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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________________
FORM 10-Q
_____________________________________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2021
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)
_____________________________________________________

Delaware82-1080209
(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 classTrading
Symbol(s)
Name of each exchange on which registered
Common StockKRYSNASDAQ
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 filerAccelerated filer
Non-accelerated filerSmaller 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 July 30, 2021, there were 22,205,642 shares of the registrant’s common stock issued and outstanding.



Krystal Biotech, Inc.
TABLE OF CONTENTS
  Page No.
  
  
  
  
  
  
  
  
 
 
 
  
 
   
 
 
 
 
 
 
 
   
 

2


PART I. FINANCIAL INFORMATION
ITEM 1.    FINANCIAL STATEMENTS (UNAUDITED)

Krystal Biotech, Inc.
Condensed Consolidated Balance Sheets
(unaudited)
(In thousands, except shares and per share data)June 30,
2021
December 31,
2020
Assets
Current assets
Cash and cash equivalents$329,527 $268,269 
Short-term investments38,203 2,993 
Prepaid expenses and other current assets2,197 3,796 
Total current assets369,927 275,058 
Property and equipment, net44,972 30,876 
Long-term investments21,411  
Right-of-use assets7,136 3,298 
Other non-current assets110 1,612 
Total assets$443,556 $310,844 
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable$1,265 $2,105 
Current portion of lease liability934 638 
Accrued expenses and other current liabilities15,920 5,109 
Build to suit lease liability 7,600 
Total current liabilities18,119 15,452 
Lease liability6,897 3,308 
Total liabilities25,016 18,760 
Commitments and contingencies (Note 6)
Stockholders' equity
Preferred stock; $0.00001 par value; 20,000,000 shares authorized at
   June 30, 2021 (unaudited) and December 31, 2020; 2,061,773
   shares issued, and no shares outstanding at June 30, 2021
   (unaudited) and December 31, 2020
  
Common stock; $0.00001 par value; 80,000,000 shares authorized at
   June 30, 2021 (unaudited) and December 31, 2020; 22,205,032
   and 19,714,220 shares issued and outstanding at June 30, 2021
   (unaudited) and December 31, 2020, respectively
  
Additional paid-in capital521,950 363,292 
Accumulated other comprehensive income (expense)(21)6 
Accumulated deficit(103,389)(71,214)
Total stockholders' equity418,540 292,084 
Total liabilities and stockholders' equity$443,556 $310,844 
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
June 30,
Six Months Ended
June 30,
(In thousands, except share and per share data)2021202020212020
Expenses
Research and development$6,594 $3,639 $12,795 $7,164 
General and administrative9,799 3,315 17,951 5,735 
Total operating expenses16,393 6,954 30,746 12,899 
Loss from operations(16,393)(6,954)(30,746)(12,899)
Other Income (Expense)
Interest and other income, net30 121 64 725 
Interest expense  (1,492) 
Net loss(16,363)(6,833)(32,174)(12,174)
Unrealized gain (loss) on available-for-sale securities(24)16 (27)30 
Comprehensive loss$(16,387)$(6,817)$(32,201)$(12,144)
Net loss per common share:
   Basic and diluted
$(0.74)$(0.37)$(1.48)$(0.68)
Weighted-average common shares outstanding:
   Basic and diluted
22,204,659 18,383,941 21,731,711 17,871,648 
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)
 Common StockAdditional Paid-inAccumulated Other ComprehensiveAccumulatedTotal
Stockholders'
(In thousands, except shares)SharesAmountCapitalIncomeDeficitEquity
Balances at January 1, 202119,714,220 $— $363,292 $6 $(71,214)$292,084 
Issuance of common stock, net2,489,837 — 152,033 — — 152,033 
Stock-based compensation expense— — 2,350 — — 2,350 
Unrealized loss on investments— — — (3)— (3)
Net loss— — — — (15,812)(15,812)
Balances at March 31, 202122,204,057 $— $517,675 $3 $(87,026)$430,652 
Issuance of common stock, net975 — 14 — — 14 
Stock-based compensation expense— — 4,261 — — 4,261 
Unrealized loss on investments— — — (24)— (24)
Net loss— — — — (16,363)(16,363)
Balances at June 30, 202122,205,032 $— $521,950 $(21)$(103,389)$418,540 
 Common StockAdditional Paid-inAccumulated Other Comprehensive AccumulatedTotal
Stockholders'
(In thousands, except shares)SharesAmountCapitalIncomeDeficitEquity
Balances at January 1, 202017,354,310 $— $241,951 $10 $(39,047)$202,914 
Issuance of common stock, net16,254 — 243 — — 243 
Stock-based compensation expense— — 539 — — 539 
Unrealized gain on investments— — — 14 — 14 
Net loss— — — — (5,341)(5,341)
Balances at March 31, 202017,370,564 $— $242,733 $24 $(44,388)$198,369 
Issuance of common stock, net2,293,495 — 117,337 — — 117,337 
Stock-based compensation expense— — 807 — — 807 
Unrealized gain on investments— — — 16 — 16 
Net loss— — — — (6,833)(6,833)
Balances at June 30, 202019,664,059 $— $360,877 $40 $(51,221)$309,696 
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)

 Six Months Ended
June 30,
(In thousands)20212020
Operating Activities
Net loss$(32,174)$(12,174)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization1,202 884 
Stock-based compensation expense6,508 1,346 
Loss on disposals of fixed assets 3 
Non-cash interest expense1,492  
Changes in operating assets and liabilities
Prepaid expenses and other current assets1,366 378 
Prepaid rent (2,400)
Lease liability(175)(105)
Accounts payable(680)706 
Accrued expenses and other current liabilities2,678 81 
Net cash used in operating activities(19,783)(11,281)
Investing Activities
Purchases of property and equipment(6,462)(3,454)
Purchases of short-term investments(38,103)(3,205)
Proceeds from maturities of short-term investments2,959 4,392 
Purchases of long-term investments(21,458) 
Net cash used in investing activities(63,064)(2,267)
Financing Activities
Issuance of common stock, net152,065 117,712 
Repayment of ASTRA build to suit liability(7,960) 
Net cash provided by financing activities144,105 117,712 
Net increase in cash and cash equivalents61,258 104,164 
Cash and cash equivalents at beginning of period268,269 187,514 
Cash and cash equivalents at end of period$329,527 $291,678 
Supplemental Disclosures of Non-Cash Investing and Financing Activities
Unpaid purchases of property and equipment$10,143 $2,675 
Unpaid offering costs$36 $132 
Initial recognition of right-of-use assets and modification$4,060 $ 
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. (the “Company,” or “we” or other similar pronouns) commenced operations on April 15, 2016. On March 31, 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 purpose of undertaking preclinical and clinical studies in Australia. On April 24, 2019, the Company incorporated Jeune Aesthtics, Inc., formerly known as Jeune, Inc. ("Jeune"), in Delaware, a wholly-owned subsidiary, for the purpose of undertaking preclinical and clinical studies for aesthetic skin conditions.
We are a clinical stage biotechnology company leading the field of redosable gene therapy for the treatment of serious rare diseases. Using our patented platform that is based on engineered herpes simplex virus type 1 ("HSV-1"), we create vectors that efficiently deliver therapeutic transgenes to cells of interest in multiple organ systems. The cell’s own machinery then transcribes and translates the encoded effector to treat or prevent disease. We formulate our vectors for non-invasive or minimally invasive routes of administration at a doctor’s office or potentially in the patient’s home by a healthcare professional. Our goal is to develop easy to use, medicines to dramatically improve the lives of patients living with rare diseases. Our innovative technology platform is supported by in-house, commercial scale current good manufacturing practices ("cGMP") manufacturing capabilities.
Liquidity
As of June 30, 2021, the Company had an accumulated deficit of $103.4 million. With the net proceeds raised from its public and private securities offerings, including the public offering of its common stock completed on February 1, 2021, the Company believes that its cash, cash equivalents and short-term investments of approximately $367.7 million as of June 30, 2021 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 preclinical 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 unaudited interim condensed financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”), as found in the Accounting Standards Codification (“ASC”), the Accounting Standards Update (“ASU”), of the Financial Accounting Standards Board (“FASB”), and the rules and regulations of the US Securities and Exchange Commission (“SEC”). All intercompany balances and transactions have been eliminated in consolidation.  Certain prior period amounts have been reclassified to conform to the current period presentation. The reclassified amounts have no impact on the Company’s previously reported financial position or results of operation.
These unaudited interim condensed financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020, as filed with the SEC on March 1, 2021.
7


Risks and Uncertainties
The novel coronavirus ("COVID-19") pandemic has resulted, and is likely to continue to result, in significant national and global economic uncertainty and may adversely affect our business. The Company is continuing to actively monitor the impact of the COVID-19 pandemic and the related 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 2021.
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 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 expenses, the fair value of financial instruments, the incremental borrowing rate for lease liabilities, and the valuation allowance included in the 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, corporate bonds, commercial paper, government agency securities 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 certificates of deposit, commercial paper, corporate bonds, and government agency securities. Investments with maturities of greater than one year are classified as long-term investments on the consolidated balance sheets and consist of corporate bonds and government agency securities. Accrued interest on corporate bonds and government agency securities 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.it
8


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.
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 of its investments as available-for-sale.
Our available-for-sale, short-term and long-term investments, which consist of certificates of deposit, commercial paper, corporate bonds, and government agency securities 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 software3 years
Lab equipment
3 -7 years
Furniture and fixtures3 years
Leasehold improvementlesser of remaining useful life or remaining lease term
Construction in progress ("CIP") 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 and six months ended June 30, 2021 and 2020.
9


Leases
The Company accounts for its lease agreements in accordance with FASB ASC Topic 842, Leases ("ASC 842"). Right-of-use lease assets represent our right to use an underlying asset during the lease term and the lease obligations represent our commitment to make lease payments arising from the lease. Right-of-use lease assets and obligations are recognized based on the present value of remaining lease payments over the lease term. As the Company’s lease agreements do not provide an implicit rate and as the Company does not have any external borrowings, we have used an estimated incremental borrowing rate based on the information available at lease commencement in determining the present value of lease payments.  Operating lease expense is recognized on a straight-line basis over the lease term. Variable lease expense is recognized in the period in which the obligation for the payment is incurred. 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 and to account for lease and non-lease components of its operating leases as a single component.
For lease arrangements where it has been determined that the Company has control over an asset that is under construction and is thus considered the accounting owner of the asset during the construction period, the Company records a construction in progress asset and corresponding financial obligation on the condensed consolidated balance sheet. Once the construction is complete, an assessment is performed to determine whether the lease meets certain "sale-leaseback" criteria. If the sale-leaseback criteria are determined to be met, the Company will remove the asset and related financial obligation from the condensed consolidated balance sheet and treat the lease as either an operating or finance lease based on our assessment of the guidance. If, upon completion of construction, the project does not meet the "sale-leaseback" criteria, the lease will be treated as a financing obligation and the Company will depreciate the asset over its estimated useful life for financial reporting purposes once the asset has been placed into service.
Research and Development Expenses
Research and development costs are charged to expense as incurred in performing research and development activities. These costs include employee compensation costs, facilities and overhead, preclinical and clinical activities, related clinical manufacturing costs, contract management services, 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 organizations and manufacturing organizations that manufacture materials used in the Company’s ongoing preclinical and clinical studies. Non-refundable 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 (“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.
10


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 accounts for forfeitures as they occur. Stock-based compensation expense recognized in the financial statements is based on awards for which service conditions are expected to be satisfied.
Comprehensive Loss
Comprehensive loss is defined as the change in equity during a period from transactions from non-owner sources. Unrealized gains or losses on available-for-sale securities is a component of other comprehensive gains or losses and is presented net of taxes. We have not recorded any reclassifications from other comprehensive gains or losses to net loss during any period presented.
Recent Accounting Pronouncements
ASU No. 2020-08, Codification Improvements to Subtopic 310-20, Receivables - Nonrefundable Fees and Other Costs
In October 2020, the FASB issued ASU 2020-08, Codification Improvements to Subtopic 310-20, Receivables - Nonrefundable Fees and Other Costs ("ASU 2020-08") to provide further clarification and update the previously issued guidance in ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20: Premium Amortization on Purchased Callable Debt Securities) ("ASU 2017-08"). ASU 2017-08 shortened the amortization period for certain callable debt securities purchased at a premium by requiring that the premium be amortized to the earliest call date. ASU 2020-08 requires that at each reporting period, to the extent that the amortized cost of an individual callable debt security exceeds the amount repayable by the issuer at the next call date, the excess premium shall be amortized to the next call date. The new standard was effective beginning January 1, 2021 and should be applied on a prospective basis as of the beginning of the period of adoption for existing or newly purchased callable debt securities. The adoption of ASU 2020-08 did not have a material impact on the Company's financial position or results of operations upon adoption.
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. Common share equivalents consist of common stock issuable upon exercise of stock options and vesting of restricted stock awards. There were 1,688,965 and 831,110 common share equivalents outstanding as of June 30, 2021 and 2020, 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
June 30,
Six Months Ended
June 30,
2021202020212020
(In thousands, except shares and per share data)(Unaudited)(Unaudited)
Numerator:  
Net loss per common share$(16,363)$(6,833)$(32,174)$(12,174)
Denominator:
Weighted-average basic and
   diluted common shares
22,204,659 18,383,941 21,731,711 17,871,648 
Basic and diluted net loss per
   common share
$(0.74)$(0.37)$(1.48)$(0.68)

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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 June 30, 2021 and December 31, 2020, respectively (in thousands):

 June 30, 2021
(unaudited)
 Amortized CostGross
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 and cash equivalents$329,527 $— $— $329,527 $329,527 $— $— 
Subtotal329,527 — — 329,527 329,527 — — 
Level 2:
Commercial paper17,483 3 — 17,486 — 17,486  
Corporate bonds30,588 1 (22)30,567 — 18,209 12,358 
U.S. government agency securities11,567 — (6)11,561 — 2,508 9,053 
Subtotal59,638 4 (28)59,614 — 38,203 21,411 
Total$389,165 $4 $(28)$389,141 $329,527 $38,203 $21,411 
 December 31, 2020
 Amortized CostGross
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 and cash equivalents$268,269 $— $— $268,269 $268,269 $— $— 
Subtotal268,269 — — 268,269 268,269 — — 
Level 2:
Certificates of deposit2,986 7 — 2,993 — 2,993  
Subtotal2,986 7 — 2,993 — 2,993  
Total$271,255 $7 $— $271,262 $268,269 $2,993 $ 
(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 year and two years.
See Note 2 to these unaudited condensed consolidated financial statements for additional discussion regarding the Company’s fair value measurements.
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5.    Balance Sheet Components
Property and Equipment, Net
Property and equipment, net consist of the following (in thousands):
 June 30,
2021
December 31,
2020
 (Unaudited) 
Construction in progress$36,180 $23,031 
Leasehold improvements5,725 4,631 
Furniture and fixtures891 870 
Computer equipment and software82 82 
Laboratory equipment5,376 4,630 
Total property and equipment48,254 33,244 
Accumulated depreciation and amortization(3,282)(2,368)
Property and equipment, net$44,972 $30,876 
Depreciation expense was $475 thousand and $914 thousand for the three and six months ended June 30, 2021 and $394 thousand and $729 thousand three and six months ended June 30, 2020, respectively.
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following (in thousands):
 June 30,
2021
December 31,
2020
 (Unaudited) 
Accrued preclinical and clinical expenses$2,970 $1,735 
Accrued professional fees2,119 642 
Accrued payroll and benefits1,273 1,486 
Accrued taxes22 40 
Accrued construction in progress9,170 1,049 
Accrued financing costs36 131 
Other current liabilities330 26 
Total$15,920 $5,109 

6.    Commitments and Contingencies
Significant Contracts and Agreements
Lease Agreements
On May 26, 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 has been amended several times to increase the area leased, which currently consists of approximately 41,000 square feet. As a result of the lease amendments, the lease expiration date was extended to October 31, 2031.
On December 26, 2019, we entered into a lease agreement for our second commercial gene therapy facility ("ASTRA") in the Pittsburgh, Pennsylvania area ("ASTRA lease") with Northfield I, LLC (the "Landlord" or "Northfield") with an initial lease term that expired on October 31, 2035. The ASTRA lease contained an option ("Purchase Option") to purchase the building, related improvements and take corresponding assignment of the Landlord's rights under its existing Ground Lease (the
13


"Ground Lease"). 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, was recorded as prepaid rent in the consolidated balance sheet at the time of payment.
On October 5, 2020, the Company was provided with notice that the initial delivery conditions of the building had been met, including completion of the building shell, interior slab, and exterior doors, and on October 15, 2020, the Company gave the Landlord notice of its intent to purchase ASTRA for approximately $9.4 million, subject to the parties entering into a commercially reasonable purchase and sale agreement. As a result of the Company's ability to exercise its option to purchase ASTRA, the Company obtained control over the construction in progress of ASTRA as of October 5, 2020. The Company recorded a $10.0 million CIP asset and a corresponding build to suit lease liability related to the costs incurred by the Landlord, offset by the previous cash contribution of $2.4 million.
On January 29, 2021, the Company entered into a Purchase and Sale Agreement ("PSA") for ASTRA with Northfield related to the purchase option exercised by the Company on October 15, 2020, for a purchase price of $9.4 million. The Company held approximately $1.5 million on deposit with Northfield under the existing lease agreement and applied this deposit as a credit against the purchase price at closing. On February 1, 2021, Northfield delivered the space as substantially complete and made the space available for access by the Company, thus triggering lease commencement. As a result, the Company concluded that this transaction did not qualify for sale-leaseback accounting because it did not meet the definition of a sale. As control did not transfer to the Lessor at lease commencement, the transaction continued to be accounted for as construction in progress and a financing obligation. On March 5, 2021, the purchase closed and the Company determined that reclassification of the construction in progress to buildings and leasehold improvements was not appropriate as the interior of the building was not yet ready for its intended use. The building continues to be held under construction in progress as of June 30, 2021. The interior of the building is currently under construction and is expected to be completed and validated in 2022. From construction completion to the closing of the purchase, the Company recognized interest expense to accrete the financial obligation to a balance that equaled the cash consideration that was paid upon the close of purchase. For more information about the expected construction costs associated with ASTRA, see "ASTRA Contractual Obligation" below.
As part of the transaction, the Company also became the accounting owner of the Ground Lease, due to obtaining control over ASTRA, and recorded the applicable operating right-of-use asset and corresponding lease liability as of October 5, 2020. When the PSA was finalized, the Company took assignment of the Lessor's Ground Lease, in accordance with the Purchase Option, of which lease payments are based on annual payments of $82 thousand, and are subject to a cumulative 10% escalation clause every 5 years through 2071.
As of June 30, 2021, future minimum commitments under the Company’s operating leases were as follows (in thousands):
 Operating
Leases
2021 (remaining six months)$457 
20221,048 
20231,067 
20241,087 
20251,113 
Thereafter12,480 
Future minimum operating lease payments$17,252 
Less: Interest9,421 
Present value of lease liability$7,831 

Supplemental condensed consolidated balance sheet information related to leases is as follows:
14


(unaudited)
 June 30, 2021December 31, 2020
Operating leases:  
Right-of-use assets$7,136 $3,298 
Current portion of lease liability934 638 
Lease liability6,897 3,308 
Total lease liability$7,831 $3,946 
Weighted average remaining lease term, in years15.016.4
Weighted average discount rate9.3 %9.4 %

The Company recorded operating lease costs of $278 thousand and $497 thousand for the three and six months ended June 30, 2021 and $145 thousand and $310 thousand for the three and six months ended June 30, 2020, respectively, and variable lease costs of $81 thousand and $118 thousand for the three and six months ended June 30, 2021 and $15 thousand and $28 thousand for the three and six months ended June 30, 2020, respectively.
Agreements with Contract Manufacturing Organizations and Contract Research Organizations
The Company has entered into various agreements with Contract Manufacturing Organizations (“CMOs”) for the manufacture of sterile excipients that are formulated with in-house produced vectors as part of the final drug product applied in certain of our clinical trials. The Company has also entered into agreements with third-party Contract Research Organizations ("CROs") to provide research and development services to further the Company’s analysis of its product candidates. The agreements entered into with the CMOs and CROs provide the terms and conditions for their respective services, which may include research and development activities, storage, packaging, labelling, and/or testing of our preclinical and clinical-stage products. The Company is obligated to make milestone payments under certain of these agreements. The estimated remaining commitment as of June 30, 2021 under these agreements is approximately $3.8 million. The Company may also be 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 $718 thousand and $2.5 million for the three and six months ended June 30, 2021 and $330 thousand and $964 thousand for the three and six months ended June 30, 2020, respectively.
Other Contractual Obligations
The Company has 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 June 30, 2021 is $4.0 million. The Company has incurred expenses under these activities of $974 thousand and $2.3 million for the three and six months ended June 30, 2021 and $489 thousand for the three and six months ended June 30, 2020, respectively.
ASTRA Contractual Obligations
The Company has contracted with various third parties to construct our second cGMP facility, ASTRA. Additionally, we have entered into various non-cancellable purchase agreements for long-lead materials to help avoid potential schedule disruptions or material shortages. These contracts typically call for the payment of fees for services or materials upon the achievement of certain milestones. The estimated remaining commitment as of June 30, 2021 is $38.0 million. The Company has included costs incurred to-date associated with ASTRA within construction in progress as of June 30, 2021.
On June 30, 2021, the Company entered into a Standard Form of Contract for Construction and the corresponding General Conditions of the Contract for Construction (collectively, the “Agreement”) with The Whiting-Turner Contracting Company (“Whiting-Turner”), pursuant to which Whiting-Turner is constructing and managing the construction of ASTRA. Subject to certain conditions in the Agreement, the Company will pay Whiting-Turner a contract price consisting of the cost of work plus a fee equal to 1.75% of the cost of work, subject to a guaranteed maximum price to be agreed upon in an amendment to the Agreement at a later date.
Legal Proceedings
15


On May 1, 2020, a complaint was filed against us in the United States District Court for the Western District of Pennsylvania by PeriphaGen, Inc., which also named our Chief Executive Officer and Chief Operating Officer, Krish Krishnan and Suma Krishnan, respectively. The complaint alleges breach of contract and misappropriation of trade secrets, which secrets the plaintiff asserts were used to develop our product candidates, including the vector backbones, and our STAR-D platform. We answered the complaint on June 26, 2020 by denying the allegations and brought a counterclaim asking the court to declare that we did not misappropriate PeriphaGen’s trade secrets or confidential information, and to further declare that we are the rightful and sole owner of our product candidates and STAR-D platform. In addition, we filed a third-party complaint against two principals of PeriphaGen, James Wechuck and David Krisky, alleging breach of contract and seeking contribution and indemnification from them in the event PeriphaGen is awarded damages. On July 29, 2020, PeriphaGen filed its response to our answer and counterclaim, denying the allegations in the counterclaim. On the same day, Messrs Wechuck and Krisky filed a motion to dismiss the third-party complaint on various grounds, and we opposed the motion. On December 1, 2020, the court ruled on Messrs. Wechuck and Krisky's motion to dismiss our third-party complaint. The court determined that our claims for contribution and indemnification based on PeriphaGen's state law claims for unfair competition and misappropriation of trade secrets can proceed. Our breach of contract claim will also go forward in full. Fact discovery is ongoing.
While we are unable to provide any assurances as to the ultimate outcome of the case, we believe the allegations in the complaint are without merit, and we intend to vigorously defend against them. We are currently unable to estimate the costs and timing of any litigation, including any potential damages if PeriphaGen were to prevail on its claims.
7.    Capitalization
Sale of Common Stock
On February 1, 2021, the Company completed a public offering of 2,211,538 shares of its common stock, including 288,461 shares purchased by the underwriters, at $65.00 per share. Net proceeds to the Company from the offering were $134.9 million after deducting underwriting discounts and commissions of approximately $8.6 million, and other offering expenses payable by the Company of $198 thousand.
On December 31, 2020, the Company entered into a sales agreement (the "Sales Agreement") with Cowen and Company, LLC ("Cowen") with respect to an at-the-market equity offering program ("ATM Program"), under which Cowen will act as the Company's agent and/or principal and may issue and sell from time to time, during the term of the Sales Agreement, shares of our common stock, par value $0.0001 per share, having an aggregate offering price up to $150.0 million ("Placement Shares"). Related offering expenses payable by the Company were $172 thousand. The issuance and sale of the Placement Shares by the Company under the Sales Agreement will be made pursuant to the Company's effective "shelf" registration statement on Form S-3. During the six months ended June 30, 2021, 262,500 shares of common stock were issued pursuant to the ATM Program at a weighted average price of $66.50 per share for net proceeds of $17.5 million, resulting in a remaining $132.5 million available for issuance under the ATM Program.
On May 21, 2020, the Company completed a public offering of 2,275,000 shares of its common stock to the public at $55.00 per share. Net proceeds to the Company from the offering were $117.2 million after deducting underwriting discounts and commissions of approximately $7.5 million, and other offering expenses payable by the Company of approximately $463 thousand.

8.    Stock-Based Compensation
Stock Options
Stock options granted to employees vest ratably over four-year periods and options granted to directors of the company vest ratably over one year to four-year periods. Stock options have a life of ten years.
The Company granted 297,500 and 799,950 stock options to employees and directors of the Company during the three and six months ended June 30, 2021, respectively, and 315,400 and 544,400 stock options to employees and directors of the Company during the three and six months ended June 30, 2020, respectively.
The following table summarizes the Company’s stock option activity:
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 Stock
Options
Outstanding
Weighted-
average
Exercise
Price
Weighted-
average
Remaining
Contractual
Life (Years)
Aggregate
Intrinsic
Value
(In thousands) (1)
Outstanding at December 31, 2020853,614 $40.31 9.0$16,804 
Granted799,950 $73.42 
Exercised(16,874)$21.41 
Cancelled or forfeited(46,525)$53.79 
Outstanding at June 30, 20211,590,165 $56.77 9.0$22,838 
Exercisable at June 30, 2021253,189 $29.73 6.9$9,690 
(1)Aggregate intrinsic value represents the difference between the closing stock price of our common stock on June 30, 2021 and the exercise price of outstanding in-the-money options.
The total intrinsic value (the amount by which the fair market value exceed the exercise price) of stock options exercised during the three and six months ended June 30, 2021 was $808 thousand and $872 thousand, respectively, and during the three and six months ended June 30, 2020 was $656 thousand and $1.2 million, respectively.
The weighted-average grant-date fair value per share of options granted to employees during the three and six months ended June 30, 2021 was $42.53 and $47.25, respectively, and during the three and six months ended June 30, 2020 was $29.78 and $31.71, respectively.
There was $49.0 million of unrecognized stock-based compensation expense related to employees’ option awards that is expected to be recognized over a weighted-average period of 3.4 years as of June 30, 2021.
The Company has recorded aggregate stock-based compensation expense related to the issuance of stock option awards in the condensed consolidated statements of operations for the three and six months ended June 30, 2021 and 2020 as follows (in thousands):
 Three Months Ended June 30,Six Months Ended June 30,
 2021202020212020
(unaudited)(unaudited)
Research and development$1,084 $181 $1,600 $370 
General and administrative2,625 626 4,240 976 
Total stock-based compensation$3,709 $807 $5,840 $1,346 
We capitalize the portion of stock-based compensation that relates to work performed on the construction of new buildings. There was $66 thousand and $103 thousand of stock-based compensation that was capitalized in the three and six months ended June 30, 2021, respectively, and zero of stock-based compensation that was capitalized in the three and six months ended June 30, 2020, respectively.
The Company recorded stock-based compensation expense of $3.7 million and $5.8 million for the three and six months ended June 30, 2021, respectively, and $807 thousand and $1.3 million for the three and six months ended June 30, 2020, respectively. The fair value of options was estimated at the date of grant using the Black-Scholes valuation model with the following weighted-average assumptions for the three and six months ended June 30, 2021 and 2020:

 Three Months Ended June 30,Six Months Ended June 30,
 2021202020212020
Expected stock price volatility72 %76 %72 %75 %
Expected term of the award (years)6.106.186.186.20
Risk-free interest rate1.05 %0.41 %1.02 %0.78 %
Weighted average exercise price$66.58$45.07$73.42$48.09
Forfeiture rate %6.42 % %6.42 %
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Restricted Stock Awards
Restricted stock awards ("RSAs") granted to employees vest ratably over a four-year period. Restricted stock awards have a life of ten years.
The Company granted zero and 98,800 RSAs to employees of the Company during the three and six months ended June 30, 2021, respectively, and zero RSAs to employees of the Company during the three and six months ended June 30, 2020, respectively.
The following table summarizes the Company’s RSA activity:
Number of SharesWeighted Average
Grant Date
Fair Value
Non-vested RSAs as of December 31, 2020 $ 
Granted98,800 $78.89 
Vested $ 
Forfeited $ 
Non-vested RSAs as of June 30, 202198,800 $78.89 
As of June 30, 2021, 98,800 RSAs were outstanding. The fair value of each restricted stock was $78.89 reflecting the closing price of our common stock on the grant date. The Company recorded stock-based compensation expense related to RSAs of $486 thousand and $668 thousand for the three and six months ended June 30, 2021 and zero for the three and six months ended June 30, 2020, respectively, within general and administrative expenses in the accompanying condensed consolidated statements of operations (in thousands):
Three Months Ended June 30,Six Months Ended June 30,
2021202020212020
(unaudited)(unaudited)
General and administrative$486 $ $668 $ 
Total stock-based compensation$486 $ $668 $ 
Shares remaining available for grant under the Company’s stock incentive plan were 1,626,006, with a sublimit for incentive stock options of 379,566, at June 30, 2021.
9.    Related Party Transactions
In December 2019, the Company advanced $420 thousand to a member of our management team to cover the personal payroll and income taxes on their taxable income from NSO exercises. This employee repaid the Company in full in January 2020.
10.    Subsequent Events
The Company evaluates events or transactions that occur after the balance sheet date, but prior to the issuance of the financial statements, to identify matters that require disclosure. The Company concluded that no subsequent events have occurred that would require recognition or disclosure in the condensed consolidated financial statements.
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ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read together with the unaudited condensed consolidated financial statements and related notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q and with the audited financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, as filed with the SEC, on March 1, 2021.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. 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. These statements relate to future events or to our future operating or financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. Some of such factors include, but are not limited to:
changes in expectations with respect to the initiation, timing, progress and results of preclinical and clinical trials for B-VEC, KB105, KB104, KB407, KB408, KB301 and any other product candidates, including 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 and expenses;
the continuing impact that the COVID-19 pandemic and measures implemented to prevent its spread may have on our business operations, access to capital, research and development activities, and preclinical and clinical trials for our product candidates;
the timing, scope or results of regulatory filings and approvals, including timing of final US Food and Drug Administration (“FDA”), marketing and other regulatory approval of our product candidates;
our ability to achieve certain accelerated or orphan drug designations from the FDA;
changes in our estimates regarding the potential market opportunity for B-VEC, KB105, KB104, KB407, KB408, KB301 and any other product candidates;
our ability to raise capital to fund our operations;
increased costs associated with our research and development programs for our product candidates;
our general and administrative expenses;
risks related to our ability to successfully develop and commercialize our product candidates, including B-VEC, KB105, KB104, KB407, KB408, KB301 and our other product candidates;
our ability to identify and develop new product candidates;
our ability to identify, recruit and retain key personnel;
risks related to our commercialization, marketing and manufacturing capabilities and strategy;
our ability 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 estimates regarding expenses, future revenue, capital requirements and needs for or ability to obtain additional financing;
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our ability to successfully resolve any intellectual property or other claims that may be brought against us;
global economic conditions; and
the impact of changes in laws and regulations.
Forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in “Risk Factors” elsewhere in this Form 10-Q and in other filings we make with the SEC from time to time. 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 Quarterly Report on Form 10-Q 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 Quarterly Report. You should read this Quarterly Report 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.
Throughout this Form 10-Q, unless the context requires otherwise, all references to “Krystal,” “the Company,” we,” “our,” “us” or similar terms refer to Krystal Biotech, Inc., together with its consolidated subsidiaries.
Overview
We are a clinical stage biotechnology company leading the field of redosable gene therapy for the treatment of serious rare diseases. Using our patented platform that is based on engineered HSV-1, we create vectors that efficiently deliver therapeutic transgenes to cells of interest in multiple organ systems. The cell’s own machinery then transcribes and translates the encoded effector to treat or prevent disease. We formulate our vectors for non-invasive or minimally invasive routes of administration at a doctor’s office or potentially in the patient’s home by a healthcare professional. Our goal is to develop easy to use, medicines to dramatically improve the lives of patients living with rare diseases. Our innovative technology platform is supported by in-house, commercial scale cGMP manufacturing capabilities.

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Our Product Candidates
The following table summarizes information regarding our product candidates in various stages of clinical and preclinical development:
https://cdn.kscope.io/bd88e55518b296eda503afc59e21275e-krys-20210630_g1.jpg

There can be no assurance that the upcoming milestones will be met on the expected timeline or at all.

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Pipeline Highlights and Recent Developments
•    B-VEC is a topical gel containing our novel vector designed to deliver two copies of the COL7A1 transgene for the treatment of dystrophic epidermolysis bullosa ("DEB"), a serious rare skin disease caused by missing or mutated type VII collagen protein ("COL7"). The randomized, double-blind, placebo-controlled GEM-3 pivotal study is ongoing. On March 30, 2021, we announced completion of patient enrollment, and we expect to announce top line data in 4Q21. Details of the pivotal study can be found at www.clinicaltrails.gov under NCT identifier NCT04491604. During 2Q21, we began enrolling patients into an open label extension ("OLE") study, including patients who participated in the Phase 3 study, as well as new participants who meet all enrollment criteria. Details of the OLE study can be found at www.clinicaltrails.gov under NCT identifier NCT04917874. Nothing included on this website shall be deemed incorporated by reference into this Quarterly Report on Form 10-Q.
•    KB105 is a topical gel containing our novel vector designed to deliver two copies of the TGM1 transgene for the treatment of TGM1-deficient autosomal recessive congenital ichthyosis ("TGM1-ARCI"), a serious rare skin disorder caused by missing or mutated TGM1 protein. A randomized, placebo-controlled Phase 1/2 study is ongoing. On July 1, 2021, we announced data from the fourth patient dosed in the trial, showing repeat topical KB105 dosing continued to be well tolerated with no adverse events or evidence of immune response. Details of the Phase 1/2 study can be found at www.clinicaltrials.gov under NCT identifier NCT04047732. Nothing included on this website shall be deemed incorporated by reference into this Quarterly Report on Form 10-Q.
•    KB407 is an inhaled (nebulized) formulation of our novel vector designed to deliver two copies of the full-length CFTR transgene for the treatment of cystic fibrosis, a serious rare lung disease caused by missing or mutated cystic fibrosis transmembrane conductance regulator ("CFTR") protein. On April 19, 2021, we announced positive preclinical data from the Good Laboratory Practice toxicology and biodistribution study, in which the No-Observed-Adverse-Effect Level was determined to be the highest dose tested. More detailed data will be presented at the 2021 North American Cystic Fibrosis Conference that will take place September 30 through October 2, 2021. We expect to initiate clinical testing in 3Q21.
•    KB408 is an inhaled (nebulized) formulation of our novel vector designed to deliver two copies of the SERPINA1 transgene, that encodes for normal human alpha-1 antitrypsin protein, for the treatment of alpha-1 antitrypsin deficiency. On April 19, 2021, we announced positive initial proof-of-concept preclinical in vitro and in vivo data. More detailed preclinical data will be presented at a future scientific conference.
•    KB104 is a topical gel formulation of our novel vector designed to deliver two copies of the SPINK5 transgene for the treatment of Netherton Syndrome, a debilitating autosomal recessive skin disorder caused by missing or mutated SPINK5 protein. We expect to initiate a Phase 1 clinical study in 2022.
We are also leveraging the ability of our platform to deliver proteins of interest to cells in the skin in the context of aesthetic medicine via our wholly owned subsidiary Jeune. A summary description of Jeune’s key product candidate and its status is as follows:
•    KB301 is a solution formulation of our novel vector for intradermal injection designed to deliver two copies of the COL3A1 transgene to address signs of aging or damaged skin caused by declining levels of, or damaged proteins within the extracellular matrix, including type III collagen. A Phase 1 study is currently ongoing. On March 24, 2021, we announced initial data from Cohort 1 on the Phase 1 study that showed safety and tolerability of the two (2) repeat KB301 injections in human subjects. On August 2, 2021, Jeune announced the dosing of the first patient in the efficacy cohort of the PEARL-1 study. The efficacy cohort is a randomized, double-blind, saline controlled evaluation of safety and efficacy of KB301 for the improvement of skin quality in approximately 30 subjects. Bilateral treatment areas on the neck behind the ear, on the cheek, and above the knee will be chosen and randomized on Day 0. Patients will receive two repeat doses of low dose KB301, high dose KB301, or saline 14 days apart. Change in skin quality from baseline will be assessed via the Skin Roughness Score, Fine Lines Score, and the Subject Satisfaction Score. Treatment areas above the knee will be evaluated for change in thickness using a caliper. Jeune expects to announce initial data from Cohort 2 in 4Q21. Details of the Phase 1 study can be found at www.clinicaltrials.gov under NCT identifier NCT04540900. Nothing included on these websites shall be deemed incorporated by reference into this Quarterly Report on Form 10-Q
Jeune has several other aesthetic medicine product candidates in various stages of preclinical development.
Business Highlights and Recent Developments
On May 3, 2021, the Company announced the appointment of Andy Orth to the position of Chief Commercial Officer of Krystal Biotech.
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In 2Q21, the Company began enrolling patients into an OLE study, including patients who participated in the Phase 3 study, as well as new participants who meet all enrollment criteria.
On June 30, 2021, the Company entered into a Standard Form of Contract for Construction and the corresponding General Conditions of the Contract for Construction with Whiting-Turner, pursuant to which Whiting-Turner is constructing and managing the construction of ASTRA located in the Pittsburgh, Pennsylvania area. The 150,000 square foot ASTRA facility is under construction and expected to be completed and validated in 2022. The Agreement contains certain customary terms and conditions of the parties addressing the Project responsibilities. Subject to certain conditions in the Agreement, the Company will pay Whiting-Turner a contract price consisting of the cost of work plus a fee equal to 1.75% of the cost of work, subject to a guaranteed maximum price to be agreed upon in an amendment to the Agreement at a later date.
COVID-19 Update
The COVID-19 pandemic has prompted governments and businesses to take unprecedented measures, such as restrictions on travel and business operations, temporary closures of businesses, and quarantines. In an effort to slow the spread of the virus, The Commonwealth of Pennsylvania where the Company’s primary offices, laboratory and manufacturing spaces are located, enacted stay-at-home orders, and sweeping restrictions to travel were initiated by corporations and governments. Although these restrictions have been lifted, it is not known at this time whether they will be reestablished or the extent to which the Company will be impacted. The degree of the pandemic’s effect on the Company’s clinical, operational and financial performance will depend on future developments, including additional protective measures that may be implemented by governmental authorities or the Company to protect its employees, or by investigators, caregivers or patients to minimize exposure, all of which are uncertain and difficult to predict. While to date the impact of the pandemic on our business and clinical trials has been minimal and the increased vaccination rates in the U.S. are encouraging, we will continue to assess the potential impact of the COVID-19 pandemic on our business and operations, including our supply chain and preclinical and clinical trial activities. For additional information regarding the impact of the coronavirus pandemic, please see "Risk Factor - Business interruptions resulting from the COVID-19 outbreak or similar public health crises could cause a disruption of the development efforts of our product candidates and adversely impact our business."
Financial Overview
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, consultants and other vendors that conduct our preclinical activities;
costs of acquiring, developing and manufacturing clinical trial materials and lab supplies;
facility costs, depreciation and other expenses, which include direct expenses for rent and maintenance of facilities and other supplies; and
payroll related expenses, including stock-based compensation expense.
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 manufacturing 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 continue with our
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pivotal Phase 3 clinical trial for B-VEC, conduct our ongoing Phase 1/2 clinical trial for KB105, conduct our phase 1 safety study for KB301 and incur preclinical expenses for our other product candidates. Due to the numerous risks and uncertainties associated with product development, we cannot determine with certainty the duration, costs and timing of our clinical trials, and, as a result, the actual costs to complete our clinical trials may exceed the expected costs.
General and Administrative Expenses
General and administrative expenses consist principally of professional fees associated with corporate and intellectual property-related legal expenses, consulting and accounting services, facility-related costs and expenses associated with obtaining and maintaining patents. 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.
ASTRA Capital Expenditures
On March 5, 2021, we closed on the purchase of the building that was constructed to house our second cGMP facility, ASTRA. We are currently in the process of constructing the interior build-out of this facility and we have entered into a contract with Whiting-Turner who will manage the construction of ASTRA. Further, we have entered into various non-cancellable purchase agreements for long-lead materials to help avoid potential schedule disruptions or material shortages. These contracts typically call for the payment of fees for services or materials upon the achievement of certain milestones. We expect to continue to incur significant capital expenditures related to ASTRA as we construct and validate this facility, which is expected to be completed in 2022.
Interest Income  
Interest income consists primarily of income earned from our cash, cash equivalents and investments.
Interest Expense
Interest expense consists primarily of non-cash interest expense recognized to accrete the build to suit financial obligation to a balance that equaled the cash consideration that was paid upon the close of the purchase of ASTRA.
Critical Accounting Policies, Significant Judgments and Estimates
There have been no significant changes during the three and six months ended June 30, 2021 to our critical accounting policies, significant judgments and estimates as disclosed in our management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2020.
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Results of Operations
Three Months Ended June 30, 2021 and 2020
 
Three Months Ended June 30,
 
 20212020Change
(In thousands)(unaudited) 
Expenses   
Research and development$6,594 $3,639 $2,955 
General and administrative9,799 3,315 6,484 
Total operating expenses16,393 6,954 9,439 
Loss from operations(16,393)(6,954)(9,439)
Other Income 
Interest and other income, net30 121 (91)
Net loss$(16,363)$(6,833)$(9,530)
Research and Development Expenses 
Research and development expenses increased $3.0 million in the three months ended June 30, 2021 compared to the three months ended June 30, 2020. Higher research and development expenses were due to an increase in outsourced research and development activities of approximately $951 thousand, lab supplies of $340 thousand, payroll related expenses of $1.2 million, which is primarily driven by an increase in headcount to support overall growth, and includes a $903 thousand increase in stock-based compensation, and other research and development expenses of $464 thousand, primarily due to depreciation, rent, and other overhead expenses.
General and Administrative Expenses
General and administrative expenses increased $6.5 million in the three months ended June 30, 2021 as compared to the three months ended June 30, 2020. Higher general and administrative spending was due largely to increases in payroll related expenses of approximately $3.4 million, which is primarily driven by an increase in headcount to support overall growth, and includes a $2.5 million increase in stock-based compensation, market research related expenses of approximately $318 thousand, legal and professional fees of approximately $1.6 million and other administrative and professional expenses of $1.1 million.
Other Income
Interest and other income for the three months ended June 30, 2021 and 2020 was $30 thousand and $121 thousand, respectively, and consisted of interest and dividend income earned from our cash, cash equivalents and investments.

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Six Months Ended June 30, 2021 and 2020
 
Six Months Ended June 30,
 
 20212020Change
(In thousands)(unaudited) 
Expenses   
Research and development$12,795 $7,164 $5,631 
General and administrative17,951 5,735 12,216 
Total operating expenses30,746 12,899 17,847 
Loss from operations(30,746)(12,899)(17,847)
Other Income (Expense) 
Interest and other income, net64 725 (661)
Interest expense(1,492)— (1,492)
Net loss$(32,174)$(12,174)$(20,000)
Research and Development Expenses 
Research and development expenses increased $5.6 million in the six months ended June 30, 2021 compared to the six months ended June 30, 2020. Higher research and development expenses were due to an increase in outsourced research and development activities of approximately $2.3 million, lab supplies of $918 thousand, payroll related expenses of $1.6 million, which is primarily driven by an increase in headcount to support overall growth, and includes a $1.2 million increase in stock-based compensation, and other research and development expenses of $817 thousand, primarily due to depreciation, rent, and other overhead expenses.
General and Administrative Expenses
General and administrative expenses increased $12.2 million in the six months ended June 30, 2021 as compared to the six months ended June 30, 2020. Higher general and administrative spending was due largely to increases in payroll related expenses of approximately $5.8 million, which is primarily driven by an increase in headcount to support overall growth, and includes a $3.9 million increase in stock-based compensation, market research related expenses of approximately $1.3 million, legal and professional fees of approximately $3.5 million and other administrative expenses of $1.6 million.
Other Income (Expense)
Interest and other income for the six months ended June 30, 2021 and 2020 was $64 thousand and $725 thousand, respectively, and consisted of interest and dividend income earned from our cash, cash equivalents and investments.
Interest expense for the six months ended June 30, 2021 and 2020 was $1.5 million and zero, respectively, and related to accretion of the financial obligation for the build to suit lease liability during the six months ended June 30, 2021 to a balance that equaled the purchase consideration for ASTRA.
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Liquidity and Capital Resources
Overview
At June 30, 2021, our cash, cash equivalents and short-term investments balance was approximately $367.7 million. Since operations began, we have incurred operating losses. Our net losses were $16.4 million and $6.8 million for the three months ended June 30, 2021 and 2020 and $32.2 million and $12.2 million for the six months ended June 30, 2021 and 2020, respectively. At June 30, 2021, we had an accumulated deficit of $103.4 million. With the net proceeds raised from its public and private securities offerings, including the public offering completed on February 1, 2021 and the ATM Program, the Company believes that its cash, cash equivalents and short-term investments as of June 30, 2021 will be sufficient to allow the Company to fund its operations for at least 12 months from the filing date of this Form 10-Q.
As the Company continues to incur losses, a transition to profitability is dependent upon the successful development, approval and commercialization of our product candidates and the achievement of a level of revenues adequate to support the Company’s cost structure. Furthermore, we expect to incur increasing costs associated with operating as a public company, meeting financial controls, satisfying regulatory and quality standards, maintaining product and clinical trials, and furthering our efforts around our current and future product candidates. The Company may never achieve profitability, and unless and until it does, the Company will continue to need to raise additional capital.
Costs related to clinical trials can be unpredictable and therefore there can be no guarantee that we will have sufficient capital to fund our continued clinical studies of B-VEC, KB105, KB301 or our planned preclinical studies for our other product candidates, or our operations. Further, we do not expect to generate any product revenues until 2022, at the earliest, assuming we receive marketing approval for B-VEC on the schedule we currently contemplate. While we are in the process of building out our internal vector manufacturing capacity, some of our manufacturing activities will be contracted out to third parties. Additionally, we currently utilize third-party contract research organizations to carry out our clinical development activities. As we seek to obtain regulatory approval for any of our product candidates, we expect to incur significant commercialization expenses as we prepare for product sales, marketing, manufacturing, and distribution. Our funds may not be sufficient to enable us to conduct pivotal clinical trials for, seek marketing approval for or commercially launch B-VEC, KB105, KB301 or any other product candidate. Accordingly, to obtain marketing approval for and to commercialize these 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, if at all. Our failure to raise capital when needed could have a negative effect on our financial condition and our ability to pursue our business strategy.
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. In order to complete the process of obtaining regulatory approval for any of our product candidates and to build the sales, manufacturing, marketing and distribution infrastructure that we believe will be necessary to commercialize our product candidates, if approved, we will require substantial additional funding.
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 timeline and cost of our pivotal Phase 3 clinical trials for B-VEC;
the progress, timing, results and costs of our ongoing Phase 1/2 clinical trials for KB105;
the progress, results and costs of our Phase 1 clinical trials for KB301;
the progress, timing and costs of manufacturing of B-VEC for our pivotal Phase 3 clinical trials;
the continued development and the filing on an IND application for future product candidates;
the initiation, scope, progress, timing, costs and results of drug discovery, laboratory testing, manufacturing, preclinical studies and clinical trials for any other product candidates that we may pursue in the future, if any;
the costs of maintaining our own commercial-scale cGMP manufacturing facilities;
the outcome, timing and costs of seeking regulatory approvals;
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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 our current and future product candidates;
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;
the costs of commercialization activities for our current and future product candidates if we receive marketing approval for such product candidates we may develop, including the costs and timing of establishing product sales, medical affairs, marketing, distribution and manufacturing capabilities;
subject to receipt of marketing approval, if any, revenue received from commercial sale of our current and future 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, maintenance, 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;
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.
We expect that we will need to obtain substantial additional funding in order to receive regulatory approval and to commercialize our 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 our 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 our product candidates that we otherwise would seek to develop or commercialize ourselves. 
Sources and Uses of Cash
The following table summarizes our sources and uses of cash (in thousands):
 Six Months Ended June 30,
 20212020
 (unaudited)
Net cash used in operating activities$(19,783)$(11,281)
Net cash used in investing activities(63,064)(2,267)
Net cash provided by financing activities144,105 117,712 
Net increase in cash$61,258 $104,164 
Operating Activities
Net cash used in operating activities for the six months ended June 30, 2021 was $19.8 million and consisted primarily of a net loss of $32.2 million adjusted for non-cash items primarily of depreciation and amortization and stock-based compensation expense of $7.7 million and build to suit interest expense of $1.5 million, as well as cash used by increases in net operating assets of approximately $3.2 million.
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Net cash used in operating activities for the six months ended June 30, 2020 was $11.3 million and consisted primarily of a net loss of $12.2 million adjusted for non-cash items of depreciation and amortization and stock-based compensation expense of approximately $2.2 million, and cash provided by decreases in net operating liabilities of approximately $1.3 million.
Investing Activities
Net cash used in investing activities for the six months ended June 30, 2021 was $63.1 million and consisted primarily of expenditures of $6.5 million on the build-out of our ASTRA facility, leasehold improvement of new office space, and purchases of computer and laboratory equipment, $59.6 million on the purchase of short-term and long-term investments, partially offset by proceeds of $3.0 million received from the maturities of short-term investments.
Net cash used in investing activities for the six months ended June 30, 2020 was $2.3 million and consisted primarily of purchases of $3.2 million of short-term available-for-sale investment securities, and expenditures of $3.5 million on the build-out of our ASTRA facility, leasehold improvement of new office space, and purchases of computer and laboratory equipment, partially offset by proceeds of $4.4 million received from the maturities of short-term investments.
Financing Activities
Net cash provided by financing activities for the six months ended June 30, 2021 was $144.1 million and consisted primarily of proceeds of $152.1 million received from our public offering, ATM Program and exercises of stock options, partially offset by expenditures of $8.0 million used for the purchase of the ASTRA building.
On February 1, 2021 the Company completed a public offering of 2,211,538 shares of its common stock at $65.00 per share. Net proceeds to the Company from the offering were $134.9 million after deducting underwriting discounts and commissions of approximately $8.6 million and other offering expenses of approximately $198 thousand.
During the six months ended June 30, 2021, pursuant to the ATM Program the Company issued 262,500 shares of common stock at a weighted average price of $66.50 per share for net proceeds of $16.9 million after deducting underwriting discounts and commissions of approximately $524 thousand. The Company also incurred $172 thousand of other offering expenses related to the ATM Program.
For the six months ended June 30, 2021, the Company received proceeds of $354 thousand from the exercise of stock options.
Net cash provided by financing activities for the six months ended June 30, 2020 was $117.7 million and was primarily from proceeds from our public offering in May 2020 of 2,275,000 shares of our common stock to the public at $55.00 per share. Net proceeds to the Company from the offering were $117.2 million after deducting underwriting discounts and commissions of approximately $7.5 million and other offering expenses of approximately $463 thousand, of which $132 thousand was unpaid as of June 30, 2020.

Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements as defined in the rules and regulations of the SEC.
Contractual Obligations
There have been no material changes to our contractual obligations as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020 other than as described in Note 6 “Commitments and Contingencies” of our condensed consolidated financial statements on this Form 10-Q.
JOBS Act Accounting Election
We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (“the JOBS Act”). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. Beginning with our fiscal year ending December 31, 2022, we will cease to be an emerging growth company.
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ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Qualitative and Quantitative Disclosures About Market Risk
We had cash, cash equivalents and short-term investments of $367.7 million at June 30, 2021, which consist primarily of money market, bank deposits, commercial paper, corporate bonds, and government agency securities. 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 portfolio which may include cash, cash equivalents and short and long-term 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, cash equivalents and short-term investments has significant risk of default or illiquidity. While we believe our cash, cash equivalents and short-term investments do 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, cash equivalents and short and long-term investments are recorded at fair value.

ITEM 4.    CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and our Chief Accounting Officer, with the participation of other members of the Company’s management, have evaluated the effectiveness of the Company’s “disclosure controls and procedures” (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)) as of the end of the period covered by this quarterly report, and our Chief Executive Officer and our Chief Accounting Officer have concluded that our disclosure controls and procedures are effective based on their evaluation of these controls and procedures as required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15.
Changes in Internal Control over Financial Reporting
We are in the process of implementing new enterprise resource planning (“ERP”) software, Microsoft Dynamics D365 (“Dynamics”), as part of a plan to integrate and upgrade our systems and processes. The implementation of this software is scheduled to continue in phases over a number of years. During the second quarter of 2021, we completed the implementation of the financial reporting and consolidation modules.As the phased implementation of this system occurs, we expect certain changes to our processes and procedures which, in turn, will result in changes to our internal control over financial reporting. We expect Dynamics to strengthen our internal financial controls by automating a number of accounting and reporting processes and activities, thereby decreasing the number of manual processes previously required. Management will continue to evaluate and monitor our internal controls as processes and procedures in each of the affected areas evolve.over financial reporting.
Other than as discussed above, no change in our internal control over financial reporting occurred during the quarter ended June 30, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


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PART II. OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS
The information set forth under the heading “Legal Proceedings” in Note 6 of the Notes to Condensed Consolidated Financial Statements included in Item 1 of Part I of this Form 10-Q is incorporated by reference in response to this item.
Item 1A. Risk Factors.
Risks Related to Our Financial Position and Need for Additional Capital
We have incurred net losses since inception. We expect to incur losses for the foreseeable future and may never achieve or maintain profitability.
Since inception, we have incurred recurring losses and negative cash flows from operations and, at June 30, 2021, we had an accumulated deficit of $103.4 million. Our ability to achieve profitability depends on our ability to successfully complete the development of, and obtain the regulatory approvals necessary to commercialize our products candidates. We do not anticipate generating revenues from product sales for the next year, if ever. We have devoted substantially all our efforts to date to research and development of our gene therapy product candidates as well as to building out our infrastructure. We expect that it could be at least a year, 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 clinical development of B-VEC, KB105, and KB301 including our current clinical trials and planned future trials;
initiate clinical trials for KB104, KB407, KB408 and preclinical studies for any additional product candidates that we may pursue in the future;  
prepare our Biologics License Application ("BLA"), Marketing Authorisation Application and approvals in certain other countries for B-VEC;
continue to operate our in-house commercial-scale cGMP manufacturing facility, ANCORIS, and complete the build out of our second cGMP manufacturing facility, ASTRA;
manufacture material for clinical trials or potential commercial sales;
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 B-VEC and additional product candidates in the European Union (“EU”) 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 the clinical trials for our product candidates, developing and validating commercial scale manufacturing processes, obtaining marketing approval for our product candidates, manufacturing, marketing and selling any product candidates for which we may obtain marketing approval and satisfying any post-marketing requirements. If we were required to discontinue development of any of our product candidates, if any of our product candidates do not receive regulatory approval, if we do not obtain our targeted indications for our product candidates or if any of our product candidates 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 this would materially adversely affect our business prospects and financial condition. Moreover, if we decide to leverage any success with our B-VEC, KB105, KB301, KB104 or KB407 product candidates to develop other product opportunities, we may not be successful in such efforts, and our business could be materially adversely affected.
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We currently have three product candidates, B-VEC, KB105, and KB301 in clinical trials and we may never develop, acquire or in-license additional product candidates. We may never succeed in any or all 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 investors to lose all or part of their 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 FDA, the European Medicines Agency ("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 B-VEC, KB105, and KB301 our expenses could increase and revenue could be further delayed.
We may need to raise additional funding in order to receive approval for our 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.
To complete the process of obtaining regulatory approval for our product candidates and to build the sales, marketing and distribution infrastructure that we believe will be necessary to commercialize our product candidates, if approved, we may require substantial additional funding. In addition, if we obtain marketing approval for our product candidates, we expect to incur significant expenses related to product sales, medical affairs, marketing, manufacturing and distribution. We anticipate that we may need additional funding to complete the development of B-VEC, KB105, KB301 and any future product candidates and to commercialize any such approved products.
Our future capital requirements will depend on many factors, including:
the progress, timing, results and costs of our Phase 3 clinical trials for B-VEC;
the progress, timing, results and costs of our Phase 1/2 clinical trials for KB105;
the progress, timing, results and costs of our Phase 1 clinical trials for KB301;
the continued development and the filing of IND applications for KB104, KB407, KB408 and other product candidates;
the initiation, scope, progress, timing, costs and results of drug discovery, laboratory testing, manufacturing, preclinical studies and clinical trials for any other product candidates that we may pursue in the future, if any;
the costs of building and maintaining our own commercial-scale cGMP manufacturing facilities;
the outcome, timing and costs of seeking regulatory approvals;
the costs associated with the manufacturing process development and evaluation of third-party manufacturers, if necessary;
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;
the costs of commercialization activities for our current and future product candidates if we receive marketing approval for B-VEC, KB105, KB301 or any other product candidates we may develop, including the costs and timing of establishing product sales, medical affairs, marketing, distribution and manufacturing capabilities;
subject to receipt of marketing approval, if any, revenue received from commercial sale of our current and future product candidates;
the terms and timing of any future collaborations, licensing, consulting or other arrangements that we may establish;