Krystal Biotech, Inc.

Notes to Condensed Consolidated Financial Statements

1. Organization

Krystal Biotech, Inc. (together with its wholly-owned subsidiaries, the “Company,” or “we” or other similar pronouns), a Delaware C-corporation, is a fully integrated, global, commercial-stage biotechnology company. We are 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 September 30, 2026, the Company had a retained earnings balance of $197.9 million. Our operating profitability is dependent upon the continued successful commercialization of VYJUVEK®, our redosable gene therapy approved in the United States, European Union (“EU”), United Kingdom (“UK”), and Japan, 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 and revenue generated from the sale of VYJUVEK, and may also seek additional capital through arrangements with strategic partners, the sale of equity, debt financings or other sources.

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 in connection with, among other things, advancing its product pipeline, expanding its commercialization capabilities, and complying with EU and Japan post-authorization regulatory requirements and EU member state-specific pricing, reimbursement, and market access activities. The Company believes that its cash and cash equivalents and short-term investments of approximately $911.9 million as of September 30, 2026 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”). 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 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, 2025 (the “2025 10-K”), as filed with the U.S. Securities and Exchange Commission (“SEC”) on February 17, 2026.

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 and applies significant judgment in developing the estimates and assumptions that are used in the preparation of these financial statements. 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 the 2025 10-K. There were no material changes to the Company’s significant accounting policies during the nine months ended September 30, 2026.

Recently Issued Accounting Pronouncements, Not Yet Adopted

There were no accounting pronouncements issued or adopted during the nine months ended September 30, 2026 that had or are expected to have a material impact on the Company’s condensed consolidated financial statements.

In November 2024, the Financial Accounting Standards Board (“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 financial statement disclosures.

In December 2025, the FASB issued ASU 2025-11 Interim Reporting (Topic 270): Narrow-Scope Improvements. This standard clarifies current interim reporting requirements on Topic 270 and introduces a disclosure principle requiring entities to disclose events since the end of the last annual reporting period that have a material impact on the entity. This standard will be effective for fiscal years beginning after December 15, 2027, with the option to apply it retrospectively. Early adoption is allowed. Currently, the Company is assessing the potential impact of this guidance on its 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 $127.3 million and $97.8 million for the three months ended September 30, 2026 and September 30, 2025, respectively and $362.9 million and $282.0 million for the nine months ended September 30, 2026 and September 30, 2025, respectively. Product revenue by significant geographic region is as follows:

The Company’s accounts receivable, net balance relating to VYJUVEK sales was $133.1 million as of September 30, 2026 and $127.4 million as of December 31, 2025. Accounts receivable, net from the Company’s customers who individually accounted for 10% or more of accounts receivable, net consisted of the following:

*Customer B’s AR balance represents less than 10% of outstanding accounts receivable, net as of September 30, 2026.

All other single customers represent less than 10% of outstanding accounts receivable, net as of September 30, 2026 and December 31, 2025.

The following table summarizes changes in allowances and discounts for the nine months ended September 30, 2026:

Rebate liabilities are included in accrued rebates and other long-term liabilities on the condensed consolidated balance sheets, as applicable, and were entirely classified as current as of September 30, 2026. Other long-term liabilities was comprised of $3.7 million of long-term accrued rebates as of December 31, 2025. Prompt pay discount 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 discounts and other accruals are recorded as reductions 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, 2026 and 2025, respectively, there were 329 thousand and 664 thousand common stock equivalents outstanding in the form of stock options andzero and 125 thousand in unvested restricted stock, that have each 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, 2026 and 2025, respectively, there were 256 thousand and 568 thousand common stock equivalents outstanding in the form of stock options andzero and 98 thousand in unvested restricted stock, that have each 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 and cash equivalents and available-for-sale securities by significant investment category as of September 30, 2026 and December 31, 2025:

(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 $1.5 million and $1.4 million for the three months ended September 30, 2026 and 2025, respectively, and $4.3 million and $4.2 million for the nine months ended September 30, 2026 and 2025, respectively. Depreciation expense capitalized into inventory was $1.2 million and $1.1 million for the three months ended September 30, 2026 and 2025, respectively, and $3.4 million and $3.1 million for the nine months ended September 30, 2026 and 2025, respectively.

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following as of September 30, 2026 and December 31, 2025:

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 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 incurred research and development expenses related to commitments under these agreements of $1.8 million and $2.3 million for the three months ended September 30, 2026 and September 30, 2025, respectively, and $6.7 million and $6.6 million for the nine months ended September 30, 2026 and September 30, 2025, respectively.

Legal Proceedings

In the ordinary course of business, the Company is 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.

The Company has received $3.0 million of insurance proceeds during the three and nine months ended September 30, 2026, related to reimbursement of litigation legal costs. The proceeds have been recorded as an offset to legal fees included in general and administrative expenses on the condensed consolidated statements of operations and comprehensive income and within operating activities on the condensed consolidated statements of cash flows.

On September 18, 2025, a stockholder filed a derivative complaint in the Court of Chancery of the State of Delaware, naming the Company’s directors as defendants and the Company as a nominal defendant. The complaint alleged claims for breach of fiduciary duty, unjust enrichment, and waste of corporate assets based on allegedly excessive non-employee director compensation in each of 2021 through 2024. In June 2026, the parties entered into a settlement agreement. On September 15, 2026, the Court approved the settlement, which includes a release of the claims asserted in the action, and dismissed the action with prejudice. The settlement does not constitute an admission of fault, liability, or wrongdoing by any party. Under the settlement, (i) the Company adopted and implemented, and will maintain for a period offive (5) years, certain corporate governance reforms relating to non-employee director compensation, and (ii) in September 2026, the Company paid the plaintiff’s attorneys’ fees and expenses, which were the only monetary component of the settlement and were not material to the condensed consolidated financial statements.

On May 29, 2026, Jonathan Forman filed a lawsuit against the Company in the United States District Court for the District of Delaware (Docket No. 1:26-cv-00628) asserting claims for correction of inventorship, under 35 U.S.C. § 256, of U.S. Patent No. 10,829,529 and U.S. Patent No. 12,522,636 (together, the “Patents”), which relate to compositions and methods for delivering CFTR polypeptides and which the plaintiff alleges are embodied in the Company’s KB407 product candidate for the treatment of cystic fibrosis. The plaintiff alleges that he conceived of, and contributed to, the inventions claimed in the Patents and that he was erroneously omitted as a named inventor on the Patents. In addition to the correction of inventorship, the plaintiff is seeking his attorneys’ fees and his costs and expenses. The Company believes the plaintiff’s claims are without merit and intends to defend the matter vigorously. The Company is unable to estimate the possible loss or range of losses, if any, that may result from the matter.

8. Leases

As of September 30, 2026, future minimum commitments under the Company’s operating leases with lease terms in excess of 12 months were as follows:

As of September 30, 2026 and December 31, 2025, the Company’s weighted-average remaining lease term for operating leases was 9.8 years and 10.1 years, respectively, and the Company’s weighted-average discount rate for operating leases was 9.7% as of September 30, 2026 and December 31, 2025.

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”) to certain employees.

Shares of common stock remaining available for grant under the Plan were approximately 1.5 million as of September 30, 2026.

Stock Options

The following table summarizes the Company’s stock option activity for the nine months ended September 30, 2026:

(1)Aggregate intrinsic value represents the difference between the closing stock price of our common stock on December 31, 2025 and September 30, 2026 and the exercise price of outstanding in-the-money options on the respective date.

The following table summarizes the Company’s stock option activity for the nine months ended September 30, 2025:

(1)Aggregate intrinsic value represents the difference between the closing stock price of our Common Stock on December 31, 2024 and September 30, 2025 and the exercise price of outstanding in-the-money options on the respective date.

The total intrinsic value (the amount by which the fair market value exceeds the exercise price) of stock options exercised was $8.5 million and $4.8 million during the three months ended September 30, 2026 and 2025, respectively, and $71.0 million and $8.1 million for the nine months ended September 30, 2026 and 2025, respectively.

The weighted-average grant-date fair value per share of options granted to employees and directors was $210.16 and $108.46 during the three months ended September 30, 2026 and 2025, respectively, and $183.75 and $109.74 for the nine months ended September 30, 2026 and 2025, respectively.

There was $95.0 million of unrecognized stock-based compensation expense related to employees’ and directors’ options that is expected to be recognized over a weighted-average period of 3.0 years as of September 30, 2026.

Restricted Stock Units

The following table summarizes the Company’s RSU activity:

There was $47.7 million of unrecognized stock-based compensation expense related to employees’ RSU awards that is expected to be recognized over a weighted-average period of 2.7 years as of September 30, 2026.

Performance-Based Restricted Stock Units

The following table summarizes the Company’s PSU activity:

PSUs granted during the period are subject to regulatory performance-based vesting conditions, as determined by the Compensation Committee of the Company’s Board of Directors, and vest on a three year cliff basis upon satisfaction of such conditions.

There was $9.6 million of unrecognized stock-based compensation expense related to employees’ PSU awards that is expected to be recognized over a weighted-average period of 2.4 years as of September 30, 2026.

Stock-Based Compensation Expense, Net

The Company recorded stock-based compensation expense, net related to its stock options and restricted stock in the condensed consolidated statements of operations and comprehensive income for the three and nine months ended September 30, 2026 and 2025 as follows:

The Company capitalized into inventory stock-based compensation associated with the allocation of labor costs related to work performed to manufacture VYJUVEK of $0.9 million and $1.1 million for the three months ended September 30, 2026 and 2025, respectively, and $2.9 million and $3.0 million for the nine months ended September 30, 2026 and 2025, respectively.

10. Income Taxes

The Company recorded an income tax expense of $17.1 million and $33.9 million for the three and nine months ended September 30, 2026, respectively. The tax expense 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 effective tax rate, the Company will make a cumulative adjustment to the income tax provision in the period the change becomes known. The Company recorded an income tax benefit of $31.4 million and $15.1 million for the three and nine months ended September 30, 2025, respectively.

We monitor the realizability of our deferred tax assets taking into consideration all relevant factors at each reporting period. As of September 30, 2026, except for certain state net operating loss carryforward and tax credit carryforward, we do not have valuation allowance against deferred tax assets. As of September 30, 2025, we released $48.4 million of our valuation allowance associated with the U.S. federal and state deferred tax assets, except for those related to certain state net operating loss carryforwards and tax credit carryforwards. We continue to maintain a full valuation allowance against certain state attributes as of September 30, 2026, because we concluded they are not more likely than not to be realized as we expect certain state attribute generation in future years to exceed our ability to use these deferred tax assets.

We are subject to income taxes in the U.S. and in many foreign jurisdictions. Significant judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets that are not more likely than not to be realized. The determination of the realizability of deferred tax assets requires significant judgment in assessing the likelihood of future tax consequences. The Company previously maintained a full valuation allowance against its U.S. federal and state deferred tax assets due to historical cumulative losses and uncertainty regarding the realization of such assets. The Company will continue to evaluate all available evidence each reporting period and may adjust the valuation allowance in future periods if estimates of future taxable income or other relevant factors change.

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 three and nine months ended September 30, 2026, and 2025:

(1)Includes stock-based compensation and other unallocated expenses which consist of shared pre-commercial manufacturing costs, primarily relating to certain raw materials, process development, quality control and quality assurance activities, as well as other manufacturing and facility related costs including rent, storage and depreciation which support the development of multiple product candidates.

12. Subsequent Event

In October 2026, the Company’s Board of Directors authorized the repurchase of up to $400 million of its common stock. The Company may repurchase shares of common stock from time to time through open market purchases, in privately negotiated transactions, or by other means. permitted under applicable securities laws, including through purchases compliant with Rule 10b-18 under the Exchange Act and trading plans adopted under Rule 10b5-1 under the Exchange Act. The program has no expiration date, does not obligate the Company to acquire any particular amount of common stock, and may be modified, suspended, or discontinued at any time at the Company’s discretion. The timing and amount of any repurchases will depend on a number of factors, including the market price of its common stock, general business and market conditions, liquidity and capital requirements, clinical development and commercialization plans, alternative uses of capital, and legal and regulatory requirements.