Krystal Biotech Inc

Notes to Condensed Consolidated Financial Statements

1. Organization

Founded in 2016, Krystal Biotech, Inc. (the “Company,” or “we” or other similar pronouns) is a fully integrated, commercial-stage biotechnology company focused on the discovery, development, manufacturing and commercialization of genetic medicines to treat diseases with high unmet medical needs. Using our patented gene therapy technology platform that is based on engineered herpes simplex virus-1 (“HSV-1”), we create vectors that efficiently deliver therapeutic transgenes to cells of interest in multiple organ systems. The cell’s own machinery then transcribes and translates the transgene to treat the disease. Our vectors are amenable to formulation 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 bytwo in-house, commercial scale Current Good Manufacturing Practice (“CGMP”) manufacturing facilities.

Liquidity

As of September 30, 2024, the Company had an accumulated deficit of $226.1 million. Our operating profitability is dependent upon the continued successful commercialization of VYJUVEK®, as well as successful development, approval, and commercialization of our other product candidates. Management intends to fund future operations through its on hand cash, cash equivalents and investments and revenue generated from the sale of VYJUVEK, and may also seek additional capital through the sale of equity, arrangements with strategic partners, debt financings 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 preclinical and clinical studies, the development of competing product candidates or other technological innovations by competitors, dependence on key personnel, protection of proprietary technology, compliance with government regulations and the ability to commercialize product candidates. 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’s U.S. Food and Drug Administration (“FDA”) approved redosable gene therapy, for treating patients, six months of age or older, suffering from dystrophic epidermolysis bullosa, a rare and severe monogenic disease that affects the skin and mucosal tissues. The Company believes that its cash, cash equivalents and short-term investments of approximately $588.3 million as of September 30, 2024 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.

Certain prior period amounts have been reclassified to conform to the current period presentation. The reclassified amounts have no impact on the Company’s previously reported financial position or results of operations.

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, 2023 (“2023 10-K”), as filed with the U.S. Securities and Exchange Commission (“SEC”) on February 26, 2024.

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, the fair value of financial instruments and the valuation allowance included in the deferred income tax calculation.

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.

One counterparty accounted for 87% and 100% of accounts receivable, net as of September 30, 2024 and December 31, 2023, respectively. No other counterparty exceeded 10% of the Company’s accounts receivable, net as of September 30, 2024. As of September 30, 2024, the credit profiles for these counterparties were deemed to be in good standing and, as such, an allowance for credit losses was not recorded. For accounts receivable arising from named patient sales, the Company evaluates the creditworthiness of each counterparty on a regular basis.

For the nine months ended September 30, 2024 and 2023, approximately 92% and 100%, respectively, of the Company’s product revenue, net was generated from a single customer in the U.S. No other customer exceeded 10% of the Company’s product revenue, net.

The Company has no financial instruments with off-balance sheet risk of loss.

Summary of Significant Accounting Policies

See Note 2 to our consolidated financial statements included in our 2023 10-K. There were no material changes to the Company’s significant accounting policies during the nine months ended September 30, 2024.

Recent Accounting Pronouncements

There were no accounting pronouncements issued or adopted during the nine months ended September 30, 2024 that are expected to have a material impact on the Company’s condensed consolidated financial statements.

In December 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-09 “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” The purpose of this guidance is to enhance the transparency and usefulness of income tax disclosures and provide comprehensive income tax information, particularly in relation to rate reconciliation and income taxes paid in the U.S. and foreign jurisdictions. This new standard will be effective for fiscal years starting after December 15, 2024, with the option to apply it retrospectively. Early adoption is also allowed. Currently, the Company is assessing the potential impact of this guidance on its consolidated financial statement disclosures.

3. Revenue Recognition

Following FDA approval on May 19, 2023, the Company began commercial marketing and sales of VYJUVEK and began recognizing revenue in the third quarter of 2023.

The following table summarizes changes in allowances and discounts for the nine months ended September 30, 2024:

Rebates are included in accrued rebates and other long-term liabilities on the condensed consolidated balance sheets. Other long-term liabilities includes $761 thousand of long-term accrued rebates. Prompt pay is recorded as an allowance against accounts receivable, net on the condensed consolidated balance sheets. Other accruals are included in accrued expenses and other current liabilities on the condensed consolidated balance sheets. Provisions for rebates, prompt pay and other accruals are recorded as a reduction to product revenue, net on the condensed consolidated statements of operations and comprehensive income.

4. Net Income Per Share Attributable to Common Stockholders

Basic net income per share attributable to common stockholders is calculated by dividing net income attributable to common stockholders by the weighted-average shares outstanding during the period, without consideration for common stock equivalents. Diluted net income per share attributable to common stockholders is computed by dividing the net income by the weighted-average number of shares of common stock and common stock equivalents outstanding for the period. Common stock equivalents consist of common stock issuable upon (1) exercise of stock options and (2) vesting of restricted stock awards, restricted stock units and performance-based restricted stock units (collectively, “restricted stock”).

For the three months ended September 30, 2024 and 2023, respectively, there were 229 thousand and 378 thousand common stock equivalents outstanding in the form of stock options that have been excluded from the calculation of diluted net income per common share as their effect would be anti-dilutive.

For the nine months ended September 30, 2024 and 2023, respectively, there were 207 thousand and 1.3 million common stock equivalents outstanding in the form of stock options that have been excluded from the calculation of diluted net income per common share as their effect would be anti-dilutive.

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, 2024 and December 31, 2023:

(1)The Company’s short-term marketable securities mature inone year or less.

(2)The Company’s long-term marketable securities mature betweenone andtwo years.

(1)The Company’s short-term marketable securities mature inone year or less.

(2)The Company’s long-term marketable securities mature betweenone andtwo years.

6. Balance Sheet Components

Inventory

Inventory consisted of the following:

Property and Equipment, Net

Property and equipment, net consisted of the following:

Depreciation expense was $1.3 million and $1.2 million for the three months ended September 30, 2024 and 2023, respectively, and $4.6 million and $3.5 million for the nine months ended September 30, 2024 and 2023, respectively. Depreciation expense capitalized into inventory was $1.0 million and $391 thousand for the three months ended September 30, 2024 and 2023, respectively, and $2.4 million and $464 thousand for the nine months ended September 30, 2024 and 2023, respectively.

In March 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, and as qualification of assets occurred through 2023 and the first half of 2024, the majority of 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 as it was determined that assets were ready for their intended use. As certain pieces of equipment are not yet qualified, the Company will continue to hold the remaining assets within construction in progress until qualification has been completed and the assets are ready for their intended use. Estimated remaining payments related to ASTRA were $7.9 million and $8.2 million as of September 30, 2024 and December 31, 2023, respectively, and are recorded in accounts payable and accrued expenses and other current liabilities on the condensed consolidated balance sheets.

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following as of September 30, 2024 and December 31, 2023:

7. Commitments and Contingencies

Agreements with Contract Manufacturing Organizations and Contract Research Organizations

The Company enters into various agreements in the normal course of business with Contract Manufacturing Organizations (“CMOs”), Contract Research Organizations (“CROs”) 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 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, testing of our clinical-stage, pre-commercial and commercial stage products and/or storage, packaging and labeling. 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 commitments as of September 30, 2024 under these agreements was approximately $736 thousand. The Company has incurred research and development expenses under CMO and CRO agreements of $2.7 million and $5.8 million for the three and nine months ended September 30, 2024 and $1.9 million and $5.0 million for the three and nine months ended September 30, 2023.

Legal Proceedings

In May 2020, PeriphaGen, Inc. (“PeriphaGen”) commenced litigation against the Company alleging breach of contract and misappropriation of trade secrets. In April 2022, the Company and PeriphaGen entered into a final settlement agreement, and the Company paid PeriphaGen an upfront payment of $25.0 million for: (i) the release of all claims in the litigation with PeriphaGen; (ii) the acquisition of certain PeriphaGen assets and (iii) the grant of a license by PeriphaGen for dermatological applications. The final settlement agreement also includes a $12.5 million payment upon FDA approval of VYJUVEK and three additional $12.5 million contingent milestone payments upon the Company reaching $100.0 million in cumulative sales, $200.0 million in cumulative sales and $300.0 million in cumulative sales. 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.

In May 2024, the parties entered into an amendment to the final settlement agreement (“Amendment”). As defined in the final settlement agreement and clarified in the Amendment, cumulative sales means the total cumulative revenue from sales of the Company’s products by the Company and its affiliates and licensees. The Amendment modified the timing of the $12.5 million contingent milestone payment triggered by the Company reaching $100.0 million in cumulative sales, such that $6.25 million would be payable following the Company’s filing of a Quarterly Report on Form 10-Q that reports $100.0 million in cumulative sales, and the remaining $6.25 million would be payable within 120 days following the end of the fiscal year in which the initial $6.25 million is paid. There were no other revisions to the final settlement agreement, and the contingent payments triggered upon reaching $200.0 million in cumulative sales and $300.0 million in cumulative sales remain payable within 30 days following the filing(s) by the Company of an Annual Report(s) on Form 10-K reporting $200.0 million in cumulative sales and $300.0 million in cumulative sales.

During the three months ended June 30, 2023, the Company obtained FDA approval of VYJUVEK and, in accordance with the final settlement agreement, paid PeriphaGen $12.5 million in June 2023.

During the three months ended June 30, 2024, the Company reached cumulative sales of $100.0 million and, in accordance with the Amendment, the Company paid PeriphaGen the $6.25 million milestone payment in September 2024. The Company is required to make the remaining $6.25 million milestone payment within 120 days following December 31, 2024.

During the three months ended September 30, 2024, the Company reached cumulative sales of $200.0 million and, in accordance with the final settlement agreement and Amendment, is required to make the associated $12.5 million milestone payment within 30 days following the filing by the Company of its Annual Report on Form 10-K for the year ended December 31, 2024.

During the three months ended September 30, 2024, in accordance with ASC 450, “Contingencies,” the Company determined that reaching $300.0 million in cumulative sales was probable and recorded litigation settlement expense of $12.5 million on the condensed consolidated statements of operations and comprehensive income. If the Company reaches $300.0 million in cumulative sales, it is required to pay PeriphaGen the associated $12.5 million milestone payment within 30 days following the filing of its Annual Report on Form 10-K that reports $300.0 million in cumulative sales.

The Company recorded litigation settlement expense of $12.5 million and $37.5 million for the three and nine months ended September 30, 2024, respectively, andzero and $12.5 million for the three and nine months ended September 30, 2023, respectively, on the condensed consolidated statements of operations and comprehensive income. As of September 30, 2024, the Company has paid $43.75 million of the total $75.0 million of total consideration discussed above and has recorded accrued litigation expense within accrued expenses and other current liabilities on its condensed consolidated balance sheet for the remaining $31.25 million.

8. Leases

As of September 30, 2024, future minimum commitments under the Company’s operating leases with lease terms in excess of 12 months were as follows:

As of September 30, 2024 and December 31, 2023, the Company’s weighted-average remaining lease term for operating leases was 12.2 years and 12.3 years, respectively, and the Company’s weighted-average discount rate for operating leases was 9.5% as of September 30, 2024 and December 31, 2023.

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

9. Capitalization

ATM Program

On May 8, 2023, the Company entered into a sales agreement with Cowen and Company, LLC (“Cowen”) with respect to an at-the-market equity offering program (“ATM Program”), under which the Company may issue and sell from time to time through Cowen, acting as agent and/or principal, shares of its common stock having an aggregate offering price up to $150.0 million (“Placement Shares”).

The 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 (the “Form S-3”), and a prospectus supplement relating to the Placement Shares that was filed with the SEC on May 8, 2023. We may terminate the ATM Program at any time upon 10 days’ notice to Cowen. If not earlier terminated, the ATM Program will automatically terminate upon issuance of all of the Placement Shares or the expiration of the Form S-3 on April 6, 2026.

The ATM Program is not and has never been active.

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 (“Plan”), which governs the issuance of equity awards 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 tofour 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 (“RSAs”) to its employees. In February 2023, the Company began issuing restricted stock units (“RSUs”) and performance-based restricted stock units (“PSUs” and with RSUs commonly referred to collectively as “restricted stock units”) to certain employees.

Shares remaining available for grant under the Plan were 2.4 million as of September 30, 2024.

Stock Options

The following table summarizes the Company’s stock option activity for the nine months ended September 30, 2024:

(1)Aggregate intrinsic value represents the difference between the closing stock price of our Common Stock on December 31, 2023 and September 30, 2024, respectively, and the exercise price of outstanding in-the-money options.

The following table summarizes the Company’s stock option activity for the nine months ended September 30, 2023:

(1)Aggregate intrinsic value represents the difference between the closing stock price of our Common Stock on December 31, 2022 and September 30, 2023, respectively, 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 was $5.9 million and $13.5 million during the three months ended September 30, 2024 and 2023, respectively, and $50.2 million and $41.4 million during the nine months ended September 30, 2024 and 2023, respectively.

The weighted-average grant-date fair value per share of options granted to employees, non-employees, and directors was $130.85 and $85.93 during the three months ended September 30, 2024 and 2023, respectively, and $114.29 and $62.87 during the nine months ended September 30, 2024 and 2023, respectively.

There was $63.4 million of unrecognized stock-based compensation expense related to employees’, non-employees’, and directors’ options that is expected to be recognized over a weighted-average period of 2.5 years as of September 30, 2024.

Restricted Stock Awards

The following table summarizes the Company’s RSA activity:

There was $713 thousand of unrecognized stock-based compensation expense related to employees’ RSAs that is expected to be recognized over a weighted-average period of 5 months as of September 30, 2024.

Restricted Stock Units

The following table summarizes the Company’s RSU activity:

There was $35.3 million of unrecognized stock-based compensation expense related to employees’ RSU awards that is expected to be recognized over a weighted-average period of 3.2 years as of September 30, 2024.

Performance-Based Restricted Stock Units

The following table summarizes the Company’s PSU activity:

PSUs vest ratably overtwo 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. As of the September 30, 2024, the Company estimated that 100% of the PSUs granted in 2024 will be eligible to vest.

There was $13.5 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, 2024.

Stock-Based Compensation Expense, Net

The Company recorded stock-based compensation expense, net related to its stock options, RSAs, RSUs and PSUs in the condensed consolidated statements of operations and comprehensive income for the three and nine months ended September 30, 2024 and 2023 as follows:

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. The Company capitalized stock-based compensation of $946 thousand and $410 thousand for the three months ended September 30, 2024 and 2023, respectively, and $2.3 million and $522 thousand for the nine months ended September 30, 2024 and 2023, respectively, into inventory.

Historically, the Company also capitalized the portion of stock-based compensation related to work performed on the construction of our manufacturing facilities. The Company capitalized stock-based compensation ofzero for each the three months ended September 30, 2024 and 2023, respectively, andzero and $162 thousand for the nine months ended September 30, 2024 and 2023, respectively, into property and equipment, net.

11. Income Taxes

The Company recorded an income tax provision of $2.6 million and $3.1 million for the three and nine months ended September 30, 2024, respectively. The tax provision for interim periods is calculated using an estimate of the annual effective tax rate, adjusted for discrete items. If there are any changes to the estimated annual tax rate, the Company will make a cumulative adjustment to the income tax provision in the period the change becomes known. The Company did not record an income tax provision for the three and nine months ended September 30, 2023 as it generated sufficient tax losses, after consideration of discrete items, during each of the periods. The Company expects to maintain a full valuation allowance against its net deferred tax assets for the year.

12. Gain from Sale of Priority Review Voucher

In August 2023, the Company entered into an agreement to sell the rare pediatric disease priority review 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 and comprehensive income as it did not have a carrying value at the time of the sale.

13. 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.