krys-10q_20200331.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended March 31, 2020

or

 

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

 

For the transition period from               to                    

Commission file number: 001-38210 

 

Krystal Biotech, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

82-1080209

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

2100 Wharton Street, Suite 701

Pittsburgh, Pennsylvania 15203

(Address of principal executive offices and zip code)

(412) 586-5830 

(Registrant’s telephone number, including area code)

N/A

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

 

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

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock

KRYS

NASDAQ

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

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

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

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

 

 

 

Non-accelerated filer

 

  

 

Smaller reporting company

 

Emerging growth company         

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

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

 

 

As of April 30, 2020, there were 17,385,809 shares of the registrants common stock issued and outstanding.

 

 

 


 

Krystal Biotech, Inc.

TABLE OF CONTENTS

 

 

 

Page No.

PART I. FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements (unaudited)

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019

 

3

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2020 and 2019

 

4

 

Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2020 and 2019

 

5

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2020 and 2019

 

6

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

7

Item 2.

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

 

17

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

28

Item 4.

Controls and Procedures

 

28

 

 

PART II. OTHER INFORMATION 

 

29

 

 

 

 

Item 1.

Legal Proceedings

 

29

Item 1A.

Risk Factors

 

29

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

58

Item 3.

Defaults Upon Senior Securities

 

58

Item 4.

Mine Safety Disclosures

 

58

Item 5.

Other Information

 

58

Item 6.

Exhibits

 

59

 

 

 

 

SIGNATURES

 

60

 

2


 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

 

 

Krystal Biotech, Inc.

Condensed Consolidated Balance Sheets

 

 

 

 

(unaudited)

 

 

 

 

 

March 31,

 

 

December 31,

 

(In thousands, except shares and per share data)

 

2020

 

 

2019

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

180,225

 

 

$

187,514

 

Short-term investments

 

 

6,479

 

 

 

6,171

 

Prepaid expenses and other current assets

 

 

1,625

 

 

 

2,195

 

Total current assets

 

 

188,329

 

 

 

195,880

 

Property and equipment, net

 

 

10,264

 

 

 

8,475

 

Long-term investments

 

 

 

 

 

497

 

Prepaid rent

 

 

2,400

 

 

 

 

Right-of-use asset

 

 

2,633

 

 

 

2,709

 

Other non-current assets

 

 

1,505

 

 

 

1,462

 

Total assets

 

$

205,131

 

 

$

209,023

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

636

 

 

$

724

 

Current portion of lease liability

 

 

509

 

 

 

480

 

Accrued expenses and other current liabilities

 

 

2,916

 

 

 

2,123

 

Total current liabilities

 

 

4,061

 

 

 

3,327

 

Lease liability

 

 

2,701

 

 

 

2,782

 

Total liabilities

 

 

6,762

 

 

 

6,109

 

Commitments and contingencies (Note 6)

 

 

 

 

 

 

 

 

Stockholders' equity

 

 

 

 

 

 

 

 

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

   March 31, 2020 (unaudited) and December 31, 2019; 2,061,773

   shares issued, and no shares outstanding at March 31, 2020

   (unaudited) and December 31, 2019

 

 

 

 

 

 

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

   March 31, 2020 (unaudited) and December 31, 2019; 17,370,564

   and 17,354,310 shares issued and outstanding at March 31, 2020

   (unaudited) and December 31, 2019, respectively

 

 

 

 

 

 

Additional paid-in capital

 

 

242,733

 

 

 

241,951

 

Accumulated other comprehensive income

 

 

24

 

 

 

10

 

Accumulated deficit

 

 

(44,388

)

 

 

(39,047

)

Total stockholders' equity

 

 

198,369

 

 

 

202,914

 

Total liabilities and stockholders' equity

 

$

205,131

 

 

$

209,023

 

 

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

3


 

Krystal Biotech, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(unaudited)

 

 

 

Three Months Ended

March 31,

 

(In thousands, except share and per share data)

 

2020

 

 

2019

 

Expenses

 

 

 

 

 

 

 

 

Research and development

 

$

3,525

 

 

$

3,167

 

General and administrative

 

 

2,421

 

 

 

1,527

 

Total operating expenses

 

 

5,946

 

 

 

4,694

 

Loss from operations

 

 

(5,946

)

 

 

(4,694

)

Other Income

 

 

 

 

 

 

 

 

Interest and other income, net

 

 

605

 

 

 

583

 

Net loss

 

 

(5,341

)

 

 

(4,111

)

Unrealized gain on available-for-sale securities

 

 

14

 

 

 

14

 

Comprehensive loss

 

$

(5,327

)

 

$

(4,097

)

 

 

 

 

 

 

 

 

 

Net loss per common share:

   Basic and diluted

 

$

(0.31

)

 

$

(0.29

)

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding:

   Basic and diluted

 

 

17,359,356

 

 

 

14,417,649

 

 

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

4


 

Krystal Biotech, Inc.

Condensed Consolidated Statements of Stockholders' Equity

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Other

Comprehensive

 

 

Accumulated

 

 

Total

Stockholders'

 

(In thousands, except shares)

 

Shares

 

 

Amount

 

 

Capital

 

 

Income

 

 

Deficit

 

 

Equity

 

Balances at January 1, 2020

 

 

17,354,310

 

 

$

 

 

$

241,951

 

 

$

10

 

 

$

(39,047

)

 

$

202,914

 

Issuance of common stock, net

 

 

16,254

 

 

 

 

 

 

243

 

 

 

 

 

 

 

 

 

243

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

539

 

 

 

 

 

 

 

 

 

539

 

Unrealized gain on investments

 

 

 

 

 

 

 

 

 

 

 

14

 

 

 

 

 

 

14

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,341

)

 

 

(5,341

)

Balances at March 31, 2020

 

 

17,370,564

 

 

$

 

 

$

242,733

 

 

$

24

 

 

$

(44,388

)

 

$

198,369

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Other

Comprehensive

 

 

Accumulated

 

 

Total

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income

 

 

Deficit

 

 

Equity

 

Balances at January 1, 2019

 

 

14,428,916

 

 

$

 

 

$

133,183

 

 

$

2

 

 

$

(19,959

)

 

$

113,226

 

Issuance of common stock, net

 

 

14,653

 

 

 

 

 

 

44

 

 

 

 

 

 

 

 

 

44

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

313

 

 

 

 

 

 

 

 

 

313

 

Unrealized gain on investments

 

 

 

 

 

 

 

 

 

 

 

14

 

 

 

 

 

 

14

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,111

)

 

 

(4,111

)

Balances at March 31, 2019

 

 

14,443,569

 

 

$

 

 

$

133,540

 

 

$

16

 

 

$

(24,070

)

 

$

109,486

 

 

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

5


 

Krystal Biotech, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

 

 

 

Three Months Ended March 31,

 

(In thousands)

 

2020

 

 

2019

 

Operating Activities

 

 

 

 

 

 

 

 

Net loss

 

$

(5,341

)

 

$

(4,111

)

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

 

 

 

 

 

 

 

 

Depreciation

 

 

335

 

 

 

132

 

Stock-based compensation expense

 

 

539

 

 

 

313

 

(Increase) decrease in

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

108

 

 

 

(352

)

Prepaid rent

 

 

(2,400

)

 

 

 

Amortization of right-of-use asset, net

 

 

26

 

 

 

67

 

Accounts payable

 

 

244

 

 

 

583

 

Accrued expenses and other current liabilities

 

 

262

 

 

 

153

 

Net cash used in operating activities

 

 

(6,227

)

 

 

(3,215

)

 

 

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(1,508

)

 

 

(1,707

)

Purchases of short-term investments

 

 

(1,967

)

 

 

(512

)

Proceeds from maturities of short-term investments

 

 

2,170

 

 

 

 

Purchase of other noncurrent assets

 

 

 

 

 

(263

)

Net cash used in investing activities

 

 

(1,305

)

 

 

(2,482

)

 

 

 

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

 

 

 

Issuance of common stock, net

 

 

243

 

 

 

40

 

Net cash provided by financing activities

 

 

243

 

 

 

40

 

Net decrease in cash and cash equivalents

 

 

(7,289

)

 

 

(5,657

)

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

 

187,514

 

 

 

103,670

 

Cash and cash equivalents at end of period

 

$

180,225

 

 

$

98,013

 

 

 

 

 

 

 

 

 

 

Supplemental Disclosures of Non-Cash Investing and Financing Activities

 

 

 

 

 

 

 

 

Unpaid purchases of property and equipment

 

$

1,302

 

 

$

375

 

Unpaid offering costs

 

$

22

 

 

$

155

 

Initial recognition of right-of-use assets

 

$

 

 

$

3,394

 

 

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

6


 

Krystal Biotech, Inc.  

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

1.

Organization

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

 

We are a gene therapy company developing a new class of transformative medicines to treat diseases caused by gene or protein dysfunction. Using our patented platform that is based on engineered herpes simplex virus type 1, or HSV-1, we create vectors that encode functional proteins. Our vector is designed to be specifically and efficiently delivered to the target cell in an outpatient setting, via topical, intradermal or inhaled routes of administration, where the cell’s own machinery transcribes and translates the encoded protein, restoring or augmenting protein function to treat or prevent disease. We are primarily focused on applying our platform to treat rare monogenic skin conditions caused by insufficient or completely absent protein production.  We have expanded our pipeline products to develop medicines to treat chronic, non-monogenic skin diseases and aesthetic skin conditions. Recognizing the breadth and potential transformative power of our vector platform, we have started expanding the scope of our product development beyond dermatology and have begun preclinical efforts in the fields of pulmonary diseases.

Liquidity

As of March 31, 2020, the Company had an accumulated deficit of $44.4 million. With the net proceeds raised upon the close of our initial public offering, or IPO, in September 2017, a private placement in August 2018, and two follow-on public offerings in October 2018 and June 2019, the Company believes that its cash, cash equivalents and short-term investments of approximately $186.7 million as of March 31, 2020 will be sufficient to allow the Company to fund its planned operations for at least the next 12 months from the date of this Quarterly Report on Form 10-Q. As the Company continues to incur losses, a transition to profitability is dependent upon the successful development, approval and commercialization of its product candidates and the achievement of a level of revenues adequate to support the Company’s cost structure. The Company may never achieve profitability and unless and until it does, the Company will continue to need to raise additional capital or obtain financing from other sources. Management intends to fund future operations through the sale of equity and debt financings and may also seek additional capital through arrangements with strategic partners or other sources. There can be no assurance that additional funding will be available on terms acceptable to the Company, if at all.

The Company is subject to risks common to companies in the biotechnology industry, including but not limited to the failure of product candidates in clinical and pre-clinical studies, the development of competing product candidates or other technological innovations by competitors, dependence on key personnel, protection of proprietary technology, compliance with government regulations and the ability to commercialize product candidates.

 

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 or GAAP as found in the Accounting Standards Codification, or ASC, the Accounting Standards Update, or ASU, of the Financial Accounting Standards Board, or FASB, and the rules and regulations of the US Securities and Exchange Commission, or SEC. All intercompany balances and transactions have been eliminated in consolidation.

 

Risks and Uncertainties

The pandemic caused by an outbreak of a new strain of coronavirus, or COVID-19, has resulted, and is likely to continue to result, in significant national and global economic disruption and may adversely affect our business. The Company is actively monitoring the impact of COVID-19 and the possible effects on its financial condition, liquidity, operations, suppliers, industry, and workforce. However, the full extent, consequences, and duration of the COVID-19 pandemic and the resulting impact on the Company cannot currently be predicted. The Company will continue to evaluate the impact that these events could have on the operations, financial position, and the results of operations and cash flows during fiscal year 2020.

7


 

Use of Estimates

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

Segment and Geographical Information

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

Concentrations of Credit Risk and Off-Balance Sheet Risk

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

Cash, Cash Equivalents and Investments

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

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

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

Fair Value of Financial Instruments

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. There is a three-level hierarchy that prioritizes the inputs used in determining fair value by their reliability and preferred use, as follows:

 

Level 1 Valuations based on quoted prices in active markets for identical assets or liabilities.

 

Level 2 Valuations based on quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data.

 

Level 3 Valuations based on inputs that are both significant to the fair value measurement and unobservable.

8


 

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

There have been no significant changes to the valuation methods utilized by the Company during the periods presented. There have been no transfers between Level 1, Level 2, and Level 3 in any periods presented.

The carrying amounts of financial instruments consisting of cash and cash equivalents, investments, prepaid expenses and other current assets, accounts payable, accrued expenses and other current liabilities included in the Company’s financial statements, are reasonable estimates of fair value, primarily due to their short maturities. Marketable securities are classified as long-term investments if the Company has the ability and intent to hold them and such holding period is longer than one year. The Company classifies all its investments as available-for-sale.

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

Property and Equipment, net

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

 

Computer equipment and software

 

3 years

Lab equipment

Furniture and fixtures

Leasehold improvements

 

3-7 years

3 years

shorter of 8 years and remaining life of lease

 

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

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. An impairment loss would be recognized when estimated future cash flows expected to result from the use of the asset and its eventual disposition are less than the carrying amount of the asset. The Company has not recognized any impairment losses for the three months ended March 31, 2020 and 2019.

 

9


 

Leases

We have entered into two lease agreements for our laboratory, manufacturing and office space. On January 1, 2019, we adopted ASC 842 – Leases. Pursuant to ASC 842, all of our leases outstanding on January 1, 2019 continued to be classified as operating leases. With the adoption of ASC 842, we recorded an operating lease right-of-use asset of $1.1 million and an operating lease liability of $1.4 million on the condensed consolidated balance sheet. Right-of-use lease assets represent our right to use the underlying asset during the lease term and the lease obligation represents our commitment to make lease payments arising from the lease. Right-of-use lease assets and obligations were recognized based on the present value of remaining lease payments over the lease term. As the Company’s leases do not provide an implicit rate, we have used an estimated incremental borrowing rate based on the information available at our adoption date in determining the present value of lease payments. Operating lease expense is recognized on a straight-line basis over the lease term. The Company adopted the New Lease Standard as of the effective date of January 1, 2019, with no restatement of prior periods or cumulative adjustment to retained earnings. Comparative periods in the Company's financial statements will be presented in accordance with the previous guidance under ASC Topic 840, Leases. Upon adoption, the Company took advantage of the transition package of practical expedients permitted within ASC 842, which allowed the Company not to reassess previous accounting conclusions around whether arrangements are, or contain, leases, as well as to carry forward both the historical classification of leases and the treatment of initial direct costs for existing leases. In addition, the Company also has made an accounting policy election to exclude leases with an initial term of twelve months or less from its balance sheet.

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 and clinical activities, 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 and clinical 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 in accordance with FASB ASC Topic 718, Compensation-Stock Compensation, or ASC 718. ASC 718 requires all stock-based payments, including grants of stock options and restricted stock, to be recognized in the statements of operations based on their grant-date fair values. Compensation expense 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.

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; and (iv) expected dividends. Due to the lack of sufficient history and trading volume of our Common Stock and a lack of Company-specific historical and implied volatility data, the Company has based its estimate of expected volatility on the historical volatility of a group of similar companies that are publicly traded. When selecting these public companies on which it has based its expected stock price volatility, the Company selected companies with comparable characteristics to it, including enterprise value, risk profiles, position within the industry, and with historical share price information sufficient to meet the expected term of the stock-based awards. The Company computes historical volatility data using the daily closing prices for the selected companies’ shares during the equivalent period of the calculated expected term of the stock-based awards. The Company will continue to apply this process until a sufficient amount of historical information regarding the volatility of its own stock price becomes available.

Due to the lack of Company-specific historical option activity, the Company has estimated the expected term of its employee stock options using the “simplified” method, whereby the expected term equals the arithmetic mean of the vesting term and the original contractual term of the option. The risk-free interest rates are based on the US Treasury securities with a maturity date commensurate with the expected term of the associated award. The Company has never paid and does not expect to pay dividends in the foreseeable future. The Company is also required to estimate forfeitures at the time of grant and to revise those estimates in subsequent periods if actual forfeitures differ from its estimates. To the extent that actual forfeitures differ

10


 

from the Company’s estimates, the differences are recorded as a cumulative adjustment in the period the estimates were revised.

Comprehensive Loss

Comprehensive loss is defined as the change in equity during a period from transactions from non-owner sources. Unrealized gains (losses) on available-for-sale securities is a component of other comprehensive gains (losses) and is presented net of taxes. We have not recorded any reclassifications from other comprehensive gains (losses) to net loss during any period presented.

Recent Accounting Pronouncements

 

In August 2018, the FASB issued ASU 2018-13 - Fair Value Measurement (Topic 820), or ASU 2018-13, which removes, modifies and adds disclosure requirements on fair value measurements. ASU 2018-13 removes disclosure requirements for transfers between Level 1 and Level 2 measurements and valuation processes for Level 3 measurements but adds new disclosure requirements including changes in unrealized gains/losses in other comprehensive income related to recurring Level 3 measurements. The amended guidance was effective for us commencing in the first quarter of 2020. Certain aspects may be applied prospectively while other aspects may be applied retrospectively upon the effective date. The adoption of the guidance resulted in us disclosing the Company’s cash, cash equivalents and available-for-sale securities by significant investment category as of March 31, 2020 and 2019.

 

3.

Net Loss Per Share Attributable to Common Stockholders  

Basic net loss per share attributable to common stockholders is calculated by dividing net loss attributable to common stockholders by the weighted average shares outstanding during the period, without consideration for common stock equivalents. Diluted net loss per share attributable to common stockholders is computed by dividing the net loss by the weighted-average number of shares of common stock and common share equivalents outstanding for the period. Stock options are common share equivalents. There were 548,193 and 443,362 common share equivalents outstanding as of March 31, 2020 and 2019, respectively, in the form of stock options and unvested restricted stock awards, that have been excluded from the calculation of diluted net loss per common share as their effect would be anti-dilutive for all periods presented.  

 

 

 

Three Months Ended

March 31,

 

 

 

2020

 

 

2019

 

(In thousands, except shares and per share data)

 

(Unaudited)

 

Numerator:

 

 

 

 

 

 

 

 

Net loss per common share

 

$

(5,341

)

 

$

(4,111

)

Denominator:

 

 

 

 

 

 

 

 

Weighted-average basic and

   diluted common shares

 

 

17,359,356

 

 

 

14,417,649

 

Basic and diluted net loss per

   common share

 

$

(0.31

)

 

$

(0.29

)

 


11


 

4. Fair Value Instruments

 

The following tables show the Company’s cash, cash equivalents and available-for-sale securities by significant investment category as of March 31, 2020 and December 31, 2019, respectively (in thousands):

 

 

March 31, 2020

 

 

Amortized Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Aggregate Fair

Value

 

 

Cash and Cash

Equivalents

 

 

Short-term

Marketable

Securities (1)

 

 

Long-term

Marketable

Securities (2)

 

Level 1:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

$

2

 

 

$

 

 

$

 

 

$

2

 

 

$

2

 

 

$

 

 

$

 

Money market instruments

 

180,223

 

 

 

 

 

 

 

 

 

180,223

 

 

 

180,223

 

 

 

 

 

 

 

Subtotal

 

180,225

 

 

 

 

 

 

 

 

 

180,225

 

 

 

180,225

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Level 2:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency securities

 

1,501

 

 

 

12

 

 

 

 

 

 

1,513

 

 

 

 

 

 

1,513

 

 

 

 

Certificates of deposit

 

4,954

 

 

 

12

 

 

 

 

 

 

4,966

 

 

 

 

 

 

4,966

 

 

 

 

Subtotal

 

6,455

 

 

 

24

 

 

 

 

 

 

6,479

 

 

 

 

 

 

6,479

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

$

186,680

 

 

$

24

 

 

$

 

 

$

186,704

 

 

$

180,225

 

 

$

6,479

 

 

$

 

 

 

December 31, 2019

 

 

Amortized Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Aggregate Fair

Value

 

 

Cash and Cash

Equivalents

 

 

Short-term

Marketable

Securities (1)

 

 

Long-term

Marketable

Securities (2)

 

Level 1:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

$

3

 

 

$

 

 

$

 

 

$

3

 

 

$

3

 

 

$

 

 

$

 

Money market instruments

 

187,511

 

 

 

 

 

 

 

 

 

187,511

 

 

 

187,511

 

 

 

 

 

 

 

Subtotal

 

187,514

 

 

 

 

 

 

 

 

 

187,514

 

 

 

187,514

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Level 2:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency securities

 

1,747

 

 

 

6

 

 

 

 

 

 

1,753

 

 

 

 

 

 

1,753

 

 

 

 

Certificates of deposit

 

4,911

 

 

 

4

 

 

 

 

 

 

4,915

 

 

 

 

 

 

4,418

 

 

 

497

 

Subtotal

 

6,658

 

 

 

10

 

 

 

 

 

 

6,668

 

 

 

 

 

 

6,171

 

 

 

497

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

$

194,172

 

 

$

10

 

 

$

 

 

$

194,182

 

 

$

187,514

 

 

$

6,171

 

 

$

497

 

 

 

(1)

The Company’s short-term marketable securities mature in one year or less.

 

(2)

The Company’s long-term marketable securities mature between one and two years.

See Note 2 to these condensed consolidated financial statements for additional discussion regarding the Company’s fair value measurements.

12


 

5.

Balance Sheet Components

Property and Equipment, Net

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

 

 

 

March 31,

2020

 

 

December 31,

2019

 

 

 

(Unaudited)

 

 

 

 

 

Construction-in-progress

 

$

2,299

 

 

$

2,431

 

Leasehold improvements

 

 

4,681

 

 

 

3,179

 

Furniture & fixtures

 

 

440

 

 

 

99

 

Computer equipment and software

 

 

67

 

 

 

45

 

Laboratory equipment

 

 

3,958

 

 

 

3,571

 

Total property and equipment

 

 

11,445

 

 

 

9,325

 

Accumulated depreciation and amortization

 

 

(1,181

)

 

 

(850

)

Property and equipment, net

 

$

10,264

 

 

$

8,475

 

 

Depreciation expense was $335 thousand and $132 thousand for the three months ended March 31, 2020 and 2019, respectively.

Accrued Expenses and Other Current Liabilities

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

 

 

 

March 31,

2020

 

 

December 31,

2019

 

 

 

(Unaudited)

 

 

 

 

 

Accrued preclinical and clinical expenses

 

$

745

 

 

$

991

 

Accrued professional fees

 

 

76

 

 

 

72

 

Accrued payroll and benefits

 

 

812

 

 

 

510

 

Accrued taxes

 

 

50

 

 

 

40

 

Accrued construction in progress and laboratory equipment

 

 

1,020

 

 

 

491

 

Other current liabilities

 

 

213

 

 

 

19

 

Total

 

$

2,916

 

 

$

2,123

 

 

6.

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 expired on October 31, 2017 (the “2016 Lease”). The 2016 Lease was amended to increase the area leased to approximately 31,000 square feet and to extend the expiration date to February 28, 2027, including 6,000 square feet relating to a month-to-month lease that we utilized through February 2020.  

On December 26, 2019, we entered into a lease agreement for our second commercial gene therapy facility (i.e. ASTRA facility) in the Pittsburgh, Pennsylvania area.  The 100,000 square foot facility is under construction and is expected to be completed by 1H 2021.  The lease will commence when the space is available for access, which is anticipated to be in the second half of 2020, and has an initial term that expires on October 31, 2035. A cash contribution in the amount of $2.4 million was paid to escrow on January 21, 2020.  The contribution was intended to reduce the amount of the building construction costs and had the effect of reducing the base rental rate of the lease and as such, is recorded as prepaid rent in the condensed consolidated balance sheet as of March 31, 2020.


13


 

As of March 31, 2020, future minimum commitments under the Company’s operating leases were as follows (in thousands): 

 

 

Operating

Leases

 

2020 (remaining nine months)

 

$

513

 

2021

 

 

1,358

 

2022

 

 

1,385

 

2023

 

 

1,413

 

2024

 

 

1,441

 

Thereafter

 

 

11,316

 

Future minimum operating lease payments

 

$

17,426

 

Less: Operating lease payments for ASTRA

 

$

13,195

 

Less: Interest

 

 

1,021

 

Present value of lease liability

 

$

3,210

 

Current portion of lease liability

 

$

509

 

Long-term portion of lease liability

 

$

2,701

 

 

The Company recorded $178 thousand and $125 thousand in rent expense for the three months ended March 31, 2020 and 2019, respectively.

 

Clinical Supply Agreements

The Company has entered into various product manufacturing and clinical supply agreements with Contract Manufacturing Organizations, or CMOs. The product manufacturing and clinical supply agreements provide the terms and conditions under which the CMOs will formulate, fill, inspect, package, label and test our drug product candidates, B-VEC and KB105 for clinical supply. The Company is obligated to make milestone payments. Additionally, certain raw materials, supplies, outsourced testing and other services for the purposes of batch production will be invoiced separately by the CMOs. The estimated remaining commitment as of March 31, 2020 under these agreements for the manufacturing of our drug product is approximately $3.0 million. The Company is also responsible for the payment of a monthly service fee for project management services for the duration of any agreements. The Company has incurred expenses under these agreements of $634 thousand and $803 thousand for the three months ended March 31, 2020 and 2019, respectively.

 

Other Contractual Obligations

During the quarter, the Company contracted with various third parties to facilitate, coordinate and perform agreed upon market research activities relating to our lead product candidate, B-VEC. These contracts typically call for the payment of fees for services upon the achievement of certain milestones. Business activities being performed under these contracts primarily include market research and other related activities.  The estimated remaining commitment as of March 31, 2020 is $530 thousand.

 

7.

Capitalization

Sale of Common Stock

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

 

14


 

On June 27, 2019, the Company completed a public offering of 2,500,000 shares of its common stock to the public at $40.00 per share. Net proceeds to the Company from the offering were $93.8 million after deducting underwriting discounts and commissions of approximately $6.0 million, and other offering expenses payable by the Company of approximately $216 thousand. On July 3, 2019, the underwriters exercised their option to purchase an additional 353,946 shares of common stock at $40.00 per share for additional net proceeds of $13.3 million after deducting underwriting discounts and commissions of approximately $849 thousand. In connection with the public offering, the Company suspended its “at-the-market” equity offering program, or ATM Facility, that had previously been put in place in March 2019 which had allowed the Company to sell shares of its common stock for up to $50.0 million in gross proceeds. Following the completion of the offering, $16.8 million remains suspended under this program.

 

8.

Stock-Based Compensation

Options granted to employees vest ratably over a four-year period and options granted to directors of the company vest ratably over one and four-year periods. Options have a life of ten years.

The Company granted 229,000 and 67,500 stock options to employees and directors of the Company during the three months ended March 31, 2020 and 2019, respectively.

The following table summarizes the Companys stock option activity:

 

 

 

Stock

Options

Outstanding

 

 

Weighted-

average

Exercise

Price

 

 

Weighted-

average

Remaining

Contractual

Life (Years)

 

 

Aggregate

Intrinsic

Value

(In thousands) (1)

 

Outstanding at December 31, 2019

 

 

420,766

 

 

$

17.71

 

 

 

8.4

 

 

$

15,859

 

Granted

 

 

229,000

 

 

$

52.28

 

 

 

 

 

 

 

 

 

Exercised

 

 

(17,129

)

 

$

14.22

 

 

 

 

 

 

$

3,348

 

Cancelled or forfeited

 

 

(84,444

)

 

$

21.28

 

 

 

 

 

 

 

 

 

Outstanding at March 31, 2020

 

 

548,193

 

 

$

31.71

 

 

 

8.8

 

 

$

8,684

 

Exercisable at March 31, 2020

 

 

120,678

 

 

$

8.79

 

 

 

7.5

 

 

$

4,158

 

 

(1)

Aggregate intrinsic value represents the difference between the closing stock price of our common stock on March 31, 2020 and the exercise price of outstanding in-the-money options.

The weighted-average grant-date fair value per share of options granted to employees during the three months ended March 31, 2020 was $34.37.

There was $9.9 million of unrecognized stock-based compensation expense related to employees awards that is expected to be recognized over a weighted-average period of 3.4 years as of March 31, 2020.

The Company has recorded aggregate stock-based compensation expense related to the issuance of stock option awards and restricted stock awards in the condensed consolidated statements of operations for the three months ended March 31, 2020 and 2019 as follows (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

 

 

Research and development

 

$