Krystal Biotech, Inc.

Notes to Condensed Consolidated Financial Statements

1. Organization

Krystal Biotech, Inc. (the “Company,” or “we” or other similar pronouns) commenced operations in April 2016. In March 2017, we converted from a California limited liability company to a Delaware C-corporation, and changed our name from Krystal Biotech LLC to Krystal Biotech, Inc. In April 2019, we 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, August 2023, March 2024, November 2024, and December 2024 we incorporated wholly-owned subsidiaries in Switzerland, Netherlands, France, Germany, Japan, Italy, and Spain, respectively, for the purpose of establishing initial operations in Europe and Japan for the commercialization of VYJUVEK® and our product pipeline.

We are a fully integrated, commercial-stage, global 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. Our innovative technology platform is supported by two in-house, commercial scale Current Good Manufacturing Practice (“CGMP”) manufacturing facilities.

Liquidity

As of March 31, 2025, the Company had an accumulated deficit of $144.9 million. Our continued operating profitability is dependent upon the continued successful commercialization of VYJUVEK, our FDA and EMA approved product, as well as successful development, approval and commercialization of our product candidates. Management intends to fund future operations through its on hand cash and cash equivalents, revenue generated from the sale of VYJUVEK and the sale of equity, and may also seek additional capital through 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 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 $616.8 million as of March 31, 2025 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 condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”). All intercompany balances and transactions have been eliminated in consolidation.

The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year. These unaudited 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, 2024 (“2024 10-K”), as filed with the U.S. Securities and Exchange Commission (“SEC”) on February 19, 2025.

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 income taxes.

Summary of Significant Accounting Policies

See Note 2 to our consolidated financial statements included in our 2024 10-K. There were no material changes to the Company’s significant accounting policies during the three months ended March 31, 2025.

Recently Issued Accounting Pronouncements, Not Yet Adopted

There were no accounting pronouncements issued or adopted during the three months ended March 31, 2025 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 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.

In November 2024, the FASB issued ASU 2024-03 Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses. This standard calls for enhanced disclosures about components of expense captions on the face of the income statement. This standard will be effective for fiscal years beginning after December 15, 2026, with the option to apply it retrospectively. Early adoption is allowed. Currently, the Company is assessing the potential impact of this guidance on its consolidated financial statement disclosures.

3. Product Revenue, Accounts Receivable and Reserves for Product Sales

The Company’s product revenue, net of sales discounts and allowances totaled $88.2 million and $45.3 million for the quarters ended March 31, 2025 and March 31, 2024 respectively.

The Company’s accounts receivable, net balance relating to VYJUVEK sales was $103.3 million as of March 31, 2025 and $104.7 million as of December 31, 2024. Accounts receivable, net from the Company’s customers who individually accounted for 10% or more of accounts receivable, net consisted of the following:

All other customers represent less than 10% of outstanding in the applicable period.

The following table summarizes changes in allowances and discounts for the three months ended March 31, 2025:

Rebates are included in accrued rebates and other long-term liabilities on the condensed consolidated balance sheets. Other long-term liabilities are comprised of $2.0 million 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 (loss).

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 March 31, 2025 and 2024, respectively, there were 413 thousand and 154 thousand common stock equivalents outstanding in the form of stock options and 48 thousand and 78 thousand in unvested restricted stock, 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 March 31, 2025 and December 31, 2024:

(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 $1.4 million and $1.4 million for the three months ended March 31, 2025 and 2024, respectively. Depreciation expense capitalized into inventory was $965 thousand and $867 thousand for the three months ended March 31, 2025 and 2024, respectively.

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following as of March 31, 2025 and December 31, 2024:

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. In accordance with the settlement agreement, the Company paid PeriphaGen total consideration of $75.0 million to settle the dispute, acquire certain assets and receive an exclusive license from PeriphaGen to certain intellectual property assets and biological materials which was paid over time upon completion of certain milestones, with the final payment occurring during the three months ended March 31, 2025. Refer to Note 7 of our consolidated financial statements in our 2024 10-K for additional information.

The Company recorded litigation settlement expense ofzero and $12.5 million for the three months ended March 31, 2025 and 2024, respectively, on the condensed consolidated statements of operations and comprehensive income (loss). At December 31, 2024, the Company had recorded $31.25 million within accrued expenses and other current liabilities on the consolidated balance sheet. During the three months ended March 31, 2025 and 2024, respectively, the Company paid $31.25 million andzero, and as such, the Company has fully paid the $75.0 million of total consideration discussed above.

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 March 31, 2025 under these agreements was approximately $414 thousand. The Company has incurred research and development expenses related to commitments under these agreements of $2.2 million for the three months ended March 31, 2025 and $1.5 million for the three months ended March 31, 2024.

Contingencies

In the ordinary course of business, the Company may be subject from time to time to various proceedings, lawsuits, disputes, or claims. In accordance with FASB ASC Topic 450, Contingencies (“ASC 450”), the Company accrues a liability for legal contingencies when it is probable that a liability has been incurred, and the amount of the loss can be reasonably estimated. If there is at least a reasonable possibility that a loss may be incurred, ASC 450 requires disclosure of a loss contingency.

In the first quarter of 2025, the Company and certain of its employees received subpoenas from the U.S. Department of Justice requesting that the Company produce certain documents regarding its sponsored genetic testing program relating to VYJUVEK and commercial practices relating thereto. The Company is cooperating and providing information in response to the subpoenas. It is not possible to estimate the amount of any loss or range of possible loss that might result from this inquiry, and because the final outcome cannot be predicted with certainty, unfavorable or unexpected developments or outcomes could result in a material impact to the Company’s results of operations.

8. Leases

As of March 31, 2025, future minimum commitments under the Company’s operating leases with lease terms in excess of 12 months were as follows:

As of March 31, 2025 and December 31, 2024, the Company’s weighted-average remaining lease term for operating leases was 10.6 years and 12.2 years, respectively, and the Company’s weighted-average discount rate for operating leases was 9.6% and 9.5% as of March 31, 2025 and December 31, 2024, respectively.

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

9. Stock-Based Compensation

In 2017, the Company adopted the 2017 IPO Stock Incentive 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, restricted stock awards (“RSAs”), 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 2.0 million as of March 31, 2025.

Stock Options

The following table summarizes the Company’s stock option activity for the three months ended March 31, 2025:

(1)Aggregate intrinsic value represents the difference between the closing stock price of our Common Stock on December 31, 2024 and March 31, 2025 and the exercise price of outstanding in-the-money options.

The following table summarizes the Company’s stock option activity for the three months ended March 31, 2024:

(1)Aggregate intrinsic value represents the difference between the closing stock price of our Common Stock on December 31, 2023 and March 31, 2024 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 $1.4 million and $24.5 million during the three months ended March 31, 2025 and 2024, respectively.

The weighted-average grant-date fair value per share of options granted to employees, non-employees, and directors was $116.88 and $106.92 during the three months ended March 31, 2025 and 2024, respectively.

There was $76.1 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 2.9 years as of March 31, 2025.

Restricted Stock Awards

The following table summarizes the Company’s RSA activity:

Restricted Stock Units

The following table summarizes the Company’s RSU activity:

There was $51.8 million of unrecognized stock-based compensation expense related to employees’ RSU awards that is expected to be recognized over a weighted-average period of 3.3 years as of March 31, 2025.

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 and were met by the end of the year in which the PSU awards were granted.

There was $8.2 million of unrecognized stock-based compensation expense related to employees’ PSU awards that is expected to be recognized over a weighted-average period of 0.9 years as of March 31, 2025.

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 (loss) for the three months ended March 31, 2025 and 2024 as follows:

The Company capitalized stock-based compensation associated with the allocation of labor costs related to work performed to manufacture VYJUVEK of $969 thousand and $724 thousand for the three months ended March 31, 2025 and 2024.

10. Income Taxes

The Company recorded an income tax provision of $7.9 million for the three months ended March 31, 2025. 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 months ended March 31, 2024 as it generated sufficient tax losses, after consideration of discrete items, during the period. At March 31, 2025, the Company maintains a full valuation allowance against its net deferred tax assets.

11. Segment Information

The Company operates asone operating segment, which is focused on the discovery, development, manufacturing and commercialization of genetic medicines to treat diseases with high unmet medical needs. The Company’s chief operating decision maker (“CODM”), our chief executive officer, utilizes financial information presented on a consolidated basis to manage and allocate resources. The CODM uses consolidated gross margin, operating margin, net income and total research and development expenses by product candidate or program to assess performance, forecast future financial results and to allocate resources.

The following table presents selected financial information with respect to the Company’s single operating segment for the quarters ended March 31, 2025, and 2024:

(1)Includes stock-based compensation, other manufacturing expenses related to our product candidates and other unallocated expenses which largely relates to depreciation and other facilities and equipment related costs

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.