h) No Rights as an Incentive Unit Member. A Participant, or a transferee of a Participant, shall have no rights as an Incentive Unit Member or assignee with respect to any Incentive Unit until such person has satisfied any requirements imposed on Incentive Unit Members or assignees by applicable law and the LLC Agreement.

(i) IRS Form W-8 or Form W-9. Each Participant shall deliver to the Company a duly completed and properly executed IRS Form W-8 (in the case of non-U.S. residents) or Form W-9 (in the case of U.S. citizens or residents) and such other tax forms as the Board of Managers reasonably requests.

(j) LLC Agreement. Each Participant granted or issued Incentive Units shall agree to be bound by and comply with the terms of the LLC Agreement. Exhibit A of the LLC Agreement shall be amended to reflect the issuance of Incentive Units to a Participant under this Plan.

(k) Modification and Assumption of Incentive Units. The Board of Managers (or any similar body of a successor entity or assignee of all or substantially all of the assets of the Company) may modify or assume outstanding Awards (whether granted by the Company or another issuer) and exchange any such Awards in return for the grant of a different incentive award of comparable value.

SECTION 6 ADJUSTMENT OF UNITS; COMPANY EVENTS.

(a) General. In the event of a subdivision of the outstanding Units, a combination or consolidation of the outstanding Units into a lesser number of Units, a recapitalization, a spin-off, a reclassification, a merger or consolidation (other than a Company Event) or a similar occurrence, appropriate adjustments shall automatically be made in each of (i) the number and kind of Incentive Units or other securities available for future grants under Section 4 and (ii) the number and kind of Incentive Units or other securities issued and outstanding hereunder or subject to Options issued and outstanding hereunder, in each case subject to any applicable provisions of the LLC Agreement or agreement of merger or consolidation.

 

3

---

Table of Contents

(b) Company Events with respect to Units. In the event the Company engages in a sale, distribution, transfer or other disposition of all or substantially all of the Company’s assets (or of a substantial portion of the Company’s assets not in the ordinary course of business), an acquisition of Units by a person or group of persons acting in concert of fifty percent (50%) or more of the outstanding Units (whether by direct acquisition, merger or consolidation or otherwise), a liquidation or dissolution of the Company, or a similar transaction (any such transaction, a “Company Event”), the outstanding Incentive Units issued hereunder (including Incentive Units outstanding following the exercise of an Option) shall be subject to the agreement governing such Company Event and the LLC Agreement. The agreement governing the Company Event may provide for one or more of the following:

(i) The continuation of such outstanding Incentive Units by the Company (if the Company is the surviving entity), including the continuation of any applicable vesting schedule.

(ii) The conversion of such outstanding Incentive Units by the surviving entity or its parent into equity of the surviving entity or its parent on terms equivalent to the terms applicable to the conversion of Units that are not Incentive Units issued hereunder (but taking into account any difference in value of the Incentive Units issued hereunder compared to Units not issued hereunder at the time of the Company Event and allowing for the continuation of any existing vesting schedule with respect to such Incentive Units).

(iii) The full or partial vesting of, or the cancellation and forfeiture of, unvested Incentive Units upon the closing of the Company Event.

(iv) The redemption of such outstanding and vested Incentive Units and a payment to the Participants equal to the amount distributable to such Incentive Units pursuant to the LLC Agreement. Such payment shall be made in the form of cash, cash equivalents, or securities of the surviving entity or its parent with a fair market value equal to the amount distributable or deemed distributable in the Company Event. Such payment may be made in installments. If no amounts would be distributable to such Incentive Units, then such Incentive Units may be cancelled without making a payment to the Participants. For purposes of this paragraph (iv), the fair market value of any security shall be determined without regard to any vesting conditions that may apply to such security and shall be determined in good faith by the Board of Managers.

(v) The redemption of such outstanding and unvested Incentive Units and a payment to the Participants equal to the amount distributable to such Incentive Units pursuant to the LLC Agreement. Such payment shall be made in the form of cash, cash equivalents, or securities of the surviving entity or its parent with a fair market value equal to the amount distributable or deemed distributable in the Company Event. Such payment may be made in installments and may be deferred until the date or dates when such Incentive Units would have vested. Such payment may be subject to vesting based on the Participant’s Continuous Service, provided that the vesting schedule shall not be less favorable to the Participant than the schedule under which such Incentive Units would have vested. If no amounts would be distributable to such Incentive Units, then such Incentive Units may be cancelled without making a payment to the Participants. For purposes of this paragraph (v), the fair market value of any security shall be determined without regard to any vesting conditions that may apply to such security and shall be determined in good faith by the Board of Managers.

(vi) Any combination of the foregoing.

 

4

---

Table of Contents

(c) Company Event with respect to Options. In the event the Company engages in a Company Event, the outstanding Options granted hereunder shall be subject to the agreement governing such Company Event and the LLC Agreement. The agreement governing the Company Event may provide for one or more of the following:

(i) The Assumption or Replacement of such outstanding Options.

(ii) The full or partial vesting of, or the cancellation and forfeiture of, unvested Options upon the closing of the Company Event.

(iii) The cashing out of such outstanding and vested Options based on the exercise price per Incentive Unit for Incentive Units issuable on exercise of such Options and the amounts distributable to Incentive Units pursuant to the LLC Agreement. Such payment shall be made in the form of cash, cash equivalents, or securities of the surviving entity or its parent with a fair market value equal to the amount distributable or deemed distributable in the Company Event. If no amounts would be distributable with respect to such Options, then such Options may be cancelled without making a payment to the Participants. For purposes of this paragraph (iii), the fair market value of any security shall be determined without regard to any vesting conditions that may apply to such security and shall be determined in good faith by the Board of Managers.

(iv) The cashing out of such outstanding and unvested Options based on the exercise price per Incentive Unit for Incentive Units issuable on exercise of such Options and the amounts distributable to Incentive Units pursuant to the LLC Agreement. Such payment shall be made in the form of cash, cash equivalents, or securities of the surviving entity or its parent. Such payment may be made in installments and may be deferred until the date or dates when such Options would have vested. Such payment may be subject to vesting based on the Participant’s Continuous Service, provided that the vesting schedule shall not be less favorable to the Participant than the schedule under which such Option would have vested. If no amounts would be distributable with respect to such Options, then such Options may be cancelled without making a payment to the Participants. For purposes of this paragraph (iv), the fair market value of any security shall be determined without regard to any vesting conditions that may apply to such security and shall be determined in good faith by the Board of Managers.

(v) Any combination of the foregoing.

(d) Reservation of Rights. The grant of an Award pursuant to the Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure, to merge, consolidate or exchange equity interests or to dissolve, liquidate, sell or transfer all or any part of its business or assets.

SECTION 7 OPTION EXERCISE.

(a) Exercise Price. The per Incentive Unit exercise price for an Option shall be not less than one hundred percent (100%) of the Fair Market Value per Incentive Unit on the date of grant.

(b) Consideration. Subject to applicable law, the consideration to be paid for the Incentive Units to be issued upon exercise of an Option, including the method of payment, shall be determined by the Board of Managers in its sole discretion.

 

5

---

Table of Contents

(c) Taxes. Upon exercise of an Option the Company shall withhold or collect from the Participant an amount sufficient to satisfy any applicable withholding tax obligations, including, but not limited to, at the discretion of the Board of Managers, by surrender of the whole number of Incentive Units covered by the Option sufficient to satisfy the minimum applicable tax withholding obligations incident to the exercise of an Option (reduced to the lowest whole number of Incentive Units if such number of Incentive Units withheld would result in withholding a fractional Incentive Unit with any remaining tax withholding settled in cash).

(d) Procedure for Exercise; Rights as a Member.

(i) Any Option granted hereunder shall be exercisable at such times and under such conditions as determined by the Board of Managers under the terms of the Plan and specified in the Award Agreement. Notwithstanding the foregoing, Options may not be exercised prior to the Incorporation or a Company Event unless otherwise determined by the Board of Managers.

(ii) An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option by the person entitled to exercise the Option and full payment for the Incentive Units with respect to which the Option is exercised has been made.

SECTION 8 CONDITIONS TO ISSUANCE.

(a) Compliance with Law. Incentive Units or Options shall not be issued under the Plan unless the issuance and delivery of such Incentive Units or Options comply with (or are exempt from) all applicable requirements of law, including (without limitation) the Securities Act, the rules and regulations promulgated thereunder, state securities laws and regulations, and the regulations of any stock exchange or other securities market on which the Company’s securities may then be traded. The Company shall have no obligation to effect any registration or qualification of the Incentive Units or Options under federal or state laws.

(b) Other. As a condition to the issuance of Incentive Units under the Plan, the Company may require the recipient thereof to represent and warrant at the time of any such issuance that the Incentive Units are being purchased only for investment and without any present intention to sell or distribute such Incentive Units. The Company shall require the person receiving Incentive Units under the Plan to execute and deliver a signature page to, and agree to comply with, the provisions of the LLC Agreement and to make such representations and warranties contained in the LLC Agreement that are required of Members of the Company.

SECTION 9 NO RETENTION RIGHTS.

Nothing in this Plan or in any Award Agreement shall confer upon the Participant any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Company (or any Related Entity employing or retaining the Participant) or of the Participant, which rights are hereby expressly reserved by each, to terminate his or her Service at any time and for any reason, with or without cause.

 

6

---

Table of Contents

SECTION 10 DURATION AND AMENDMENTS.

(a) Term of the Plan. The Plan, as set forth herein, shall become effective as of the date hereof. The Plan shall terminate automatically on October     , 2026. The Plan may be terminated on any earlier date pursuant to Subsection (b) below.

(b) Right to Amend or Terminate the Plan. The Board of Managers may amend, suspend or terminate the Plan at any time and for any reason.

(c) Effect of Amendment or Termination. No Awards shall be granted under the Plan after the termination thereof. The termination of the Plan, or any amendment thereof, shall not affect any Award previously granted under the Plan.

SECTION 11 DISTRIBUTIONS AND ALLOCATIONS.

Distributions and allocations to Participants with respect to their Incentive Units shall be governed by the LLC Agreement and any applicable Award Agreement.

SECTION 12 INCORPORATION.

Upon an Incorporation, all references to the number of Incentive Units issued or issuable under the Plan shall be adjusted to reflect the conversion or exchange ratio in effect for the conversion or exchange of Incentive Units into shares of stock on consummation of the Incorporation and rounded up to the nearest whole share, and the exercise price or purchase price per Incentive Unit under any outstanding Option immediately prior to the Incorporation shall be appropriately adjusted to take into account the conversion or exchange ratio to determine the exercise price or purchase price per share of stock subject to the Option immediately after the Incorporation. Upon the Incorporation, all references in the Plan to Incentive Units shall automatically be converted into references to the shares of stock into which the Incentive Units are converted and all references to the Company shall automatically be converted into references to the appropriate corporate successor thereto.

SECTION 13 NO EFFECT ON RETIREMENT AND OTHER BENEFIT PLANS.

Except as specifically provided in a retirement or other benefit plan of the Company or a Related Entity, Awards shall not be deemed compensation for purposes of computing benefits or contributions under any retirement plan of the Company or a Related Entity, and shall not affect any benefits under any other benefit plan of any kind or any benefit plan subsequently instituted under which the availability or amount of benefits is related to level of compensation. The Plan is not a “Pension Plan” or “Welfare Plan” under the Employee Retirement Income Security Act of 1974, as amended.

SECTION 14 INFORMATION TO PARTICIPANTS.

To the extent required by applicable law, the Company shall provide to each Participant, during the period for which such Participant has one or more Awards outstanding, copies of financial statements at least annually. The Company shall not be required to provide such information to persons whose duties in connection with the Company assure them access to equivalent information.

 

7

---

Table of Contents

SECTION 15 UNFUNDED OBLIGATION.

Any amounts payable to Participants pursuant to the Plan shall be unfunded and unsecured obligations for all purposes, including, without limitation, Title I of the Employee Retirement Income Security Act of 1974, as amended. Neither the Company nor any Related Entity shall be required to segregate any monies from its general funds, or to create any trusts, or establish any special accounts with respect to such obligations. The Company shall retain at all times beneficial ownership of any investments, including trust investments, which the Company may make to fulfill its payment obligations hereunder. Any investments or the creation or maintenance of any trust or any Participant account shall not create or constitute a trust or fiduciary relationship between the Board of Managers, the Company or any Related Entity and a Participant, or otherwise create any vested or beneficial interest in any Participant or the Participant’s creditors in any assets of the Company or a Related Entity. The Participants shall have no claim against the Company or any Related Entity for any changes in the value of any assets that may be invested or reinvested by the Company with respect to the Plan.

SECTION 16 CONSTRUCTION.

Captions and titles contained herein are for convenience only and shall not affect the meaning or interpretation of any provision of the Plan. Except when otherwise indicated by the context, the singular shall include the plural and the plural shall include the singular. Use of the term “or” is not intended to be exclusive, unless the context clearly requires otherwise.

SECTION 17 NONEXCLUSIVITY OF THE PLAN.

Neither the adoption of the Plan by the Board of Managers nor any provision of the Plan will be construed as creating any limitations on the power of the Board of Managers to adopt such additional compensation arrangements as it may deem desirable, including, without limitation, the granting of incentive awards otherwise than under the Plan, and such arrangements may be either generally applicable or applicable only in specific cases.

SECTION 18 INFORMATION TO PARTICIPANTS.

Beginning on the earlier of (i) the date that the aggregate number of Participants under this Plan is five hundred (500) or more and the Company is relying on the exemption provided by Rule 12h-1(f)(1) under the Exchange Act and (ii) the date that the Company is required to deliver information to Participants pursuant to Rule 701 under the Securities Act, and until such time as the Company becomes subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, is no longer relying on the exemption provided by Rule 12h-1(f)(1) under the Exchange Act or is no longer required to deliver information to Participants pursuant to Rule 701 under the Securities Act, the Company shall provide to each Participant the information described in paragraphs (e)(3), (4), and (5) of Rule 701 under the Securities Act not less frequently than every six (6) months with the financial statements being not more than 180 days old and with such information provided either by physical or electronic delivery to Participants or by written notice to Participants of the availability of the information on an

 

8

---

Table of Contents

Internet site that may be password-protected and of any password needed to access the information. The Company may request that Participants agree to keep the information to be provided pursuant to this section confidential. If a Participant does not agree to keep the information to be provided pursuant to this section confidential, then the Company will not be required to provide the information unless otherwise required pursuant to Rule 12h-1(f)(1) under the Exchange Act or Rule 701 of the Securities Act.

SECTION 19 DEFINITIONS.

Capitalized terms used in this Plan without definition shall have the meanings given to them in the LLC Agreement. As used in this Plan:

“Assumed” (and with correlative meaning, “Assume” and “Assumption”) means either (i) the Award is expressly affirmed by the Company or (ii) the contractual obligations represented by the Award are expressly assumed (and not simply by operation of law) by the successor entity or its parent with appropriate adjustments to the number and type of securities of the successor entity or its parent subject to the Award and the exercise or purchase price thereof which at least preserves the compensation element of the Award existing at the time of the assumption as determined in accordance with the instruments evidencing the agreement to assume the Award.

“Award” shall mean an award of Incentive Units or Options under the Plan and, as the context requires, the Incentive Units for which an Option is exercisable.

“Award Agreement” means the written agreement evidencing the grant of an Award executed by the Company and the Participant, including any amendments thereto.

“Code” shall mean the Internal Revenue Code of 1986, as amended.

“Company” shall mean Dexter Edward, LLC, a Delaware limited liability company.

“Company Event” shall have the meaning given such term in Section 6(b) of this Plan.

“Continuous Service” means the provision of services to the Company or a Related Entity in any capacity of Service Provider to the extent not interrupted or terminated. In jurisdictions requiring notice in advance of an effective termination as a Service Provider, Continuous Service shall be deemed terminated upon the actual cessation of providing services to the Company or a Related Entity notwithstanding any required notice period that must be fulfilled before a termination as a Service Provider can be effective under applicable laws. A Participant’s Continuous Service shall be deemed to have terminated either upon an actual termination of Continuous Service or upon the entity for which the Participant provides services ceasing to be a Related Entity. Continuous Service shall not be considered interrupted in the case of (i) any approved leave of absence, (ii) transfers among the Company, any Related Entity, or any successor, in any capacity of Service Provider, or (iii) any change in status as long as the individual remains in the service of the Company or a Related Entity in any capacity of Service Provider (except as otherwise provided in an Award Agreement).

 

9

---

Table of Contents

“Exchange Act” shall mean the Securities and Exchange Act of 1934, as amended.

“Fair Market Value” shall have the meaning given to such term in the LLC Agreement.

“Incentive Liquidation Value” shall have the meaning given to such term in the LLC Agreement.

“Incentive Unit” shall mean one Incentive Unit of the Company, as defined in the LLC Agreement and as adjusted in accordance with Section 6 (if applicable).

“Incorporation” means the incorporation of the Company, whether through a merger, acquisition, exchange of equity resulting in the Company becoming a wholly-owned subsidiary of a corporation, or other transaction resulting in a corporation succeeding to all of, or a substantial portion of, the assets and liabilities of the Company, in each case pursuant to which the existing Members of the Company substantially maintain their percentage ownership over the successor entity or entities immediately after such transaction.

“LLC Agreement” shall mean the Amended and Restated Limited Liability Company Operating Agreement for Krystal Biotech, LLC, dated as of October     , 2016, as amended from time to time, or any successor agreement.

“Manager” shall mean a member of the board of managers of the Company.

“Member” shall mean a person who is a Member of the Company pursuant to the LLC Agreement.

“Officer” shall mean any individual who is an officer of the Company or a Related Entity.

“Option” means an option to purchase Incentive Units pursuant to an Award Agreement granted under the Plan.

“Participant” shall mean a person who receives an Award under this Plan.

“Parent” shall mean any entity (other than the Company) in an unbroken chain of entities ending with the Company, if each of the entities other than the Company owns shares, units or interests possessing fifty percent (50%) or more of the total combined voting power of all classes of shares, units or interests in one of the other entities in such chain. An entity that attains the status of a Parent on a date after the adoption of the Plan shall be considered a Parent commencing as of such date.

“Plan” shall mean this Krystal Biotech, LLC Equity Incentive Plan, as amended.

“Profits Interest” shall have the meaning given to such term in the LLC Agreement.

 

10

---

Table of Contents

“Profits Interest Hurdle” shall have the meaning given to such term in the LLC Agreement.

“Related Entity” means any Parent or Subsidiary of the Company.

“Replaced” (and with correlative meaning, “Replace” and “Replacement”) means the Award is replaced with a comparable award of the Company, any successor entity (if applicable) or the Parent of either of them which preserves the compensation element of such Award existing at the time of the replacement and provides for subsequent payout in accordance with the same (or a more favorable) vesting schedule applicable to such Award. The determination of Award comparability shall be made by the Board of Managers and its determination shall be final, binding and conclusive.

“Securities Act” shall mean the Securities Act of 1933, as amended.

“Service” shall mean service as a Service Provider.

“Service Provider” shall mean a Manager, Officer, employee, consultant or other service provider of the Company or any Related Entity.

“Subsidiary” means any entity (other than the Company) in an unbroken chain of entities beginning with the Company, if each of the entities other than the last entity in the unbroken chain owns shares, units or interests possessing fifty percent (50%) or more of the total combined voting power of all classes of shares, units or interests in one of the other entities in such chain. An entity that attains the status of a Subsidiary on a date after the adoption of the Plan shall be considered a Subsidiary commencing as of such date.

 

11

Exhibit 10.6

KRYSTAL BIOTECH, INC.

2017 STOCK INCENTIVE PLAN

1.    Purposes of the Plan. The purposes of this Plan are to attract and retain the best available personnel, to provide additional incentives to Employees, Directors and Consultants and to promote the success of the Company’s business.

2.    Definitions. The following definitions shall apply as used herein and in the individual Award Agreements except as defined otherwise in an individual Award Agreement. In the event a term is separately defined in an individual Award Agreement, such definition shall supersede the definition contained in this Section 2.

(a)    “Administrator” means the Board or any of the Committees appointed to administer the Plan.

(b)    “Affiliate” and “Associate” shall have the respective meanings ascribed to such terms in Rule 12b-2 promulgated under the Exchange Act.

(c)    “Applicable Laws” means the legal requirements relating to the Plan and the Awards under applicable provisions of federal and state securities laws, the corporate laws of Delaware and, to the extent other than Delaware, the corporate law of the state of the Company’s incorporation, the Code, the rules of any applicable stock exchange or national market system, and the rules of any non-U.S. jurisdiction applicable to Awards granted to residents therein.

(d)    “Assumed” means that pursuant to a Corporate Transaction either (i) the Award is expressly affirmed by the Company or (ii) the contractual obligations represented by the Award are expressly assumed (and not simply by operation of law) by the successor entity or its Parent in connection with the Corporate Transaction with appropriate adjustments to the number and type of securities of the successor entity or its Parent subject to the Award and the exercise or purchase price thereof which at least preserves the compensation element of the Award existing at the time of the Corporate Transaction as determined in accordance with the instruments evidencing the agreement to assume the Award.

(e)    “Award” means the grant of an Option, SAR, Dividend Equivalent Right, Restricted Stock, Restricted Stock Unit or other right or benefit under the Plan.

(f)    “Award Agreement” means the written agreement evidencing the grant of an Award executed by the Company and the Grantee, including any amendments thereto.

(g)    “Board” means the Board of Directors of the Company.

(h)    “Cause” means, with respect to the termination by the Company or a Related Entity of the Grantee’s Continuous Service, that such termination is for “Cause” as such term (or word of like import) is expressly defined in a then-effective written agreement between the Grantee and the Company or such Related Entity, or in the absence of such then-effective written agreement and definition, is based on, in the determination of the Administrator, the Grantee’s: (i) performance of any act or failure to perform any act in bad faith and to the

 

1

---

detriment of the Company or a Related Entity; (ii) dishonesty, intentional misconduct or material breach of any agreement with the Company or a Related Entity; or (iii) commission of a crime involving dishonesty, breach of trust, or physical or emotional harm to any person.

(i)    “Change in Control” means a change in ownership or control of the Company after the Registration Date effected through either of the following transactions:

(i)    the direct or indirect acquisition by any person or related group of persons (other than an acquisition from or by the Company or by a Company-sponsored employee benefit plan or by a person that directly or indirectly controls, is controlled by, or is under common control with, the Company) of beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Company’s outstanding securities pursuant to a tender or exchange offer made directly to the Company’s shareholders which a majority of the Continuing Directors who are not Affiliates or Associates of the offeror do not recommend such shareholders accept, or

(ii)    a change in the composition of the Board over a period of twelve (12) months or less such that a majority of the Board members (rounded up to the next whole number) ceases, by reason of one or more contested elections for Board membership, to be comprised of individuals who are Continuing Directors.

(j)    “Code” means the Internal Revenue Code of 1986, as amended.

(k)    “Committee” means any committee composed of members of the Board appointed by the Board to administer the Plan.

(l)    “Common Stock” means the common stock of the Company.

(m)    “Company” means Krystal Biotech, Inc., a Delaware corporation, or any successor entity that adopts the Plan in connection with a Corporate Transaction.

(n)    “Consultant” means any person (other than an Employee or a Director, solely with respect to rendering services in such person’s capacity as a Director) who is engaged by the Company or any Related Entity to render consulting or advisory services to the Company or such Related Entity.

(o)    “Continuing Directors” means members of the Board who either (i) have been Board members continuously for a period of at least twelve (12) months or (ii) have been Board members for less than twelve (12) months and were elected or nominated for election as Board members by at least a majority of the Board members described in clause (i) who were still in office at the time such election or nomination was approved by the Board.

(p)    “Continuous Service” means that the provision of services to the Company or a Related Entity in any capacity of Employee, Director or Consultant is not interrupted or terminated. In jurisdictions requiring notice in advance of an effective termination as an Employee, Director or Consultant, Continuous Service shall be deemed terminated upon the actual cessation of providing services to the Company or a Related Entity notwithstanding any

 

2

---

required notice period that must be fulfilled before a termination as an Employee, Director or Consultant can be effective under Applicable Laws. A Grantee’s Continuous Service shall be deemed to have terminated either upon an actual termination of Continuous Service or upon the entity for which the Grantee provides services ceasing to be a Related Entity. Continuous Service shall not be considered interrupted in the case of (i) any approved leave of absence, (ii) transfers among the Company, any Related Entity, or any successor, in any capacity of Employee, Director or Consultant, or (iii) any change in status as long as the individual remains in the service of the Company or a Related Entity in any capacity of Employee, Director or Consultant (in each case, except as otherwise provided in the Award Agreement). Notwithstanding the foregoing, except as otherwise determined by the Administrator, in the event of any spin-off of a Related Entity, service as an Employee, Director or Consultant for such Related Entity following such spin-off shall be deemed to be Continuous Service for purposes of the Plan and any Award under the Plan. An approved leave of absence shall include sick leave, military leave, or any other authorized personal leave. For purposes of each Incentive Stock Option granted under the Plan, if such leave exceeds three (3) months, and reemployment upon expiration of such leave is not guaranteed by statute or contract, then the Incentive Stock Option shall be treated as a Non-Qualified Stock Option on the day three (3) months and one (1) day following the expiration of such three (3) month period.

(q)    “Corporate Transaction” means any of the following transactions, provided, however, that the Administrator shall determine under parts (iv) and (v) whether multiple transactions are related, and its determination shall be final, binding and conclusive:

(i)    a merger or consolidation in which the Company is not the surviving entity, except for a transaction the principal purpose of which is to change the state in which the Company is incorporated;

(ii)    the sale, transfer or other disposition of all or substantially all of the assets of the Company;

(iii)    the complete liquidation or dissolution of the Company;

(iv)    any reverse merger or series of related transactions culminating in a reverse merger (including, but not limited to, a tender offer followed by a reverse merger) in which the Company is the surviving entity but (A) the shares of Common Stock outstanding immediately prior to such merger are converted or exchanged by virtue of the merger into other property, whether in the form of securities, cash or otherwise, or (B) in which securities possessing more than fifty percent (50%) of the total combined voting power of the Company’s outstanding securities are transferred to a person or persons different from those who held such securities immediately prior to such merger or the initial transaction culminating in such merger, but excluding any such transaction or series of related transactions that the Administrator determines shall not be a Corporate Transaction; or

(v)    acquisition in a single or series of related transactions by any person or related group of persons (other than the Company or by a Company-sponsored employee benefit plan) of beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act) of securities possessing more than fifty percent (50%) of the total combined

 

3

---

voting power of the Company’s outstanding securities but excluding any such transaction or series of related transactions that the Administrator determines shall not be a Corporate Transaction.

(r)    “Covered Employee” means an Employee who is a “covered employee” under Section 162(m)(3) of the Code.

(s)    “Director” means a member of the Board or the board of directors of any Related Entity.

(t)    “Disability” means as defined under the long-term disability policy of the Company or the Related Entity to which the Grantee provides services regardless of whether the Grantee is covered by such policy. If the Company or the Related Entity to which the Grantee provides service does not have a long-term disability plan in place, “Disability” means that a Grantee is unable to carry out the responsibilities and functions of the position held by the Grantee by reason of any medically determinable physical or mental impairment for a period of not less than ninety (90) consecutive days. A Grantee will not be considered to have incurred a Disability unless he or she furnishes proof of such impairment sufficient to satisfy the Administrator in its discretion.

(u)    “Dividend Equivalent Right” means a right entitling the Grantee to compensation measured by dividends paid with respect to Common Stock.

(v)    “Employee” means any person, including an Officer or Director, who is in the employ of the Company or any Related Entity, subject to the control and direction of the Company or any Related Entity as to both the work to be performed and the manner and method of performance. The payment of a director’s fee by the Company or a Related Entity shall not be sufficient to constitute “employment” by the Company.

(w)    “Exchange Act” means the Securities Exchange Act of 1934, as amended.

(x)    “Fair Market Value” means, as of any date, the value of Common Stock determined as follows:

(i)    If the Common Stock is listed on one or more established stock exchanges or national market systems, including without limitation The NASDAQ Global Select Market, The NASDAQ Global Market or The NASDAQ Capital Market of The NASDAQ Stock Market LLC, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on the principal exchange or system on which the Common Stock is listed (as determined by the Administrator) on the date of determination (or, if no closing sales price or closing bid was reported on that date, as applicable, on the last trading date such closing sales price or closing bid was reported), as reported in The Wall Street Journal or such other source as the Administrator deems reliable;

(ii)    If the Common Stock is regularly quoted on an automated quotation system (including the OTC Bulletin Board) or by a recognized securities dealer, its Fair Market Value shall be the closing sales price for such stock as quoted on such system or by such securities dealer on the date of determination, but if selling prices are not reported, the Fair

 

4

---

Market Value of a share of Common Stock shall be the mean between the high bid and low asked prices for the Common Stock on the date of determination (or, if no such prices were reported on that date, on the last date such prices were reported), as reported in The Wall Street Journal or such other source as the Administrator deems reliable; or

(iii)    In the absence of an established market for the Common Stock of the type described in (i) and (ii), above, the Fair Market Value thereof shall be determined by the Administrator in good faith and in a manner consistent with Applicable Laws.

(y)    “Good Reason” means, with respect to the termination by the Grantee of the Grantee’s Continuous Service, that such termination is for “Good Reason” as such term (or word of like import) is expressly defined in a then-effective written agreement between the Grantee and the Company or a Related Entity, or in the absence of such then-effective written agreement and definition, means the occurrence of any of the following events or conditions unless consented to by the Grantee (and the Grantee shall be deemed to have consented to any such event or condition unless the Grantee provides written notice of the Grantee’s non-acquiescence within 30 days of the effective time of such event or condition): (i) a change in the Grantee’s responsibilities or duties which represents a material and substantial diminution in the Grantee’s responsibilities; (ii) a material reduction in the Grantee’s base salary; provided that an across-the-board reduction in the salary level of substantially all other individuals in positions similar to the Grantee’s by the same percentage amount shall not constitute such a salary reduction; or (iii) requiring the Grantee to be based at any place outside a 50 mile radius from the Grantee’s job location or residence except for reasonably required travel on business.

(z)    “Grantee” means an Employee, Director or Consultant who receives an Award under the Plan.

(aa)    “Immediate Family” means any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in law, daughter-in-law, brother-in-law, or sister-in-law, including adoptive relationships, any person sharing the Grantee’s household (other than a tenant or employee), a trust in which these persons (or the Grantee) have more than fifty percent (50%) of the beneficial interest, a foundation in which these persons (or the Grantee) control the management of assets, and any other entity in which these persons (or the Grantee) own more than fifty percent (50%) of the voting interests.

(bb)    “Incentive Stock Option” means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code.

(cc)    “Non-Qualified Stock Option” means an Option not intended to qualify as an Incentive Stock Option.

(dd)    “Officer” means a person who is an officer of the Company or a Related Entity within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder.

(ee)    “Option” means an option to purchase Shares pursuant to an Award Agreement granted under the Plan.

 

5

---

(ff)    “Parent” means a “parent corporation”, whether now or hereafter existing, as defined in Section 424(e) of the Code.

(gg)    “Performance-Based Compensation” means compensation qualifying as “performance-based compensation” under Section 162(m) of the Code.

(hh)    “Plan” means this Company 2017 Stock Incentive Plan.

(ii)    “Post-Termination Exercise Period” means the period specified in the Award Agreement of not less than thirty (30) days commencing on the date of termination (other than termination by the Company or any Related Entity for Cause) of the Grantee’s Continuous Service, or such longer period as may be applicable upon death or Disability.

(jj)    “Registration Date” means the first to occur of: (i) the closing of the first sale to the general public pursuant to a registration statement filed with and declared effective by the Securities and Exchange Commission under the Securities Act of 1933, as amended, of (A) the Common Stock or (B) the same class of securities of a successor corporation (or its Parent) issued pursuant to a Corporate Transaction in exchange for or in substitution of the Common Stock; or (ii) in the event of a Corporate Transaction, the date of the consummation of the Corporate Transaction if the same class of securities of the successor corporation (or its Parent) issuable in such Corporate Transaction shall have been sold to the general public pursuant to a registration statement filed with and declared effective by the Securities and Exchange Commission under the Securities Act of 1933, as amended, on or prior to the date of consummation of such Corporate Transaction.

(kk)    “Related Entity” means any Parent or Subsidiary of the Company.

(ll)    “Replaced” means that pursuant to a Corporate Transaction the Award is replaced with a comparable stock award or a cash incentive program of the Company, the successor entity (if applicable) or Parent of either of them which preserves the compensation element of such Award existing at the time of the Corporate Transaction and provides for subsequent payout in accordance with the same (or a more favorable) vesting schedule applicable to such Award. The determination of Award comparability shall be made by the Administrator and its determination shall be final, binding and conclusive.

(mm)    “Restricted Stock” means Shares issued under the Plan to the Grantee for such consideration, if any, and subject to such restrictions on transfer, rights of first refusal, repurchase provisions, forfeiture provisions, and other terms and conditions as established by the Administrator. Dividends payable with respect to Restricted Stock that is subject to performance vesting shall be held subject to the vesting of the underlying Shares.

(nn)    “Restricted Stock Units” means an Award which may be earned in whole or in part upon the passage of time or the attainment of performance criteria established by the Administrator and which may be settled for cash, Shares or other securities or a combination of cash, Shares or other securities as established by the Administrator.

(oo)    “Rule 16b-3” means Rule 16b-3 promulgated under the Exchange Act or any successor thereto.

 

6

---

(pp)    “SAR” means a stock appreciation right entitling the Grantee to Shares or cash compensation, as established by the Administrator, measured by appreciation in the value of Common Stock.

(qq)    “Share” means a share of the Common Stock.

(rr)    “Subsidiary” means a “subsidiary corporation”, whether now or hereafter existing, as defined in Section 424(f) of the Code.

3.    Stock Subject to the Plan.

(a)    Subject to the provisions of Section 10 below, the maximum aggregate number of Shares which may be issued pursuant to all Awards (including Incentive Stock Options) is 42,900 Shares. Subject to the provisions of Section 10 below, any increase to the maximum aggregate number of Shares which may be issued pursuant to all Awards shall be subject to shareholder approval. The Shares may be authorized, but unissued, or reacquired Common Stock.

(b)    Any Shares covered by an Award (or portion of an Award) which is forfeited, canceled or expires (whether voluntarily or involuntarily) shall be deemed not to have been issued for purposes of determining the maximum aggregate number of Shares which may be issued under the Plan. Shares that actually have been issued under the Plan pursuant to an Award shall not be returned to the Plan and shall not become available for future issuance under the Plan, except that if unvested Shares are forfeited, or repurchased by the Company at the lower of their original purchase price or their Fair Market Value at the time of repurchase, such Shares shall become available for future grant under the Plan. To the extent not prohibited by the listing requirements of The NASDAQ Stock Market LLC (or other established stock exchange or national market system on which the Common Stock is traded) or Applicable Laws, any Shares covered by an Award which are surrendered or withheld: (i) in payment of the Award exercise or purchase price (including pursuant to the “net exercise” of an option pursuant to Section 7(b)(vi)); or (ii) in satisfaction of tax withholding obligations incident to the receipt, exercise or vesting of an Award shall be deemed not to have been issued for purposes of determining the maximum number of Shares which may be issued pursuant to all Awards under the Plan, unless otherwise determined by the Administrator.

4.    Administration of the Plan.

(a)    Plan Administrator.

(i)    Administration with Respect to Directors and Officers. Prior to the Registration Date, with respect to grants of Awards to Directors or Employees who are also Officers or Directors of the Company, the Plan shall be administered by (A) the Board or (B) a Committee designated by the Board, which Committee shall be constituted in such a manner as to satisfy the Applicable Laws. On or after the Registration Date, with respect to grants of Awards to Directors or Employees who are also Officers or Directors of the Company, the Plan shall be administered by (A) the Board or (B) a Committee designated by the Board, which Committee shall be constituted in such a manner as to satisfy the Applicable Laws and to permit such grants and related transactions under the Plan to be exempt from Section 16(b) of the

 

7

---

Exchange Act in accordance with Rule 16b-3. Once appointed, such Committee shall continue to serve in its designated capacity until otherwise directed by the Board.

(ii)    Administration With Respect to Consultants and Other Employees. With respect to grants of Awards to Employees or Consultants who are neither Directors nor Officers of the Company, the Plan shall be administered by (A) the Board or (B) a Committee designated by the Board, which Committee shall be constituted in such a manner as to satisfy the Applicable Laws. Once appointed, such Committee shall continue to serve in its designated capacity until otherwise directed by the Board.

(iii)    Administration With Respect to Covered Employees. Notwithstanding the foregoing, as of and after the date that the exemption for the Plan under Section 162(m) of the Code expires, as set forth in Section 19 below, grants of Awards to any Covered Employee intended to qualify as Performance-Based Compensation shall be made only by a Committee (or subcommittee of a Committee) which is comprised solely of two or more Directors eligible to serve on a committee making Awards qualifying as Performance-Based Compensation. In the case of such Awards granted to Covered Employees, references to the “Administrator” or to a “Committee” shall be deemed to be references to such Committee or subcommittee.

(iv)    Officer Authorization to Grant Awards. The Board may authorize one or more Officers to grant Awards subject to such limitations as the Board determines from time to time and subject to limitations under Applicable Laws.

(b)    Multiple Administrative Bodies. The Plan may be administered by different bodies with respect to Directors, Officers, Consultants, and Employees who are neither Directors nor Officers.

(c)    Powers of the Administrator. Subject to Applicable Laws and the provisions of the Plan (including any other powers given to the Administrator hereunder), and except as otherwise provided by the Board, the Administrator shall have the authority, in its discretion:

(i)    to select the Employees, Directors and Consultants to whom Awards may be granted from time to time hereunder;

(ii)    to determine whether and to what extent Awards are granted hereunder;

(iii)    to determine the number of Shares or the amount of other consideration to be covered by each Award granted hereunder;

(iv)    to approve forms of Award Agreements for use under the Plan;

(v)    to determine the terms and conditions of any Award granted hereunder;

 

8

---

(vi)    to establish additional terms, conditions, rules or procedures to accommodate the rules or laws of applicable non-U.S. jurisdictions and to afford Grantees favorable treatment under such rules or laws;

(vii)    to amend the terms of any outstanding Award granted under the Plan, provided that any amendment that would adversely affect the Grantee’s rights under an outstanding Award shall not be made without the Grantee’s written consent, provided, however, that an amendment or modification that may cause an Incentive Stock Option to become a Non-Qualified Stock Option shall not be treated as adversely affecting the rights of the Grantee. Notwithstanding the foregoing, (A) the reduction or increase of the exercise price of any Option awarded under the Plan and the base appreciation amount of any SAR awarded under the Plan and (B) canceling an Option or SAR at a time when its exercise price or base appreciation amount (as applicable) exceeds the Fair Market Value of the underlying Shares, in exchange for another Option, SAR, Restricted Stock, or other Award or for cash, in each case, shall not be subject to shareholder approval;

(viii)    to construe and interpret the terms of the Plan and Awards, including without limitation, any notice of award or Award Agreement, granted pursuant to the Plan; and

(ix)    to take such other action, not inconsistent with the terms of the Plan, as the Administrator deems appropriate.

The express grant in the Plan of any specific power to the Administrator shall not be construed as limiting any power or authority of the Administrator; provided that the Administrator may not exercise any right or power reserved to the Board. Any decision made, or action taken, by the Administrator or in connection with the administration of this Plan shall be final, conclusive and binding on all persons having an interest in the Plan.

(d)    Indemnification. In addition to such other rights of indemnification as they may have as members of the Board or as Officers or Employees of the Company or a Related Entity, members of the Board and any Officers or Employees of the Company or a Related Entity to whom authority to act for the Board, the Administrator or the Company is delegated shall be defended and indemnified by the Company to the extent permitted by law on an after-tax basis against all reasonable expenses, including attorneys’ fees, actually and necessarily incurred in connection with the defense of any claim, investigation, action, suit or proceeding, or in connection with any appeal therein, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan, or any Award granted hereunder, and against all amounts paid by them in settlement thereof (provided such settlement is approved by the Company) or paid by them in satisfaction of a judgment in any such claim, investigation, action, suit or proceeding, except in relation to matters as to which it shall be adjudged in such claim, investigation, action, suit or proceeding that such person is liable for gross negligence, bad faith or intentional misconduct; provided, however, that within thirty (30) days after the institution of such claim, investigation, action, suit or proceeding, such person shall offer to the Company, in writing, the opportunity at the Company’s expense to defend the same.

 

9

---

5.    Eligibility. Awards other than Incentive Stock Options may be granted to Employees, Directors and Consultants. Incentive Stock Options may be granted only to Employees of the Company or a Parent or a Subsidiary of the Company. An Employee, Director or Consultant who has been granted an Award may, if otherwise eligible, be granted additional Awards. Awards may be granted to such Employees, Directors or Consultants who are residing in non-U.S. jurisdictions as the Administrator may determine from time to time.

6.    Terms and Conditions of Awards.

(a)    Types of Awards. The Administrator is authorized under the Plan to award any type of arrangement to an Employee, Director or Consultant that is not inconsistent with the provisions of the Plan and that by its terms involves or might involve the issuance of (i) Shares, (ii) cash or (iii) an Option, a SAR, or similar right with a fixed or variable price related to the Fair Market Value of the Shares and with an exercise or conversion privilege related to the passage of time, the occurrence of one or more events, or the satisfaction of performance criteria or other conditions. Such awards include, without limitation, Options, SARs, sales or bonuses of Restricted Stock, Restricted Stock Units or Dividend Equivalent Rights, and an Award may consist of one such security or benefit, or two (2) or more of them in any combination or alternative.

(b)    Designation of Award. Each Award shall be designated in the Award Agreement. In the case of an Option, the Option shall be designated as either an Incentive Stock Option or a Non-Qualified Stock Option. However, notwithstanding such designation, an Option will qualify as an Incentive Stock Option under the Code only to the extent the $100,000 limitation of Section 422(d) of the Code is not exceeded. The $100,000 limitation of Section 422(d) of the Code is calculated based on the aggregate Fair Market Value of the Shares subject to Options designated as Incentive Stock Options which become exercisable for the first time by a Grantee during any calendar year (under all plans of the Company or any Parent or Subsidiary of the Company). For purposes of this calculation, Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of the Shares shall be determined as of the grant date of the relevant Option. In the event that the Code or the regulations promulgated thereunder are amended after the date the Plan becomes effective to provide for a different limit on the Fair Market Value of Shares permitted to be subject to Incentive Stock Options, then such different limit will be automatically incorporated herein and will apply to any Options granted after the effective date of such amendment.

(c)    Conditions of Award. Subject to the terms of the Plan, the Administrator shall determine the provisions, terms, and conditions of each Award including, but not limited to, the Award vesting schedule, repurchase provisions, rights of first refusal, forfeiture provisions, form of payment (cash, Shares, or other consideration) upon settlement of the Award, payment contingencies, and satisfaction of any performance criteria. The performance criteria established by the Administrator may be based on any one of, or combination of, increase in share price, earnings per share, total shareholder return, return on equity, return on assets, return on investment, net operating income, cash flow, revenue, economic value added, personal management objectives, or other measure of performance selected by the Administrator. Partial achievement of the specified criteria may result in a payment or vesting corresponding to the degree of achievement as specified in the Award Agreement. In addition, the performance

 

10

---

criteria shall be calculated in accordance with generally accepted accounting principles, but excluding the effect (whether positive or negative) of any change in accounting standards and any other item that is either unusual or infrequent in nature, as determined in accordance with Accounting Standards Codification Topic 225-20 “Extraordinary and Unusual Items”, as determined by the Administrator, occurring after the establishment of the performance criteria applicable to the Award intended to be Performance-Based Compensation. Each such adjustment, if any, shall be made solely for the purpose of providing a consistent basis from period to period for the calculation of performance criteria in order to prevent the dilution or enlargement of the Grantee’s rights with respect to an Award intended to be Performance-Based Compensation.

(d)    Acquisitions and Other Transactions. The Administrator may issue Awards under the Plan in settlement, assumption or substitution for, outstanding awards or obligations to grant future awards in connection with the Company or a Related Entity acquiring another entity, an interest in another entity or an additional interest in a Related Entity whether by merger, stock purchase, asset purchase or other form of transaction.

(e)    Deferral of Award Payment. The Administrator may establish one or more programs under the Plan to permit selected Grantees the opportunity to elect to defer receipt of consideration upon exercise of an Award, satisfaction of performance criteria, or other event that absent the election would entitle the Grantee to payment or receipt of Shares or other consideration under an Award. The Administrator may establish the election procedures, the timing of such elections, the mechanisms for payments of, and accrual of interest or other earnings, if any, on amounts, Shares or other consideration so deferred, and such other terms, conditions, rules and procedures that the Administrator deems advisable for the administration of any such deferral program.

(f)    Separate Programs. The Administrator may establish one or more separate programs under the Plan for the purpose of issuing particular forms of Awards to one or more classes of Grantees on such terms and conditions as determined by the Administrator from time to time.

(g)    Individual Limitations on Awards.

(i)    Individual Option and SAR Limit. Following the date that the exemption from application of Section 162(m) of the Code described in Section 19 (or any exemption having similar effect) ceases to apply to Awards, the maximum number of Shares with respect to which Options and SARs may be granted to any Grantee in any calendar year shall be 1,000,000 Shares. In connection with a Grantee’s commencement of Continuous Service, a Grantee may be granted Options and SARs for up to an additional 1,000,000 Shares which shall not count against the limit set forth in the previous sentence. The foregoing limitations shall be adjusted proportionately in connection with any change in the Company’s capitalization pursuant to Section 10, below. To the extent required by Section 162(m) of the Code or the regulations thereunder, in applying the foregoing limitations with respect to a Grantee, if any Option or SAR is canceled, the canceled Option or SAR shall continue to count against the maximum number of Shares with respect to which Options and SARs may be granted to the Grantee. For this purpose, the repricing of an Option (or in the case of a SAR, the base amount on which the stock appreciation is calculated is reduced to reflect a reduction in the Fair Market Value of the Common Stock) shall be treated as the cancellation of the existing Option or SAR and the grant of a new Option or SAR.

 

11

---

(ii)    Individual Limit for Restricted Stock and Restricted Stock Units. Following the date that the exemption from application of Section 162(m) of the Code described in Section 19 (or any exemption having similar effect) ceases to apply to Awards, for awards of Restricted Stock and Restricted Stock Units that are intended to be Performance-Based Compensation, the maximum number of Shares with respect to which such Awards may be granted to any Grantee in any calendar year shall be 1,000,000 Shares. The foregoing limitation shall be adjusted proportionately in connection with any change in the Company’s capitalization pursuant to Section 10, below.

(iii)    Individual Limit for Non-Employee Director Awards. The aggregate grant date fair value of Awards to a Director who is not then an Employee may not exceed $1,000,000 in any calendar year

(h)    Early Exercise. The Award Agreement may, but need not, include a provision whereby the Grantee may elect at any time while an Employee, Director or Consultant to exercise any part or all of the Award prior to full vesting of the Award. Any unvested Shares received pursuant to such exercise may be subject to a repurchase right in favor of the Company or a Related Entity or to any other restriction the Administrator determines to be appropriate.

(i)    Term of Award. The term of each Award shall be the term stated in the Award Agreement, provided, however, that the term shall be no more than ten (10) years from the date of grant thereof. However, in the case of an Incentive Stock Option granted to a Grantee who, at the time the Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary of the Company, the term of the Incentive Stock Option shall be five (5) years from the date of grant thereof or such shorter term as may be provided in the Award Agreement. Notwithstanding the foregoing, the specified term of any Award shall not include any period for which the Grantee has elected to defer the receipt of the Shares or cash issuable pursuant to the Award.

(j)    Transferability of Awards. Incentive Stock Options may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Grantee, only by the Grantee. Other Awards shall be transferable (i) by will or by the laws of descent and distribution and (ii) during the lifetime of the Grantee, to the extent and in the manner authorized by the Administrator by gift or pursuant to a domestic relations order to members of the Grantee’s Immediate Family. Notwithstanding the foregoing, the Grantee may designate one or more beneficiaries of the Grantee’s Award in the event of the Grantee’s death on a beneficiary designation form provided by the Administrator.

(k)    Time of Granting Awards. The date of grant of an Award shall for all purposes be the date on which the Administrator makes the determination to grant such Award, or such other later date as is determined by the Administrator.

 

12

---

(l)    Award Exchange Programs. The Administrator may establish one or more programs under the Plan to permit selected Grantees to exchange an Award under the Plan for one or more other types of Awards under the Plan on such terms and conditions as determined by the Administrator from time to time.

7.    Award Exercise or Purchase Price, Consideration and Taxes.

(a)    Exercise or Purchase Price. The exercise or purchase price, if any, for an Award shall be as follows:

(i)    In the case of an Incentive Stock Option:

(A)    granted to an Employee who, at the time of the grant of such Incentive Stock Option owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary of the Company, the per Share exercise price shall be not less than one hundred ten percent (110%) of the Fair Market Value per Share on the date of grant; or

(B)    granted to any Employee other than an Employee described in the preceding paragraph, the per Share exercise price shall be not less than one hundred percent (100%) of the Fair Market Value per Share on the date of grant.

(ii)    In the case of a Non-Qualified Stock Option, the per Share exercise price shall be such price as is determined by the Administrator.

(iii)    In the case of SARs, the base appreciation amount shall not be less than one hundred percent (100%) of the Fair Market Value per Share on the date of grant.

(iv)    In the case of Awards intended to qualify as Performance-Based Compensation, the exercise or purchase price, if any, shall be not less than one hundred percent (100%) of the Fair Market Value per Share on the date of grant.

(v)    In the case of the sale of Shares, the per Share purchase price, if any, shall be such price as is determined by the Administrator.

(vi)    In the case of other Awards, such price as is determined by the Administrator.

(vii)    Notwithstanding the foregoing provisions of this Section 7(a), in the case of an Award issued pursuant to Section 6(d), above, the exercise or purchase price for the Award shall be determined in accordance with the provisions of the relevant instrument evidencing the agreement to issue such Award.

(b)    Consideration. Subject to Applicable Laws, the consideration to be paid for the Shares to be issued upon exercise or purchase of an Award including the method of payment, shall be determined by the Administrator. In addition to any other types of consideration the Administrator may determine, the Administrator is authorized to accept as consideration for Shares issued under the Plan the following, provided that the portion of the

 

13

---

consideration equal to the par value of the Shares must be paid in cash or other legal consideration permitted by the Delaware General Corporation Law:

(i)    cash;

(ii)    check;

(iii)    delivery of the Grantee’s promissory note with such recourse, interest, security, and redemption provisions as the Administrator determines as appropriate (but only to the extent that the acceptance or terms of the promissory note would not violate an Applicable Law);

(iv)    surrender of Shares held for the requisite period, if any, necessary to avoid a charge to the Company’s earnings for financial reporting purposes, or delivery of a properly executed form of attestation of ownership of Shares as the Administrator may require which have a Fair Market Value on the date of surrender or attestation equal to the aggregate exercise price of the Shares as to which said Award shall be exercised;

(v)    with respect to Options, if the exercise occurs on or after the Registration Date, payment through a broker-dealer sale and remittance procedure pursuant to which the Grantee (A) shall provide written instructions to a Company designated brokerage firm to effect the immediate sale of some or all of the purchased Shares and remit to the Company sufficient funds to cover the aggregate exercise price payable for the purchased Shares and (B) shall provide written directives to the Company to deliver the certificates for the purchased Shares directly to such brokerage firm in order to complete the sale transaction;

(vi)    with respect to Options, payment through a “net exercise” such that, without the payment of any funds, the Grantee may exercise the Option and receive the net number of Shares equal to (i) the number of Shares as to which the Option is being exercised, multiplied by (ii) a fraction, the numerator of which is the Fair Market Value per Share (on such date as is determined by the Administrator) less the exercise price per Share, and the denominator of which is such Fair Market Value per Share (the number of net Shares to be received shall be rounded down to the nearest whole number of Shares); or

(vii)    any combination of the foregoing methods of payment.

The Administrator may at any time or from time to time, by adoption of or by amendment to the standard forms of Award Agreement described in Section 4(c)(iv), or by other means, grant Awards which do not permit all of the foregoing forms of consideration to be used in payment for the Shares or which otherwise restrict one or more forms of consideration.

(c)    Taxes. No Shares shall be delivered under the Plan to any Grantee or other person until such Grantee or other person has made arrangements acceptable to the Administrator for the satisfaction of any non-U.S., federal, state, or local income and employment tax withholding obligations, including, without limitation, obligations incident to the receipt of Shares. Upon exercise or vesting of an Award the Company shall withhold or collect from the Grantee an amount sufficient to satisfy such tax obligations, including, but not limited to, by surrender of the whole number of Shares covered by the Award sufficient to satisfy

 

14

---

the applicable tax withholding obligations incident to the exercise or vesting of an Award (limited to avoid, as determined by the Administrator, financial accounting charges under applicable accounting guidance and reduced to the lowest whole number of Shares if such number of Shares withheld would result in withholding a fractional Share with any remaining tax withholding settled in cash).

8.    Exercise of Award.

(a)    Procedure for Exercise; Rights as a Shareholder.

(i)    Any Award granted hereunder shall be exercisable at such times and under such conditions as determined by the Administrator under the terms of the Plan and specified in the Award Agreement.

(ii)    An Award shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Award by the person entitled to exercise the Award and full payment for the Shares with respect to which the Award is exercised has been made, including, to the extent selected, use of the broker-dealer sale and remittance procedure to pay the purchase price as provided in Section 7(b)(v).

(b)    Exercise of Award Following Termination of Continuous Service. In the event of termination of a Grantee’s Continuous Service for any reason other than Disability or death (but not in the event of a Grantee’s change of status from Employee to Consultant or from Consultant to Employee), such Grantee may, but only during the Post-Termination Exercise Period (but in no event later than the expiration date of the term of such Award as set forth in the Award Agreement), exercise the portion of the Grantee’s Award that was vested at the date of such termination or such other portion of the Grantee’s Award as may be determined by the Administrator. The Grantee’s Award Agreement may provide that upon the termination of the Grantee’s Continuous Service for Cause, the Grantee’s right to exercise the Award shall terminate concurrently with the termination of the Grantee’s Continuous Service. In the event of a Grantee’s change of status from Employee to Consultant, an Employee’s Incentive Stock Option shall convert automatically to a Non-Qualified Stock Option on the day three (3) months and one (1) day following such change of status. To the extent that the Grantee’s Award was unvested at the date of termination, or if the Grantee does not exercise the vested portion of the Grantee’s Award within the Post-Termination Exercise Period, the Award shall terminate.

(c)    Disability of Grantee. In the event of termination of a Grantee’s Continuous Service as a result of his or her Disability, such Grantee may, but only within twelve (12) months from the date of such termination (or such longer period as specified in the Award Agreement but in no event later than the expiration date of the term of such Award as set forth in the Award Agreement), exercise the portion of the Grantee’s Award that was vested at the date of such termination; provided, however, that if such Disability is not a “disability” as such term is defined in Section 22(e)(3) of the Code, in the case of an Incentive Stock Option such Incentive Stock Option shall automatically convert to a Non-Qualified Stock Option on the day three (3) months and one day following such termination. To the extent that the Grantee’s Award was unvested at the date of termination, or if Grantee does not exercise the vested portion of the Grantee’s Award within the time specified herein, the Award shall terminate.

 

15

---

(d)    Death of Grantee. In the event of a termination of the Grantee’s Continuous Service as a result of his or her death, or in the event of the death of the Grantee during the Post-Termination Exercise Period or during the twelve (12) month period following the Grantee’s termination of Continuous Service as a result of his or her Disability, the Grantee’s estate or a person who acquired the right to exercise the Award by bequest or inheritance may exercise the portion of the Grantee’s Award that was vested as of the date of termination, within twelve (12) months from the date of death (or such longer period as specified in the Award Agreement but in no event later than the expiration of the term of such Award as set forth in the Award Agreement). To the extent that, at the time of death, the Grantee’s Award was unvested, or if the Grantee’s estate or a person who acquired the right to exercise the Award by bequest or inheritance does not exercise the vested portion of the Grantee’s Award within the time specified herein, the Award shall terminate.

(e)    Extension if Exercise Prevented by Law. Notwithstanding the foregoing, if the exercise of an Award within the applicable time periods set forth in this Section 8 is prevented by the provisions of Section 9 below, the Award shall remain exercisable until one (1) month after the date the Grantee is notified by the Company that the Award is exercisable, but in any event no later than the expiration of the term of such Award as set forth in the Award Agreement and only in a manner and to the extent permitted under Code Section 409A.

9.    Conditions Upon Issuance of Shares.

(a)    If at any time the Administrator determines that the delivery of Shares pursuant to the exercise, vesting or any other provision of an Award is or may be unlawful under Applicable Laws, the vesting or right to exercise an Award or to otherwise receive Shares pursuant to the terms of an Award shall be suspended until the Administrator determines that such delivery is lawful and shall be further subject to the approval of counsel for the Company with respect to such compliance. The Company shall have no obligation to effect any registration or qualification of the Shares under federal or state laws.

(b)    As a condition to the exercise of an Award, the Company may require the person exercising such Award to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required by any Applicable Laws.

10.    Adjustments Upon Changes in Capitalization. Subject to any required action by the shareholders of the Company and Section 11 below, the number of Shares covered by each outstanding Award, and the number of Shares which have been authorized for issuance under the Plan but as to which no Awards have yet been granted or which have been returned to the Plan, the exercise or purchase price of each such outstanding Award, the maximum number of Shares with respect to which Awards may be granted to any Grantee in any calendar year, as well as any other terms that the Administrator determines require adjustment shall be proportionately adjusted for: (i) any increase or decrease in the number of issued Shares resulting from a stock split, reverse stock split, stock dividend, recapitalization, combination or reclassification of the Shares, or similar transaction affecting the Shares; (ii) any other increase or decrease in the number of issued Shares effected without receipt of consideration by the Company; or (iii) any

 

16

---

other transaction with respect to Common Stock including a corporate merger, consolidation, acquisition of property or stock, separation (including a spin-off or other distribution of stock or property), reorganization, liquidation (whether partial or complete) or any similar transaction; provided, however that conversion of any convertible securities of the Company shall not be deemed to have been “effected without receipt of consideration.” In the event of any distribution of cash or other assets to shareholders other than a normal cash dividend, the Administrator shall also make such adjustments as provided in this Section 10 or substitute, exchange or grant Awards to effect such adjustments (collectively “adjustments”). Any such adjustments to outstanding Awards will be effected in a manner that precludes the enlargement of rights and benefits under such Awards. In connection with the foregoing adjustments, the Administrator may, in its discretion, prohibit the exercise of Awards or other issuance of Shares, cash or other consideration pursuant to Awards during certain periods of time. Except as the Administrator determines, no issuance by the Company of shares of any class, or securities convertible into shares of any class, shall affect, and no adjustment by reason hereof shall be made with respect to, the number or price of Shares subject to an Award.

11.    Corporate Transactions and Changes in Control.

(a)    Termination of Award to Extent Not Assumed in Corporate Transaction. Effective upon the consummation of a Corporate Transaction, all outstanding Awards under the Plan shall terminate. However, all such Awards shall not terminate to the extent they are Assumed in connection with the Corporate Transaction.

(b)    Acceleration of Award Upon Corporate Transaction or Change in Control. The Administrator shall have the authority, exercisable either in advance of any actual or anticipated Corporate Transaction or Change in Control or at the time of an actual Corporate Transaction or Change in Control and exercisable at the time of the grant of an Award under the Plan or any time while an Award remains outstanding, to provide for the full or partial automatic vesting and exercisability of one or more outstanding unvested Awards under the Plan and the release from restrictions on transfer and repurchase or forfeiture rights of such Awards in connection with a Corporate Transaction or Change in Control, on such terms and conditions as the Administrator may specify. The Administrator also shall have the authority to condition any such Award vesting and exercisability or release from such limitations upon the subsequent termination of the Continuous Service of the Grantee within a specified period following the effective date of the Corporate Transaction or Change in Control.

(c)    Effect of Acceleration on Incentive Stock Options. Any Incentive Stock Option accelerated under this Section 11 in connection with a Corporate Transaction or Change in Control shall remain exercisable as an Incentive Stock Option under the Code only to the extent the $100,000 dollar limitation of Section 422(d) of the Code is not exceeded.

12.    Effective Date and Term of Plan. The Plan shall become effective upon the earlier to occur of its adoption by the Board or its approval by the shareholders of the Company. It shall continue in effect for a term of ten (10) years unless sooner terminated. Subject to Section 17 below, and Applicable Laws, Awards may be granted under the Plan upon its becoming effective.

 

17

---

13.    Amendment, Suspension or Termination of the Plan.

(a)    The Board may at any time amend, suspend or terminate the Plan. To the extent necessary to comply with Applicable Laws, the Company shall obtain shareholder approval of any Plan amendment in such a manner and to such a degree as required.

(b)    No Award may be granted during any suspension of the Plan or after termination of the Plan.

(c)    No suspension or termination of the Plan (including termination of the Plan under Section 12, above) shall adversely affect any rights under Awards already granted to a Grantee.

14.    Reservation of Shares.

(a)    The Company, during the term of the Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan.

(b)    The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company’s counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained.

15.    No Effect on Terms of Employment/Consulting Relationship. The Plan shall not confer upon any Grantee any right with respect to the Grantee’s Continuous Service, nor shall it interfere in any way with his or her right or the right of the Company or any Related Entity to terminate the Grantee’s Continuous Service at any time, with or without cause including, but not limited to, Cause, and with or without notice. The ability of the Company or any Related Entity to terminate the employment of a Grantee who is employed at will is in no way affected by its determination that the Grantee’s Continuous Service has been terminated for Cause for the purposes of this Plan.

16.    No Effect on Retirement and Other Benefit Plans. Except as specifically provided in a retirement or other benefit plan of the Company or a Related Entity, Awards shall not be deemed compensation for purposes of computing benefits or contributions under any retirement plan of the Company or a Related Entity, and shall not affect any benefits under any other benefit plan of any kind or any benefit plan subsequently instituted under which the availability or amount of benefits is related to level of compensation. The Plan is not a “Pension Plan” or “Welfare Plan” under the Employee Retirement Income Security Act of 1974, as amended.

17.    Shareholder Approval. Continuance of the Plan shall be subject to approval by the shareholders of the Company within twelve (12) months before or after the date the Plan is adopted. Such shareholder approval shall be obtained in the degree and manner required under Applicable Laws. Any Award exercised before shareholder approval is obtained shall be rescinded if shareholder approval is not obtained within the time prescribed, and Shares issued on the exercise of any such Award shall not be counted in determining whether shareholder approval is obtained.

 

18

---

18.    Information to Grantees. To the extent required by Applicable Laws, the Company shall provide to each Grantee, during the period for which such Grantee has one or more Awards outstanding, copies of financial statements at least annually. The Company shall not be required to provide such information to persons whose duties in connection with the Company assure them access to equivalent information.

19.    Effect of Section 162(m) of the Code. Section 162(m) of the Code does not apply to the Plan prior to the Registration Date or such earlier time that the Company first becomes subject to the reporting obligations of Section 12 of the Exchange Act. Following the Registration Date or such earlier time that the Company first becomes subject to the reporting obligations of Section 12 of the Exchange Act, the Plan, and all Awards (except Awards of Restricted Stock that vest over time) issued thereunder, are intended to be exempt from the application of Section 162(m) of the Code, which restricts under certain circumstances the Federal income tax deduction for compensation paid by a public company to named executives in excess of $1 million per year. The exemption is based on Treasury Regulation Section 1.162-27(f), in the form existing on the effective date of the Plan, with the understanding that such regulation generally exempts from the application of Section 162(m) of the Code compensation paid pursuant to a plan that existed before a company becomes publicly held. Under such Treasury Regulation, this exemption is available to the Plan for the duration of the period that lasts until the earliest of (i) the expiration of the Plan, (ii) the material modification of the Plan, (iii) the exhaustion of the maximum number of shares of Common Stock available for Awards under the Plan, as set forth in Section 3(a), (iv) the first meeting of shareholders at which directors are to be elected that occurs after the close of the third calendar year following the calendar year in which the Company first becomes subject to the reporting obligations of Section 12 of the Exchange Act, or (v) such other date required by Section 162(m) of the Code and the rules and regulations promulgated thereunder. To the extent that the Administrator determines as of the date of grant of an Award that (i) the Award is intended to qualify as Performance-Based Compensation and (ii) the exemption described above is no longer available with respect to such Award, such Award shall not be effective until any shareholder approval required under Section 162(m) of the Code has been obtained.

20.    Unfunded Obligation. Grantees shall have the status of general unsecured creditors of the Company. Any amounts payable to Grantees pursuant to the Plan shall be unfunded and unsecured obligations for all purposes, including, without limitation, Title I of the Employee Retirement Income Security Act of 1974, as amended. Neither the Company nor any Related Entity shall be required to segregate any monies from its general funds, or to create any trusts, or establish any special accounts with respect to such obligations. The Company shall retain at all times beneficial ownership of any investments, including trust investments, which the Company may make to fulfill its payment obligations hereunder. Any investments or the creation or maintenance of any trust or any Grantee account shall not create or constitute a trust or fiduciary relationship between the Administrator, the Company or any Related Entity and a Grantee, or otherwise create any vested or beneficial interest in any Grantee or the Grantee’s creditors in any assets of the Company or a Related Entity. The Grantees shall have no claim

 

19

---

against the Company or any Related Entity for any changes in the value of any assets that may be invested or reinvested by the Company with respect to the Plan.

21.    Construction. Captions and titles contained herein are for convenience only and shall not affect the meaning or interpretation of any provision of the Plan. Except when otherwise indicated by the context, the singular shall include the plural and the plural shall include the singular. Use of the term “or” is not intended to be exclusive, unless the context clearly requires otherwise.

22.    Nonexclusivity of the Plan. Neither the adoption of the Plan by the Board, the submission of the Plan to the shareholders of the Company for approval, nor any provision of the Plan will be construed as creating any limitations on the power of the Board to adopt such additional compensation arrangements as it may deem desirable, including, without limitation, the granting of Awards otherwise than under the Plan, and such arrangements may be either generally applicable or applicable only in specific cases.

 

20

Exhibit 10.7

KRYSTAL BIOTECH, INC.

2017 IPO STOCK INCENTIVE PLAN

1. Purposes of the Plan. The purposes of this Plan are to attract and retain the best available personnel, to provide additional incentives to Employees, Directors and Consultants and to promote the success of the Company’s business.

2. Definitions. The following definitions shall apply as used herein and in the individual Award Agreements except as defined otherwise in an individual Award Agreement. In the event a term is separately defined in an individual Award Agreement, such definition shall supersede the definition contained in this Section 2.

(a) “Administrator” means the Board or any of the Committees appointed to administer the Plan.

(b) “Affiliate” and “Associate” shall have the respective meanings ascribed to such terms in Rule 12b-2 promulgated under the Exchange Act.

(c) “Applicable Laws” means the legal requirements relating to the Plan and the Awards under applicable provisions of federal and state securities laws, the corporate laws of Delaware and, to the extent other than Delaware, the corporate law of the state of the Company’s incorporation, the Code, the rules of any applicable stock exchange or national market system, and the rules of any non-U.S. jurisdiction applicable to Awards granted to residents therein.

(d) “Assumed” means that pursuant to a Corporate Transaction either (i) the Award is expressly affirmed by the Company or (ii) the contractual obligations represented by the Award are expressly assumed (and not simply by operation of law) by the successor entity or its Parent in connection with the Corporate Transaction with appropriate adjustments to the number and type of securities of the successor entity or its Parent subject to the Award and the exercise or purchase price thereof which at least preserves the compensation element of the Award existing at the time of the Corporate Transaction as determined in accordance with the instruments evidencing the agreement to assume the Award.

(e) “Award” means the grant of an Option, SAR, Dividend Equivalent Right, Restricted Stock, Restricted Stock Unit or other right or benefit under the Plan.

(f) “Award Agreement” means the written agreement evidencing the grant of an Award executed by the Company and the Grantee, including any amendments thereto.

(g) “Board” means the Board of Directors of the Company.

(h) “Cash-Based Award” means an Award denominated in cash that may be settled in cash and/or Shares, which may be subject to restrictions, as established by the Administrator.

 

1

---

(i) “Cause” means, with respect to the termination by the Company or a Related Entity of the Grantee’s Continuous Service, that such termination is for “Cause” as such term (or word of like import) is expressly defined in a then-effective written agreement between the Grantee and the Company or such Related Entity, or in the absence of such then-effective written agreement and definition, is based on, in the determination of the Administrator, the Grantee’s: (i) performance of any act or failure to perform any act in bad faith and to the detriment of the Company or a Related Entity; (ii) dishonesty, intentional misconduct or material breach of any agreement with the Company or a Related Entity; or (iii) commission of a crime involving dishonesty, breach of trust, or physical or emotional harm to any person.

(j) “Change in Control” means a change in ownership or control of the Company after the Registration Date effected through either of the following transactions:

(i) the direct or indirect acquisition by any person or related group of persons (other than an acquisition from or by the Company or by a Company-sponsored employee benefit plan or by a person that directly or indirectly controls, is controlled by, or is under common control with, the Company) of beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Company’s outstanding securities pursuant to a tender or exchange offer made directly to the Company’s shareholders which a majority of the Continuing Directors who are not Affiliates or Associates of the offeror do not recommend such shareholders accept, or

(ii) a change in the composition of the Board over a period of twelve (12) months or less such that a majority of the Board members (rounded up to the next whole number) ceases, by reason of one or more contested elections for Board membership, to be comprised of individuals who are Continuing Directors.

(k) “Code” means the Internal Revenue Code of 1986, as amended.

(l) “Committee” means any committee composed of members of the Board appointed by the Board to administer the Plan.

(m) “Common Stock” means the common stock of the Company.

(n) “Company” means Krystal Biotech, Inc., a Delaware corporation, or any successor entity that adopts the Plan in connection with a Corporate Transaction.

(o) “Consultant” means any person (other than an Employee or a Director, solely with respect to rendering services in such person’s capacity as a Director) who is engaged by the Company or any Related Entity to render consulting or advisory services to the Company or such Related Entity.

(p) “Continuing Directors” means members of the Board who either (i) have been Board members continuously for a period of at least twelve (12) months or (ii) have been Board members for less than twelve (12) months and were elected or nominated for election as Board members by at least a majority of the Board members described in clause (i) who were still in office at the time such election or nomination was approved by the Board.

 

2

---

(q) “Continuous Service” means that the provision of services to the Company or a Related Entity in any capacity of Employee, Director or Consultant is not interrupted or terminated. In jurisdictions requiring notice in advance of an effective termination as an Employee, Director or Consultant, Continuous Service shall be deemed terminated upon the actual cessation of providing services to the Company or a Related Entity notwithstanding any required notice period that must be fulfilled before a termination as an Employee, Director or Consultant can be effective under Applicable Laws. A Grantee’s Continuous Service shall be deemed to have terminated either upon an actual termination of Continuous Service or upon the entity for which the Grantee provides services ceasing to be a Related Entity. Continuous Service shall not be considered interrupted in the case of (i) any approved leave of absence, (ii) transfers among the Company, any Related Entity, or any successor, in any capacity of Employee, Director or Consultant, or (iii) any change in status as long as the individual remains in the service of the Company or a Related Entity in any capacity of Employee, Director or Consultant (in each case, except as otherwise provided in the Award Agreement). Notwithstanding the foregoing, except as otherwise determined by the Administrator, in the event of any spin-off of a Related Entity, service as an Employee, Director or Consultant for such Related Entity following such spin-off shall be deemed to be Continuous Service for purposes of the Plan and any Award under the Plan. An approved leave of absence shall include sick leave, military leave, or any other authorized personal leave. For purposes of each Incentive Stock Option granted under the Plan, if such leave exceeds three (3) months, and reemployment upon expiration of such leave is not guaranteed by statute or contract, then the Incentive Stock Option shall be treated as a Non-Qualified Stock Option on the day three (3) months and one (1) day following the expiration of such three (3) month period.

(r) “Corporate Transaction” means any of the following transactions, provided, however, that the Administrator shall determine under parts (iv) and (v) whether multiple transactions are related, and its determination shall be final, binding and conclusive:

(i) a merger or consolidation in which the Company is not the surviving entity, except for a transaction the principal purpose of which is to change the state in which the Company is incorporated;

(ii) the sale, transfer or other disposition of all or substantially all of the assets of the Company;

(iii) the complete liquidation or dissolution of the Company;

(iv) any reverse merger or series of related transactions culminating in a reverse merger (including, but not limited to, a tender offer followed by a reverse merger) in which the Company is the surviving entity but (A) the shares of Common Stock outstanding immediately prior to such merger are converted or exchanged by virtue of the merger into other property, whether in the form of securities, cash or otherwise, or (B) in which securities possessing more than fifty percent (50%) of the total combined voting power of the Company’s outstanding securities are transferred to a person or persons different from those who held such securities immediately prior to such merger or the initial transaction culminating in such merger, but excluding any such transaction or series of related transactions that the Administrator determines shall not be a Corporate Transaction; or

 

3

---

(v) acquisition in a single or series of related transactions by any person or related group of persons (other than the Company or by a Company-sponsored employee benefit plan) of beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Company’s outstanding securities but excluding any such transaction or series of related transactions that the Administrator determines shall not be a Corporate Transaction.

(s) “Covered Employee” means an Employee who is a “covered employee” under Section 162(m)(3) of the Code.

(t) “Director” means a member of the Board or the board of directors of any Related Entity.

(u) “Disability” means as defined under the long-term disability policy of the Company or the Related Entity to which the Grantee provides services regardless of whether the Grantee is covered by such policy. If the Company or the Related Entity to which the Grantee provides service does not have a long-term disability plan in place, “Disability” means that a Grantee is unable to carry out the responsibilities and functions of the position held by the Grantee by reason of any medically determinable physical or mental impairment for a period of not less than ninety (90) consecutive days. A Grantee will not be considered to have incurred a Disability unless he or she furnishes proof of such impairment sufficient to satisfy the Administrator in its discretion.

(v) “Dividend Equivalent Right” means a right entitling the Grantee to compensation measured by dividends paid with respect to Common Stock, provided that no such right may be granted with respect to Options or SARs.

(w) “Employee” means any person, including an Officer or Director, who is in the employ of the Company or any Related Entity, subject to the control and direction of the Company or any Related Entity as to both the work to be performed and the manner and method of performance. The payment of a director’s fee by the Company or a Related Entity shall not be sufficient to constitute “employment” by the Company.

(x) “Exchange Act” means the Securities Exchange Act of 1934, as amended.

(y) “Fair Market Value” means, as of any date, the value of Common Stock determined as follows:

(i) If the Common Stock is listed on one or more established stock exchanges or national market systems, including without limitation The NASDAQ Global Select Market, The NASDAQ Global Market or The NASDAQ Capital Market of The NASDAQ Stock Market LLC, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on the principal exchange or system on which the Common Stock is listed (as determined by the Administrator) on the date of determination (or, if no closing sales price or closing bid was reported on that date, as applicable, on the last trading date such closing sales price or closing bid was reported), as reported in The Wall Street Journal or such other source as the Administrator deems reliable;

 

4

---

(ii) If the Common Stock is regularly quoted on an automated quotation system (including the OTC Bulletin Board) or by a recognized securities dealer, its Fair Market Value shall be the closing sales price for such stock as quoted on such system or by such securities dealer on the date of determination, but if selling prices are not reported, the Fair Market Value of a share of Common Stock shall be the mean between the high bid and low asked prices for the Common Stock on the date of determination (or, if no such prices were reported on that date, on the last date such prices were reported), as reported in The Wall Street Journal or such other source as the Administrator deems reliable; or

(iii) In the absence of an established market for the Common Stock of the type described in (i) and (ii), above, the Fair Market Value thereof shall be determined by the Administrator in good faith and in a manner consistent with Applicable Laws.

(z) “Good Reason” means, with respect to the termination by the Grantee of the Grantee’s Continuous Service, that such termination is for “Good Reason” as such term (or word of like import) is expressly defined in a then-effective written agreement between the Grantee and the Company or a Related Entity, or in the absence of such then-effective written agreement and definition, means the occurrence of any of the following events or conditions unless consented to by the Grantee (and the Grantee shall be deemed to have consented to any such event or condition unless the Grantee provides written notice of the Grantee’s non-acquiescence within 30 days of the effective time of such event or condition): (i) a change in the Grantee’s responsibilities or duties which represents a material and substantial diminution in the Grantee’s responsibilities; (ii) a material reduction in the Grantee’s base salary; provided that an across-the-board reduction in the salary level of substantially all other individuals in positions similar to the Grantee’s by the same percentage amount shall not constitute such a salary reduction; or (iii) requiring the Grantee to be based at any place outside a 50 mile radius from the Grantee’s job location or residence except for reasonably required travel on business.

(aa) “Grantee” means an Employee, Director or Consultant who receives an Award under the Plan.

(bb) “Immediate Family” means any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in law, daughter-in-law, brother-in-law, or sister-in-law, including adoptive relationships, any person sharing the Grantee’s household (other than a tenant or employee), a trust in which these persons (or the Grantee) have more than fifty percent (50%) of the beneficial interest, a foundation in which these persons (or the Grantee) control the management of assets, and any other entity in which these persons (or the Grantee) own more than fifty percent (50%) of the voting interests.

(cc) “Incentive Stock Option” means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code.

(dd) “Non-Qualified Stock Option” means an Option not intended to qualify as an Incentive Stock Option.

 

5

---

(ee) “Officer” means a person who is an officer of the Company or a Related Entity within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder.

(ff) “Option” means an option to purchase Shares pursuant to an Award Agreement granted under the Plan.

(gg) “Parent” means a “parent corporation”, whether now or hereafter existing, as defined in Section 424(e) of the Code.

(hh) “Performance-Based Compensation” means compensation qualifying as “performance-based compensation” under Section 162(m) of the Code.

(ii) “Plan” means this Company 2017 IPO Stock Incentive Plan.

(jj) “Post-Termination Exercise Period” means the period specified in the Award Agreement of not less than thirty (30) days commencing on the date of termination (other than termination by the Company or any Related Entity for Cause) of the Grantee’s Continuous Service, or such longer period as may be applicable upon death or Disability.

(kk) “Registration Date” means the first to occur of: (i) the closing of the first sale to the general public pursuant to a registration statement filed with and declared effective by the Securities and Exchange Commission under the Securities Act of 1933, as amended, of (A) the Common Stock or (B) the same class of securities of a successor corporation (or its Parent) issued pursuant to a Corporate Transaction in exchange for or in substitution of the Common Stock; or (ii) in the event of a Corporate Transaction, the date of the consummation of the Corporate Transaction if the same class of securities of the successor corporation (or its Parent) issuable in such Corporate Transaction shall have been sold to the general public pursuant to a registration statement filed with and declared effective by the Securities and Exchange Commission under the Securities Act of 1933, as amended, on or prior to the date of consummation of such Corporate Transaction.

(ll) “Related Entity” means any Parent or Subsidiary of the Company.

(mm) “Replaced” means that pursuant to a Corporate Transaction the Award is replaced with a comparable stock award or a cash incentive program of the Company, the successor entity (if applicable) or Parent of either of them which preserves the compensation element of such Award existing at the time of the Corporate Transaction and provides for subsequent payout in accordance with the same (or a more favorable) vesting schedule applicable to such Award. The determination of Award comparability shall be made by the Administrator and its determination shall be final, binding and conclusive.

(nn) “Restricted Stock” means Shares issued under the Plan to the Grantee for such consideration, if any, and subject to such restrictions on transfer, rights of first refusal, repurchase provisions, forfeiture provisions, and other terms and conditions as established by the Administrator. Dividends payable with respect to Restricted Stock that is subject to performance vesting shall be held subject to the vesting of the underlying Shares.

 

6

---

(oo) “Restricted Stock Units” means an Award which may be earned in whole or in part upon the passage of time or the attainment of performance criteria established by the Administrator and which may be settled for cash, Shares or other securities or a combination of cash, Shares or other securities as established by the Administrator. Dividend Equivalent Rights granted in connection with a Restricted Stock Unit that vests based on the attainment of performance criteria shall be subject to the vesting of the underlying Restricted Stock Unit.

(pp) “Rule 16b-3” means Rule 16b-3 promulgated under the Exchange Act or any successor thereto.

(qq) “SAR” means a stock appreciation right entitling the Grantee to Shares or cash compensation, as established by the Administrator, measured by appreciation in the value of Common Stock.

(rr) “Share” means a share of the Common Stock.

(ss) “Subsidiary” means a “subsidiary corporation”, whether now or hereafter existing, as defined in Section 424(f) of the Code.

3. Stock Subject to the Plan.

(a) Subject to the provisions of Section 10 below, the maximum aggregate number of Shares which may be issued pursuant to Awards initially shall be 900,000 Shares, and commencing with the first business day of each calendar year beginning with the calendar year following the calendar year in which the Plan becomes effective such maximum aggregate number of Shares shall be increased by a number equal to four percent (4%) of the number of Shares outstanding as of the last day of the immediately preceding calendar year. Notwithstanding the foregoing, subject to the provisions of Section 10, below, the maximum aggregate number of Shares available for grant of Incentive Stock Options shall be 900,000 Shares, and such number shall not be subject to annual adjustment as described above. The Shares to be issued pursuant to Awards may be authorized, but unissued, or reacquired Common Stock.

(b) Any Shares covered by an Award (or portion of an Award) which is forfeited, canceled or expires (whether voluntarily or involuntarily) shall be deemed not to have been issued for purposes of determining the maximum aggregate number of Shares which may be issued under the Plan. Shares that actually have been issued under the Plan pursuant to an Award shall not be returned to the Plan and shall not become available for future issuance under the Plan, except that if unvested Shares are forfeited, or repurchased by the Company at their original purchase price, or at the lower of their original purchase price or their Fair Market Value at the time of repurchase, such Shares shall become available for future grant under the Plan. To the extent not prohibited by the listing requirements of The NASDAQ Stock Market LLC (or other established stock exchange or national market system on which the Common Stock is traded) or Applicable Laws, any Shares covered by an Award which are surrendered or withheld: (i) in payment of the Award exercise or purchase price (including pursuant to the “net exercise” of an option pursuant to Section 7(b)(vi)); or (ii) in satisfaction of tax withholding obligations incident to the receipt, exercise or vesting of an Award shall be deemed not to have been issued

 

7

---

for purposes of determining the maximum number of Shares which may be issued pursuant to all Awards under the Plan, unless otherwise determined by the Administrator. SARs payable in Shares shall reduce the maximum aggregate number of Shares which may be issued under the Plan only by the number of actual Shares issued to the Grantee upon exercise of the SAR.

(c) Prior to the end of the transition period described in Section 19, the maximum aggregate amount of cash that may be issued pursuant to Cash-Based Awards under the Plan to Covered Employees is $5,000,000.

4. Administration of the Plan.

(a) Plan Administrator.

(i) Administration with Respect to Directors and Officers. Prior to the Registration Date, with respect to grants of Awards to Directors or Employees who are also Officers or Directors of the Company, the Plan shall be administered by (A) the Board or (B) a Committee designated by the Board, which Committee shall be constituted in such a manner as to satisfy the Applicable Laws. On or after the Registration Date, with respect to grants of Awards to Directors or Employees who are also Officers or Directors of the Company, the Plan shall be administered by (A) the Board or (B) a Committee designated by the Board, which Committee shall be constituted in such a manner as to satisfy the Applicable Laws and to permit such grants and related transactions under the Plan to be exempt from Section 16(b) of the Exchange Act in accordance with Rule 16b-3. Once appointed, such Committee shall continue to serve in its designated capacity until otherwise directed by the Board. In the case of Awards granted to Directors or Employees who are also Officers or Directors of the Company, references to the “Administrator” or to a “Committee” shall be deemed to be references to such Committee.

(ii) Administration With Respect to Consultants and Other Employees. With respect to grants of Awards to Employees or Consultants who are neither Directors nor Officers of the Company, the Plan shall be administered by (A) the Board or (B) a Committee designated by the Board, which Committee shall be constituted in such a manner as to satisfy the Applicable Laws. Once appointed, such Committee shall continue to serve in its designated capacity until otherwise directed by the Board.

(iii) Administration With Respect to Covered Employees. Notwithstanding the foregoing, as of and after the date that the exemption for the Plan under Section 162(m) of the Code expires, as set forth in Section 19 below, grants of Awards to any Covered Employee intended to qualify as Performance-Based Compensation shall be made only by a Committee (or subcommittee of a Committee) which is comprised solely of two or more Directors eligible to serve on a committee making Awards qualifying as Performance-Based Compensation. In the case of such Awards granted to Covered Employees, references to the “Administrator” or to a “Committee” shall be deemed to be references to such Committee or subcommittee.

(iv) Officer Authorization to Grant Awards. The Board may authorize one or more Officers to grant Awards subject to such limitations as the Board determines from time to time and subject to limitations under Applicable Laws.

 

8

---

(v) Administration Errors. In the event an Award is granted in a manner inconsistent with the provisions of this subsection (a), such Award shall be presumptively valid as of its grant date to the extent permitted by the Applicable Laws.

(b) Multiple Administrative Bodies. The Plan may be administered by different bodies with respect to Directors, Officers, Consultants, and Employees who are neither Directors nor Officers.

(c) Powers of the Administrator. Subject to Applicable Laws and the provisions of the Plan (including any other powers given to the Administrator hereunder), and except as otherwise provided by the Board, the Administrator shall have the authority, in its discretion:

(i) to select the Employees, Directors and Consultants to whom Awards may be granted from time to time hereunder;

(ii) to determine whether and to what extent Awards are granted hereunder;

(iii) to determine the number of Shares or the amount of other consideration to be covered by each Award granted hereunder;

(iv) to approve forms of Award Agreements for use under the Plan;

(v) to determine the terms and conditions of any Award granted hereunder;

(vi) to establish additional terms, conditions, rules or procedures to accommodate the rules or laws of applicable non-U.S. jurisdictions and to afford Grantees favorable treatment under such rules or laws;

(vii) to amend the terms of any outstanding Award granted under the Plan, provided that any amendment that would adversely affect the Grantee’s rights under an outstanding Award shall not be made without the Grantee’s written consent, provided, however, that an amendment or modification that may cause an Incentive Stock Option to become a Non-Qualified Stock Option shall not be treated as adversely affecting the rights of the Grantee. Notwithstanding the foregoing, (A) the reduction or increase of the exercise price of any Option awarded under the Plan and the base appreciation amount of any SAR awarded under the Plan shall be subject to shareholder approval and (B) canceling an Option or SAR at a time when its exercise price or base appreciation amount (as applicable) exceeds the Fair Market Value of the underlying Shares, in exchange for another Option, SAR, Restricted Stock, or other Award or for cash, shall be subject to shareholder approval, unless the cancellation and exchange occurs in connection with a Corporate Transaction. Notwithstanding the foregoing, canceling an Option or SAR in exchange for another Option, SAR, Restricted Stock, or other Award or for cash with an exercise price, purchase price or base appreciation amount (as applicable) that is equal to or greater than the exercise price or bae appreciation amount (as applicable) of the original Option or SAR shall not be subject to shareholder approval;

 

9

---

(viii) to construe and interpret the terms of the Plan and Awards, including without limitation, any notice of award or Award Agreement, granted pursuant to the Plan; and

(ix) to take such other action, not inconsistent with the terms of the Plan, as the Administrator deems appropriate.

The express grant in the Plan of any specific power to the Administrator shall not be construed as limiting any power or authority of the Administrator; provided that the Administrator may not exercise any right or power reserved to the Board. Any decision made, or action taken, by the Administrator or in connection with the administration of this Plan shall be final, conclusive and binding on all persons having an interest in the Plan.

(d) Indemnification. In addition to such other rights of indemnification as they may have as members of the Board or as Officers or Employees of the Company or a Related Entity, members of the Board and any Officers or Employees of the Company or a Related Entity to whom authority to act for the Board, the Administrator or the Company is delegated shall be defended and indemnified by the Company to the extent permitted by law on an after-tax basis against all reasonable expenses, including attorneys’ fees, actually and necessarily incurred in connection with the defense of any claim, investigation, action, suit or proceeding, or in connection with any appeal therein, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan, or any Award granted hereunder, and against all amounts paid by them in settlement thereof (provided such settlement is approved by the Company) or paid by them in satisfaction of a judgment in any such claim, investigation, action, suit or proceeding, except in relation to matters as to which it shall be adjudged in such claim, investigation, action, suit or proceeding that such person is liable for gross negligence, bad faith or intentional misconduct; provided, however, that within thirty (30) days after the institution of such claim, investigation, action, suit or proceeding, such person shall offer to the Company, in writing, the opportunity at the Company’s expense to defend the same.

5. Eligibility. Awards other than Incentive Stock Options may be granted to Employees, Directors and Consultants. Incentive Stock Options may be granted only to Employees of the Company or a Parent or a Subsidiary of the Company. An Employee, Director or Consultant who has been granted an Award may, if otherwise eligible, be granted additional Awards. Awards may be granted to such Employees, Directors or Consultants who are residing in non-U.S. jurisdictions as the Administrator may determine from time to time.

6. Terms and Conditions of Awards.

(a) Types of Awards. The Administrator is authorized under the Plan to award any type of arrangement to an Employee, Director or Consultant that is not inconsistent with the provisions of the Plan and that by its terms involves or might involve the issuance of (i) Shares, (ii) cash or (iii) an Option, a SAR, or similar right with a fixed or variable price related to the Fair Market Value of the Shares and with an exercise or conversion privilege related to the passage of time, the occurrence of one or more events, or the satisfaction of performance criteria or other conditions. Such awards include, without limitation, Options, SARs, sales or bonuses of Restricted Stock, Restricted Stock Units or Dividend Equivalent Rights, and an Award may consist of one such security or benefit, or two (2) or more of them in any combination or alternative.

 

10

---

(b) Designation of Award. Each Award shall be designated in the Award Agreement. In the case of an Option, the Option shall be designated as either an Incentive Stock Option or a Non-Qualified Stock Option. However, notwithstanding such designation, an Option will qualify as an Incentive Stock Option under the Code only to the extent the $100,000 limitation of Section 422(d) of the Code is not exceeded. The $100,000 limitation of Section 422(d) of the Code is calculated based on the aggregate Fair Market Value of the Shares subject to Options designated as Incentive Stock Options which become exercisable for the first time by a Grantee during any calendar year (under all plans of the Company or any Parent or Subsidiary of the Company). For purposes of this calculation, Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of the Shares shall be determined as of the grant date of the relevant Option. In the event that the Code or the regulations promulgated thereunder are amended after the date the Plan becomes effective to provide for a different limit on the Fair Market Value of Shares permitted to be subject to Incentive Stock Options, then such different limit will be automatically incorporated herein and will apply to any Options granted after the effective date of such amendment.

(c) Conditions of Award. Subject to the terms of the Plan, the Administrator shall determine the provisions, terms, and conditions of each Award including, but not limited to, the Award vesting schedule, repurchase provisions, rights of first refusal, forfeiture provisions, form of payment (cash, Shares, or other consideration) upon settlement of the Award, payment contingencies, and satisfaction of any performance criteria. The performance criteria established by the Administrator may be based on any one of, or combination of, increase in share price, earnings per share, total shareholder return, return on equity, return on assets, return on investment, net operating income, cash flow, revenue, economic value added, personal management objectives, or other measure of performance selected by the Administrator. Partial achievement of the specified criteria may result in a payment or vesting corresponding to the degree of achievement as specified in the Award Agreement. In addition, the performance criteria shall be calculated in accordance with generally accepted accounting principles, but excluding the effect (whether positive or negative) of any change in accounting standards and any extraordinary, unusual or nonrecurring item, as determined by the Administrator, occurring after the establishment of the performance criteria applicable to the Award intended to be Performance-Based Compensation. Each such adjustment, if any, shall be made solely for the purpose of providing a consistent basis from period to period for the calculation of performance criteria in order to prevent the dilution or enlargement of the Grantee’s rights with respect to an Award intended to be Performance-Based Compensation.

(d) Acquisitions and Other Transactions. The Administrator may issue Awards under the Plan in settlement, assumption or substitution for, outstanding awards or obligations to grant future awards in connection with the Company or a Related Entity acquiring another entity, an interest in another entity or an additional interest in a Related Entity whether by merger, stock purchase, asset purchase or other form of transaction.

 

11

---

(e) Deferral of Award Payment. The Administrator may establish one or more programs under the Plan to permit selected Grantees the opportunity to elect to defer receipt of consideration upon exercise of an Award, satisfaction of performance criteria, or other event that absent the election would entitle the Grantee to payment or receipt of Shares or other consideration under an Award. The Administrator may establish the election procedures, the timing of such elections, the mechanisms for payments of, and accrual of interest or other earnings, if any, on amounts, Shares or other consideration so deferred, and such other terms, conditions, rules and procedures that the Administrator deems advisable for the administration of any such deferral program.

(f) Separate Programs. The Administrator may establish one or more separate programs under the Plan for the purpose of issuing particular forms of Awards to one or more classes of Grantees on such terms and conditions as determined by the Administrator from time to time.

(g) Individual Limitations on Awards.

(i) Individual Option and SAR Limit. Following the date that the exemption from application of Section 162(m) of the Code described in Section 19 (or any exemption having similar effect) ceases to apply to Awards, the maximum number of Shares with respect to which Options and SARs may be granted to any Grantee in any calendar year shall be 700,000 Shares. In connection with a Grantee’s commencement of Continuous Service, a Grantee may be granted Options and SARs for up to an additional 700,000 Shares which shall not count against the limit set forth in the previous sentence. The foregoing limitations shall be adjusted proportionately in connection with any change in the Company’s capitalization pursuant to Section 10, below. To the extent required by Section 162(m) of the Code or the regulations thereunder, in applying the foregoing limitations with respect to a Grantee, if any Option or SAR is canceled, the canceled Option or SAR shall continue to count against the maximum number of Shares with respect to which Options and SARs may be granted to the Grantee. For this purpose, the repricing of an Option (or in the case of a SAR, the base amount on which the stock appreciation is calculated is reduced to reflect a reduction in the Fair Market Value of the Common Stock) shall be treated as the cancellation of the existing Option or SAR and the grant of a new Option or SAR.

(ii) Individual Limit for Restricted Stock and Restricted Stock Units. Following the date that the exemption from application of Section 162(m) of the Code described in Section 19 (or any exemption having similar effect) ceases to apply to Awards, for awards of Restricted Stock and Restricted Stock Units that are intended to be Performance-Based Compensation, the maximum number of Shares with respect to which such Awards may be granted to any Grantee in any calendar year shall be 700,000 Shares. The foregoing limitation shall be adjusted proportionately in connection with any change in the Company’s capitalization pursuant to Section 10, below.

(iii) Individual Limit for Cash-Based Awards. Following the date that the exemption from application of Section 162(m) of the Code described in Section 19 (or any exemption having similar effect) ceases to apply to Awards, for Cash-Based Awards that are intended to be Performance-Based Compensation, with respect to each twelve (12) month period

 

12

---

that constitutes or is part of each Performance Period, the maximum amount that may be paid to a Grantee pursuant to such Awards shall be $5,000,000. In addition, the foregoing limitation shall be prorated for any Performance Period consisting of fewer than twelve (12) months by multiplying such limitation by a fraction, the numerator of which is the number of months in the Performance Period and the denominator of which is twelve (12).

(iv) Individual Limit for Awards to Members of the Board. The maximum number of Shares with respect to which Awards may be granted to any member of the Board (in consideration for such member’s services as a member of the Board) in any calendar year shall be 700,000 Shares.

(v) Deferral. If the vesting or receipt of Shares or cash under an Award is deferred to a later date, any amount (whether denominated in Shares or cash) paid in addition to the original number of Shares or amount of cash subject to such Award will not be treated as an increase in the number of Shares or amount of cash subject to the Award if the additional amount is based either on a reasonable rate of interest or on one or more predetermined actual investments such that the amount payable by the Company at the later date will be based on the actual rate of return of a specific investment (including any decrease as well as any increase in the value of an investment).

(h) Early Exercise. The Award Agreement may, but need not, include a provision whereby the Grantee may elect at any time while an Employee, Director or Consultant to exercise any part or all of the Award prior to full vesting of the Award. Any unvested Shares received pursuant to such exercise may be subject to a repurchase right in favor of the Company or a Related Entity or to any other restriction the Administrator determines to be appropriate.

(i) Term of Award. The term of each Award shall be the term stated in the Award Agreement, provided, however, that the term shall be no more than ten (10) years from the date of grant thereof. However, in the case of an Incentive Stock Option granted to a Grantee who, at the time the Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary of the Company, the term of the Incentive Stock Option shall be five (5) years from the date of grant thereof or such shorter term as may be provided in the Award Agreement. Notwithstanding the foregoing, the specified term of any Award shall not include any period for which the Grantee has elected to defer the receipt of the Shares or cash issuable pursuant to the Award.

(j) Transferability of Awards. Incentive Stock Options may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Grantee, only by the Grantee. Other Awards shall be transferable (i) by will or by the laws of descent and distribution and (ii) during the lifetime of the Grantee, to the extent and in the manner authorized by the Administrator by gift or pursuant to a domestic relations order to members of the Grantee’s Immediate Family. Notwithstanding the foregoing, the Grantee may designate one or more beneficiaries of the Grantee’s Award in the event of the Grantee’s death on a beneficiary designation form provided by the Administrator.

 

13

---

(k) Time of Granting Awards. The date of grant of an Award shall for all purposes be the date on which the Administrator makes the determination to grant such Award, or such other later date as is determined by the Administrator.

(l) Award Exchange Programs. The Administrator may establish one or more programs under the Plan to permit selected Grantees to exchange an Award under the Plan for one or more other types of Awards under the Plan on such terms and conditions as determined by the Administrator from time to time.

7. Award Exercise or Purchase Price, Consideration and Taxes.

(a) Exercise or Purchase Price. The exercise or purchase price, if any, for an Award shall be as follows:

(i) In the case of an Incentive Stock Option:

(A) granted to an Employee who, at the time of the grant of such Incentive Stock Option owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary of the Company, the per Share exercise price shall be not less than one hundred ten percent (110%) of the Fair Market Value per Share on the date of grant; or

(B) granted to any Employee other than an Employee described in the preceding paragraph, the per Share exercise price shall be not less than one hundred percent (100%) of the Fair Market Value per Share on the date of grant.

(ii) In the case of a Non-Qualified Stock Option, the per Share exercise price shall be not less than one hundred percent (100%) of the Fair Market Value per Share on the date of grant.

(iii) In the case of Awards intended to qualify as Performance-Based Compensation, the exercise or purchase price, if any, shall be not less than one hundred percent (100%) of the Fair Market Value per Share on the date of grant.

(iv) In the case of SARs, the base appreciation amount shall be not less than one hundred percent (100%) of the Fair Market Value per Share on the date of grant.

(v) In the case of other Awards, such price as is determined by the Administrator.

(vi) Notwithstanding the foregoing provisions of this Section 7(a), in the case of an Award issued pursuant to Section 6(d), above, the exercise or purchase price for the Award shall be determined in accordance with the provisions of the relevant instrument evidencing the agreement to issue such Award.

 

14

---

(b) Consideration. Subject to Applicable Laws, the consideration to be paid for the Shares to be issued upon exercise or purchase of an Award including the method of payment, shall be determined by the Administrator. In addition to any other types of consideration the Administrator may determine, the Administrator is authorized to accept as consideration for Shares issued under the Plan the following, provided that the portion of the consideration equal to the par value of the Shares must be paid in cash or other legal consideration permitted by the Delaware General Corporation Law:

(i) cash;

(ii) check;

(iii) delivery of the Grantee’s promissory note with such recourse, interest, security, and redemption provisions as the Administrator determines as appropriate (but only to the extent that the acceptance or terms of the promissory note would not violate an Applicable Law);

(iv) surrender of Shares held for the requisite period, if any, necessary to avoid a charge to the Company’s earnings for financial reporting purposes, or delivery of a properly executed form of attestation of ownership of Shares as the Administrator may require which have a Fair Market Value on the date of surrender or attestation equal to the aggregate exercise price of the Shares as to which said Award shall be exercised;

(v) with respect to Options, if the exercise occurs when the Common Stock is listed on one or more established stock exchanges or national market systems, including without limitation the NASDAQ Capital Market, payment through a broker-dealer sale and remittance procedure pursuant to which the Grantee (A) shall provide written instructions to a Company designated brokerage firm to effect the immediate sale of some or all of the purchased Shares and remit to the Company sufficient funds to cover the aggregate exercise price payable for the purchased Shares and (B) shall provide written directives to the Company to deliver the certificates for the purchased Shares directly to such brokerage firm in order to complete the sale transaction;

(vi) with respect to Options, payment through a “net exercise” such that, without the payment of any funds, the Grantee may exercise the Option and receive the net number of Shares equal to (i) the number of Shares as to which the Option is being exercised, multiplied by (ii) a fraction, the numerator of which is the Fair Market Value per Share (on such date as is determined by the Administrator) less the exercise price per Share, and the denominator of which is such Fair Market Value per Share (the number of net Shares to be received shall be rounded down to the nearest whole number of Shares); or

(vii) any combination of the foregoing methods of payment.

The Administrator may at any time or from time to time, by adoption of or by amendment to the standard forms of Award Agreement described in Section 4(c)(iv), or by other means, grant Awards which do not permit all of the foregoing forms of consideration to be used in payment for the Shares or which otherwise restrict one or more forms of consideration.

 

15

---

(c) Taxes. No Shares shall be delivered under the Plan to any Grantee or other person until such Grantee or other person has made arrangements acceptable to the Administrator for the satisfaction of any non-U.S., federal, state, or local income and employment tax withholding obligations, including, without limitation, obligations incident to the receipt of Shares. Upon exercise or vesting of an Award the Company shall withhold or collect from the Grantee an amount sufficient to satisfy such tax obligations, including, but not limited to, by surrender of the whole number of Shares covered by the Award, if applicable, sufficient to satisfy the minimum applicable tax withholding obligations incident to the exercise or vesting of an Award (reduced to the lowest whole number of Shares if such number of Shares withheld would result in withholding a fractional Share with any remaining tax withholding settled in cash).

8. Exercise of Award.

(a) Procedure for Exercise; Rights as a Shareholder.

(i) Any Award granted hereunder shall be exercisable at such times and under such conditions as determined by the Administrator under the terms of the Plan and specified in the Award Agreement.

(ii) An Award shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Award by the person entitled to exercise the Award and full payment for the Shares with respect to which the Award is exercised has been made, including, to the extent selected, use of the broker-dealer sale and remittance procedure to pay the purchase price as provided in Section 7(b)(v).

(b) Exercise of Award Following Termination of Continuous Service. In the event of termination of a Grantee’s Continuous Service for any reason other than Disability or death (but not in the event of a Grantee’s change of status from Employee to Consultant or from Consultant to Employee), such Grantee may, but only during the Post-Termination Exercise Period (but in no event later than the expiration date of the term of such Award as set forth in the Award Agreement), exercise the portion of the Grantee’s Award that was vested at the date of such termination or such other portion of the Grantee’s Award as may be determined by the Administrator. The Grantee’s Award Agreement may provide that upon the termination of the Grantee’s Continuous Service for Cause, the Grantee’s right to exercise the Award shall terminate concurrently with the termination of the Grantee’s Continuous Service. In the event of a Grantee’s change of status from Employee to Consultant, an Employee’s Incentive Stock Option shall convert automatically to a Non-Qualified Stock Option on the day three (3) months and one (1) day following such change of status. To the extent that the Grantee’s Award was unvested at the date of termination, or if the Grantee does not exercise the vested portion of the Grantee’s Award within the Post-Termination Exercise Period, the Award shall terminate.

(c) Disability of Grantee. In the event of termination of a Grantee’s Continuous Service as a result of his or her Disability, such Grantee may, but only within twelve (12) months from the date of such termination (or such longer period as specified in the Award Agreement but in no event later than the expiration date of the term of such Award as set forth in the Award Agreement), exercise the portion of the Grantee’s Award that was vested at the date of such termination; provided, however, that if such Disability is not a “disability” as such term is defined in Section 22(e)(3) of the Code, in the case of an Incentive Stock Option such Incentive Stock Option shall automatically convert to a Non-Qualified Stock Option on the day three (3) months and one day following such termination. To the extent that the Grantee’s Award was unvested at the date of termination, or if Grantee does not exercise the vested portion of the Grantee’s Award within the time specified herein, the Award shall terminate.

 

16

---

(d) Death of Grantee. In the event of a termination of the Grantee’s Continuous Service as a result of his or her death, or in the event of the death of the Grantee during the Post-Termination Exercise Period or during the twelve (12) month period following the Grantee’s termination of Continuous Service as a result of his or her Disability, the Grantee’s estate or a person who acquired the right to exercise the Award by bequest or inheritance may exercise the portion of the Grantee’s Award that was vested as of the date of termination, within twelve (12) months from the date of death (or such longer period as specified in the Award Agreement but in no event later than the expiration of the term of such Award as set forth in the Award Agreement). To the extent that, at the time of death, the Grantee’s Award was unvested, or if the Grantee’s estate or a person who acquired the right to exercise the Award by bequest or inheritance does not exercise the vested portion of the Grantee’s Award within the time specified herein, the Award shall terminate.

(e) Extension if Exercise Prevented by Law. Notwithstanding the foregoing, if the exercise of an Award within the applicable time periods set forth in this Section 8 is prevented by the provisions of Section 9 below, the Award shall remain exercisable until one (1) month after the date the Grantee is notified by the Company that the Award is exercisable, but in any event no later than the expiration of the term of such Award as set forth in the Award Agreement and only in a manner and to the extent permitted under Code Section 409A. Any Award designated as an Incentive Stock Option to the extent not exercised within the time permitted by law for the exercise of Incentive Stock Options following the termination of a Grantee’s Continuous Service shall convert automatically to a Non-Qualified Stock Option and thereafter shall be exercisable as such to the extent exercisable by its terms for the period specified in the Award Agreement.

9. Conditions Upon Issuance of Shares.

(a) If at any time the Administrator determines that the delivery of Shares pursuant to the exercise, vesting or any other provision of an Award is or may be unlawful under Applicable Laws, the vesting or right to exercise an Award or to otherwise receive Shares pursuant to the terms of an Award shall be suspended until the Administrator determines that such delivery is lawful and shall be further subject to the approval of counsel for the Company with respect to such compliance. The Company shall have no obligation to effect any registration or qualification of the Shares under federal or state laws.

(b) As a condition to the exercise of an Award, the Company may require the person exercising such Award to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required by any Applicable Laws.

 

17

---

10. Adjustments Upon Changes in Capitalization. Subject to any required action by the shareholders of the Company and Section 11 below, the number of Shares covered by each outstanding Award, and the number of Shares which have been authorized for issuance under the Plan but as to which no Awards have yet been granted or which have been returned to the Plan, the exercise or purchase price of each such outstanding Award, the maximum number of Shares with respect to which Awards may be granted to any Grantee in any calendar year, as well as any other terms that the Administrator determines require adjustment shall be proportionately adjusted for: (i) any increase or decrease in the number of issued Shares resulting from a stock split, reverse stock split, stock dividend, recapitalization, combination or reclassification of the Shares, or similar transaction affecting the Shares; (ii) any other increase or decrease in the number of issued Shares effected without receipt of consideration by the Company; or (iii) any other transaction with respect to Common Stock including a corporate merger, consolidation, acquisition of property or stock, separation (including a spin-off or other distribution of stock or property), reorganization, liquidation (whether partial or complete) or any similar transaction; provided, however that conversion of any convertible securities of the Company shall not be deemed to have been “effected without receipt of consideration.” In the event of any distribution of cash or other assets to shareholders other than a normal cash dividend, the Administrator shall also make such adjustments as provided in this Section 10 or substitute, exchange or grant Awards to effect such adjustments (collectively “adjustments”). Any such adjustments to outstanding Awards will be effected in a manner that precludes the enlargement of rights and benefits under such Awards. In connection with the foregoing adjustments, the Administrator may, in its discretion, prohibit the exercise of Awards or other issuance of Shares, cash or other consideration pursuant to Awards during certain periods of time. Except as the Administrator determines, no issuance by the Company of shares of any class, or securities convertible into shares of any class, shall affect, and no adjustment by reason hereof shall be made with respect to, the number or price of Shares subject to an Award.

11. Corporate Transactions and Changes in Control.

(a) Termination of Award to Extent Not Assumed in Corporate Transaction. Effective upon the consummation of a Corporate Transaction, all outstanding Awards under the Plan shall terminate. However, all such Awards shall not terminate to the extent they are Assumed in connection with the Corporate Transaction.

(b) Acceleration of Award Upon Corporate Transaction or Change in Control. The Administrator shall have the authority, exercisable either in advance of any actual or anticipated Corporate Transaction or Change in Control or at the time of an actual Corporate Transaction or Change in Control and exercisable at the time of the grant of an Award under the Plan or any time while an Award remains outstanding, to provide for the full or partial automatic vesting and exercisability of one or more outstanding unvested Awards under the Plan and the release from restrictions on transfer and repurchase or forfeiture rights of such Awards in connection with a Corporate Transaction or Change in Control, on such terms and conditions as the Administrator may specify. The Administrator also shall have the authority to condition any such Award vesting and exercisability or release from such limitations upon the subsequent termination of the Continuous Service of the Grantee within a specified period following the effective date of the Corporate Transaction or Change in Control. The Administrator may provide that any Awards so vested or released from such limitations in connection with a Change in Control, shall remain fully exercisable until the expiration or sooner termination of the Award.

 

18

---

(c) Effect of Acceleration on Incentive Stock Options. Any Incentive Stock Option accelerated under this Section 11 in connection with a Corporate Transaction or Change in Control shall remain exercisable as an Incentive Stock Option under the Code only to the extent the $100,000 dollar limitation of Section 422(d) of the Code is not exceeded.

12. Effective Date and Term of Plan. The Plan shall become effective upon the completion of the Company’s initial public offering. It shall continue in effect for a term of ten (10) years unless sooner terminated. Subject to Section 17 below, and Applicable Laws, Awards may be granted under the Plan upon its becoming effective.

13. Amendment, Suspension or Termination of the Plan.

(a) The Board may at any time amend, suspend or terminate the Plan; provided, however, that no such amendment shall be made without the approval of the Company’s shareholders to the extent such approval is required by Applicable Laws.

(b) No Award may be granted during any suspension of the Plan or after termination of the Plan.

(c) No suspension or termination of the Plan (including termination of the Plan under Section 12, above) shall adversely affect any rights under Awards already granted to a Grantee.

14. Reservation of Shares.

(a) The Company, during the term of the Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan.

(b) The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company’s counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained.

15. No Effect on Terms of Employment/Consulting Relationship. The Plan shall not confer upon any Grantee any right with respect to the Grantee’s Continuous Service, nor shall it interfere in any way with his or her right or the right of the Company or any Related Entity to terminate the Grantee’s Continuous Service at any time, with or without cause including, but not limited to, Cause, and with or without notice. The ability of the Company or any Related Entity to terminate the employment of a Grantee who is employed at will is in no way affected by its determination that the Grantee’s Continuous Service has been terminated for Cause for the purposes of this Plan.

16. No Effect on Retirement and Other Benefit Plans. Except as specifically provided in a retirement or other benefit plan of the Company or a Related Entity, Awards shall not be deemed compensation for purposes of computing benefits or contributions under any retirement plan of the Company or a Related Entity, and shall not affect any benefits under any other benefit plan of any kind or any benefit plan subsequently instituted under which the availability or amount of benefits is related to level of compensation. The Plan is not a “Pension Plan” or “Welfare Plan” under the Employee Retirement Income Security Act of 1974, as amended.

 

19

---

17. Shareholder Approval. Continuance of the Plan shall be subject to approval by the shareholders of the Company within twelve (12) months before or after the date the Plan is adopted. Such shareholder approval shall be obtained in the degree and manner required under Applicable Laws. Any Award exercised before shareholder approval is obtained shall be rescinded if shareholder approval is not obtained within the time prescribed, and Shares issued on the exercise of any such Award shall not be counted in determining whether shareholder approval is obtained.

18. Information to Grantees. To the extent required by Applicable Laws, the Company shall provide to each Grantee, during the period for which such Grantee has one or more Awards outstanding, copies of financial statements at least annually. The Company shall not be required to provide such information to persons whose duties in connection with the Company assure them access to equivalent information.

19. Effect of Section 162(m) of the Code. Section 162(m) of the Code does not apply to the Plan prior to the Registration Date or such earlier time that the Company first becomes subject to the reporting obligations of Section 12 of the Exchange Act. Following the Registration Date or such earlier time that the Company first becomes subject to the reporting obligations of Section 12 of the Exchange Act, the Plan, and all Awards (except Awards of Restricted Stock that vest over time) issued thereunder, are intended to be exempt from the application of Section 162(m) of the Code, which restricts under certain circumstances the Federal income tax deduction for compensation paid by a public company to named executives in excess of $1 million per year. The exemption is based on Treasury Regulation Section 1.162-27(f), in the form existing on the effective date of the Plan, with the understanding that such regulation generally exempts from the application of Section 162(m) of the Code compensation paid pursuant to a plan that existed before a company becomes publicly held. Under such Treasury Regulation, this exemption is available to the Plan for the duration of the period that lasts until the earliest of (i) the expiration of the Plan, (ii) the material modification of the Plan, (iii) the exhaustion of the maximum number of shares of Common Stock available for Awards under the Plan, as set forth in Section 3(a), (iv) the first meeting of shareholders at which directors are to be elected that occurs after the close of the third calendar year following the calendar year in which the Company first becomes subject to the reporting obligations of Section 12 of the Exchange Act, or (v) such other date required by Section 162(m) of the Code and the rules and regulations promulgated thereunder. To the extent that the Administrator determines as of the date of grant of an Award that (i) the Award is intended to qualify as Performance-Based Compensation and (ii) the exemption described above is no longer available with respect to such Award, such Award shall not be effective until any shareholder approval required under Section 162(m) of the Code has been obtained.

20. Unfunded Obligation. Grantees shall have the status of general unsecured creditors of the Company. Any amounts payable to Grantees pursuant to the Plan shall be unfunded and unsecured obligations for all purposes, including, without limitation, Title I of the Employee Retirement Income Security Act of 1974, as amended. Neither the Company nor any

 

20

---

Related Entity shall be required to segregate any monies from its general funds, or to create any trusts, or establish any special accounts with respect to such obligations. The Company shall retain at all times beneficial ownership of any investments, including trust investments, which the Company may make to fulfill its payment obligations hereunder. Any investments or the creation or maintenance of any trust or any Grantee account shall not create or constitute a trust or fiduciary relationship between the Administrator, the Company or any Related Entity and a Grantee, or otherwise create any vested or beneficial interest in any Grantee or the Grantee’s creditors in any assets of the Company or a Related Entity. The Grantees shall have no claim against the Company or any Related Entity for any changes in the value of any assets that may be invested or reinvested by the Company with respect to the Plan.

21. Construction. Captions and titles contained herein are for convenience only and shall not affect the meaning or interpretation of any provision of the Plan. Except when otherwise indicated by the context, the singular shall include the plural and the plural shall include the singular. Use of the term “or” is not intended to be exclusive, unless the context clearly requires otherwise.

22. Clawback/Recoupment. Each Award shall be subject to reduction, cancellation, forfeiture or recoupment to the extent necessary to comply with (i) any clawback, forfeiture or other similar policy adopted by the Board or the Administrator and as in effect from time to time, or (ii) Applicable Laws, whether such policy or Applicable Law becomes effective prior to or following the grant of such Award, and the Company may take such actions as may, in its discretion, be necessary to effectuate any such policy or Applicable Law.

23. Nonexclusivity of the Plan. Neither the adoption of the Plan by the Board, the submission of the Plan to the shareholders of the Company for approval, nor any provision of the Plan will be construed as creating any limitations on the power of the Board to adopt such additional compensation arrangements as it may deem desirable, including, without limitation, the granting of Awards otherwise than under the Plan, and such arrangements may be either generally applicable or applicable only in specific cases.

 

21

Exhibit 10.8

KRYSTAL BIOTECH 2017 EQUITY INCENTIVE PLAN

NOTICE OF OPTION GRANT

You have been granted an option to purchase Common Stock of Krystal Biotech, Inc. (the “Company”), subject to the terms and conditions of this Notice of Option Grant (this “Notice”), Krystal Biotech 2017 Equity Incentive Plan, as amended from time to time (the “Plan”), and the attached Option Agreement as follows. Unless otherwise defined herein, the terms defined in the Plan and the Option Agreement shall have the same defined meanings in this Notice.

 

Name of Participant:
Date of Award:
Exercise Price per Share:		$
Total Number of Shares
Subject to the Option:
Total Exercise Price:		$
Type of Option:		Non-Qualified Option
		Qualified Option
Expiration Date:
Post-Termination Exercise Period:		90 days
Vesting Schedule:		The Option shall vest with respect to  1⁄4 of the Shares subject thereto when the Participant completes 12 months of Continuous Service, with the first  1⁄4 vesting on the twelve-month anniversary of the Vesting Commencement Date. All Options shall vest upon the occurrence of a Company Event.
Vesting Commencement Date:

By your signature and the signature of the Company’s representative on the Option Agreement, you and the Company agree that the Option is granted under and governed by the terms and conditions of this Notice, the Plan and Option Agreement, each of which are attached to and made a part of this document.

---

THE OPTION GRANTED PURSUANT TO THIS AGREEMENT, AND THE SHARES FOR WHICH SUCH OPTION IS EXERCISABLE, HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED. THE PARTICIPANT HEREBY AGREES THAT ALL SHARES ACQUIRED PURSUANT TO THIS AGREEMENT SHALL BE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER AS SET FORTH IN THE BYLAWS OF THE COMPANY.

KRYSTAL BIOTECH 2017 EQUITY INCENTIVE PLAN:

OPTION AGREEMENT

THIS OPTION AGREEMENT (this “Agreement”) is entered into as of                 , by Krystal Biotech, Inc., a Delaware corporation (the “Company”), and                (the “Participant”).

SECTION 1. GRANT OF OPTION.

The Company hereby grants to the Participant named in the Notice of Option Grant (the “Notice”) an option (the “Option”) to purchase the total number and type of Shares subject to the Option (the “Optioned Shares”) set forth in the Notice, at the exercise price per Share set forth in the Notice (the “Exercise Price”), subject to the terms and provisions of the Notice, this Agreement and the Plan, each of which are incorporated herein by reference. Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Agreement.

SECTION 2. EXERCISE OF OPTION.

(a) Right to Exercise. The Option shall vest during its term in accordance with the Vesting Schedule set out in the Notice and with the applicable provisions of the Plan and this Agreement, provided that the Option shall not be exercisable, to the extent vested, until the earlier of a Company Event or an Incorporation. The Option shall be subject to the provisions of the Notice and the Plan relating to the exercisability or termination of the Option in the event of a Company Event. The Participant shall be subject to reasonable limitations on the number of requested exercises during any monthly or weekly period as determined by the Manager. In no event shall the Company issue fractional Shares.

(b) Method of Exercise. The Option shall be exercisable by delivery of an exercise notice in a form determined by the Board of Directors from time to time or by such other procedure as specified from time to time by the Board of Directors, which shall state the election to exercise the Option, the whole number of Shares in respect of which the Option is being exercised, and such other provisions as may be required by the Board of Directors. The exercise notice shall be delivered in person, by certified mail, or by such other method (including electronic transmission) as determined from time to time by the Board of Directors to the Company accompanied by payment of the Exercise Price and all applicable income and employment taxes required to be withheld.

---

(c) Taxes. No Shares will be delivered to the Participant pursuant to the exercise of the Option until the Participant has made arrangements acceptable to the Board of Directors for the satisfaction of applicable income tax and employment tax withholding obligations and such other tax obligations of the Participant as may be incident to the receipt of Shares. Upon exercise of the Option, the Company or the Participant’s employer may offset or withhold (from any amount owed by the Company or the Participant’s employer to the Participant) or collect from the Participant an amount sufficient to satisfy such tax withholding obligations. Furthermore, in the event of any determination that the Company has failed to withhold a sum sufficient to pay all withholding taxes due in connection with the Option, the Participant agrees to pay the Company the amount of such deficiency in cash within five (5) days after receiving a written demand from the Company to do so, whether or not the Participant is an employee of the Company at that time.

SECTION 3. CONDITIONS TO EXERCISE AND ISSUANCE OF SHARES.

The Participant understands that neither the Option nor the Shares exercisable pursuant to the Option have been registered under the Securities Act or any other securities laws and are subject to the Bylaws of the Company as they may be amended from time to time. As a condition to exercise of the Option, the Participant shall make such representations and warranties as are required by Section 9(b) of the Plan and take such other actions as the Board of Directors requests in its reasonable discretion as a condition to the issuance of Shares to the Participant and the admission of such Participant as a shareholder of the Company.

SECTION 4. METHOD OF PAYMENT.

Payment of the Exercise Price shall be made by any of the following, or a combination thereof, at the election of the Participant; provided, however, that such exercise method does not then violate any applicable law: by cash, check or wire transfer.

SECTION 5. RESTRICTIONS ON EXERCISE.

The Option may not be exercised if the issuance of the Shares subject to the Option upon such exercise would constitute a violation of any applicable laws. If the exercise of the Option within the applicable time periods set forth in Sections 6, 7 and 8 of this Agreement is prevented by the provisions of this Section 5(a), the Option shall remain exercisable until one (1) month after the date the Participant is notified by the Company that the Option is exercisable, but in any event no later than the expiration date set forth in the Notice (the “Expiration Date”).

SECTION 6. TERMINATION OR CHANGE OF CONTINUOUS SERVICE.

(a) Subject to Section 5, in the event the Participant’s Continuous Service terminates, the Participant may, but only during the Post-Termination Exercise Period set forth in the Notice, exercise the portion of the Option that was vested at the date of such termination (the “Termination Date”) to the extent such portion is not forfeited in accordance with the terms of

---

the Notice. The Post-Termination Exercise Period shall commence on the Termination Date.    no event, however, shall the Option be exercised later than the Expiration Date set forth in the Notice. In the event of the Participant’s change in status from Employee to Consultant or from Consultant to Employee, the Option shall remain in effect and the Option shall continue to vest in accordance with the Vesting Schedule set forth in the Notice. To the extent that the Option was unvested on the Termination Date, or if the Participant does not exercise the vested portion of the Option within the Post-Termination Exercise Period, the Option shall terminate.

(b) If the Participant commences working on a part-time basis, then the Board of Directors may adjust the Vesting Schedule set forth in the Notice in accordance with the Company’s part-time work policy or the terms of an agreement between the Participant and the Company pertaining to his or her part-time schedule. If the Participant goes on a leave of absence, then the Company may adjust the Vesting Schedule set forth in the Notice in accordance with the Company’s leave of absence policy or the terms of such leave.

SECTION 7. DISABILITY OF PARTICIPANT.

Subject to Section 5, in the event the Participant’s Continuous Service terminates as a result of his or her Disability, the Participant may, but only within twelve (12) months from the Termination Date and in no event later than the Expiration Date, exercise the portion of the Option that was vested on the Termination Date to the extent such portion is not forfeited in accordance with the terms of the Notice. To the extent that the Option was unvested on the Termination Date, or if the Participant does not exercise the vested portion of the Option within the time specified herein, the Option shall terminate. For purposes of this Agreement, “Disability” shall have the same meaning as defined under the long-term disability policy of the Company or the Related Entity to which the Participant provides services regardless of whether the Participant is covered by such policy. If the Company or the Related Entity to which the Participant provides service does not have a long-term disability plan in place, “Disability” means that the Participant is unable to carry out the responsibilities and functions of the position held by the Participant by reason of any medically determinable physical or mental impairment for a period of not less than ninety (90) consecutive days. The Participant will not be considered to have incurred a Disability unless he or she furnishes proof of such impairment sufficient to satisfy the Board of Directors in its discretion.

SECTION 8. DEATH OF PARTICIPANT.

Subject to Section 5, in the event of the termination of the Participant’s Continuous Service as a result of his or her death, or in the event of the Participant’s death during the Post-Termination Exercise Period or during the twelve (12) month period following the Participant’s termination of Continuous Service as a result of his or her Disability, the person who acquired the right to exercise the Option pursuant to Section 9 may, within twelve (12) months following the date of the Participant’s death but in no event later than the Expiration Date, exercise the portion of the Option that was vested on the Termination Date to the extent such portion is not forfeited in accordance with the terms of the Notice. To the extent that the Option was unvested on the date of death, or if the vested portion of the Option is not exercised within the time specified herein, the Option shall terminate.

---

SECTION 9. TRANSFERABILITY OF OPTION.

The Option may not be transferred in any manner other than by will or by the laws of descent and distribution; provided, however, that the Option may be transferred during the lifetime of the Participant to the extent and in the manner determined by the Board of Directors in its sole discretion. Notwithstanding the foregoing, the Participant may designate one or more beneficiaries of the Participant’s Option in the event of the Participant’s death on a beneficiary designation form provided by the Board of Directors. Following the death of the Participant, the Option, to the extent provided in Section 8, may be exercised (a) by the person or persons designated under the deceased Participant’s beneficiary designation, or (b) in the absence of an effectively designated beneficiary, by the Participant’s legal representative or by any person empowered to do so under the deceased Participant’s will or under the then applicable laws of descent and distribution. The terms of the Option shall be binding upon the executors, administrators, heirs, successors and transferees of the Participant.

SECTION 10. TERM OF OPTION.

The Option must be exercised no later than the Expiration Date or such earlier date as otherwise provided herein. After the Expiration Date or such earlier date, the Option shall be of no further force or effect and may not be exercised.

SECTION 11. RESTRICTION ON TRANSFER OF SHARES.

(a) General. The Participant shall not transfer, assign, encumber or otherwise dispose of any Shares issued hereunder without the written consent of the Board of Directors, which written consent may be granted or withheld in its sole discretion.

(b) Bylaws. Shares issued hereunder shall be subject to any transfer restrictions which are included in the Bylaws of the Company.

(c) Market Stand-Off. In connection with any underwritten public offering by the Company or the Company’s successor in an acquisition or otherwise (collectively, the “Successor Entity”) of its equity securities pursuant to an effective registration statement filed under the Securities Act, including the Successor Entity’s initial public offering, the Participant or any holder of the Shares acquired under this Agreement shall not directly or indirectly sell, make any short sale of, loan, hypothecate, pledge, offer, grant or sell any option or other contract for the purchase of, purchase any option or other contract for the sale of, or otherwise dispose of or transfer, or agree to engage in any of the foregoing transactions with respect to, any Shares acquired under this Agreement (or other equity securities of the Successor Entity) without the prior written consent of the Successor Entity or its underwriters. Such restriction (the “Market Stand-Off”) shall be in effect for such period of time following the date of the final prospectus for the offering as may be requested by the Successor Entity or such underwriters. In no event, however, shall such period exceed 180 days. The Market Stand-Off shall in any event terminate two years after the date of the Successor Entity’s initial public offering. In the event of the declaration of a stock dividend, a spin-off, a stock split, an adjustment in conversion ratio, a recapitalization or a similar transaction affecting the Successor Entity’s outstanding securities without receipt of consideration, any new, substituted or additional securities which are by

---

reason of such transaction distributed with respect to any Shares subject to the Market Stand-Off, or into which such Shares thereby become convertible, shall immediately be subject to the Market Stand-Off. In order to enforce the Market Stand-Off, the Successor Entity may impose stop-transfer instructions with respect to the Shares acquired under this Agreement until the end of the applicable stand-off period. The Successor Entity’s underwriters shall be beneficiaries of the agreement set forth in this Subsection (c). This Subsection (c) shall not apply to Shares registered in the public offering under the Securities Act, and the Participant shall be subject to this Subsection (c) only if the directors and officers of the Successor Entity are subject to similar arrangements.

(d) Securities Law Restrictions. Regardless of whether the issuance of Shares hereunder have been registered under the Securities Act or have been registered or qualified under the securities laws of any state, the Company at its discretion may impose restrictions upon the sale, pledge or other transfer of the Shares (including the placement of appropriate legends on Share certificates or the imposition of stop-transfer instructions) if, in the judgment of the Company, such restrictions are necessary or desirable in order to achieve compliance with the Securities Act, the securities laws of any state or any other law.

(e) Rights of the Company. The Company shall not be required to (i) transfer on its books any Shares that have been sold or transferred in contravention of this Agreement or its Bylaws or (ii) treat as an M owner of Shares, or otherwise to accord voting, distribution or liquidation rights to, any transferee to whom Shares have been transferred in contravention of this Agreement or the Bylaws.

(f) Administration. Any determination by the Company and its counsel in connection with any of the matters set forth in this Section 11 shall be conclusive and binding on the Participant and all other persons.

SECTION 12. ADJUSTMENT OF OPTIONS AND SHARES.

In the event of any transaction described in Section 10 of the Plan, the number and kind of Shares for which the Option is exercisable shall be adjusted as set forth in Section 10 of the Plan. In the event that the Company engages in a Corporate Transaction or a Change in Control occurs as described in the Plan, the Option shall be governed by Section 11 of the Plan.

SECTION 13. TAX CONSEQUENCES.

(a) The Participant may incur tax liability as a result of the Participant’s purchase or disposition of the Shares. THE PARTICIPANT SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THE OPTION OR DISPOSING OF THE SHARES.

(b) Notwithstanding the Company’s good faith determination of the Fair Market Value of the Shares for purposes of determining the Exercise Price Per Share of the Option as set forth in the Notice, the taxing authorities may assert that the Fair Market Value of the Shares on the Date of Award was greater than the Exercise Price Per Share. Under Section 409A of the Code, if the Exercise Price Per Share of the Option is less than the Fair Market Value of the Shares on the Date of Award, the Option may be treated as a form of deferred

---

compensation and the Participant may be subject to an acceleration of income recognition, an additional 20% tax (or 40% tax in the case of California residents), plus interest and possible penalties. The Company makes no representation that the Option will comply with Section 409A of the Code and makes no undertaking to prevent Section 409A of the Code from applying to the Option or to mitigate its effects on any deferrals or payments made in respect of the Option. The Participant is encouraged to consult a tax adviser regarding the potential impact of Section 409A of the Code.

SECTION 14. ENTIRE AGREEMENT; GOVERNING LAW.

The Notice, the Plan, and this Agreement constitute the entire agreement of the parties hereto with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and the Participant with respect to the subject matter hereof, and may not be modified adversely to the Participant’s interest except by means of a writing signed by the Company and the Participant. Nothing in the Notice, the Plan and this Agreement (except as expressly provided therein) is intended to confer any rights or remedies on any persons other than the parties hereto. The Notice, the Plan, and this Agreement are to be construed in accordance with and governed by the internal laws of the State of California without giving effect to any choice of law rule that would cause the application of the laws of any jurisdiction other than the internal laws of the State of California to the rights and duties of the parties hereto. Should any provision of the Notice, the Plan, or this Agreement be determined to be illegal or unenforceable, such provision shall be enforced to the fullest extent allowed by law and the other provisions shall nevertheless remain effective and shall remain enforceable.

SECTION 15. CONSTRUCTION.

The captions used in the Notice and this Agreement are inserted for convenience and shall not be deemed a part of the Option for construction or interpretation. Except when otherwise indicated by the context, the singular shall include the plural and the plural shall include the singular. Use of the term “or” is not intended to be exclusive, unless the context clearly requires otherwise.

SECTION 16. ADMINISTRATION AND INTERPRETATION.

Any question or dispute regarding the administration or interpretation of the Notice, the Plan or this Agreement shall be submitted by the Participant or by the Company to the Board of Directors. The resolution of such question or dispute by the Board of Directors shall be final and binding on all persons.

SECTION 17. VENUE.

The Company, the Participant, and the Participant’s assignees pursuant to Section 9 (the “Parties”) agree that any suit, action, or proceeding arising out of or relating to the Notice, the Plan or this Agreement shall be brought in the federal and state courts of the State of California and that the Parties shall submit to the jurisdiction of such court. The Parties irrevocably waive, to the fullest extent permitted by law, any objection the party may have to the laying of venue for any such suit, action or proceeding brought in such court. If any one or more provisions of this Section 18 shall for any reason be held invalid or unenforceable, it is the specific intent of the Parties that such provisions shall be modified to the minimum extent necessary to make it or its application valid and enforceable.

---

SECTION 18. NOTICES.

Any notice required by the terms of this Agreement shall be given in writing, which shall include electronic communications. Notice shall be addressed to the Company at its principal executive office and to the Participant at the address that he or she most recently provided to the Company.

REMAINDER OF PAGE INTENTIONALLY LEFT BLANK

---

IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement, in the case of the Company by its duly authorized officer, as of the day and year first above written.

 

PARTICIPANT:				KRYSTAL BIOTECH, INC.
				By:
				Title:

IN EXECUTING THIS AGREEMENT, THE PARTICIPANT ACKNOWLEDGES RECEIPT OF A COPY OF THE PLAN, THE NOTICE AND THIS AGREEMENT AND REPRESENTS THAT HE OR SHE IS FAMILIAR WITH THE TERMS AND PROVISIONS THEREOF, AND HEREBY ACCEPTS THE AWARD SUBJECT TO ALL OF THE TERMS AND PROVISIONS HEREOF AND THEREOF. THE PARTICIPANT HAS REVIEWED THIS AGREEMENT, THE PLAN AND THE NOTICE IN THEIR ENTIRETY, HAS HAD AN OPPORTUNITY TO OBTAIN THE ADVICE OF COUNSEL PRIOR TO EXECUTING THIS AGREEMENT, AND FULLY UNDERSTANDS ALL PROVISIONS OF THIS AGREEMENT, THE NOTICE AND THE PLAN. THE PARTICIPANT HEREBY AGREES THAT ALL QUESTIONS OF INTERPRETATION AND ADMINISTRATION RELATING TO THIS AGREEMENT, THE NOTICE AND THE PLAN SHALL BE RESOLVED BY THE BOARD OF DIRECTORS.

Exhibit 10.9

KRYSTAL BIOTECH, INC. 2017 IPO STOCK INCENTIVE PLAN

NOTICE OF OPTION GRANT

You (the “Participant”) have been granted an option to purchase Common Stock of Krystal Biotech, Inc. (the “Company”), subject to the terms and conditions of this Notice of Option Grant (this “Notice”), Krystal Biotech, Inc. 2017 IPO Stock Incentive Plan, as amended from time to time (the “Plan”), and the attached Option Agreement as follows. Unless otherwise defined herein, the terms used in this Notice shall have the same defined meanings as in the Plan.

 

Name of Participant:
Date of Award:
Vesting Commencement Date:
Exercise Price per Share:		$
Total Number of Shares Subject to the Option (the “Shares”):
Total Exercise Price:		$
Type of Option:		Non-Qualified Stock Option
		Incentive Stock Option
Expiration Date:
Post-Termination Exercise Period:		90 days
Vesting Schedule:		The Option shall vest over 4 years, with the Option vesting with respect to the first 25% of the Shares when the Participant completes 12 months of Continuous Service after the Vesting Commencement Date, and an additional 25% of the Shares subject thereto shall vest on each twelve-month anniversary of the Vesting Commencement Date thereafter.   In the event of termination of the Participant’s Continuous Service for Cause, the Participant’s right to exercise the Option shall terminate concurrently with the termination of the Grantee’s Continuous Service, except as otherwise determined by the Board of Directors.

---

THE PARTICIPANT ACKNOWLEDGES AND AGREES THAT THE SHARES SUBJECT TO THE OPTION SHALL VEST, IF AT ALL, ONLY DURING THE PERIOD OF THE PARTICIPANT’S CONTINUOUS SERVICE (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THE OPTION OR ACQUIRING SHARES HEREUNDER). THE PARTICIPANT FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS NOTICE, THE OPTION AGREEMENT, OR THE PLAN SHALL CONFER UPON THE PARTICIPANT ANY RIGHT WITH RESPECT TO FUTURE AWARDS OR CONTINUATION OF THE PARTICIPANT’S CONTINUOUS SERVICE, NOR SHALL IT INTERFERE IN ANY WAY WITH THE PARTICIPANT’S RIGHT OR THE RIGHT OF THE COMPANY OR RELATED ENTITY TO WHICH THE PARTICIPANT PROVIDES SERVICES TO TERMINATE THE PARTICIPANT’S CONTINUOUS SERVICE, WITH OR WITHOUT CAUSE, AND WITH OR WITHOUT NOTICE. THE PARTICIPANT ACKNOWLEDGES THAT UNLESS THE PARTICIPANT HAS A WRITTEN EMPLOYMENT AGREEMENT WITH THE COMPANY TO THE CONTRARY, THE PARTICIPANT’S STATUS IS AT WILL.

The Participant acknowledges receipt of a copy of the Plan and the Option Agreement, and represents that he or she is familiar with the terms and provisions thereof, and hereby accepts the Option subject to all of the terms and provisions hereof and thereof. The Participant has reviewed this Notice, the Plan, and the Option Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Notice, and fully understands all provisions of this Notice, the Plan and the Option Agreement. The Participant hereby agrees that all questions of interpretation and administration relating to this Notice, the Plan and the Option Agreement shall be resolved by the Board of Directors in accordance with Section 14 of the Option Agreement. The Participant further agrees to the venue selection and waiver of a jury trial in accordance with Section 15 of the Option Agreement. The Participant further agrees to notify the Company upon any change in the residence address indicated in this Notice.

 

Dated:				Signed:
						Participant

---

KRYSTAL BIOTECH, INC. 2017 IPO STOCK    INCENTIVE PLAN:

OPTION AGREEMENT

THIS OPTION AGREEMENT (this “Option Agreement”) is entered into as of                     , by Krystal Biotech, Inc., a Delaware corporation (the “Company”), and                              (the “Participant”).

SECTION 1. GRANT OF OPTION.

The Company hereby grants to the Participant named in the Notice of Option Grant (the “Notice”) an option (the “Option”) to purchase the total number and type of Shares subject to the Option (the “Shares”) set forth in the Notice, at the exercise price per Share set forth in the Notice (the “Exercise Price”), subject to the terms and provisions of the Notice, this Option Agreement and the Krystal Biotech, Inc. 2017 IPO Stock Incentive Plan, as amended from time to time (the “Plan”), each of which are incorporated herein by reference. Unless otherwise defined herein, the terms used in this Option Agreement shall have the same defined meanings as in the Plan.

If designated in the Notice as an Incentive Stock Option, the Option is intended to qualify as an Incentive Stock Option as defined in Section 422 of the Code. However, notwithstanding such designation, the Option will qualify as an Incentive Stock Option under the Code only to the extent the $100,000 dollar limitation of Section 422(d) of the Code is not exceeded. The $100,000 limitation of Section 422(d) of the Code is calculated based on the aggregate Fair Market Value of the Shares subject to options designated as Incentive Stock Options which become exercisable for the first time by the Participant during any calendar year (under all plans of the Company or any Parent or Subsidiary of the Company). For purposes of this calculation, Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of the shares subject to such options shall be determined as of the grant date of the relevant option.

SECTION 2. EXERCISE OF OPTION.

(a)    Right to Exercise. The Option shall vest during its term in accordance with the Vesting Schedule set out in the Notice and with the applicable provisions of the Plan and this Option Agreement. The Option shall be subject to the provisions of the Notice and the Plan relating to the exercisability or termination of the Option in the event of a Corporate Transaction or Change in Control. The Participant shall be subject to reasonable limitations on the number of requested exercises during any monthly or weekly period as determined by the Board of Directors. In no event shall the Company issue fractional Shares.

(b)    Method of Exercise. The Option shall be exercisable by delivery of an exercise notice in a form determined by the Board of Directors from time to time or by such other procedure as specified from time to time by the Board of Directors, which shall state the election to exercise the Option, the whole number of Shares in respect of which the Option is being exercised, and such other provisions as may be required by the Board of Directors. The

---

exercise notice shall be delivered in person, by certified mail, or by such other method (including electronic transmission) as determined from time to time by the Board of Directors to the Company accompanied by payment of the Exercise Price or other method of payment provided for in Section 3 and all applicable income and employment taxes required to be withheld. The Option shall be deemed to be exercised upon receipt by the Company of such notice accompanied by the Exercise Price and all applicable withholding taxes, which, to the extent selected, shall be deemed to be satisfied by use of the broker-dealer sale and remittance procedure to pay the Exercise Price provided in Section 3(d) below to the extent such procedure is available to the Grantee at the time of exercise and such an exercise would not violate any Applicable Law.

(c)    Taxes. No Shares will be delivered to the Participant or other person pursuant to the exercise of the Option until the Participant or other person has made arrangements acceptable to the Board of Directors for the satisfaction of applicable income tax and employment tax withholding obligations, including, without limitation, such other tax obligations of the Participant as may be incident to the receipt of Shares. Upon exercise of the Option, the Company or the Participant’s employer may offset or withhold (from any amount owed by the Company or the Participant’s employer to the Participant) or collect from the Participant or other person an amount sufficient to satisfy such tax withholding obligations. Furthermore, in the event of any determination that the Company has failed to withhold a sum sufficient to pay all withholding taxes due in connection with the Option, the Participant agrees to pay the Company the amount of such deficiency in cash within five (5) days after receiving a written demand from the Company to do so, whether or not the Participant is an employee of the Company at that time.

(d)    Section 16(b). Notwithstanding any provision of this Option Agreement to the contrary, other than termination of the Participant’s Continuous Service for Cause, if a sale within the applicable time periods set forth herein of Shares acquired upon the exercise of the Option would subject the Participant to suit under Section 16(b) of the Exchange Act, the Option shall remain exercisable until the earliest to occur of (i) the tenth (10th) day following the date on which a sale of such Shares by the Participant would no longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day after the Participant’s termination of Continuous Service, or (iii) the date on which the Option expires.

SECTION 3. METHOD OF PAYMENT.

Payment of the Exercise Price shall be made by any of the following, or a combination thereof, at the election of the Participant; provided, however, that such exercise method does not then violate any Applicable Law and, provided further, that the portion of the Exercise Price equal to the par value of the Shares must be paid in cash or other legal consideration permitted by the Delaware General Corporation Law:

(a)    cash;

(b)    check;

(c)    wire transfer;

---

(d)    surrender of Shares held for the requisite period, if any, necessary to avoid a charge to the Company’s earnings for financial reporting purposes, or delivery of a properly executed form of attestation of ownership of Shares as the Board of Directors may require which have a Fair Market Value on the date of surrender or attestation equal to the aggregate Exercise Price of the Shares as to which the Option is being exercised;

(e)    payment through a “net exercise” such that, without the payment of any funds, the Grantee may exercise the Option and receive the net number of Shares equal to (i) the number of Shares as to which the Option is being exercised, multiplied by (ii) a fraction, the numerator of which is the Fair Market Value per Share (on such date as is determined by the Board of Directors) less the Exercise Price per Share, and the denominator of which is such Fair Market Value per Share (the number of net Shares to be received shall be rounded down to the nearest whole number of Shares); or

(f)    payment through a broker-dealer sale and remittance procedure pursuant to which the Grantee (i) shall provide written instructions to a Company-designated brokerage firm to effect the immediate sale of some or all of the purchased Shares and remit to the Company sufficient funds to cover the aggregate exercise price payable for the purchased Shares and (ii) shall provide written directives to the Company to deliver the certificates for the purchased Shares directly to such brokerage firm in order to complete the sale transaction.

SECTION 4. RESTRICTIONS ON EXERCISE.

The Option may not be exercised if the issuance of the Shares subject to the Option upon such exercise would constitute a violation of any Applicable Laws. If the exercise of the Option within the applicable time periods set forth in Sections 5, 6 and 7 of this Option Agreement is prevented by the provisions of this Section 4, the Option shall remain exercisable until one (1) month after the date the Participant is notified by the Company that the Option is exercisable, but in any event no later than the expiration date set forth in the Notice (the “Expiration Date”).

SECTION 5. TERMINATION OR CHANGE OF CONTINUOUS SERVICE.

(a)    Subject to Section 4, in the event the Participant’s Continuous Service terminates other than for Cause, the Participant may, but only during the Post-Termination Exercise Period set forth in the Notice, exercise the portion of the Option that was vested at the date of such termination (the “Termination Date”) to the extent such portion is not forfeited in accordance with the terms of the Notice. The Post-Termination Exercise Period shall commence on the Termination Date. In the event of termination of the Participant’s Continuous Service for Cause, the Participant’s right to exercise the Option shall, except as otherwise determined by the Board of Directors terminate concurrently with the termination of the Grantee’s Continuous Service (also the “Termination Date”). In no event, however, shall the Option be exercised later than the Expiration Date set forth in the Notice. In the event of the Participant’s change in status from Employee to Director or Consultant or from Director or Consultant to Employee, the Option shall remain in effect and the Option shall continue to vest in accordance with the Vesting Schedule set forth in the Notice; provided, however, that with respect to any Incentive Stock Option that shall remain in effect after a change in status from Employee to Director or

---

Consultant, such Incentive Stock Option shall cease to be treated as an Incentive Stock Option and shall be treated as a Non-Qualified Stock Option on the day three (3) months and one (1) day following such change in status. Except as provided in Sections 6 and 7 below, to the extent that the Option was unvested on the Termination Date, or if the Participant does not exercise the vested portion of the Option within the Post-Termination Exercise Period, the Option shall terminate.

(b)    If the Participant commences working on a part-time basis, then the Board of Directors may adjust the Vesting Schedule set forth in the Notice in accordance with the Company’s part-time work policy or the terms of an agreement between the Participant and the Company pertaining to his or her part-time schedule, to the extent such adjustment would not violate any Applicable Law or cause payment of additional taxes. If the Participant goes on a leave of absence, then the Company may adjust the Vesting Schedule set forth in the Notice in accordance with the Company’s leave of absence policy or the terms of such leave, to the extent such adjustment would not violate any Applicable Law or cause payment of additional taxes.

SECTION 6. DISABILITY OF PARTICIPANT.

Subject to Section 4, in the event the Participant’s Continuous Service terminates as a result of his or her Disability, the Participant may, but only within twelve (12) months from the Termination Date and in no event later than the Expiration Date, exercise the portion of the Option that was vested on the Termination Date to the extent such portion is not forfeited in accordance with the terms of the Notice; provided, however, that if such Disability is not a “disability” as such term is defined in Section 22(e)(3) of the Code and the Option is an Incentive Stock Option, such Incentive Stock Option shall cease to be treated as an Incentive Stock Option and shall be treated as a Non-Qualified Stock Option on the day three (3) months and one (1) day following the Termination Date. To the extent that the Option was unvested on the Termination Date, or if the Participant does not exercise the vested portion of the Option within the time specified herein, the Option shall terminate. Section 22(e)(3) of the Code provides that an individual is permanently and totally disabled if he or she is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve (12) months.

SECTION 7. DEATH OF PARTICIPANT.

Subject to Section 4, in the event of the termination of the Participant’s Continuous Service as a result of his or her death, or in the event of the Participant’s death during the Post-Termination Exercise Period or during the twelve (12) month period following the Participant’s termination of Continuous Service as a result of his or her Disability, the person who acquired the right to exercise the Option pursuant to Section 8 may, within twelve (12) months following the date of the Participant’s death but in no event later than the Expiration Date, exercise the portion of the Option that was vested on the Termination Date to the extent such portion is not forfeited in accordance with the terms of the Notice. To the extent that the Option was unvested on the date of death, or if the vested portion of the Option is not exercised within the time specified herein, the Option shall terminate.

---

SECTION 8. TRANSFERABILITY OF OPTION.

The Option, if an Incentive Stock Option, may not be transferred in any manner other than by will or by the laws of descent and distribution and may be exercised during the lifetime of the Participant only by the Participant. The Option, if a Non-Qualified Stock Option, may not be transferred in any manner other than by will or by the laws of descent and distribution, provided, however, that the Non-Qualified Stock Option may be transferred during the lifetime of the Participant to the extent and in the manner determined by the Board of Directors in its sole discretion. Notwithstanding the foregoing, the Participant may designate one or more beneficiaries of the Participant’s Incentive Stock Option or Non-Qualified Stock Option in the event of the Participant’s death on a beneficiary designation form provided by the Board of Directors. Following the death of the Participant, the Option, to the extent provided in Section 7, may be exercised (a) by the person or persons designated under the deceased Participant’s beneficiary designation, or (b) in the absence of an effectively designated beneficiary, by the Participant’s legal representative or by any person empowered to do so under the deceased Participant’s will or under the then applicable laws of descent and distribution. The terms of the Option shall be binding upon the executors, administrators, heirs, successors and transferees of the Participant.

SECTION 9. TERM OF OPTION.

The Option must be exercised no later than the Expiration Date or such earlier date as otherwise provided herein. After the Expiration Date or such earlier date, the Option shall be of no further force or effect and may not be exercised.

SECTION 10. ADJUSTMENT OF OPTIONS AND SHARES.

In the event of any transaction described in Section 10 of the Plan, the number and kind of Shares for which the Option is exercisable shall be adjusted as set forth in Section 10 of the Plan. In the event that the Company engages in a Corporate Transaction or Change of Control as described in the Plan, the Option shall be governed by Section 11 of the Plan.

SECTION 11. TAX CONSEQUENCES.

The Participant may incur tax liability as a result of the Participant’s purchase or disposition of the Shares. THE PARTICIPANT SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THE OPTION OR DISPOSING OF THE SHARES.

SECTION 12. ENTIRE AGREEMENT; GOVERNING LAW.

The Notice, the Plan and this Option Agreement constitute the entire agreement of the parties hereto with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and the Participant with respect to the subject matter hereof, and may not be modified adversely to the Participant’s interest except by means of a writing signed by the Company and the Participant. Nothing in the Notice, the Plan and this Option Agreement (except as expressly provided therein) is intended to confer any rights or remedies on any persons other than the parties hereto. The Notice, the Plan and this Option

---

Agreement are to be construed in accordance with and governed by the internal laws of the State of Delaware without giving effect to any choice of law rule that would cause the application of the laws of any jurisdiction other than the internal laws of the State of Delaware to the rights and duties of the parties hereto. Should any provision of the Notice, the Plan or this Option Agreement be determined to be illegal or unenforceable, such provision shall be enforced to the fullest extent allowed by law and the other provisions shall nevertheless remain effective and shall remain enforceable.

SECTION 13. CONSTRUCTION.

The captions used in the Notice and this Option Agreement are inserted for convenience and shall not be deemed a part of the Option for construction or interpretation. Except when otherwise indicated by the context, the singular shall include the plural and the plural shall include the singular. Use of the term “or” is not intended to be exclusive, unless the context clearly requires otherwise.

SECTION 14. ADMINISTRATION AND INTERPRETATION.

Any question or dispute regarding the administration or interpretation of the Notice, the Plan or this Option Agreement shall be submitted by the Participant or by the Company to the Board of Directors. The resolution of such question or dispute by the Board of Directors shall be final and binding on all persons.

SECTION 15. VENUE.

The Company, the Participant, and the Participant’s assignees pursuant to Section 8 (the “Parties”) agree that any suit, action, or proceeding arising out of or relating to the Notice, the Plan or this Option Agreement shall be brought in the federal and state courts of the State of Delaware and that the Parties shall submit to the jurisdiction of such court. The Parties irrevocably waive, to the fullest extent permitted by law, any objection the party may have to the laying of venue for any such suit, action or proceeding brought in such court. THE PARTIES ALSO EXPRESSLY WAIVE ANY RIGHT THEY HAVE OR MAY HAVE TO A JURY TRIAL OF ANY SUCH SUIT, ACTION OR PROCEEDING. If any one or more provisions of this Section 15 shall for any reason be held invalid or unenforceable, it is the specific intent of the Parties that such provisions shall be modified to the minimum extent necessary to make it or its application valid and enforceable.

SECTION 16. NOTICES.

Any notice required by the terms of this Option Agreement shall be given in writing, which shall include electronic communications. Notice shall be addressed to the Company at its principal executive office and to the Participant at the address that he or she most recently provided to the Company.

---

IN WITNESS WHEREOF, each of the parties hereto has executed this Option Agreement, in the case of the Company by its duly authorized officer, as of the day and year first above written.

 

PARTICIPANT:				KRYSTAL BIOTECH, INC.
				By:
				Title:

IN EXECUTING THIS OPTION AGREEMENT, THE PARTICIPANT ACKNOWLEDGES RECEIPT OF A COPY OF THE PLAN, THE NOTICE AND THIS OPTION AGREEMENT AND REPRESENTS THAT HE OR SHE IS FAMILIAR WITH THE TERMS AND PROVISIONS THEREOF, AND HEREBY ACCEPTS THE AWARD SUBJECT TO ALL OF THE TERMS AND PROVISIONS HEREOF AND THEREOF. THE PARTICIPANT HAS REVIEWED THIS OPTION AGREEMENT, THE PLAN AND THE NOTICE IN THEIR ENTIRETY, HAS HAD AN OPPORTUNITY TO OBTAIN THE ADVICE OF COUNSEL PRIOR TO EXECUTING THIS OPTION AGREEMENT, AND FULLY UNDERSTANDS ALL PROVISIONS OF THIS OPTION AGREEMENT, THE NOTICE AND THE PLAN. THE PARTICIPANT HEREBY AGREES THAT ALL QUESTIONS OF INTERPRETATION AND ADMINISTRATION RELATING TO THIS OPTION AGREEMENT, THE NOTICE AND THE PLAN SHALL BE RESOLVED BY THE BOARD OF DIRECTORS.

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the use in this Amendment No. 2 to Registration Statement No. 333-220085 of Form S-1 and related Prospectus dated September 14, 2017 of our report dated July 14, 2017 (except for the subsequent events noted in Note 13, as to which the date is September 14, 2017) with respect to the financial statements of Krystal Biotech, Inc. for the year ended December 31, 2016, and to the reference to us under the heading “Experts” in this Prospectus which is part of this Registration Statement.

/s/ Mayer Hoffman McCann P.C.

San Diego, California

September 14, 2017