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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 September 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 October 29, 2021, there were 22,237,984 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)September 30,
2021
December 31,
2020
Assets
Current assets
Cash and cash equivalents$286,614 $268,269 
Short-term investments56,479 2,993 
Prepaid expenses and other current assets2,719 3,796 
Total current assets345,812 275,058 
Property and equipment, net78,642 30,876 
Long-term investments19,237  
Right-of-use assets7,342 3,298 
Other non-current assets62 1,612 
Total assets$451,095 $310,844 
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable$4,757 $2,105 
Current portion of lease liability1,023 638 
Accrued expenses and other current liabilities29,999 5,109 
Build to suit lease liability 7,600 
Total current liabilities35,779 15,452 
Lease liability7,079 3,308 
Total liabilities42,858 18,760 
Commitments and contingencies (Note 6)
Stockholders' equity
Preferred stock; $0.00001 par value; 20,000,000 shares authorized at
   September 30, 2021 (unaudited) and December 31, 2020; 2,061,773
   shares issued, and no shares outstanding at September 30, 2021
   (unaudited) and December 31, 2020
  
Common stock; $0.00001 par value; 80,000,000 shares authorized at
   September 30, 2021 (unaudited) and December 31, 2020; 22,237,984
   and 19,714,220 shares issued and outstanding at September 30, 2021
   (unaudited) and December 31, 2020, respectively
  
Additional paid-in capital527,229 363,292 
Accumulated other comprehensive income (expense)(14)6 
Accumulated deficit(118,978)(71,214)
Total stockholders' equity408,237 292,084 
Total liabilities and stockholders' equity$451,095 $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
September 30,
Nine Months Ended
September 30,
(In thousands, except share and per share data)2021202020212020
Expenses
Research and development$6,080 $5,100 $18,875 $12,264 
General and administrative9,572 4,580 27,524 10,315 
Total operating expenses15,652 9,680 46,399 22,579 
Loss from operations(15,652)(9,680)(46,399)(22,579)
Other Income (Expense)
Interest and other income, net63 70 127 795 
Interest expense  (1,492) 
Net loss(15,589)(9,610)(47,764)(21,784)
Unrealized gain (loss) on available-for-sale securities7 (20)(20)10 
Comprehensive loss$(15,582)$(9,630)$(47,784)$(21,774)
Net loss per common share:
   Basic and diluted
$(0.70)$(0.49)$(2.18)$(1.18)
Weighted-average common shares outstanding:
   Basic and diluted
22,212,266 19,676,016 21,893,656 18,477,495 
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 
Issuance of common stock, net32,952 — 1,534 — — 1,534 
Stock-based compensation expense— — 3,745 — — 3,745 
Unrealized gain on investments— — — 7 — 7 
Net loss— — — — (15,589)(15,589)
Balances at September 30, 202122,237,984 $ $527,229 $(14)$(118,978)$408,237 
 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 
Issuance of common stock, net42,811 — 298 — — 298 
Stock-based compensation expense— — 1,356 — — 1,356 
Unrealized loss on investments— — — (20)— (20)
Net loss— — — — (9,610)(9,610)
Balances at September 30, 202019,706,870 $ $362,531 $20 $(60,831)$301,720 
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)

 Nine Months Ended
September 30,
(In thousands)20212020
Operating Activities
Net loss$(47,764)$(21,784)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization1,985 1,361 
Stock-based compensation expense10,174 2,702 
Loss on disposals of fixed assets 33 
Non-cash interest expense1,492  
Changes in operating assets and liabilities
Prepaid expenses and other current assets814 489 
Prepaid rent (2,400)
Lease liability(240)(165)
Accounts payable(225)725 
Accrued expenses and other current liabilities6,726 980 
Net cash used in operating activities(27,038)(18,059)
Investing Activities
Purchases of property and equipment(27,453)(7,636)
Purchases of investments(83,810)(3,205)
Proceeds from maturities of investments11,033 5,877 
Net cash used in investing activities(100,230)(4,964)
Financing Activities
Issuance of common stock, net153,573 117,878 
Repayment of ASTRA build to suit liability(7,960) 
Net cash provided by financing activities145,613 117,878 
Net increase in cash and cash equivalents18,345 94,855 
Cash and cash equivalents at beginning of period268,269 187,514 
Cash and cash equivalents at end of period$286,614 $282,369 
Supplemental Disclosures of Non-Cash Investing and Financing Activities
Unpaid purchases of property and equipment$23,213 $3,173 
Unpaid offering costs$11 $ 
Initial recognition of right-of-use assets and modification$4,396 $ 
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, a wholly-owned subsidiary, for the purpose of undertaking preclinical and clinical studies in Australia. On April 24, 2019, the Company incorporated Jeune Aesthetics, 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 delivery 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 September 30, 2021, the Company had an accumulated deficit of $119.0 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 $343.1 million as of September 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”). In the opinion of management, all adjustments, which consist of all normal recurring adjustments necessary for a fair presentation of the Company's financial position and results of operations for the interim periods ended September 30, 2021 and 2020, are reflected in the interim condensed consolidated financial statements. All intercompany balances and transactions have been eliminated in consolidation.
The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year. 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.
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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.
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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 nine months ended September 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.
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Due to the lack of Company-specific historical option activity, the Company has estimated the expected term of its employee and non-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 1,900,638 and 853,336 common share equivalents outstanding as of September 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
September 30,
Nine Months Ended
September 30,
2021202020212020
(In thousands, except shares and per share data)(Unaudited)(Unaudited)
Numerator:  
Net loss per common share$(15,589)$(9,610)$(47,764)$(21,784)
Denominator:
Weighted-average basic and
   diluted common shares
22,212,266 19,676,016 21,893,656 18,477,495 
Basic and diluted net loss per
   common share
$(0.70)$(0.49)$(2.18)$(1.18)

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

 September 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$286,614 $— $— $286,614 $286,614 $— $— 
Subtotal286,614 — — 286,614 286,614 — — 
Level 2:
Commercial paper22,490 2 — 22,492 — 22,492  
Corporate bonds37,683 1 (26)37,658 — 29,465 8,193 
U.S. government agency securities15,567 2 (3)15,566 — 4,522 11,044 
Subtotal75,740 5 (29)75,716 — 56,479 19,237 
Total$362,354 $5 $(29)$362,330 $286,614 $56,479 $19,237 
 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):
 September 30,
2021
December 31,
2020
 (Unaudited) 
Construction in progress$70,211 $23,031 
Leasehold improvements5,723 4,631 
Furniture and fixtures891 870 
Computer equipment and software85 82 
Laboratory and manufacturing equipment5,485 4,630 
Total property and equipment82,395 33,244 
Accumulated depreciation and amortization(3,753)(2,368)
Property and equipment, net$78,642 $30,876 
Depreciation expense was $474 thousand and $1.4 million for the three and nine months ended September 30, 2021 and $399 thousand and $1.1 million three and nine months ended September 30, 2020, respectively.
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following (in thousands):
 September 30,
2021
December 31,
2020
 (Unaudited) 
Accrued preclinical and clinical expenses$3,743 $1,735 
Accrued professional fees1,903 642 
Accrued payroll and benefits1,799 1,486 
Accrued taxes32 40 
Accrued construction in progress22,064 1,049 
Accrued financing costs447 131 
Other current liabilities11 26 
Total$29,999 $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 44,000 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
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"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 September 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 Obligations" 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 September 30, 2021, future minimum commitments under the Company’s operating leases were as follows (in thousands):
 Operating
Leases
2021 (remaining three months)$255 
20221,094 
20231,114 
20241,135 
20251,162 
Thereafter12,786 
Future minimum operating lease payments$17,546 
Less: Interest9,444 
Present value of lease liability$8,102 

Supplemental condensed consolidated balance sheet information related to leases is as follows:
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(unaudited)
 September 30, 2021December 31, 2020
Operating leases:  
Right-of-use assets$7,342 $3,298 
Current portion of lease liability1,023 638 
Lease liability7,079 3,308 
Total lease liability$8,102 $3,946 
Weighted average remaining lease term, in years14.616.4
Weighted average discount rate9.2 %9.4 %

The Company recorded operating lease costs of $339 thousand and $836 thousand for the three and nine months ended September 30, 2021 and $148 thousand and $458 thousand for the three and nine months ended September 30, 2020, respectively, and variable lease costs of $65 thousand and $183 thousand for the three and nine months ended September 30, 2021 and $60 thousand and $88 thousand for the three and nine months ended September 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 September 30, 2021 under these agreements is approximately $2.6 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 $744 thousand and $3.3 million for the three and nine months ended September 30, 2021 and $1.3 million and $2.3 million for the three and nine months ended September 30, 2020, respectively.
Commercial Preparedness Activities
The Company has contracted with various third parties to facilitate, coordinate and perform agreed upon commercial preparedness and 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. The estimated remaining commitment as of September 30, 2021 is $3.9 million. The Company has incurred expenses under these activities of $1.8 million and $4.1 million for the three and nine months ended September 30, 2021 and $582 thousand and $1.1 million for the three and nine months ended September 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 September 30, 2021 is $39.4 million. The Company has included costs incurred to-date associated with ASTRA within construction in progress as of September 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.
Effective September 13, 2021, the Company entered into a guaranteed maximum price amendment (the "Amendment") to the Agreement to set forth the guaranteed maximum price, as well as the date by which Whiting-Turner is to achieve
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Substantial Completion (as defined in the Agreement). Under the Amendment, the guaranteed maximum price to be paid by the Company is $78.9 million, subject to certain additions and deductions by change orders as provided by the Agreement, and the date of Substantial Completion of Whiting-Turner's work under the Agreement is March 30, 2022. Whiting-Turner’s work under the Agreement represents a portion of the work necessary to complete construction of the ASTRA facility and, therefore the date of Substantial Completion of Whiting-Turner’s work under the Agreement does not equate to the date of completion of ASTRA. The guaranteed maximum price under the Agreement constitutes only a portion of the total estimated cost of building and equipping ASTRA.
Legal Proceedings
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. ("PeriphaGen"), 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.
PeriphaGen is seeking monetary damages, injunctive relief, attorneys' fees and costs. 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.
The Company has received insurance proceeds during fiscal year 2021 relating to legal defense costs and expenses associated with the PeriphaGen litigation. During the three and nine months ended September 30, 2021, the Company has received $954 thousand of insurance proceeds and an additional $619 thousand has been approved for reimbursement, which is expected to be received in November 2021 and has been recorded as a receivable within Prepaid Expenses and Other Current Assets on the Condensed Consolidated Balance Sheet as management determined that the amount was probable of collection. The reimbursements have been recorded as an offset to our legal fees included in General and Administrative expenses on the Condensed Consolidated Statements of Operations and within Operating Activities on the Condensed Consolidated Statements of Cash Flows.
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 nine months ended September 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 $16.9 million after deducting underwriting discounts and commissions of approximately $524 thousand, resulting in a remaining $132.5 million available for issuance under the ATM Program.
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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 and non-employees vest ratably over four-year periods and stock 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 322,500 and 1,122,450 stock options to employees and directors of the Company during the three and nine months ended September 30, 2021, respectively, and 195,850 and 740,250 stock options to employees and directors of the Company during the three and nine months ended September 30, 2020, respectively.
The Company granted 50,000 and zero stock options to non-employees during the three and nine months ended September 30, 2021 and 2020, respectively.
The following table summarizes the Company’s stock option activity:
 Stock
Options
Outstanding
Weighted-
average
Exercise
Price
Weighted-
average
Remaining
Contractual
Life (Years)
Aggregate
Intrinsic
Value
(In thousands) (1)
Outstanding at December 31, 2020853,614 $40.31 9.0$16,804 
Granted1,172,450 $67.15 
Exercised(49,726)$38.11 
Cancelled or forfeited(172,000)$61.28 
Expired(2,500)$78.89 
Outstanding at September 30, 20211,801,838 $55.78 9.1$9,456 
Exercisable at September 30, 2021265,843 $30.02 7.4$6,087 
(1)Aggregate intrinsic value represents the difference between the closing stock price of our common stock on September 30, 2021 and the exercise price of outstanding in-the-money options.
The total intrinsic value (the amount by which the fair market value exceeds the exercise price) of stock options exercised during the three and nine months ended September 30, 2021 was $348 thousand and $1.2 million, respectively, and during the three and nine months ended September 30, 2020 was $1.7 million and $2.9 million, respectively.
The weighted-average grant-date fair value per share of options granted to employees and directors during the three and nine months ended September 30, 2021 was $35.00 and $43.73, respectively, and during the three and nine months ended September 30, 2020 was $27.44 and $30.58, respectively.
The weighted-average grant-date fair value per share of options granted to non-employees during the three and nine months ended September 30, 2021 was $33.93 and $33.93, respectively, and during the three and nine months ended September 30, 2020 was zero, respectively.
There was $51.9 million of unrecognized stock-based compensation expense related to employees and directors’ option awards that is expected to be recognized over a weighted-average period of 3.3 years as of September 30, 2021.
There was $1.7 million of unrecognized stock-based compensation expense related to non-employees’ option awards that is expected to be recognized over a weighted-average period of 3.9 years as of September 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 nine months ended September 30, 2021 and 2020 as follows (in thousands):
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 Three Months Ended September 30,Nine Months Ended September 30,
 2021202020212020
(unaudited)(unaudited)
Research and development$673 $344 $2,273 $714 
General and administrative2,502 1,012 6,742 1,988 
Total stock-based compensation$3,175 $1,356 $9,015 $2,702 
We capitalize the portion of stock-based compensation that relates to work performed on the construction of new buildings. There was $79 thousand and $182 thousand of stock-based compensation that was capitalized in the three and nine months ended September 30, 2021, respectively, and zero of stock-based compensation that was capitalized in the three and nine months ended September 30, 2020, respectively.
The Company recorded stock-based compensation expense of $3.2 million and $9.0 million for the three and nine months ended September 30, 2021, respectively, and $1.4 million and $2.7 million for the three and nine months ended September 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 nine months ended September 30, 2021 and 2020:

 Three Months Ended September 30,Nine Months Ended September 30,
 2021202020212020
Expected stock price volatility73 %75 %73 %75 %
Expected term of the award (years)6.236.206.196.20
Risk-free interest rate1.13 %0.34 %1.05 %0.66 %
Weighted average exercise price$53.69$41.89$67.15$46.46
Forfeiture rate %10.85 % %10.85 %
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 nine months ended September 30, 2021, respectively, and zero RSAs to employees of the Company during the three and nine months ended September 30, 2020.
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 September 30, 202198,800 $78.89 
As of September 30, 2021, 98,800 RSAs were outstanding. The fair value of each restricted stock award 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 $491 thousand and $1.2 million for the three and nine months ended September 30, 2021, respectively, and zero for the three and nine months ended September 30, 2020, within general and administrative expenses in the accompanying condensed consolidated statements of operations (in thousands):
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Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
(unaudited)(unaudited)
General and administrative$491 $ $1,159 $ 
Total stock-based compensation$491 $ $1,159 $ 
Shares remaining available for grant under the Company’s stock incentive plan were 1,381,481, with a sublimit for incentive stock options of 379,921, at September 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, KB303 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, KB303 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, KB303 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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risks related to our ongoing litigation;
our ability to successfully resolve any intellectual property or other claims that have been brought against us to date and may be brought against us in the future;
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 delivery 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/3f1401735f7ba0551262086d893018ba-krys-20210930_g1.jpg


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

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 was designed to evaluate topical B-VEC as compared to placebo in DEB patients. On October 25, 2021,
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we announced completion of the GEM-3 study, 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. On September 9, 2021, we announced that the U.S. FDA approved a compassionate use request from a physician for the use of topical (eye drop) B-VEC in the system of a single DEB patient after undergoing surgical removal of the scarred layer of the cornea.
•    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 September 29, 2021, we announced that the Bellberry Human Research Ethics Committee in Australia granted approval to conduct a Phase 1 clinical study of inhaled KB407 in patients with cystic fibrosis, and trial initiation is anticipated in 4Q21. More detailed data from the Good Laboratory Practice "GLP" toxicology and biodistribution study was presented at the virtual 2021 North American Cystic Fibrosis Conference that took place November 2-5, 2021.
•    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. We presented preclinical pharmacology data for KB408 at the European Society of Gene & Cell Therapy Virtual Congress that was held October 19-22, 2021.
•    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 Aesthetics, Inc. ("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 August 2, 2021, Jeune announced the dosing of the first patient in the second Cohort of the PEARL-1 study. This cohort is a randomized, double-blind, saline controlled evaluation of safety and efficacy of KB301 for the improvement of skin quality. Enrollment of this cohort completed in October 2021, and Jeune expects to announce initial data from Cohort 2 in early 2022. Details of the Phase 1 study can be found at www.clinicaltrials.gov under NCT identifier NCT04540900. Nothing included on this website 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 September 15, 2021, we announced the appointment of Laurent Goux as the General Manager of Europe.
On October 12, 2021, we announced a collaboration with GeneDx, Inc., a wholly-owned subsidiary of BioReference Laboratories, Inc., an OPKO Health company, to offer no-charge genetic testing for all types of Epidermolysis Bullosa (EB). The goal of the program, called Krystal Decode DEBTM, is to help patients with the dystrophic form of this genetic condition, also known as DEB, get a definitive diagnosis sooner, with highly accurate results obtained with a blood or cheek swab sample.

COVID-19 Update
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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 coronavirus disease ("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 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
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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 nine months ended September 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 September 30, 2021 and 2020
 
Three Months Ended September 30,
 
 20212020Change
(In thousands)(unaudited) 
Expenses   
Research and development$6,080 $5,100 $980 
General and administrative9,572 4,580 4,992 
Total operating expenses15,652 9,680 5,972 
Loss from operations(15,652)(9,680)(5,972)
Other Income 
Interest and other income, net63 70 (7)
Net loss$(15,589)$(9,610)$(5,979)
Research and Development Expenses 
Research and development expenses increased $980 thousand in the three months ended September 30, 2021 compared to the three months ended September 30, 2020. Higher research and development expenses were due to an increase in preclinical, clinical and pre-commercial manufacturing activities of $538 thousand, payroll related expenses of $363 thousand, which were primarily driven by an increase in headcount to support overall growth, and includes a $327 thousand increase in stock-based compensation, software related costs of $167 thousand, and other research and development expenses of $191 thousand, primarily due to depreciation and rent. These increases were offset by decrease in outsourced research and development activities of approximately $279 thousand.
General and Administrative Expenses
General and administrative expenses increased $5.0 million in the three months ended September 30, 2021 as compared to the three months ended September 30, 2020. Higher general and administrative spending was due largely to increases in payroll related expenses of approximately $3.1 million, which was primarily driven by an increase in headcount to support overall growth, and includes a $2.0 million increase in stock-based compensation, commercial preparedness expenses of approximately $1.2 million, medical affairs costs of $101 thousand, software related costs of $453 thousand, and other administrative expenses of $422 thousand, primarily due to rent and insurance costs. These increases were offset by a decrease in legal and professional fees of approximately $316 thousand, which includes $1.6 million of insurance proceeds.
Other Income
Interest and other income for the three months ended September 30, 2021 and 2020 was $63 thousand and $70 thousand, respectively, and consisted of interest and dividend income earned from our cash, cash equivalents and investments.

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Nine Months Ended September 30, 2021 and 2020
 
Nine Months Ended September 30,
 
 20212020Change
(In thousands)