Krystal Biotech, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) Krystal Biotech, Inc. Condensed Consolidated Balance Sheets (unaudited) (In thousands, except shares and per share data) September 30, 2020 December 31, 2019 Assets Current assets Cash and cash equivalents $ 282,369 $ 187,514 Short-term investments 3,996 6,171 Prepaid expenses and other current assets 1,287 2,195 Total current assets 287,652 195,880 Property and equipment, net 17,512 8,475 Long-term investments — 497 Prepaid rent 2,400 — Right-of-use asset 2,476 2,709 Other non-current assets 1,411 1,462 Total assets $ 311,451 $ 209,023 Liabilities and Stockholders' Equity Current liabilities Accounts payable $ 2,591 $ 1,021 Current portion of lease liability 564 480 Accrued expenses and other current liabilities 4,043 1,826 Total current liabilities 7,198 3,327 Lease liability 2,533 2,782 Total liabilities 9,731 6,109 Commitments and contingencies (Note 6) Stockholders' equity Preferred stock; $ 0.00001 par value; 20,000,000 shares authorized at September 30, 2020 (unaudited) and December 31, 2019; 2,061,773 shares issued, and no shares outstanding at September 30, 2020 (unaudited) and December 31, 2019 — — Common stock; $ 0.00001 par value; 80,000,000 shares authorized at September 30, 2020 (unaudited) and December 31, 2019; 19,706,870 and 17,354,310 shares issued and outstanding at September 30, 2020 (unaudited) and December 31, 2019, respectively — — Additional paid-in capital 362,531 241,951 Accumulated other comprehensive income 20 10 Accumulated deficit ( 60,831 ) ( 39,047 ) Total stockholders' equity 301,720 202,914 Total liabilities and stockholders' equity $ 311,451 $ 209,023 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3 Krystal Biotech, Inc. Condensed Consolidated Statements of Operations and Comprehensive Loss (unaudited) Three Months Ended September 30, Nine Months Ended September 30, (In thousands, except share and per share data) 2020 2019 2020 2019 Expenses Research and development $ 5,100 $ 3,885 $ 12,264 $ 11,267 General and administrative 4,580 1,457 10,315 4,660 Total operating expenses 9,680 5,342 22,579 15,927 Loss from operations ( 9,680 ) ( 5,342 ) ( 22,579 ) ( 15,927 ) Other Income Interest and other income, net 70 1,070 795 2,196 Net loss ( 9,610 ) ( 4,272 ) ( 21,784 ) ( 13,731 ) Unrealized gain (loss) on available-for-sale securities ( 20 ) ( 7 ) 10 9 Comprehensive loss $ ( 9,630 ) $ ( 4,279 ) $ ( 21,774 ) $ ( 13,722 ) Net loss per common share: Basic and diluted $ ( 0.49 ) $ ( 0.25 ) $ ( 1.18 ) $ ( 0.89 ) Weighted-average common shares outstanding: Basic and diluted 19,676,016 17,291,245 18,477,495 15,420,995 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4 Krystal Biotech, Inc. Condensed Consolidated Statements of Stockholders' Equity (unaudited) Common Stock Additional Paid-in Accumulated Other Comprehensive Accumulated Total Stockholders' (In thousands, except shares) Shares Amount Capital Income Deficit Equity Balances at January 1, 2020 17,354,310 $ — $ 241,951 $ 10 $ ( 39,047 ) $ 202,914 Issuance of common stock, net 16,254 — 243 — — 243 Stock-based compensation expense — — 539 — — 539 Unrealized gain on investments — — — 14 — 14 Net loss — — — — ( 5,341 ) ( 5,341 ) Balances at March 31, 2020 17,370,564 $ — $ 242,733 $ 24 $ ( 44,388 ) $ 198,369 Issuance of common stock, net 2,293,495 — 117,337 — — 117,337 Stock-based compensation expense — — 807 — — 807 Unrealized gain on investments — — — 16 — 16 Net loss — — — — ( 6,833 ) ( 6,833 ) Balances at June 30, 2020 19,664,059 $ — $ 360,877 $ 40 $ ( 51,221 ) $ 309,696 Issuance of common stock, net 42,811 — 298 — — 298 Stock-based compensation expense — — 1,356 — — 1,356 Unrealized loss on investments — — — ( 20 ) — ( 20 ) Net loss — — — — ( 9,610 ) ( 9,610 ) Balances at September 30, 2020 19,706,870 $ — $ 362,531 $ 20 $ ( 60,831 ) $ 301,720 Common Stock Additional Paid-in Accumulated Other Comprehensive Accumulated Total Stockholders' (In thousands, except shares) Shares Amount Capital Income Deficit Equity Balances at January 1, 2019 14,428,916 $ — $ 133,183 $ 2 $ ( 19,959 ) $ 113,226 Issuance of common stock, net 14,653 — 44 — — 44 Stock-based compensation expense — — 313 — — 313 Unrealized gain on investments — — — 14 — 14 Net loss — — — — ( 4,111 ) ( 4,111 ) Balances at March 31, 2019 14,443,569 $ — $ 133,540 $ 16 $ ( 24,070 ) $ 109,486 Issuance of common stock, net 2,501,500 — 93,825 — — 93,825 Stock-based compensation expense — — 325 — — 325 Unrealized gain on investments — — — 2 — 2 Net loss — — — — ( 5,348 ) ( 5,348 ) Balances at June 30, 2019 16,945,069 $ — $ 227,690 $ 18 $ ( 29,418 ) $ 198,290 Issuance of common stock, net 362,571 — 13,357 — — 13,357 Stock-based compensation expense — — 278 — — 278 Unrealized loss on investments — — — ( 7 ) — ( 7 ) Net loss — — — — ( 4,272 ) ( 4,272 ) Balances at September 30, 2019 17,307,640 $ — $ 241,325 $ 11 $ ( 33,690 ) $ 207,646 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5 Krystal Biotech, Inc. Condensed Consolidated Statements of Cash Flows (unaudited) Nine Months Ended September 30, (In thousands) 2020 2019 Operating Activities Net loss $ ( 21,784 ) $ ( 13,731 ) Adjustments to reconcile net loss to net cash used in operating activities Depreciation and amortization 1,361 753 Stock-based compensation expense 2,702 916 Loss on disposals of fixed assets 33 54 Changes in operating assets and liabilities Prepaid expenses and other current assets 489 ( 465 ) Prepaid rent ( 2,400 ) — Lease liability ( 165 ) ( 55 ) Accounts payable 725 170 Accrued expenses and other current liabilities 980 668 Net cash used in operating activities ( 18,059 ) ( 11,690 ) Investing Activities Purchases of property and equipment ( 7,636 ) ( 4,120 ) Purchases of short-term investments ( 3,205 ) ( 6,867 ) Proceeds from maturities of short-term investments 5,877 6,587 Net cash used in investing activities ( 4,964 ) ( 4,400 ) Financing Activities Issuance of common stock, net 117,878 107,226 Net cash provided by financing activities 117,878 107,226 Net increase in cash and cash equivalents 94,855 91,136 Cash and cash equivalents at beginning of period 187,514 103,670 Cash and cash equivalents at end of period $ 282,369 $ 194,806 Supplemental Disclosures of Non-Cash Investing and Financing Activities Unpaid purchases of property and equipment $ 3,173 $ 1,026 Initial recognition of right-of-use assets $ — $ 3,066 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 6 Krystal Biotech, Inc. Notes to Condensed Consolidated Financial Statements (unaudited) 1. Organization Krystal Biotech, Inc. and its consolidated subsidiary (the “Company,” or “we” or other similar pronouns) commenced operations in April 2016. On March 31, 2017, the Company converted from a California limited liability company to a Delaware C-corporation, and changed its name from Krystal Biotech, LLC to Krystal Biotech, Inc. On June 19, 2018, the Company incorporated Krystal Australia Pty Ltd., an Australian proprietary limited company, for the purposes of undertaking preclinical and clinical studies in Australia. On April 24, 2019, the Company incorporated Jeune, Inc. in Delaware, a wholly-owned subsidiary, for the purpose of undertaking preclinical studies for aesthetic skin conditions. We are a clinical stage gene therapy company developing a new class of transformative medicines to treat diseases caused by gene or protein dysfunction or absence. Using our patented platform that is based on engineered herpes simplex virus type 1 (“HSV-1”), we create vectors that encode functional proteins. Our vector is designed to be specifically and efficiently delivered to the target cell in an outpatient setting, via topical, intradermal or inhaled routes of administration, where the cell’s own machinery transcribes and translates the encoded protein, restoring or augmenting protein function to treat or prevent disease. We are primarily focused on applying our platform to treat rare monogenic skin conditions caused by insufficient or completely absent protein production. We have expanded our pipeline products to develop medicines to treat chronic, non-monogenic skin diseases and aesthetic skin conditions. Recognizing the breadth and potential transformative power of our HSV-1 vector platform, we have started expanding the scope of our product development beyond skin and have begun preclinical efforts in the field of pulmonary diseases. Liquidity As of September 30, 2020, the Company had an accumulated deficit of $ 60.8 million. With the net proceeds raised from its public and private securities offerings, including the public offering completed in May 21, 2020, the Company believes that its cash, cash equivalents and short-term investments of approximately $ 286.4 million as of September 30, 2020 will be sufficient to allow the Company to fund its planned operations for at least the next 12 months from the date of this Quarterly Report on Form 10-Q. As the Company continues to incur losses, a transition to profitability is dependent upon the successful development, approval and commercialization of its product candidates and the achievement of a level of revenues adequate to support the Company’s cost structure. The Company may never achieve profitability and unless and until it does, the Company will continue to need to raise additional capital or obtain financing from other sources. Management intends to fund future operations through the sale of equity and debt financings and may also seek additional capital through arrangements with strategic partners or other sources. There can be no assurance that additional funding will be available on terms acceptable to the Company, if at all. The Company is subject to risks common to companies in the biotechnology industry, including but not limited to the failure of product candidates in clinical and preclinical studies, the development of competing product candidates or other technological innovations by competitors, dependence on key personnel, protection of proprietary technology, compliance with government regulations and the ability to c ommercialize product candidates. 2. Summary of Significant Accounting Policies Basis of Presentation The accompanying unaudited interim condensed financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), as found in the Accounting Standards Codification (“ASC”), the Accounting Standards Update (“ASU”), of the Financial Accounting Standards Board (“FASB”), and the rules and regulations of the US Securities and Exchange Commission (“SEC”). 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 operation. These unaudited interim condensed financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, as filed with the SEC on March 10, 2020. 7 Risks and Uncertainties The pandemic caused by an outbreak of a new strain of coronavirus (“COVID-19”) has resulted, and is likely to continue to result, in significant national and global economic disruption and may adversely affect our business. The Company is actively monitoring the impact of COVID-19 and the possible effects on its financial condition, liquidity, operations, suppliers, industry, and workforce. However, the full extent, consequences, and duration of the COVID-19 pandemic and the resulting impact on the Company cannot currently be predicted. The Company will continue to evaluate the impact that these events could have on the operations, financial position, and the results of operations and cash flows during fiscal year 2020. Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts in the condensed consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates. Management considers many factors in selecting appropriate financial accounting policies and controls, and in developing the estimates and assumptions that are used in the preparation of these financial statements. Management must apply significant judgment in this process. In addition, other factors may affect estimates, including expected business and operational changes, sensitivity and volatility associated with the assumptions used in developing estimates, and whether historical trends are expected to be representative of future trends. The estimation process often may yield a range of potentially reasonable estimates of the ultimate future outcomes and management must select an amount that falls within that range of reasonable estimates. This process may result in actual results differing materially from those estimated amounts used in the preparation of the financial statements. Estimates are used in the following areas including stock-based compensation expense, accrued expenses, the fair value of financial instruments, incremental borrowing rate for lease liability, and the valuation allowance included in the deferred income tax calculation. Segment and Geographical Information Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company and the Company’s chief operating decision maker view the Company’s operations and manage its business in one operating segment, which is the business of developing and commercializing pharmaceuticals. Concentrations of Credit Risk and Off-Balance Sheet Risk Financial instruments that potentially subject the Company to credit risk consist of cash, cash equivalents and investments. The Company’s policy is to invest its cash, cash equivalents and investments in money market funds, certificates of deposit and various other bank deposit accounts. The counterparties to the agreements relating to the Company’s investments consist of financial institutions of high credit standing. The Company is exposed to credit risk in the event of default by the financial institutions to the extent amounts recorded on the balance sheets are in excess of insured limits. The Company has not experienced any credit losses in such accounts and does not believe it is exposed to any significant credit risk on these funds. The Company has no financial instruments with off-balance sheet risk of loss. Cash, Cash Equivalents and Investments Cash and cash equivalents consist of money market funds and bank deposits. Cash equivalents are defined as short-term, highly liquid investments with original maturities of 90 days or less at the date of purchase. Investments with maturities of greater than 90 days but less than one year are classified as short-term investments on the consolidated balance sheets and consist of US Treasury bills and certificates of deposit. Investments with maturities of greater than one year are classified as long-term investments on the consolidated balance sheets and consist of certificates of deposit. Accrued interest on US Treasury bills and certificates of deposit are also classified as short-term investments. As our entire investment portfolio is considered available for use in current operations, we classify all investments as available-for-sale securities. Available-for-sale securities are carried at fair value, with unrealized gains and losses reported in accumulated other comprehensive loss, which is a separate component of stockholders’ equity in the consolidated balance sheets. 8 Fair Value of Financial Instruments Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. There is a three-level hierarchy that prioritizes the inputs used in determining fair value by their reliability and preferred use, as follows: • Level 1 — Valuations based on quoted prices in active markets for identical assets or liabilities. • Level 2 — Valuations based on quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data. • Level 3 — Valuations based on inputs that are both significant to the fair value measurement and unobservable. To the extent that a valuation is based on models or inputs that are less observable, or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized within Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. There have been no significant changes to the valuation methods utilized by the Company during the periods presented. There have been no transfers between Level 1, Level 2, and Level 3 in any periods presented. The carrying amounts of financial instruments consisting of cash and cash equivalents, investments, prepaid expenses and other current assets, accounts payable, accrued expenses and other current liabilities included in the Company’s financial statements, are reasonable estimates of fair value, primarily due to their short maturities. Marketable securities are classified as long-term investments if the Company has the ability and intent to hold them and such holding period is longer than one year. The Company classifies all of its investments as available-for-sale. Our available-for-sale, short-term investments, which consist of US Treasury bills and certificates of deposit, are considered to be Level 2 valuations. The fair value of Level 2 financial assets is determined using inputs that are observable in the market or can be derived principally from or corroborated by observable market data, such as pricing for similar securities, recently executed transactions, cash flow models with yield curves, and benchmark securities. In addition, Level 2 financial instruments are valued using comparisons to like-kind financial instruments and models that use readily observable market data as their basis. Property and Equipment, net Property and equipment, net, is stated at cost, less accumulated depreciation. Maintenance and repairs that do not improve or extend the lives of the respective assets are expensed to operations as incurred, while costs of major additions and betterments are capitalized. Upon disposal, the related cost and accumulated depreciation is removed from the accounts and any resulting gain or loss is included in the results of operations. Depreciation is recorded using the straight-line method over the estimated useful lives of the respective assets, which are as follows: Computer equipment and software 3 years Lab equipment 3 - 7 years Furniture and fixtures 3 years Leasehold improvement shorter of 8 years or remaining life of lease 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. An impairment loss would be recognized when estimated future cash flows expected to result from the use of the asset and its eventual disposition are less than the carrying amount of the asset. The Company has no t recognized any impairment losses for the three and nine months ended September 30, 2020 and 2019. 9 Leases We have entered into lease agreements for our laboratory, manufacturing and office spaces. On January 1, 2019, we adopted ASC 842 – Leases. Pursuant to ASC 842, all of our leases outstanding on January 1, 2019 continued to be classified as operating leases. With the adoption of ASC 842, we recorded an operating lease right-of-use asset of $ 1.1 million and an operating lease liability of $ 1.4 million on the condensed consolidated balance sheet. Right-of-use lease assets represent our right to use the underlying asset during the lease term and the lease obligations represent our commitment to make lease payments arising from the lease. Right-of-use lease assets and obligations were recognized based on the present value of remaining lease payments over the lease term. As the Company’s lease agreements do not provide an implicit rate and as the Company does no t have any external borrowings, we have used an estimated incremental borrowing rate based on the information available at lease commencement in determining the present value of lease payments. Operating lease expense is recognized on a straight-line basis over the lease term. Variable lease expense is recognized in the period in which the obligation for the payment is incurred. The Company adopted the new lease standard as of the effective date of January 1, 2019, with no restatement of prior periods or cumulative adjustment to retained earnings. Upon adoption, the Company took advantage of the transition package of practical expedients permitted within ASC 842, which allowed the Company not to reassess previous accounting conclusions around whether arrangements were, or contained, leases, as well as to carry forward both the historical classification of leases and the treatment of initial direct costs for existing leases. In addition, the Company also has made an accounting policy election to exclude leases with an initial term of twelve months or less from its balance sheet and to account for lease and non-lease components of its operating leases as a single component. Research and Development Expenses Research and development costs are charged to expense as incurred in performing research and development activities. The costs include employee compensation costs, facilities and overhead, preclinical and clinical activities, related clinical manufacturing costs, contract management services, regulatory and other related costs. The Company estimates contract research and clinical trials materials manufacturing expenses based on the services performed pursuant to contracts with research and manufacturing organizations that manufacture materials used in the Company’s ongoing preclinical and clinical studies. Nonrefundable advanced payments for goods or services to be received in the future for use in research and development activities are deferred and capitalized. The capitalized amounts are expensed as the related goods are delivered or the services are performed. In accruing service fees, the Company estimates the time period over which services will be performed and the level of effort to be expended in each period. These estimates are based on communications with the third-party service providers and the Company’s estimates of accrued expenses using information available at each balance sheet date. If the actual timing of the performance of services or the level of effort varies from the estimate, the Company will adjust the accrual accordingly. Stock-Based Compensation Expense The Company accounts for its stock-based compensation awards in accordance with FASB ASC Topic 718, Compensation-Stock Compensation (“ASC 718”). ASC 718 requires all stock-based payments, including grants of stock options and restricted stock, to be recognized in the statements of operations based on their grant-date fair values. Compensation expense is recognized on a straight-line basis based on the grant-date fair value over the associated service period of the award, which is generally the vesting term. The Company estimates the fair value of its stock options using the Black-Scholes option pricing model, which requires the input of subjective assumptions, including: (i) the expected stock price volatility; (ii) the expected term of the award; (iii) the risk-free interest rate; and (iv) expected dividends. Due to the lack of sufficient history and trading volume of our Common Stock and a lack of Company-specific historical and implied volatility data, the Company has based its estimate of expected volatility on the historical volatility of a group of similar companies that are publicly traded. When selecting these public companies on which it has based its expected stock price volatility, the Company selected companies with comparable characteristics to it, including enterprise value, risk profiles, position within the industry, and with historical share price information sufficient to meet the expected term of the stock-based awards. The Company computes historical volatility data using the daily closing prices for the selected companies’ shares during the equivalent period of the calculated expected term of the stock-based awards. The Company will continue to apply this process until a sufficient amount of historical information regarding the volatility of its own stock price becomes available. Due to the lack of Company-specific historical option activity, the Company has estimated the expected term of its employee stock options using the “simplified” method, whereby the expected term equals the arithmetic mean of the vesting term and the original contractual term of the option. The risk-free interest rates are based on the US Treasury securities with a maturity date commensurate with the expected term of the associated award. The Company has never paid and does not expect 10 to pay dividends in the foreseeable future. The Company is also required to estimate forfeitures at the time of grant and to revise those estimates in subsequent periods if actual forfeitures differ from its estimates. To the extent that actual forfeitures differ from the Company’s estimates, the differences are recorded as a cumulative adjustment in the period the estimates were revised. Comprehensive Loss Comprehensive loss is defined as the change in equity during a period from transactions from non-owner sources. Unrealized gains or losses on available-for-sale securities is a component of other comprehensive gains or losses and is presented net of taxes. We have not recorded any reclassifications from other comprehensive gains or losses to net loss during any period presented. Recent Accounting Pronouncements In August 2018, the FASB issued ASU 2018-13 - Fair Value Measurement (Topic 820) (“ASU 2018-13”) which removes, modifies and adds disclosure requirements on fair value measurements. ASU 2018-13 removes disclosure requirements for transfers between Level 1 and Level 2 measurements and valuation processes for Level 3 measurements but adds new disclosure requirements including changes in unrealized gains/losses in other comprehensive income related to recurring Level 3 measurements. The amended guidance was effective for us commencing in the first quarter of 2020. Certain aspects may be applied prospectively while other aspects may be applied retrospectively upon the effective date. The adoption of the guidance resulted in us disclosing the Company’s cash, cash equivalents and available-for-sale securities by significant investment category as of September 30, 2020 and 2019. 3. Net Loss Per Share Attributable to Common Stockholders Basic net loss per share attributable to common stockholders is calculated by dividing net loss attributable to common stockholders by the weighted average shares outstanding during the period, without consideration for common stock equivalents. Diluted net loss per share attributable to common stockholders is computed by dividing the net loss by the weighted-average number of shares of common stock and common share equivalents outstanding for the period. Stock options are common share equivalents. There were 853,336 and 452,311 common share equivalents outstanding as of September 30, 2020 and 2019, respectively, in the form of stock options, that have been excluded from the calculation of diluted net loss per common share as their effect would be anti-dilutive for all periods presented. Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (In thousands, except shares and per share data) (Unaudited) (Unaudited) Numerator: Net loss per common share $ ( 9,610 ) $ ( 4,272 ) $ ( 21,784 ) $ ( 13,731 ) Denominator: Weighted-average basic and diluted common shares 19,676,016 17,291,245 18,477,495 15,420,995 Basic and diluted net loss per common share $ ( 0.49 ) $ ( 0.25 ) $ ( 1.18 ) $ ( 0.89 ) 11 4. Fair Value Instruments The following tables show the Company’s cash, cash equivalents and available-for-sale securities by significant investment category as of September 30, 2020 and December 31, 2019, respectively (in thousands): September 30, 2020 (unaudited) 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 $ 3 $ — $ — $ 3 $ 3 $ — $ — Money market instruments 282,366 — — 282,366 282,366 — — Subtotal 282,369 — — 282,369 282,369 — — Level 2: U.S. government agency securities 501 2 — 503 — 503 — Certificates of deposit 3,474 19 — 3,493 — 3,493 — Subtotal 3,975 21 — 3,996 — 3,996 — Total $ 286,344 $ 21 $ — $ 286,365 $ 282,369 $ 3,996 $ — December 31, 2019 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 $ 3 $ — $ — $ 3 $ 3 $ — $ — Money market instruments 187,511 — — 187,511 187,511 — — Subtotal 187,514 — — 187,514 187,514 — — Level 2: U.S. government agency securities 1,747 6 — 1,753 — 1,753 — Certificates of deposit 4,911 4 — 4,915 — 4,418 497 Subtotal 6,658 10 — 6,668 — 6,171 497 Total $ 194,172 $ 10 $ — $ 194,182 $ 187,514 $ 6,171 $ 497 (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. 12 5. Balance Sheet Components Property and Equipment, Net Property and equipment, net consist of the following (in thousands): September 30, 2020 December 31, 2019 (Unaudited) Construction-in-progress $ 9,389 $ 2,431 Leasehold improvements 4,712 3,179 Furniture and fixtures 854 99 Computer equipment and software 67 45 Laboratory equipment 4,457 3,571 Total property and equipment 19,479 9,325 Accumulated depreciation and amortization ( 1,967 ) ( 850 ) Property and equipment, net $ 17,512 $ 8,475 Depreciation expense was $ 399 thousand and $ 1.1 million for the three and nine months ended September 30, 2020, respectively, and $ 190 thousand and $ 498 thousand for the three and nine months ended September 30, 2019, respectively. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consisted of the following (in thousands): September 30, 2020 December 31, 2019 (Unaudited) Accrued preclinical and clinical expenses $ 969 $ 977 Accrued professional fees 358 24 Accrued payroll and benefits 1,096 510 Accrued taxes 30 40 Accrued construction in progress 1,577 263 Other current liabilities 13 12 Total $ 4,043 $ 1,826 6. Commitments and Contingencies Significant Contracts and Agreements Lease Agreements On May 26, 2016, the Company signed an operating lease for laboratory and office space that commenced in June 2016 and expired on October 31, 2017 (the “2016 Lease”). The 2016 Lease was amended to increase the area leased to approximately 31,000 square feet and to extend the expiration date to February 28, 2027 , including 6,000 square feet relating to a month-to-month lease that we utilized through February 2020. On December 26, 2019, we entered into a lease agreement for our second commercial gene therapy facility (“ASTRA”) in the Pittsburgh, Pennsylvania area (“ASTRA lease”) with Northfield I, LLC (the “Landlord”). The 150,000 square foot facility is under construction and is expected to be completed and validated in 2022. The lease will commence when the space is available for access, which is anticipated to be in 2H 2020, and has an initial term that expires on October 31, 2035 . The ASTRA lease contains an option (“Purchase Option”) to purchase the building, related improvements and take corresponding assignment of the Landlord's rights under its existing Ground Lease (the “Ground Lease”). The Purchase Option may be 13 exercised by the Company at any time prior to the date that is thirty days after the initial delivery date, as defined in the lease as the date in which certain delivery conditions have been met by the Landlord. A cash contribution in the amount of $ 2.4 million was paid to escrow on January 21, 2020. The contribution was intended to reduce the amount of the building construction costs and had the effect of reducing the base rental rate of the lease and as such, is recorded as prepaid rent in the condensed consolidated balance sheet as of September 30, 2020. Refer to Note 10 for additional information. As of September 30, 2020, future minimum commitments under the Company’s operating leases were as follows (in thousands): Operating Leases 2020 (remaining three months) $ 274 2021 1,358 2022 1,385 2023 1,413 2024 1,441 Thereafter 11,316 Future minimum operating lease payments $ 17,187 Less: Operating lease payments for ASTRA 13,195 Less: Interest 895 Present value of lease liability $ 3,097 Supplemental condensed consolidated balance sheet information related to leases is as follows: (unaudited) September 30, 2020 September 30, 2019 Operating leases: Right-of-use asset $ 2,476 $ 2,796 Current portion of lease liability 564 462 Lease liability 2,533 2,860 Total lease liability $ 3,097 $ 3,322 Weighted average remaining lease term, in years 6.4 7.4 Weighted average discount rate 8.0 % 8.0 % The Company recorded operating lease costs of $ 148 thousand and $ 458 thousand for the three and nine months ended September 30, 2020 and $ 167 thousand and $ 449 thousand for the three and nine months ended September 30, 2019, respectively, and variable lease costs of $ 60 thousand and $ 88 thousand for the three and nine months ended September 30, 2020 and $ 9 thousand and $ 26 thousand for the three and nine months ended September 30, 2019. Clinical Supply and Product Manufacturing Agreements The Company has entered into various product manufacturing and clinical supply agreements with Contract Manufacturing Organizations (“CMOs”) for the manufacture of clinical trial materials and Contract Research Organizations (“CROs”) for clinical trial services. The product manufacturing and clinical supply agreements provide the terms and conditions under which the CMOs and CROs will formulate, fill, inspect, package, label and test our drug product candidates, B-VEC and KB105 for clinical supply. The Company is obligated to make milestone payments. Additionally, certain raw materials, supplies, outsourced testing and other services for the purposes of batch production will be invoiced separately by the CMOs. The estimated remaining commitment as of September 30, 2020 under these agreements for the manufacturing of our drug product is approximately $ 4.8 million. The Company is also responsible for the payment of a monthly service fee for project management services for the duration of any agreements. The Company has incurred expenses under these agreements of $ 1.3 million and $ 2.3 million for the three months and nine months ended September 30, 2020, respectively, and $ 1.0 million and $ 3.0 million for the three and nine months ended September 30, 2019, respectively. 14 Other Contractual Obligations The Company has contracted with various third parties to facilitate, coordinate and perform agreed upon market research activities relating to our lead product candidate, B-VEC. These contracts typically call for the payment of fees for services upon the achievement of certain milestones. Business activities being performed under these contracts primarily include market research and other related activities. The estimated remaining commitment as of September 30, 2020 is $ 1.2 million. The Company has incurred expenses under these activities of $ 582 thousand and $ 1.1 million for the three and nine months ended September 30, 2020, respectively, and zero for the three and nine months ended September 30, 2019, respectively. Legal Proceedings On May 1, 2020, a complaint was filed against us in the United States District Court for the Western District of Pennsylvania by PeriphaGen Inc., which also named our chief executive officer and chief operating officer, Krish Krishnan and Suma Krishnan, respectively. The complaint alleges breach of contract and misappropriation of trade secrets, which secrets the plaintiff asserts were used to develop our product candidates, including the vector backbones, and our STAR-D platform. We answered the complaint on June 26, 2020 by denying the allegations and brought a counterclaim asking the court to declare that we did not misappropriate PeriphaGen’s trade secrets or confidential information, and to further declare that we are the rightful and sole owner of our product candidates and STAR-D platform. In addition, we filed a third-party complaint against two principals of PeriphaGen, James Wechuck and David Krisky, alleging breach of contract and seeking contribution and indemnification from them in the event PeriphaGen is awarded damages. On July 29, 2020, PeriphaGen filed its response to our answer and counterclaim, denying the allegations in the counterclaim. On the same day, the Messrs. Wechuck and Krisky filed a motion to dismiss the third-party complaint on various grounds, and we have opposed the motion. Discovery in the case has commenced and is expected to continue into the first half of 2021. While we are unable to provide any assurances as to the ultimate outcome of the case, we believe the allegations in the complaint are without merit, and we intend to vigorously defend against them. We are currently unable to estimate the costs and timing of any litigation, including any potential damages if PeriphaGen were to prevail on its claims. 7. Capitalization Sale of Common Stock On November 1, 2017, the Company entered into a stock purchase agreement (“the Agreement”), with the Epidermolysis Bullosa Medical Research Foundation, a California not-for-profit corporation (“EBMRF"), and EB Research Partnership, Inc., a New York not-for-profit corporation (“EBRP”), and together with EBMRF, the Purchasers, pursuant to which the Company sold to the Purchasers an aggregate of 70,000 shares of the Company’s common stock for a purchase price of $ 11.00 per share, or the Transaction. The Agreement contains redemption features whereby the Company is required to repurchase all or a portion of the shares at a purchase price of $ 11.00 per share or the closing trading price of the common stock on the redemption request date, whichever is higher, should the Company cease commercially reasonable efforts to work on the research plan pursuant to the Agreement. As the remaining redemption feature is within the control of the Company, the issued common stock has been classified as permanent equity. The Company has continued to perform work relating to the research plan and does not intend to cease commercially reasonable efforts to do so. On June 27, 2019, the Company completed a public offering of 2,500,000 shares of its common stock to the public at $ 40.00 per share. Net proceeds to the Company from the offering were $ 93.8 million after deducting underwriting discounts and commissions of approximately $ 6.0 million, and other offering expenses payable by the Company of approximately $ 216 thousand. On July 3, 2019, the underwriters exercised their option to purchase an additional 353,946 shares of common stock at $ 40.00 per share for additional net proceeds of $ 13.3 million after deducting underwriting discounts and commissions of approximately $ 849 thousand. In connection with the public offering, the Company suspended its “at-the-market” equity offering program (“ATM Facility”), that had previously been put in place in March 2019 which had allowed the Company to sell shares of its common stock for up to $ 50.0 million in gross proceeds. Following the completion of the offering, $ 16.8 million remains suspended under this program. On May 21, 2020, the Company completed a public offering of 2,275,000 shares of its common stock to the public at $ 55.00 per share. Net proceeds to the Company from the offering were $ 117.2 million after deducting underwriting discounts and commissions of approximately $ 7.5 million, and other offering expenses payable by the Company of approximately $ 463 thousand. 15 8. Stock-Based Compensation Stock options granted to employees vest ratably over a four-year period and options granted to directors of the company vest ratably over one year and four-year periods. Stock options have a life of ten years . The Company granted 195,850 and 740,250 stock options to employees and directors of the Company during the three and nine months ended September 30, 2020, respectively, and 29,500 and 139,000 stock options to employees and directors of the Company during the three and nine months ended September 30, 2019, respectively. The following table summarizes the Company’s stock option activity: Stock Options Outstanding Weighted- average Exercise Price Weighted- average Remaining Contractual Life (Years) Aggregate Intrinsic Value (In thousands) (1) Outstanding at December 31, 2019 420,766 $ 17.71 8.4 $ 15,859 Granted 740,250 $ 46.46 Exercised ( 76,935 ) $ 9.43 $ 5,423 Cancelled or forfeited ( 230,745 ) $ 30.55 Outstanding at September 30, 2020 853,336 $ 39.93 9.1 $ 6,056 Exercisable at September 30, 2020 104,266 $ 11.54 7.2 $ 3,285 (1) Aggregate intrinsic value represents the difference between the closing stock price of our common stock on September 30, 2020 and the exercise price of outstanding in-the-money options. The weighted-average grant-date fair value per share of options granted to employees during the three months ended September 30, 2020 was $ 27.44 . There was $ 19.0 million of unrecognized stock-based compensation expense related to employees’ awards that is expected to be recognized over a weighted-average period of 3.1 years as of September 30, 2020. The Company has recorded aggregate stock-based compensation expense related to the issuance of stock option awards and restricted stock awards in the condensed consolidated statements of operations for the three and nine months ended September 30, 2020 and 2019 as follows (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 (unaudited) (unaudited) Research and development $ 344 $ 154 $ 714 $ 396 General and administrative 1,012 124 1,988 520 Total stock-based compensation $ 1,356 $ 278 $ 2,702 $ 916 Stock Options Granted: The Company recorded stock-based compensation expense of $ 1.4 million and $ 2.7 million for the three and nine months ended September 30, 2020, respectively and $ 278 thousand and $ 734 thousand for the three and nine months ended September 30, 2019, respectively. The fair value of options was estimated at the date of grant using the Black-Scholes valuation model with the following weighted-average assumptions for the three and nine months ended September 30, 2020 and 2019: 16 Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Expected stock price volatility 75 % 74 % 75 % 72 % Expected term of the award (years) 6.20 6.24 6.20 6.08 Risk-free interest rate 0.34 % 1.63 % 0.66 % 2.20 % Weighted average exercise price $ 41.89 $ 38.72 $ 46.46 $ 29.73 Forfeiture rate 10.85 % 10.00 % 10.85 % 10.00 % Restricted Stock Awards: The Company granted 26,213 and 16,213 restricted stock awards (“RSAs”), on June 1, 2018 to our Chief Executive Officer and Chief Operating Officer, respectively. The RSAs vested ratably over a one-year period and had completely vested as of May 31, 2019. No RSAs were outstanding as of September 30, 2020. The fair value of each restricted stock was $ 10.30 reflecting the closing price of our common stock on the grant date. The Company recorded stock-based compensation expense related to RSAs of zero for the three and nine months ended September 30, 2020 and zero and $ 182 thousand for the three and nine months ended September 30, 2019, respectively, within general and administrative expenses in the accompanying condensed consolidated statements of operations. Shares remaining available for grant under the Company’s stock incentive plan were 1,698,412 , with a sublimit for incentive stock options of 537,068 , at September 30, 2020. 9. Related Party Transactions In December 2019, the Company advanced $ 420 thousand to a member of our management team to cover the personal payroll and income taxes on their taxable income from NSO exercises. This employee repaid the Company in the full amount on January 6, 2020. 10. Subsequent Events On October 15, 2020, the Company gave the Landlord notice of its intent to purchase ASTRA for approximately $ 9.5 million, subject to the parties entering into a commercially reasonable purchase and sale agreement. The Company currently holds approximately $ 1.5 million on deposit with the Landlord under the existing lease agreement and intends to apply this deposit as a credit against the purchase price at closing. We also expect that the $ 2.4 million currently recorded as prepaid rent on the balance sheet would be reclassified to property, plant and equipment as part of the book value of the building. As a result of the purchase, the Company will also take assignment of the Lessor's Ground Lease, in accordance with the Purchase Option, of which lease payments are based on annual payments of $ 82 thousand, and subject to a cumulative 10 % escalation clause every 5 years through 2071. The financial statement impact related to the transaction cannot be reasonably estimated as of the date of filing due to the uncertainty of market rates and the timing of the close of purchase. 17