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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, 2023

or

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

For the transition period from               to                    

Commission file number: 001-38210

_____________________________________________________

Krystal Biotech, Inc.

(Exact name of registrant as specified in its charter)

_____________________________________________________

Delaware						82-1080209
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification Number)

2100 Wharton Street, Suite 701

Pittsburgh, Pennsylvania 15203

(Address of principal executive offices and zip code)

(412) 586-5830

(Registrant’s telephone number, including area code)

N/A

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

_____________________________________________________

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

Title of each class			Trading Symbol(s)			Name of each exchange on which registered
Common Stock			KRYS			NASDAQ Global Select Market

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

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

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

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company     ☐

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

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

As of October 30, 2023, there were 28,206,330 shares of the registrant’s common stock issued and outstanding.

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Krystal Biotech, Inc.

TABLE OF CONTENTS

									Page No.
PART I. FINANCIAL INFORMATION
Item 1.			Financial Statements
			Condensed Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022 (unaudited)						3
			Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2023 and 2022 (unaudited)						4
			Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2023 and 2022 (unaudited)						5
			Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2023 and 2022 (unaudited)						6
			Notes to Condensed Consolidated Financial Statements (unaudited)						7
Item 2.			Management’s Discussion and Analysis of Financial Condition and Results of Operations						22
Item 3.			Quantitative and Qualitative Disclosures About Market Risk						36
Item 4.			Controls and Procedures						36
PART II. OTHER INFORMATION
Item 1.			Legal Proceedings						37
Item 1A.			Risk Factors						37
Item 2.			Unregistered Sales of Equity Securities and Use of Proceeds						50
Item 3.			Defaults Upon Senior Securities						50
Item 4.			Mine Safety Disclosures						50
Item 5.			Other Information						50
Item 6.			Exhibits						51
SIGNATURES									52

2

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PART I. FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

Krystal Biotech, Inc.

Condensed Consolidated Balance Sheets

(unaudited)

(In thousands, except share and per share data)			September 30, 2023						December 31, 2022
Assets
Current assets
Cash and cash equivalents			$	373,241					$	161,900
Short-term investments			188,828						217,271
Accounts receivable, net			9,316						—
Inventory			5,278						—
Prepaid expenses and other current assets			5,465						4,608
Total current assets			582,128						383,779
Property and equipment, net			164,029						161,684
Long-term investments			36,548						4,621
Right-of-use assets			7,360						8,042
Other non-current assets			285						324
Total assets			$	790,350					$	558,450
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable			$	4,340					$	3,981
Current portion of lease liability			1,501						1,561
Accrued expenses and other current liabilities			21,742						23,305
Total current liabilities			27,583						28,847
Lease liability			6,819						7,372
Total liabilities			34,402						36,219
Commitments and contingencies (Note 7)
Stockholders' equity
Common stock; $0.00001 par value; 80,000,000 shares authorized at September 30, 2023 and December 31, 2022; 28,194,655 shares issued and outstanding at September 30, 2023; and 25,763,743 shares issued and outstanding at December 31, 2022			—						—
Additional paid-in capital			1,034,849						803,718
Accumulated other comprehensive loss			(382)						(728)
Accumulated deficit			(278,519)						(280,759)
Total stockholders' equity			755,948						522,231
Total liabilities and stockholders' equity			$	790,350					$	558,450

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

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Krystal Biotech, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

(unaudited)

			Three Months Ended September 30,												Nine Months Ended September 30,
(In thousands, except share and per share data)			2023						2022						2023						2022
Product revenues, net			$	8,556					$	—					$	8,556					$	—
Expenses:
Cost of goods sold			223						—						223						—
Research and development			10,629						11,516						35,061						31,720
Selling, general, and administrative			23,697						19,935						73,637						53,705
Litigation settlement			—						—						12,500						25,000
Total operating expenses			34,549						31,451						121,421						110,425
(Loss) from operations			(25,993)						(31,451)						(112,865)						(110,425)
Other income:
Gain from sale of priority review voucher			100,000						—						100,000						—
Interest and other income, net			6,740						1,601						15,105						2,502
Net income (loss)			$	80,747					$	(29,850)					2,240						(107,923)
Unrealized (loss) gain on available-for-sale securities and currency translation adjustment			(146)						70						346						(1,312)
Comprehensive income (loss)			$	80,601					$	(29,780)					$	2,586					$	(109,235)
Net income (loss) per common share:
Basic			$	2.88					$	(1.17)					$	0.08					$	(4.24)
Diluted			$	2.79					$	(1.17)					$	0.08					$	(4.24)
Weighted-average common shares outstanding:
Basic			28,042,130						25,619,125						26,812,278						25,428,097
Diluted			28,892,226						25,619,125						27,384,539						25,428,097

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

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Krystal Biotech, Inc.

Condensed Consolidated Statements of Stockholders' Equity

(unaudited)

			Common Stock												Additional Paid-in						Accumulated Other Comprehensive						Accumulated						Total Stockholders'
(In thousands, except shares)			Shares						Amount						Capital						Loss						Deficit						Equity
Balances at January 1, 2023			25,763,743						$	—					$	803,718					$	(728)					$	(280,759)					$	522,231
Issuance of common stock, net			42,021						—						2,208						—						—						2,208
Shares surrendered for taxes			(9,551)						—						(749)						—						—						(749)
Stock-based compensation expense			—						—						10,599						—						—						10,599
Unrealized gain on investments and other			—						—						—						574						—						574
Net loss			—						—						—						—						(45,297)						(45,297)
Balances at March 31, 2023			25,796,213						$	—					$	815,776					$	(154)					$	(326,056)					$	489,566
Issuance of common stock, net			2,178,703						—						185,397						—						—						185,397
Stock-based compensation expense			—						—						11,443						—						—						11,443
Unrealized (loss) on investments and other			—						—						—						(82)						—						(82)
Net loss			—						—						—						—						(33,210)						(33,210)
Balances at June 30, 2023			27,974,916						$	—					$	1,012,616					$	(236)					$	(359,266)					$	653,114
Issuance of common stock, net			219,739						—						13,511						—						—						13,511
Stock-based compensation expense			—						—						8,722						—						—						8,722
Unrealized (loss) on investments and other			—						—						—						(146)						—						(146)
Net income			—						—						—						—						80,747						80,747
Balances at September 30, 2023			28,194,655						$	—					$	1,034,849					$	(382)					$	(278,519)					$	755,948

			Common Stock												Additional Paid-in						Accumulated Other Comprehensive						Accumulated						Total Stockholders'
(In thousands, except shares)			Shares						Amount						Capital						(Loss)						Deficit						Equity
Balances at January 1, 2022			25,207,985						$	—					$	734,523					$	(163)					$	(140,784)					$	593,576
Issuance of common stock, net			1,475						—						55						—						—						55
Shares surrendered for taxes and forfeitures			(10,379)						—						(649)						—						—						(649)
Stock-based compensation expense			—						—						6,571						—						—						6,571
Unrealized (loss) on investments and other			—						—						—						(1,034)						—						(1,034)
Net loss			—						—						—						—						(49,965)						(49,965)
Balances at March 31, 2022			25,199,081						$	—					$	740,500					$	(1,197)					$	(190,749)					$	548,554
Issuance of common stock, net			472,706						—						30,748						—						—						30,748
Shares forfeited			(7,500)						—						—						—						—						—
Stock-based compensation expense			—						—						8,335						—						—						8,335
Unrealized (loss) on investments and other			—						—						—						(348)						—						(348)
Net loss			—						—						—						—						(28,108)						(28,108)
Balances at June 30, 2022			25,664,287						$	—					$	779,583					$	(1,545)					$	(218,857)					$	559,181
Issuance of common stock, net			45,377						—						2,176						—						—						2,176
Stock-based compensation expense			—						—						9,195						—						—						9,195
Unrealized gain on investments and other			—						—						—						70						—						70
Net loss			—						—						—						—						(29,850)						(29,850)
Balances at September 30, 2022			25,709,664						$	—					$	790,954					$	(1,475)					$	(248,707)					$	540,772

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

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Krystal Biotech, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

			Nine Months Ended September 30,
(In thousands)			2023						2022
Operating Activities
Net income (loss)			$	2,240					$	(107,923)
Adjustments to reconcile net income (loss) to net cash (used in) operating activities
Gain from sale of priority review voucher			(100,000)						—
Depreciation and amortization			2,569						2,966
Stock-based compensation expense			30,080						23,678
Loss on disposals of fixed assets			—						22
Other, net			(4,290)						(224)
Changes in operating assets and liabilities
Accounts receivable			(9,316)						—
Inventory			(3,983)						—
Prepaid expenses and other current assets			(137)						1,031
Other non-current assets			(48)						(31)
Lease liability			(603)						(459)
Accounts payable			121						(316)
Accrued expenses and other current liabilities			1,795						3,016
Net cash (used in) operating activities			(81,572)						(78,240)
Investing Activities
Proceeds from sale of priority review voucher			100,000						—
Purchases of property and equipment			(9,952)						(47,762)
Purchases of investments			(425,870)						(214,712)
Proceeds from maturities of investments			428,620						153,599
Net cash provided by (used in) investing activities			92,798						(108,875)
Financing Activities
Issuance of common stock, net of issuance costs			200,880						32,927
Taxes paid related to settlement of restricted stock awards			(749)						(649)
Net cash provided by financing activities			200,131						32,278
Effect of exchange rate changes on cash and cash equivalents			(16)						—
Net increase (decrease) in cash and cash equivalents			211,341						(154,837)
Cash and cash equivalents at beginning of period			161,900						341,246
Cash and cash equivalents at end of period			$	373,241					$	186,409
Supplemental Disclosures of Non-Cash Investing and Financing Activities
Unpaid purchases of property and equipment included in accounts payable and accrued expenses			$	11,103					$	15,305
Initial recognition of right-of-use assets			$	—					$	1,556

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

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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 in April 2016. In March 2017, the Company converted from a California limited liability company to a Delaware C-corporation, and changed its name from Krystal Biotech LLC to Krystal Biotech, Inc. In June 2018, the Company incorporated a wholly-owned subsidiary in Australia for the purpose of undertaking preclinical and clinical studies in Australia. In April 2019, the Company incorporated Jeune Aesthetics, Inc. (“Jeune Aesthetics”), in Delaware, a wholly-owned subsidiary, for the purpose of undertaking preclinical and clinical studies for aesthetic skin conditions. In January 2022, August 2022, December 2022, and August 2023, the Company incorporated wholly-owned subsidiaries in Switzerland, Netherlands, France, and Germany, respectively, for the purpose of establishing initial operations in Europe for the commercialization of the Company’s product pipeline.

We are a commercial-stage biotechnology company focused on the discovery, development, and commercialization of genetic medicines to treat diseases with high unmet medical needs. Our approach leverages our patented platform that is based on an engineered Herpes Simplex Virus-1 (“HSV-1”) vector to deliver therapeutic transgenes to cells of interest in multiple organ systems. The cell’s own machinery then transcribes and translates the transgene to treat the disease. We formulate our vectors for non-invasive or minimally invasive routes of administration at a healthcare professional’s office or in the patient’s home by a healthcare professional. Our innovative technology platform is supported by two in-house, commercial scale Current Good Manufacturing Practices ("CGMP") manufacturing facilities.

On May 19, 2023, the Company received U.S. Food and Drug Administration (“FDA”) approval for its first product, VYJUVEK® (“VYJUVEK”) for the treatment of Dystrophic Epidermolysis Bullosa (“DEB”) in patients six months or older. Additionally, the Company received a Rare Pediatric Disease Priority Review Voucher (“PRV”) in connection with the VYJUVEK approval. VYJUVEK became commercially available upon approval, and we began generating revenue from VYJUVEK product sales in 3Q 2023.

Liquidity

As of September 30, 2023, the Company had an accumulated deficit of $278.5 million. As the Company continues to incur operating losses, a transition to operating profitability is dependent upon the successful commercialization of VYJUVEK as well as successful development, approval, and commercialization of its other product candidates and the achievement of a level of revenues adequate to support the Company’s cost structure. The Company may never achieve operating 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 its on hand cash and cash equivalents, revenue generated from the sale of VYJUVEK, the sale of equity, 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. The Company expects to incur significant costs to further its pipeline and to expand its commercialization capabilities in advance of the potential global regulatory approvals of VYJUVEK. The Company believes that its cash, cash equivalents and short-term investments of approximately $562.1 million as of September 30, 2023 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.

2.    Summary of Significant Accounting Policies

Basis of Presentation

The accompanying interim condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”). 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 presented, are reflected in the interim condensed consolidated financial statements. All intercompany balances and transactions have been eliminated in consolidation.

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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 consolidated 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, 2022, as filed with the U.S. Securities and Exchange Commission (“SEC”) on February 27, 2023.

Use of Estimates

The preparation of condensed consolidated 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 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. If actual results in the future vary from the Company’s estimates, the Company will adjust these estimates in the period these variances become known. Estimates are used in the following areas, among others: variable consideration associated with revenue recognition, stock-based compensation expense, accrued expenses, 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 pharmaceutical products.  

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 less than one year are classified as short-term investments on the condensed consolidated balance sheets and consist of commercial paper, corporate bonds, and U.S. government agency securities. Investments with maturities of greater than one year are classified as long-term investments on the condensed consolidated balance sheets and consist of corporate bonds and government agency securities. Accrued interest on investments is also classified as short-term investments on the condensed consolidated balance sheets.

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 condensed consolidated balance sheets. Any premium arising at purchase is amortized to the earliest call date and any discount arising at purchase is accreted to maturity. Amortization and accretion of premiums and discounts are recorded in interest and other income, net, in the condensed consolidated statements of operations and comprehensive income (loss).

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.

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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, accounts receivable, net, prepaid expenses and other current assets, accounts payable, accrued expenses and other current liabilities included in the Company’s condensed consolidated financial statements, approximate fair value, primarily due to their short maturities. Our available-for-sale, short-term and long-term investments are considered to be Level 2 financial instruments.

Revenue Recognition

The Company sells VYJUVEK to a limited number of specialty pharmacies (“SPs”) that mix the medication and administer it to patients in the patient’s home by a healthcare professional and a single specialty distributor (“SD”), that distributes VYJUVEK to hospitals and outpatient clinics where patients are administered the medication at a healthcare professional’s office.

The Company recognizes product revenue under ASC Topic 606, Revenue from Contracts with Customers (“Topic 606”). Under Topic 606, the Company is required to complete the following five steps:

(i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price, including variable consideration, if any; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation.

The Company recognizes revenue when the customer obtains control of the product, which occurs at a point in time, upon delivery to the customer. Sales and other taxes collected concurrent with revenue-producing activities are excluded from revenue. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring VYJUVEK and is generally based upon a list or fixed price less allowances for returns, rebates and discounts. The Company’s payment terms are generally 30 to 60 days from the invoice date.

Variable Consideration

Product revenues is recorded at the net sales price, or transaction price, upon delivery and transfer of control to the customer, and includes an estimate of variable consideration, which results from discounts, rebates, and returns that are offered within contracts between the Company and its customers.

–Prompt Pay Discounts: As an incentive for prompt payment, the Company offers a cash discount to customers. The Company estimates accrued prompt pay discounts using the most likely amount method. The Company expects that all eligible customers will comply with the contractual terms to earn the discount. The Company records the discount as an allowance against accounts receivable, net and a reduction of revenue.

–Government Rebates: The Company participates in certain government rebate programs including Medicaid. The Company estimates accrued government rebates using the expected value method. The Company accrues estimated rebates based on estimated percentages of VYJUVEK prescribed to qualified patients, estimated rebate percentages and estimated levels of inventory in the distribution channel that will be prescribed to qualified patients and records the rebates as a reduction of revenue. Accrued government rebates are recorded as a reduction of revenue and are included in other accrued liabilities on the condensed consolidated balance sheets.

–Commercial Rebates: The Company participates in certain commercial rebate programs. Under these rebate programs, the Company pays a rebate to the commercial entity or third-party administrator of the program. Accrued commercial rebates are estimated using the expected value method. The Company accrues estimated rebates based on contract prices, estimated percentages of VYJUVEK that will be prescribed to qualified patients and estimated levels of inventory in the distribution channel. Accrued commercial rebates are recorded as a reduction of revenue and are included in other accrued liabilities on the condensed consolidated balance sheets.

–Copay Assistance: The Company provides copay assistance to qualified patients, helping them meet copay obligations to their insurance provider. The Company reimburses pharmacies for this discount through third-party vendors. The Company estimates copay assistance costs using the expected value method. The estimate is based on contract prices, estimated percentages of VYJUVEK that will be prescribed to qualified patients, average assistance paid based on reporting from third-party vendors and estimated levels of inventory in the distribution channel. Copay assistance costs are recorded as reductions to revenue and are accrued in other accrued liabilities on the condensed consolidated balance sheets.

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–Returns: The Company offers SPs and SDs limited return rights relating to product damage or defect and based on these provisions, the Company believes that there will be minimal returns.

Variable consideration is estimated and reduces the transaction price to reflect the Company’s best estimate of the amount of consideration to which the Company is entitled based on the terms of the contracts and are recorded in the same period the related product revenues is recognized. The amount of variable consideration that is included in the transaction price may be constrained and is included in the net sales price only to the extent that it is considered probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. Actual amounts of consideration ultimately received may differ from the Company’s estimates. If actual results in the future vary from the Company’s estimates, the Company will adjust these estimates in the period these variances become known.

Cost of Goods Sold

Cost of goods sold includes direct and indirect costs related to the manufacturing of VYJUVEK. These costs consist of manufacturing costs, personnel costs including stock-based compensation, facility costs, and other indirect overhead costs. Cost of goods sold may also include period costs related to certain manufacturing services and inventory adjustment charges.

Accounts Receivable

Accounts receivable is recorded net of allowances for prompt payment discounts, returns, and credit losses. The Company estimates an allowance for credit losses by considering factors such as credit quality, the age of the accounts receivable balances, and current economic conditions that may affect a customer’s ability to pay. As of September 30, 2023, the credit profiles for the Company’s customer was deemed to be in good standing, and as such an allowance for credit losses was not recorded.

Concentration of Credit Risk and Off-Balance Sheet Risk

Financial instruments that subject the Company to credit risk primarily consist of cash and cash equivalents, short-term investments, long-term investments, and accounts receivable, net. The Company maintains its cash and cash equivalent balances with high-quality financial institutions and, consequently, the Company believes that such funds are subject to minimal credit risk. The Company is exposed to credit risk in the event of default by the financial institutions to the extent amounts recorded on the condensed consolidated 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’s accounts receivable, net and marketable securities, which primarily consist of U.S. government agency securities and treasuries, equity securities, corporate bonds and commercial paper, potentially subject the Company to concentrations of credit risk. The Company had one customer for the three and nine months ended September 30, 2023 and no product revenues for the three and nine months ended September 30, 2022. The Company has no financial instruments with off-balance sheet risk of loss.

Inventories

The Company capitalizes inventory costs associated with products when future economic benefit is expected to be realized. These costs consist of raw materials, manufacturing-related costs, personnel costs including stock-based compensation, facility costs, and other indirect overhead costs. Prior to receiving FDA approval for VYJUVEK in May 2023, the Company expensed costs related to inventory for clinical and pre-commercial purposes directly to research and development expense. Following the FDA’s approval of VYJUVEK, the Company began capitalizing inventory related to commercialized products held for sale, in-process of production for sale, and raw materials to be used in the manufacturing of inventory.

The Company values its inventories at the lower-of-cost and net realizable value, on a first-in, first-out (“FIFO”) basis. The Company adjusts the net realizable value of any excess, obsolete or unsalable inventories in the period in which an impairment is identified. For the three and nine months ended September 30, 2023 and 2022, there were no inventory impairment adjustments. As of September 30, 2023, the Company recorded $5.3 million of inventory, consisting of raw materials, work-in-process, and finished goods within inventory on the Company’s condensed consolidated balance sheets.

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 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:

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Buildings and building improvements			7 - 47 years
Computer equipment and software			3 - 7 years
Manufacturing equipment			3 - 20 years
Laboratory equipment			3 - 15 years
Furniture and fixtures			3 - 7 years
Leasehold improvements			lesser of useful life or remaining life of lease

The Company reviews the estimated useful lives of its property and equipment on a continuing basis. In evaluating the useful lives, the Company considers how long assets will remain functionally effective, whether the technology continues to be relevant and considers other competitive and economic factors. If the assessment indicates that the assets will be used for a shorter or longer period than previously anticipated, the useful life of the assets is adjusted, resulting in a change in estimate. Changes in estimates are accounted for on a prospective basis by depreciating the current carrying values of the assets over their revised remaining useful lives.

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

Impairment of Long-Lived Assets

The Company evaluates long-lived assets for potential impairment when events or changes in circumstances indicate the carrying value of the assets may not be recoverable. We review the recoverability of the net book value of long-lived assets whenever events and circumstances indicate ("triggering events") that the net book value of an asset may not be recoverable. In cases where a triggering event occurs and undiscounted expected future cash flows are less than the net book value, we recognize an impairment loss equal to an amount by which the net book value exceeds the fair value of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell. The Company has not identified any triggering events or recognized any impairment losses for the three and nine months ended September 30, 2023 and 2022.

Leases

The Company accounts for its lease agreements in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification, or ASC, Topic 842, Leases. Right-of-use lease assets represent the right to use an underlying asset during the lease term and the lease liabilities represent the 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 existing lease agreements do not provide an implicit rate and as the Company does not have any external borrowings, the Company has 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 condensed consolidated balance sheets and to account for lease and non-lease components of its operating leases as a single component.

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, clinical manufacturing costs, contract management services, regulatory and other related costs.

The Company estimates contract research and 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 capitalized within prepaid expenses and other current assets on the condensed consolidated balance sheets. 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 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.

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Stock-Based Compensation Expense

The Company applies the fair value recognition provisions of FASB, ASC Topic 718, Compensation—Stock Compensation ("ASC 718"), to account for stock-based compensation. Compensation costs related to equity awards granted are based on the estimated fair value of the awards on the date of grant.

ASC 718 requires all stock-based payments, including grants of stock options and restricted stock, to be recognized in the consolidated statements of operations based on their grant-date fair values. Compensation expense for stock options, restricted stock awards, and restricted stock units 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. Compensation expense for performance-based restricted stock units is recognized for the awards that are probable of vesting over the service period of the award. On a quarterly basis, management estimates the probable number of performance-based restricted stock units that would vest until such time that the ultimate achievement of the performance criteria are known.

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.

The Company estimates stock price volatility by using its own historical data. The expected term of the Company’s stock options is estimated 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 U.S. Treasury securities with a maturity date commensurate with the expected term of the associated award. The Company has never paid and does not expect to pay dividends in the foreseeable future. The Company 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 Income (Loss)

Comprehensive income (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 and foreign currency translation are components of other comprehensive gains or losses and are presented net of taxes. We record reclassifications from other comprehensive gains or losses to interest and other income, net on the condensed consolidated statements of operations related to realized gains on sales of available-for-sale securities.

The Company reviews its securities quarterly to determine whether an other-than-temporary impairment has occurred. The Company determined that there were no other-than-temporary impairments during the three and nine months ended September 30, 2023 and 2022.

Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the FASB that the Company adopts as of the specified effective date. There were no recently adopted accounting pronouncements that had a material impact on the Company’s condensed consolidated financial statements, and no recently issued accounting pronouncements that are expected to have a material impact on the Company’s condensed consolidated financial statements.

3.    Revenue Recognition

The Company began commercial marketing and sales of VYJUVEK throughout the United States and began recognizing revenue in 3Q 2023. For the three and nine months ended September 30, 2023 and 2022, the Company recognized net product revenues of $8.6 million and zero, respectively. Accounts receivable balances were $9.3 million and zero as of September 30, 2023 and December 31, 2022, respectively.

The following table summarizes changes in allowances and discounts for the three months ended September 30, 2023 (in thousands):

			Rebates						Prompt Pay						Other Accruals						Total
Balance as of June 30, 2023			$	—					$	—					$	—					$	—
Provision			920						195						78						1,192
Payments/Credits			—						(5)						—						(5)
Balance, as of September 30, 2023			$	920					$	190					$	78					$	1,187

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4.    Net Income (Loss) Per Share Attributable to Common Stockholders

Basic net income (loss) per share attributable to common stockholders is calculated by dividing net income (loss) attributable to common stockholders by the weighted average shares outstanding during the period, without consideration for common stock equivalents. Diluted net income (loss) per share attributable to common stockholders is computed by dividing the net income (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 and restricted stock units.

There were 378,299 and 1,277,313 common share equivalents, in the form of stock options, that have been excluded of from the calculation of diluted net income (loss) per common share for the three and nine months ended September 30, 2023, respectively, as their effect would be anti-dilutive. There were 3,565,110 common share equivalents outstanding in the form of stock options and unvested restricted stock awards as of September 30, 2022 that were excluded from the calculation of diluted net income (loss) per common share as their effect would be anti-dilutive.

			Three Months Ended September 30,												Nine Months Ended September 30,
(In thousands, except share and per share data)			2023						2022						2023						2022
Numerator:
Net income (loss)			$	80,747					$	(29,850)					$	2,240					$	(107,923)
Denominator:
Weighted-average basic common shares			28,042,130						25,619,125						26,812,278						25,428,097
Dilutive effect of stock options and unvested restricted stock			850,096						—						572,261						—
Weighted-average diluted common shares			28,892,226						25,619,125						27,384,539						25,428,097
Net income (loss) per common share — Basic			$	2.88					$	(1.17)					$	0.08					$	(4.24)
Net income (loss) per common share — Diluted			$	2.79					$	(1.17)					$	0.08					$	(4.24)

5.    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, 2023 and December 31, 2022, respectively (in thousands):

			September 30, 2023
			Amortized Cost						Gross Unrealized Gains						Gross Unrealized (Losses)						Aggregate Fair Value						Cash and Cash Equivalents						Short-term Marketable Securities (1)						Long-term Marketable Securities (2)
Level 1:
Cash and cash equivalents			$	373,241					$	—					$	—					$	373,241					$	373,241					$	—					$	—
Subtotal			373,241						—						—						373,241						373,241						—						—
Level 2:
Commercial paper			43,496						1						(9)						43,488						—						43,488						—
Corporate bonds			70,465						4						(201)						70,268						—						56,463						13,805
U.S. government agency securities			111,635						225						(240)						111,620						—						88,877						22,743
Subtotal			225,596						230						(450)						225,376						—						188,828						36,548
Total			$	598,837					$	230					$	(450)					$	598,617					$	373,241					$	188,828					$	36,548

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			December 31, 2022
			Amortized Cost						Gross Unrealized Gains						Gross Unrealized (Losses)						Aggregate Fair Value						Cash and Cash Equivalents						Short-term Marketable Securities (1)						Long-term Marketable Securities (2)
Level 1:
Cash and cash equivalents			$	161,900					$	—					$	—					$	161,900					$	161,900					$	—					$	—
Subtotal			161,900						—						—						161,900						161,900						—						—
Level 2:
Commercial paper			63,624						5						(23)						63,606						—						63,606						—
Corporate bonds			82,241						13						(419)						81,835						—						77,214						4,621
U.S. government agency securities			76,683						161						(393)						76,451						—						76,451						—
Subtotal			222,548						179						(835)						221,892						—						217,271						4,621
Total			$	384,448					$	179					$	(835)					$	383,792					$	161,900					$	217,271					$	4,621

(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.

6.    Balance Sheet Components

Property and Equipment, Net

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

			September 30, 2023						December 31, 2022
Building and building improvements			72,193						—
Construction in progress			$	56,074					$	131,331
Leasehold improvements			24,835						24,217
Manufacturing equipment			16,827						9,783
Laboratory equipment			2,339						2,089
Furniture and fixtures			1,518						957
Computer equipment and software			982						100
Total property and equipment			174,768						168,477
Accumulated depreciation			(10,739)						(6,793)
Property and equipment, net			$	164,029					$	161,684

Depreciation expense was $1.2 million and $3.5 million for the three and nine months ended September 30, 2023 and $669 thousand and $1.6 million for the three and nine months ended September 30, 2022, respectively.

On March 27, 2023, the Company received the permanent occupancy permit for its second commercial scale CGMP facility, ASTRA, which allowed the Company to begin utilizing certain portions of the building. As a result, certain assets relating to ASTRA were reclassified from construction in progress to leasehold improvements, manufacturing equipment, buildings and building improvements, furniture and fixtures, or computer equipment and software during the first half of 2023. The Company placed additional portions of ASTRA into service during the three months ended September 30, 2023 as it was determined that additional assets were ready for their intended use. As certain building improvements are not yet complete and certain qualification activities are still underway, the Company will continue to hold the remaining assets within construction in progress until validation has been completed and the assets are ready for their intended use. Validation of the facility is expected to be completed in 2023.

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Accrued Expenses and Other Current Liabilities

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

			September 30, 2023						December 31, 2022
Accrued construction in progress			$	7,548					$	11,452
Accrued payroll and benefits			7,033						6,781
Accrued professional fees			2,786						3,397
Other current liabilities			2,315						267
Accrued preclinical and clinical expenses			1,908						1,365
Accrued taxes			152						43
Total			$	21,742					$	23,305

7.    Commitments and Contingencies

Agreements with Contract Research Organizations and Contract Manufacturing Organizations

The Company enters into various agreements in the normal course of business with Contract Research Organizations ("CROs"), Contract Manufacturing Organizations ("CMOs") and other third parties for preclinical research studies, clinical trials and testing and manufacturing services. The agreements with CMOs primarily relate to the manufacturing of our cell and virus banks and for the manufacturing of our sterile gel that is mixed with in-house produced vectors as part of the final drug product for VYJUVEK. Agreements with third parties may also include research and development consulting activities, clinical-trial agreements, storage, packaging, labeling, and/or testing of our preclinical and clinical-stage or pre-commercial products. The Company is obligated to make milestone payments under certain of these contracts. 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 estimated remaining commitment as of September 30, 2023 under these agreements is approximately $2.7 million. The Company has incurred research and development expenses under these agreements of $1.9 million and $5.0 million for the three and nine months ended September 30, 2023, respectively, and $2.1 million and $5.1 million for the three and nine months ended September 30, 2022, respectively.

ASTRA Contractual Obligations

The Company has contracted with various third parties to complete and qualify our second CGMP facility, ASTRA. 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, 2023 is $11.1 million and primarily relates to the remaining building improvements and certain qualification activities of the facility. The Company has included costs incurred to-date associated with the ongoing build-out of ASTRA within construction in progress, except for the assets of the facility that have been placed in service.

As of September 30, 2023, Substantial Completion, as defined in the Standard Form of Contract for Construction and the corresponding General Conditions of the Contract for Construction (the “Agreement”) with Whiting-Turner Contracting Company (“Whiting-Turner”), the construction manager for ASTRA, had not been achieved. 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 may not equate to the date of in-service for portions of ASTRA or the date of full facility completion of ASTRA.

Legal Proceedings

In May 2020, a complaint was filed against the Company in the United States District Court for the Western District of Pennsylvania by PeriphaGen, Inc. ("PeriphaGen") alleging breach of contract and misappropriation of trade secrets. On April 27, 2022, the Company and PeriphaGen entered into a final settlement agreement, and the Company paid PeriphaGen an upfront payment of $25.0 million on April 28, 2022 for: (i) the release of all claims in the trade secret litigation with PeriphaGen; (ii) the acquisition of certain PeriphaGen assets, and (iii) the grant of a license by PeriphaGen for dermatological applications. In accordance with the settlement agreement, on June 15, 2023, the Company paid PeriphaGen an additional $12.5 million following the FDA’s approval of VYJUVEK. The settlement agreement requires the Company to pay three additional $12.5 million contingent milestone payments upon reaching $100.0 million in total cumulative sales, $200.0 million in total cumulative sales and $300.0 million in total cumulative sales. As defined in the settlement agreement, cumulative sales shall include all revenue from sales of the Company products by the Company and its affiliates and licensees, as reported by the

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Company in its annual Form 10-K filings. If all milestones are achieved, the total consideration for settling the dispute, acquiring certain assets, and granting of a license from PeriphaGen will be $75.0 million, of which $37.5 million has been paid.

The Company recorded the settlement payments of zero and $12.5 million for the three and nine months ended September 30, 2023, respectively, and zero and $25.0 million for the three and nine months ended September 30, 2022, respectively, under litigation settlement expense on the condensed consolidated statements of operations. As of September 30, 2023, the Company has not recorded an accrual for the remaining contingent milestone payments.

The Company did not receive insurance proceeds during the three and nine months ended September 30, 2023 and received zero and $768 thousand during the three and nine months ended September 30, 2022, respectively. The reimbursements have been recorded as a reduction to our legal fees included in selling, general, and administrative expenses on the condensed consolidated statements of operations and within operating activities on the condensed consolidated statements of cash flows.

8.    Leases

As of September 30, 2023, future minimum commitments under the Company’s operating leases with lease terms in excess of 12 months were as follows (in thousands):

			Operating Leases
2023 (remaining three months)			$	413
2024			1,539
2025			1,277
2026			1,277
2027			1,300
Thereafter			10,763
Future minimum operating lease payments			$	16,569
Less: Interest			(8,249)
Present value of lease liability			$	8,320

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

			September 30, 2023						December 31, 2022
Operating leases:
Right-of-use assets			$	7,360					$	8,042
Current portion of lease liability			1,501						1,561
Lease liability			6,819						7,372
Total lease liability			$	8,320					$	8,933
Weighted average remaining lease term, in years			12.3						12.5
Weighted average discount rate			9.4		%				9.4		%

The components of the Company's lease expense are as follows:

			Three Months Ended September 30,												Nine Months Ended September 30,
			2023						2022						2023						2022
Lease cost:
Operating lease expense			$	379					$	399					$	1,282					$	1,200
Variable lease expense			62						48						150						168
Total lease expense			$	441					$	447					$	1,432					$	1,368

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9.    Capitalization

ATM Program

On December 31, 2020, the Company entered into a sales agreement with Cowen and Company, LLC ("Cowen") with respect to an at-the-market equity offering program ("2020 ATM Program"), under which the Company issued and sold from time to time through Cowen, acting as agent and/or principal, shares of its common stock, par value $0.0001 per share, having an aggregate offering price up to $150.0 million ("Placement Shares"). The issuance and sale of the Placement Shares were made pursuant to the Company's effective "shelf" registration statement on Form S-3 that was filed with the Securities and Exchange Commission (the “SEC”) on May 4, 2020 (the “2020 Shelf Registration Statement”). During the nine months ended September 30, 2022, the Company issued and sold 434,782 Placement Shares at a weighted average price of $69.00 per share for net proceeds of $29.1 million after deducting selling commissions of approximately $900 thousand.

The Company’s 2020 Shelf Registration Statement expired on May 4, 2023, and the Company put in place a new at-the-market equity offering program under substantially the same terms as the 2020 ATM Program (the “New ATM Program”). Accordingly, on May 8, 2023, the Company entered into a new sales agreement with Cowen to issue and sell shares of the Company’s common stock having an aggregate offering price of up to $150.0 million (the “New Placement Shares”) from time to time, under which Cowen will act as the Company’s agent and/or principal. The New Placement Shares will be offered and sold pursuant to the Company’s effective shelf registration statement on Form S-3 filed with the SEC on April 6, 2023, and a prospectus supplement relating to the New Placement Shares that was filed with the SEC on May 8, 2023. During the quarter ended September 30, 2023 no shares of common stock were issued pursuant to the New ATM Program, resulting in $150.0 million available for issuance under the New ATM Program.

2023 Private Placement Offering

On May 22, 2023 and May 23, 2023, the Company sold 1,720,100 and 9,629 shares of common stock, respectively, in a private placement to certain institutional investors at a price of $92.50 per share for aggregate net proceeds of $160.0 million. In addition, the Company entered into a Registration Rights Agreement with the investors (“Registration Rights Agreement”) that required the Company to file a registration statement with the SEC within 60 days of the date of the Registration Rights Agreement registering the resale of the shares of common stock issued in the private placement. On July 18, 2023, the Company filed the resale registration statement on Form S-3ASR with the SEC, which became effective upon filing.

10.    Stock-Based Compensation

In 2017, the Company adopted the 2017 IPO Stock Plan (the “Plan”), which governs the issuance of stock options and restricted stock to employees, certain non-employee consultants, and directors. Initially, the Company reserved 900 thousand shares for issuance under the Plan with an initial sublimit for incentive stock options of 900 thousand shares. On an annual basis, the amount of shares available for issuance under the Plan increases by an amount equal to four percent of the total outstanding shares as of the last day of the preceding calendar year. The sublimit of incentive stock options is not subject to the increase. The Company has historically granted stock options and restricted stock awards to its employees. In February 2023, the Company began issuing restricted stock units and performance-based restricted stock units to certain employees.

Stock Options

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

The Company granted 30,500 and 419,780 stock options to employees, non-employees, and directors of the Company during the three and nine months ended September 30, 2023 and 189,000 and 1,958,000 to employees, non-employees, and directors of the Company during the three and nine months ended September 30, 2022, respectively.

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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, 2022			3,582,181						$	61.50					8.7						$	64,880
Granted			419,780						$	91.38
Exercised			(710,734)						$	57.98
Cancelled or forfeited			(623,967)						$	64.19
Expired			—						$	—
Outstanding at September 30, 2023			2,667,260						$	66.04					8.2						$	133,648
Exercisable at September 30, 2023			707,277						$	55.51					7.1						$	42,793

(1)Aggregate intrinsic value represents the difference between the closing stock price of our common stock on September 30, 2023 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, 2023 was $13.5 million and $41.4 million, respectively, and during the three and nine months ended September 30, 2022 was $1.3 million and $2.1 million, respectively.

The weighted-average grant-date fair value per share of options granted to employees, non-employees, and directors during the three and nine months ended September 30, 2023 was $85.93 and $62.87, respectively, and during the three and nine months ended September 30, 2022 was $49.59 and $43.66, respectively.

There was $77.5 million of unrecognized stock-based compensation expense related to employees', non-employees', and directors’ option awards that is expected to be recognized over a weighted-average period of 2.6 years as of September 30, 2023.

The Company has recorded 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, 2023 and 2022, respectively, as follows (in thousands):

			Three Months Ended September 30,												Nine Months Ended September 30,
			2023						2022						2023						2022
Research and development			$	2,033					$	2,184					$	6,858					$	5,547
Selling, general, and administrative			4,796						6,433						18,881						16,791
Total stock-based compensation			$	6,829					$	8,617					$	25,739					$	22,338

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, 2023 and 2022:

			Three Months Ended September 30,												Nine Months Ended September 30,
			2023						2022						2023						2022
Expected stock price volatility			74		%				78		%				73		%				78		%
Expected term of the award (years)			6.2						6.2						6.0						6.2
Risk-free interest rate			4.26		%				3.20		%				3.94		%				2.27		%
Weighted average exercise price			$	125.06					$	70.91					$	91.38					$	63.03
Forfeiture rate			—		%				—		%				—		%				—		%
Dividend yield			—		%				—		%				—		%				—		%

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Restricted Stock Awards

Restricted stock awards ("RSAs") granted to employees vest ratably over a four-year period. The Company granted zero RSAs to employees of the Company during each of the three and nine months ended September 30, 2023 and September 30, 2022, respectively.

			Number of Shares						Weighted Average Grant Date Fair Value
Non-vested RSAs as of December 31, 2022			66,600						$	78.89
Granted			—						$	—
Vested			(12,649)						$	78.89
Surrendered for taxes			(9,551)						$	78.89
Non-vested RSAs as of September 30, 2023			$	44,400					$	78.89

There was $2.5 million of unrecognized stock-based compensation expense related to employees’ RSAs that is expected to be recognized over a weighted-average period of 1.4 years as of September 30, 2023.

The Company recorded stock-based compensation expense related to RSAs in the condensed consolidated statement of operations for the three and nine months ended September 30, 2023 and 2022, as follows (in thousands):

			Three Months Ended September 30,												Nine Months Ended September 30,
			2023						2022						2023						2022
Selling, general, and administrative			$	437					$	441					$	1,305					$	1,340
Total stock-based compensation			$	437					$	441					$	1,305					$	1,340

Restricted Stock Units

Restricted stock units (“RSUs”) granted to employees vest ratably over a four-year period. The Company granted zero and 186,900 RSUs to employees of the Company during the three and nine months ended September 30, 2023, respectively, and zero RSUs during the three and nine months ended September 30, 2022, respectively.

			Number of Shares						Weighted Average Grant Date Fair Value
Non-vested RSUs as of December 31, 2022			—
Granted			186,900						$	81.91
Vested			—
Surrendered or forfeited			(24,700)						$	81.91
Non-vested RSUs as of September 30, 2023			162,200						$	81.91

There was $11.3 million of unrecognized stock-based compensation expense related to employees’ RSU awards that is expected to be recognized over a weighted-average period of 3.4 years as of September 30, 2023.

The Company recorded stock-based compensation expense related to RSUs in the condensed consolidated statement of operations for the three and nine months ended September 30, 2023 and 2022, as follows (in thousands):

			Three Months Ended September 30,												Nine Months Ended September 30,
			2023						2022						2023						2022
Research and Development			$	303					$	—					$	837					$	—
Selling, general, and administrative			370						—						998						—
Total stock-based compensation			$	673					$	—					$	1,835					$	—

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Performance-Based Restricted Stock Units

Performance-based restricted stock units (“PSUs”) granted to employees vest ratably over two years based upon continued service through the vesting date and the achievement of specific regulatory and commercial performance criteria as determined by the Compensation Committee of the Company’s Board of Directors. The performance criteria are to be completed by the end of the year in which the PSU awards were granted. Each PSU represents the right to receive one share of the Company's common stock upon vesting. The Company recognizes stock-based compensation expense for the fair value of the PSU awards relating to the portion of the awards that are probable of vesting over the service period. On a quarterly basis, management estimates the probable number of PSU’s that would vest until such time that the ultimate achievement of the performance criteria are known. As of September 30, 2023, the Company estimates that 100% of the PSUs granted will be eligible to vest.

The Company granted zero and 60,000 PSUs to employees of the Company during the three and nine months ended September 30, 2023 and zero PSUs during the three and nine months ended September 30, 2022.

			Number of Shares						Weighted Average Grant Date Fair Value
Non-vested PSUs as of December 31, 2022			—
Granted			60,000						$	81.91
Vested			—
Surrendered or forfeited			(10,000)						$	81.91
Non-vested PSUs as of September 30, 2023			50,000						$	81.91

There was $2.9 million of unrecognized stock-based compensation expense related to employees’ PSU awards that is expected to be recognized over a weighted-average period of 1.4 years as of September 30, 2023.

The Company recorded stock-based compensation expense related to PSUs in the condensed consolidated statement of operations for the three and nine months ended September 30, 2023 and 2022 as follows (in thousands):

			Three Months Ended September 30,												Nine Months Ended September 30,
			2023						2022						2023						2022
Selling, general, and administrative			$	373					$	—					$	1,201					$	—
Total stock-based compensation			$	373					$	—					$	1,201					$	—

Shares remaining available for grant under the Plan were 1,489,488, with a sublimit for incentive stock options of 30,783, at September 30, 2023.

After the FDA approval of VYJUVEK on May 19, 2023, the Company began capitalizing stock-based compensation associated with the allocation of labor costs related to work performed to manufacture VYJUVEK. For the three and nine months ended September 30, 2023, the Company capitalized $410 thousand and $522 thousand, respectively, in inventory.

Historically, the Company also capitalized the portion of stock-based compensation related to work performed on the construction of our manufacturing facilities. There was zero and $162 thousand of stock-based compensation that was capitalized in property and equipment during the three and nine months ended September 30, 2023 and $137 thousand and $423 thousand of stock-based compensation that was capitalized in property and equipment during the three and nine months ended September 30, 2022, respectively.

11.    Gain from Sale of Priority Review Voucher

In August 2023, the Company entered into an agreement to sell the rare pediatric disease voucher (“PRV”), which was awarded to the Company in connection with the FDA’s approval of VYJUVEK. The transaction closed in August 2023 and was not subject to any commissions or closing costs. The proceeds of $100.0 million from the sale of the PRV were recorded as a gain from sale of priority review voucher on the Company’s condensed consolidated statement of operations as it did not have a carrying value at the time of the sale.

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12.    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 recognition or 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, 2022, as filed with the SEC on February 27, 2023.

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:

•the commercial success of VYJUVEK;

•the initiation, timing, cost, progress and results of our research and development activities, preclinical studies and clinical trials for our product candidates;

•the timing, scope or results of regulatory filings and approvals, including timing of final U.S. Food and Drug Administration (“FDA”) 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 our FDA-approved product, VYJUVEK (beremagene geperpavec-svdt) (also known as “B-VEC” where not approved), and our product candidates;

•increases in costs associated with our research and development programs for our product candidates;

•increases in our selling, general, and administrative expenses;

•risks related to our ability to successfully develop and commercialize our product candidates;

•our ability to identify new product candidates;

•our ability to identify, recruit and retain key personnel;

•risks related to our marketing and manufacturing capabilities and strategy;

•our business model and strategic plans for our business, product candidates and technology;

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

•our competitive position and the success of competing therapies;

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

•our ability to establish and maintain collaborations;

•our financial performance and our estimates regarding expenses, future revenue, capital requirements and needs for additional financing, as well as our ability to raise capital;

•our ability to successfully avoid or resolve any litigation, intellectual property or other claims, that may be brought against us;

•global economic conditions, including the recent rise in inflation and interest rates and recent bank failures; and

•the impact of changes in laws and regulations.

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Forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in (i) Item 1A of Part II of this Quarterly Report on Form 10-Q, (ii) “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, and (iii) 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. Web links throughout this document are provided for convenience only and are not intended to be active hyperlinks to the referenced websites. No content on the referenced websites shall be deemed incorporated by reference into this Quarterly Report on Form 10-Q.

Overview

We are a commercial-stage biotechnology company focused on the discovery, development, and commercialization of genetic medicines to treat diseases with high unmet medical needs. Our approach leverages our patented platform that is based on an engineered Herpes Simplex Virus-1 (“HSV-1”) vector to deliver therapeutic transgenes to cells of interest in multiple organ systems. The cell’s own machinery then transcribes and translates the transgene to treat the disease. We formulate our vectors for non-invasive or minimally invasive routes of administration at a healthcare professional’s office or in the patient’s home by a healthcare professional. Our innovative technology platform is supported by two in-house, commercial scale CGMP manufacturing facilities.

Our US FDA Approved Product

VYJUVEK

On May 19, 2023, the United States Food and Drug Administration (the “FDA”) approved VYJUVEK, the first ever re-dosable gene therapy for treating patients, six months of age or older, suffering from Dystrophic Epidermolysis Bullosa (“DEB”), a rare and severe monogenic disease that affects the skin and mucosal tissues and is caused by one or more mutations in a gene called COL7A1. VYJUVEK is a redosable topical gel containing our novel vector designed to deliver two copies of the COL7A1 transgene to a patient’s skin cells to produce the COL7 protein. VYJUVEK is the first and only medicine approved by the FDA for the treatment of DEB, both recessive and dominant, that can be administered by a healthcare professional in either a healthcare professional setting or in the home. We possess exclusive rights to develop, manufacture, and commercialize VYJUVEK and all our pipeline candidates throughout the world.

As of September 30, 2023, the Company received 284 Patient Start Forms, of which 20% were generated for patients with dominant DEB. In addition, the Company has received positive coverage determinations from all major commercial national health plans. Optional Medicaid fee-for service states initiated coverage in July, and the Company expects to receive positive coverage from most mandatory states in the fourth quarter of 2023 and the balance in the first quarter of 2024. Consequently, we plan on reporting the number of Patients on Therapy starting in the first quarter of 2024 as we believe that Patients on Therapy will be a better predictor of net revenue from VYJUVEK sales.

In October 2023, we filed for a Marketing Authorization for B-VEC with the European Medicines Agency (the “EMA”) and anticipate approval in the EU in the second half of 2024. Previously, in July 2023, the Company received a positive opinion from the EMA Pediatric Committee on the Pediatric Investigation Plan for B-VEC for the treatment of DEB with no additional studies required.

In July 2023, the Pharmaceuticals and Medical Devices Agency in Japan officially accepted our open label extension study of B-VEC. Following that acceptance, we initiated an open label extension study of B-VEC in 5 patients in Japan. Details of the study can be found at jrct.niph.go.jp under JRCT ID jRCT2053230075. We intend to file a Japanese New Drug Application for B-VEC for the treatment of DEB in the first half of 2024 following completion of the open label extension study.

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Pipeline Highlights and Recent Developments

Respiratory

KB407 is an inhaled (nebulized) formulation of our novel vector designed to deliver two copies of the full-length cystic fibrosis transmembrane conductance regulator (“CFTR”) transgene for the treatment of Cystic Fibrosis (“CF”), a serious rare lung disease caused by missing or mutated CFTR protein. In July 2023, we announced that we dosed the first patient in a Phase 1 (CORAL-1) clinical trial of KB407 for the treatment of CF. Cohort 1 of the CORAL-1 study has been enrolled and completed. The Company is working to initiate Cohort 2 of the CORAL-1 study following safety review by the Data Monitoring Committee. The CORAL-1 study is a multi-center, dose-escalation trial of KB407 in patients with CF, regardless of their underlying genotype. The Company anticipates announcing data from the CORAL-1 study in 2024. Details of the Phase 1 study can be found at www.clinicaltrials.gov under NCT identifier NCT05504837.

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 (“AATD”), a serious rare lung disease. In September 2023, the Company announced that the FDA had cleared the Company’s Investigational New Drug (“IND”) application for KB408. The Company plans to initiate a Phase 1 clinical trial (SERPINA-1) and dose the first patient with KB408 in the first quarter of 2024. Previously, the FDA granted Orphan Drug Designation for KB408 for the treatment of AATD.

Oncology

In July 2023, we announced expansion of our R&D pipeline to oncology, leveraging our prior experience in skin and lung tissue for local delivery of immune boosting cytokines to the tumor microenvironment. Our lead oncology product candidate, KB707, is a modified HSV-1 vector designed to deliver genes encoding both human IL-12 and IL-2 to the tumor microenvironment and promote systemic immune-mediated tumor clearance. KB707 targets solid tumors that are accessible via intratumoral injection or inhalation.

In July 2023, the FDA accepted our IND application to evaluate intratumoral injection of KB707 in a clinical trial to treat patients with locally advanced or metastatic solid tumor malignancies. The FDA also granted KB707 fast track designation to delay disease progression in the treatment of patients with anti-PD-1 relapsed/refractory locally advanced or metastatic melanoma.

In October 2023, we dosed the first patient in the KB707 Phase 1 (OPAL-1) study to evaluate intratumoral KB707 in patients with locally advanced or metastatic solid tumor malignancies. The OPAL-1 study is an open-label, multi-center, monotherapy, dose escalation and expansion study, enrolling patients with locally advanced or metastatic solid tumors, who relapsed or are refractory to standard of care, with at least one measurable and injectable tumor accessible by transcutaneous route. The primary objective of the study is to evaluate safety and tolerability of KB707. Efficacy will also be assessed by multiple measures including overall response rate, progression free survival, and overall survival, and the immune effects of KB707 monotherapy will be assessed in tumor tissue, lymph nodes, and blood. Details of the Phase 1 study can be found www.clinicaltrials.gov under NCT identifier NCT05970497.

The Company presented preclinical data in multiple oncology models at the Society for Immunotherapy of Cancer’s annual meeting on November 3 and 4, 2023. Combinatorial IL-2 and IL-12 expressed from the Company’s platform technology was shown in one presentation, to provide a synergistic effect in a melanoma model, suppressing treated and non-treated tumor outgrowth, enhancing survival, and eliciting a durable memory response sufficient for recurrent tumor control. Similarly, the Company presented that non-invasive inhalation of vector-encoded IL-2 and IL-12 was found to be both safe and effective in treating lung tumors in a metastasis model, resulting in long-term survival after single or repeated cancer cell challenge, suggestive of prolonged adaptive immunity.

The Company is on track to file an amendment to the existing KB707 IND in the fourth quarter of 2023 to allow the Company to evaluate inhaled KB707 in a clinical trial to treat tumors in a patient’s lungs. The Company expects to dose the first patient with inhaled KB707 in the first half of 2024.

Dermatology

KB105 is a topical gel containing our novel vector designed to deliver two copies of the TGM1 transgene for the treatment of TGM1-ARCI, a serious rare skin disorder caused by missing or mutated TMG1 protein. 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 intend to commence our Phase 2 trial of KB105 (JADE-1) for the treatment of TGM1-ARCI, in 2024, and we anticipate filing an IND application with the FDA and initiating a clinical trial of KB104 to treat patients with Netherton Syndrome in late 2024.

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Aesthetics

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”). 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. In April 2023, Jeune treated the first subject in the Phase 1, Cohort 3 study of KB301 for the improvement of lateral canthal lines (“LCL”) at rest. The Phase 1, Cohort 3 study is being conducted at a single center as an open label study to evaluate two different doses of KB301 in up to 20 subjects. Improvement of lateral canthal lines at rest was selected as a target indication for KB301 based upon the Phase 1 safety, efficacy and durability studies, which evaluated KB301 in the lower and upper cheek, including the lateral canthal region. Subjects will be followed for three months after KB301 treatment. Jeune has encountered delays in enrollment in the Cohort 3 study and plans to announce results from this study in the first half of 2024. Following completion of this study, Jeune plans to initiate a Phase 2 study of KB301 in LCL at rest. Details of the Phase 1 study can be found at www.clinicaltrials.gov under NCT identifier (NCT04540900).

Business Highlights and Recent Developments

On October 10, 2023, the United States Patent & Trademark Office issued U.S. Patent No. 11,779,660 entitled Viral Vectors for Cancer Therapy to Krystal Biotech, Inc. The issued patent covers the Company’s lead oncology product candidate, KB707.

In August 2023, the Company sold its Rare Pediatric Disease Priority Review Voucher (“PRV”) for $100.0 million. The Company was awarded the PRV in connection with the FDA’s accelerated approval of VYJUVEK. Under the Rare Pediatric Disease Priority Review Voucher Program, the FDA awards priority review vouchers to sponsors of rare pediatric disease product applications that meet certain criteria. The program is intended to encourage development of new drugs and biologics for the prevention and treatment of rare pediatric diseases. A PRV can be redeemed to receive priority review of a subsequent marketing application for a different product, or alternatively, sold or transferred.

In August 2023, we began research and development operations in our second CGMP biologics manufacturing facility, ASTRA. ASTRA is a 155,000 sq. ft. state-of-the-art CGMP facility with comprehensive end-to-end capabilities, which currently include or will include, process development, analytical testing, virus and cell banking, commercial scale drug product/substance manufacturing, fill/finish and packaging, labeling and distribution, waste handling, environmental monitoring, and warehousing with temperature controlled CGMP storage. ASTRA is equipped with multiple clean rooms with flexibility designed into its configuration for further scale-up and scale-out capabilities.

Financial Overview

Revenue

In May 2023, we received FDA approval for VYJUVEK for the treatment of DEB in patients six months or older. After approval, we began commercial marketing and sales of the product throughout the United States and began recognizing revenue in 3Q 2023. Our future revenue will fluctuate from quarter to quarter for many reasons, including the uncertain timing and amount of any such sales.

We sell VYJUVEK through agreements with a limited number of specialty pharmacies (“SPs”) that mix the medication and administer it to patients in the patient’s home by a healthcare professional and a specialty distributor (“SD”), that distributes VYJUVEK to hospitals and outpatient clinics where patients are administered the medication at a healthcare professional’s office. The transaction price that we recognized as revenue for products includes an estimate of variable consideration, which includes discounts, returns, and rebates that are offered within contracts with our customers. Refer to Note 2 of our condensed consolidated financial statements for additional information.

Cost of Goods Sold

We recognize cost of goods sold for direct and indirect costs related to the manufacturing of VYJUVEK. These costs consist of manufacturing costs, personnel costs including stock-based compensation, facility costs, and other indirect overhead costs. Cost of goods sold may also include period costs related to certain manufacturing services and inventory adjustment charges.

Prior to receiving FDA approval for VYJUVEK in May 2023, costs associated with the manufacturing of VYJUVEK were expensed as research and development expense. As such, a portion of the cost of inventory sold during the period was expensed prior to FDA approval. We anticipate that the previously expensed inventory has and will continue to favorably impact the cost of goods sold and the Company’s gross margin until the remaining pre-approval inventory is sold.

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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, contract research 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 resume dosing with KB105 Phase 1/2 clinical trial, continue the Phase 1, Cohort 3 study and initiate a Phase 2 trial for KB301, continue the Phase 1 trial for KB407, continue the Phase 1 trial for intratumoral KB707 and initiate a Phase 1 trial for inhaled KB707, initiate a Phase 1 trial for KB408, initiate a Phase 1 trial for KB104, 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 clinical trials, and, as a result, the actual costs to complete clinical trials may exceed the expected costs. 

Selling, General, and Administrative Expenses

Selling, general, and administrative expenses consist principally of salaries and other related costs, including stock-based compensation for personnel in our executive, commercial, business development and other administrative functions. Selling, general, and administrative expenses also include 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 selling, general, and administrative costs include travel expenses, patient access program fees, management service fees, and other selling expenses which include transportation, shipping and handling fees.

We anticipate that our selling, general, and administrative expenses will increase in the future to support the continued research and development of our product candidates and our commercial and operational goals. 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, we anticipate that we will continue to increase our salary and personnel costs and other expenses as a result of our commercial activities in the U.S. and preparation for commercial operations outside of the U.S.

ASTRA Capital Expenditures

In March 2021, we closed on the purchase of the building that was constructed to house our second CGMP facility, ASTRA, and we are currently in the process of completing and qualifying this facility. The Company placed a portion of ASTRA into service during the three and nine months ended September 30, 2023 as it was determined that certain assets were ready for their intended use. On March 27, 2023, the Company received the permanent occupancy permit for ASTRA which allowed the Company to begin utilizing certain portions of the building. As certain building improvements and certain qualification activities are still underway, the Company will continue to hold the remaining assets within construction in progress until validation has been completed and the assets are ready for their intended use. Validation of the facility is expected to be completed in 2023.

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Gain from Sale of Priority Review Voucher

Gain from sale of priority review voucher relates to proceeds from sale of the rare pediatric PRV we received in connection with the FDA’s approval of VYJUVEK.

Interest and Other Income  

Interest and other income consists primarily of income earned from our cash, cash equivalents and investments.

Critical Accounting Policies, and Significant Judgments and Estimates

Our management’s discussion and analysis of our financial position and results of operations is based on our financial statements, which have been prepared in accordance with United States generally accepted accounting principles, or GAAP. The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.

Revenue Recognition

After FDA approval of VYJUVEK in May 2023, we began commercial marketing and made our first product sales in 3Q 2023. ASC 606 Revenue from Contracts with Customers requires us to make estimates of variable consideration, included in contracts with customers, to be included in the transaction price.

The transaction price that is recognized as revenue for products upon delivery and transfer of control to the customer includes an estimate of variable consideration for reserves, which result from discounts, rebates, and returns that are offered within contracts between us and our customers.

–Prompt Pay Discounts: As an incentive for prompt payment, we offer a cash discount to customers. We estimate accrued prompt pay discounts using the most likely amount method. We record the discount as an allowance against accounts receivable, net and a reduction of revenue.

–Government Rebates: We participate in certain government rebate programs including Medicaid. We estimate accrued government rebates using the expected value method. We accrue estimated rebates based on estimated percentages of VYJUVEK prescribed to qualified patients, estimated rebate percentages and estimated levels of inventory in the distribution channel that will be prescribed to qualified patients and record the rebates as a reduction of revenue. Accrued government rebates are included in other accrued liabilities on the condensed consolidated balance sheets.

–Commercial Rebates: We participate in certain commercial rebate programs. Under these rebate programs, we pay a rebate to the commercial entity or third-party administrator of the program. Accrued commercial rebates are estimated using the expected value method. We accrue estimated rebates based on contract prices, estimated percentages of medicine that will be prescribed to qualified patients and estimated levels of inventory in the distribution channel and record the rebate as a reduction of revenue. Accrued commercial rebates are included in other accrued liabilities on the condensed consolidated balance sheets.

–Copay Assistance: We reimburse pharmacies for this discount through third-party vendors. We estimate accrued copay assistance costs using the expected value method. The estimate is based on contract prices, estimated percentages of VYJUVEK that will be prescribed to qualified patients, average assistance paid based on reporting from the third-party vendors and estimated levels of inventory in the distribution channel. Copay assistance costs are recorded as reductions to revenue and are accrued in other accrued liabilities on the condensed consolidated balance sheets.

–Returns: We offer SPs and SDs limited return rights relating to product damage or defect and based on these provisions, we believe that there will be minimal returns.

Variable consideration is estimated and reduces the transaction price to reflect our best estimate of the amount of consideration to which we are entitled based on the terms of the contracts and are recorded in the same period the related product revenues is recognized. The amount of variable consideration that is included in the transaction price may be constrained and is included in the net sales price only to the extent that it is considered probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. Actual amounts of consideration ultimately received may differ from our estimates. If actual results in the future vary from our estimates, we will adjust these estimates in the period these variances become known.

Aside from revenue recognition as noted above, there have been no significant changes during the three and nine months ended September 30, 2023 to our critical accounting policies, significant judgments and estimates as disclosed in our

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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, 2022.

Results of Operations

Three Months Ended September 30, 2023 and 2022

			Three Months Ended September 30,
			2023						2022						Change
(In thousands)			(unaudited)
Product revenues, net			$	8,556					$	—					8,556
Expenses:
Cost of goods sold			223						—						223
Research and development			10,629						11,516						(887)
Selling, general, and administrative			23,697						19,935						3,762
Total operating expenses			34,549						31,451						3,098
Loss from operations			(25,993)						(31,451)						5,458
Other income
Gain from sale of priority review voucher			100,000						—						100,000
Interest and other income, net			6,740						1,601						5,139
Net income (loss)			$	80,747					$	(29,850)					$	110,597

Product Revenues, net

Product revenues, net was $8.6 million for the three months ended September 30, 2023 as compared to zero for the three months ended September 30, 2022 due to initial sales of VYJUVEK after FDA approval was obtained on May 19, 2023. As VYJUVEK was approved by the FDA in May 2023, there were no comparative period revenues. To date, all of our product revenue has been generated in the United States.

Cost of Goods Sold

Cost of goods sold was $223 thousand for the three months ended September 30, 2023 as compared to zero for the three months ended September 30, 2022 due to initial sales of VYJUVEK after FDA approval was obtained on May 19, 2023. Prior to receiving FDA approval for VYJUVEK in May 2023, costs associated with the manufacturing of VYJUVEK were expensed as research and development expense. As such, a portion of the cost of inventory sold during the period was expensed prior to FDA approval.

Research and Development Expenses 

Research and development expenses decreased $887 thousand in the three months ended September 30, 2023 compared to the three months ended September 30, 2022. The decrease was primarily due to decreases in pre-commercial manufacturing expenses of approximately $1.1 million due to costs related to the manufacturing of VYJUVEK following FDA approval being recorded as inventory, a decrease in outsourced research and development of $581 thousand, and a decrease of $482 thousand from overhead allocations to inventory. These decreases were partially offset by increased payroll related expenses of $859 thousand, which were primarily driven by an increase in headcount to support overall growth, and includes a $152 thousand increase in stock-based compensation, and an increase in depreciation of $484 thousand.

Research and development expenses consist primarily of costs relating to the preclinical and clinical development of our product candidates and preclinical programs. Direct research and development expenses associated with our product candidates or development programs consist of compensation related expenses for our internal resources conducting research and development activities, fees paid to external consultants, contract research organizations, or for costs to support our clinical trials. Indirect research and development expenses that are allocated to our product candidates or programs consist of lab supplies and software fees. A significant portion of our research and development expenses are not allocated to individual product candidates and preclinical programs, as certain expenses benefit multiple product candidates and pre-clinical programs. For example, we do not allocate costs associated with stock-based compensation, manufacturing of preclinical or clinical development products or costs relating to facilities and equipment to individual product candidates and preclinical programs.

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The following table summarizes our research and development expenses by product candidate or program, and for unallocated expenses, by type, for the three months ended September 30, 2023 and 2022:

						Three Months Ended September 30,
(in thousands)						2023						2022						Change
KB103(1)						$	1,749					$	2,330					$	(581)
KB105						7						7						—
KB407						441						585						(144)
KB301						150						549						(399)
KB707						1,265						68						1,197
Other dermatology programs						1						437						(436)
Other respiratory programs						340						128						212
Other aesthetics programs						9						42						(33)
Other research programs						172						232						(60)
Other development programs						160						175						(15)
Stock-based compensation						2,336						2,184						152
Other unallocated manufacturing expenses(2)						2,682						3,639						(957)
Other unallocated expenses(3)						1,317						1,140