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) June 30, 2021 December 31, 2020 Assets Current assets Cash and cash equivalents $ 329,527 $ 268,269 Short-term investments 38,203 2,993 Prepaid expenses and other current assets 2,197 3,796 Total current assets 369,927 275,058 Property and equipment, net 44,972 30,876 Long-term investments 21,411 — Right-of-use assets 7,136 3,298 Other non-current assets 110 1,612 Total assets $ 443,556 $ 310,844 Liabilities and Stockholders' Equity Current liabilities Accounts payable $ 1,265 $ 2,105 Current portion of lease liability 934 638 Accrued expenses and other current liabilities 15,920 5,109 Build to suit lease liability — 7,600 Total current liabilities 18,119 15,452 Lease liability 6,897 3,308 Total liabilities 25,016 18,760 Commitments and contingencies (Note 6) Stockholders' equity Preferred stock; $ 0.00001 par value; 20,000,000 shares authorized at June 30, 2021 (unaudited) and December 31, 2020; 2,061,773 shares issued, and no shares outstanding at June 30, 2021 (unaudited) and December 31, 2020 — — Common stock; $ 0.00001 par value; 80,000,000 shares authorized at June 30, 2021 (unaudited) and December 31, 2020; 22,205,032 and 19,714,220 shares issued and outstanding at June 30, 2021 (unaudited) and December 31, 2020, respectively — — Additional paid-in capital 521,950 363,292 Accumulated other comprehensive income (expense) ( 21 ) 6 Accumulated deficit ( 103,389 ) ( 71,214 ) Total stockholders' equity 418,540 292,084 Total liabilities and stockholders' equity $ 443,556 $ 310,844 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 June 30, Six Months Ended June 30, (In thousands, except share and per share data) 2021 2020 2021 2020 Expenses Research and development $ 6,594 $ 3,639 $ 12,795 $ 7,164 General and administrative 9,799 3,315 17,951 5,735 Total operating expenses 16,393 6,954 30,746 12,899 Loss from operations ( 16,393 ) ( 6,954 ) ( 30,746 ) ( 12,899 ) Other Income (Expense) Interest and other income, net 30 121 64 725 Interest expense — — ( 1,492 ) — Net loss ( 16,363 ) ( 6,833 ) ( 32,174 ) ( 12,174 ) Unrealized gain (loss) on available-for-sale securities ( 24 ) 16 ( 27 ) 30 Comprehensive loss $ ( 16,387 ) $ ( 6,817 ) $ ( 32,201 ) $ ( 12,144 ) Net loss per common share: Basic and diluted $ ( 0.74 ) $ ( 0.37 ) $ ( 1.48 ) $ ( 0.68 ) Weighted-average common shares outstanding: Basic and diluted 22,204,659 18,383,941 21,731,711 17,871,648 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, 2021 19,714,220 $ — $ 363,292 $ 6 $ ( 71,214 ) $ 292,084 Issuance of common stock, net 2,489,837 — 152,033 — — 152,033 Stock-based compensation expense — — 2,350 — — 2,350 Unrealized loss on investments — — — ( 3 ) — ( 3 ) Net loss — — — — ( 15,812 ) ( 15,812 ) Balances at March 31, 2021 22,204,057 $ — $ 517,675 $ 3 $ ( 87,026 ) $ 430,652 Issuance of common stock, net 975 — 14 — — 14 Stock-based compensation expense — — 4,261 — — 4,261 Unrealized loss on investments — — — ( 24 ) — ( 24 ) Net loss — — — — ( 16,363 ) ( 16,363 ) Balances at June 30, 2021 22,205,032 $ — $ 521,950 $ ( 21 ) $ ( 103,389 ) $ 418,540 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 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) Six Months Ended June 30, (In thousands) 2021 2020 Operating Activities Net loss $ ( 32,174 ) $ ( 12,174 ) Adjustments to reconcile net loss to net cash used in operating activities Depreciation and amortization 1,202 884 Stock-based compensation expense 6,508 1,346 Loss on disposals of fixed assets — 3 Non-cash interest expense 1,492 — Changes in operating assets and liabilities Prepaid expenses and other current assets 1,366 378 Prepaid rent — ( 2,400 ) Lease liability ( 175 ) ( 105 ) Accounts payable ( 680 ) 706 Accrued expenses and other current liabilities 2,678 81 Net cash used in operating activities ( 19,783 ) ( 11,281 ) Investing Activities Purchases of property and equipment ( 6,462 ) ( 3,454 ) Purchases of short-term investments ( 38,103 ) ( 3,205 ) Proceeds from maturities of short-term investments 2,959 4,392 Purchases of long-term investments ( 21,458 ) — Net cash used in investing activities ( 63,064 ) ( 2,267 ) Financing Activities Issuance of common stock, net 152,065 117,712 Repayment of ASTRA build to suit liability ( 7,960 ) — Net cash provided by financing activities 144,105 117,712 Net increase in cash and cash equivalents 61,258 104,164 Cash and cash equivalents at beginning of period 268,269 187,514 Cash and cash equivalents at end of period $ 329,527 $ 291,678 Supplemental Disclosures of Non-Cash Investing and Financing Activities Unpaid purchases of property and equipment $ 10,143 $ 2,675 Unpaid offering costs $ 36 $ 132 Initial recognition of right-of-use assets and modification $ 4,060 $ — 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. (the “Company,” or “we” or other similar pronouns) commenced operations on April 15, 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 purpose of undertaking preclinical and clinical studies in Australia. On April 24, 2019, the Company incorporated Jeune Aesthtics, Inc., formerly known as Jeune, Inc. ("Jeune"), in Delaware, a wholly-owned subsidiary, for the purpose of undertaking preclinical and clinical studies for aesthetic skin conditions. We are a clinical stage biotechnology company leading the field of redosable gene therapy for the treatment of serious rare diseases. Using our patented platform that is based on engineered herpes simplex virus type 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 encoded effector to treat or prevent disease. We formulate our vectors for non-invasive or minimally invasive routes of administration at a doctor’s office or potentially in the patient’s home by a healthcare professional. Our goal is to develop easy to use, medicines to dramatically improve the lives of patients living with rare diseases. Our innovative technology platform is supported by in-house, commercial scale current good manufacturing practices ("cGMP") manufacturing capabilities. Liquidity As of June 30, 2021, the Company had an accumulated deficit of $ 103.4 million. With the net proceeds raised from its public and private securities offerings, including the public offering of its common stock completed on February 1, 2021, the Company believes that its cash, cash equivalents and short-term investments of approximately $ 367.7 million as of June 30, 2021 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 generally accepted accounting principles 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, 2020, as filed with the SEC on March 1, 2021. 7 Risks and Uncertainties The novel coronavirus ("COVID-19") pandemic has resulted, and is likely to continue to result, in significant national and global economic uncertainty and may adversely affect our business. The Company is continuing to actively monitor the impact of the COVID-19 pandemic and the related 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 2021. Use of Estimates The preparation of 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 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, the incremental borrowing rate for lease liabilities, 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, corporate bonds, commercial paper, government agency securities 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 certificates of deposit, commercial paper, corporate bonds, and government agency securities. Investments with maturities of greater than one year are classified as long-term investments on the consolidated balance sheets and consist of corporate bonds and government agency securities. Accrued interest on corporate bonds and government agency securities 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.it 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 and long-term investments, which consist of certificates of deposit, commercial paper, corporate bonds, and government agency securities 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 lesser of remaining useful life or remaining lease term Construction in progress ("CIP") 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 six months ended June 30, 2021 and 2020. 9 Leases The Company accounts for its lease agreements in accordance with FASB ASC Topic 842, Leases ("ASC 842"). Right-of-use lease assets represent our right to use an 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 are 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 not 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. 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. For lease arrangements where it has been determined that the Company has control over an asset that is under construction and is thus considered the accounting owner of the asset during the construction period, the Company records a construction in progress asset and corresponding financial obligation on the condensed consolidated balance sheet. Once the construction is complete, an assessment is performed to determine whether the lease meets certain "sale-leaseback" criteria. If the sale-leaseback criteria are determined to be met, the Company will remove the asset and related financial obligation from the condensed consolidated balance sheet and treat the lease as either an operating or finance lease based on our assessment of the guidance. If, upon completion of construction, the project does not meet the "sale-leaseback" criteria, the lease will be treated as a financing obligation and the Company will depreciate the asset over its estimated useful life for financial reporting purposes once the asset has been placed into service. Research and Development Expenses Research and development costs are charged to expense as incurred in performing research and development activities. These costs include employee compensation costs, facilities and overhead, preclinical and clinical activities, 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 organizations and manufacturing organizations that manufacture materials used in the Company’s ongoing preclinical and clinical studies. Non-refundable advanced payments for goods or services to be received in the future for use in research and development activities are 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. 10 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 to pay dividends in the foreseeable future. The Company accounts for forfeitures as they occur. Stock-based compensation expense recognized in the financial statements is based on awards for which service conditions are expected to be satisfied. Comprehensive 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 ASU No. 2020-08, Codification Improvements to Subtopic 310-20, Receivables - Nonrefundable Fees and Other Costs In October 2020, the FASB issued ASU 2020-08, Codification Improvements to Subtopic 310-20, Receivables - Nonrefundable Fees and Other Costs ("ASU 2020-08") to provide further clarification and update the previously issued guidance in ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20: Premium Amortization on Purchased Callable Debt Securities) ("ASU 2017-08"). ASU 2017-08 shortened the amortization period for certain callable debt securities purchased at a premium by requiring that the premium be amortized to the earliest call date. ASU 2020-08 requires that at each reporting period, to the extent that the amortized cost of an individual callable debt security exceeds the amount repayable by the issuer at the next call date, the excess premium shall be amortized to the next call date. The new standard was effective beginning January 1, 2021 and should be applied on a prospective basis as of the beginning of the period of adoption for existing or newly purchased callable debt securities. The adoption of ASU 2020-08 did not have a material impact on the Company's financial position or results of operations upon adoption. 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. Common share equivalents consist of common stock issuable upon exercise of stock options and vesting of restricted stock awards. There were 1,688,965 and 831,110 common share equivalents outstanding as of June 30, 2021 and 2020, respectively, in the form of stock options and unvested restricted stock awards, 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 June 30, Six Months Ended June 30, 2021 2020 2021 2020 (In thousands, except shares and per share data) (Unaudited) (Unaudited) Numerator: Net loss per common share $ ( 16,363 ) $ ( 6,833 ) $ ( 32,174 ) $ ( 12,174 ) Denominator: Weighted-average basic and diluted common shares 22,204,659 18,383,941 21,731,711 17,871,648 Basic and diluted net loss per common share $ ( 0.74 ) $ ( 0.37 ) $ ( 1.48 ) $ ( 0.68 ) 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 June 30, 2021 and December 31, 2020, respectively (in thousands): June 30, 2021 (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 and cash equivalents $ 329,527 $ — $ — $ 329,527 $ 329,527 $ — $ — Subtotal 329,527 — — 329,527 329,527 — — Level 2: Commercial paper 17,483 3 — 17,486 — 17,486 — Corporate bonds 30,588 1 ( 22 ) 30,567 — 18,209 12,358 U.S. government agency securities 11,567 — ( 6 ) 11,561 — 2,508 9,053 Subtotal 59,638 4 ( 28 ) 59,614 — 38,203 21,411 Total $ 389,165 $ 4 $ ( 28 ) $ 389,141 $ 329,527 $ 38,203 $ 21,411 December 31, 2020 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Aggregate Fair Value Cash and Cash Equivalents Short-term Marketable Securities (1) Long-term Marketable Securities (2) Level 1: Cash and cash equivalents $ 268,269 $ — $ — $ 268,269 $ 268,269 $ — $ — Subtotal 268,269 — — 268,269 268,269 — — Level 2: Certificates of deposit 2,986 7 — 2,993 — 2,993 — Subtotal 2,986 7 — 2,993 — 2,993 — Total $ 271,255 $ 7 $ — $ 271,262 $ 268,269 $ 2,993 $ — (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): June 30, 2021 December 31, 2020 (Unaudited) Construction in progress $ 36,180 $ 23,031 Leasehold improvements 5,725 4,631 Furniture and fixtures 891 870 Computer equipment and software 82 82 Laboratory equipment 5,376 4,630 Total property and equipment 48,254 33,244 Accumulated depreciation and amortization ( 3,282 ) ( 2,368 ) Property and equipment, net $ 44,972 $ 30,876 Depreciation expense was $ 475 thousand and $ 914 thousand for the three and six months ended June 30, 2021 and $ 394 thousand and $ 729 thousand three and six months ended June 30, 2020, respectively. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consisted of the following (in thousands): June 30, 2021 December 31, 2020 (Unaudited) Accrued preclinical and clinical expenses $ 2,970 $ 1,735 Accrued professional fees 2,119 642 Accrued payroll and benefits 1,273 1,486 Accrued taxes 22 40 Accrued construction in progress 9,170 1,049 Accrued financing costs 36 131 Other current liabilities 330 26 Total $ 15,920 $ 5,109 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 has been amended several times to increase the area leased, which currently consists of approximately 41,000 square feet. As a result of the lease amendments, the lease expiration date was extended to October 31, 2031. 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" or "Northfield") with an initial lease term that expired on October 31, 2035. The ASTRA lease contained 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 13 "Ground Lease"). 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, was recorded as prepaid rent in the consolidated balance sheet at the time of payment. On October 5, 2020, the Company was provided with notice that the initial delivery conditions of the building had been met, including completion of the building shell, interior slab, and exterior doors, and on October 15, 2020, the Company gave the Landlord notice of its intent to purchase ASTRA for approximately $ 9.4 million, subject to the parties entering into a commercially reasonable purchase and sale agreement. As a result of the Company's ability to exercise its option to purchase ASTRA, the Company obtained control over the construction in progress of ASTRA as of October 5, 2020. The Company recorded a $ 10.0 million CIP asset and a corresponding build to suit lease liability related to the costs incurred by the Landlord, offset by the previous cash contribution of $ 2.4 million. On January 29, 2021, the Company entered into a Purchase and Sale Agreement ("PSA") for ASTRA with Northfield related to the purchase option exercised by the Company on October 15, 2020, for a purchase price of $ 9.4 million. The Company held approximately $ 1.5 million on deposit with Northfield under the existing lease agreement and applied this deposit as a credit against the purchase price at closing. On February 1, 2021, Northfield delivered the space as substantially complete and made the space available for access by the Company, thus triggering lease commencement. As a result, the Company concluded that this transaction did not qualify for sale-leaseback accounting because it did not meet the definition of a sale. As control did not transfer to the Lessor at lease commencement, the transaction continued to be accounted for as construction in progress and a financing obligation. On March 5, 2021, the purchase closed and the Company determined that reclassification of the construction in progress to buildings and leasehold improvements was not appropriate as the interior of the building was not yet ready for its intended use. The building continues to be held under construction in progress as of June 30, 2021. The interior of the building is currently under construction and is expected to be completed and validated in 2022. From construction completion to the closing of the purchase, the Company recognized interest expense to accrete the financial obligation to a balance that equaled the cash consideration that was paid upon the close of purchase. For more information about the expected construction costs associated with ASTRA, see "ASTRA Contractual Obligation" below. As part of the transaction, the Company also became the accounting owner of the Ground Lease, due to obtaining control over ASTRA, and recorded the applicable operating right-of-use asset and corresponding lease liability as of October 5, 2020. When the PSA was finalized, the Company took 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 are subject to a cumulative 10 % escalation clause every 5 years through 2071. As of June 30, 2021, future minimum commitments under the Company’s operating leases were as follows (in thousands): Operating Leases 2021 (remaining six months) $ 457 2022 1,048 2023 1,067 2024 1,087 2025 1,113 Thereafter 12,480 Future minimum operating lease payments $ 17,252 Less: Interest 9,421 Present value of lease liability $ 7,831 Supplemental condensed consolidated balance sheet information related to leases is as follows: 14 (unaudited) June 30, 2021 December 31, 2020 Operating leases: Right-of-use assets $ 7,136 $ 3,298 Current portion of lease liability 934 638 Lease liability 6,897 3,308 Total lease liability $ 7,831 $ 3,946 Weighted average remaining lease term, in years 15.0 16.4 Weighted average discount rate 9.3 % 9.4 % The Company recorded operating lease costs of $ 278 thousand and $ 497 thousand for the three and six months ended June 30, 2021 and $ 145 thousand and $ 310 thousand for the three and six months ended June 30, 2020, respectively, and variable lease costs of $ 81 thousand and $ 118 thousand for the three and six months ended June 30, 2021 and $ 15 thousand and $ 28 thousand for the three and six months ended June 30, 2020, respectively. Agreements with Contract Manufacturing Organizations and Contract Research Organizations The Company has entered into various agreements with Contract Manufacturing Organizations (“CMOs”) for the manufacture of sterile excipients that are formulated with in-house produced vectors as part of the final drug product applied in certain of our clinical trials. The Company has also entered into agreements with third-party Contract Research Organizations ("CROs") to provide research and development services to further the Company’s analysis of its product candidates. The agreements entered into with the CMOs and CROs provide the terms and conditions for their respective services, which may include research and development activities, storage, packaging, labelling, and/or testing of our preclinical and clinical-stage products. The Company is obligated to make milestone payments under certain of these agreements. The estimated remaining commitment as of June 30, 2021 under these agreements is approximately $ 3.8 million. 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 Company has incurred expenses under these agreements of $ 718 thousand and $ 2.5 million for the three and six months ended June 30, 2021 and $ 330 thousand and $ 964 thousand for the three and six months ended June 30, 2020, respectively. 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 June 30, 2021 is $ 4.0 million. The Company has incurred expenses under these activities of $ 974 thousand and $ 2.3 million for the three and six months ended June 30, 2021 and $ 489 thousand for the three and six months ended June 30, 2020, respectively. ASTRA Contractual Obligations The Company has contracted with various third parties to construct our second cGMP facility, ASTRA. Additionally, we have entered into various non-cancellable purchase agreements for long-lead materials to help avoid potential schedule disruptions or material shortages. These contracts typically call for the payment of fees for services or materials upon the achievement of certain milestones. The estimated remaining commitment as of June 30, 2021 is $ 38.0 million. The Company has included costs incurred to-date associated with ASTRA within construction in progress as of June 30, 2021. On June 30, 2021, the Company entered into a Standard Form of Contract for Construction and the corresponding General Conditions of the Contract for Construction (collectively, the “Agreement”) with The Whiting-Turner Contracting Company (“Whiting-Turner”), pursuant to which Whiting-Turner is constructing and managing the construction of ASTRA. Subject to certain conditions in the Agreement, the Company will pay Whiting-Turner a contract price consisting of the cost of work plus a fee equal to 1.75 % of the cost of work, subject to a guaranteed maximum price to be agreed upon in an amendment to the Agreement at a later date. Legal Proceedings 15 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, Messrs Wechuck and Krisky filed a motion to dismiss the third-party complaint on various grounds, and we opposed the motion. On December 1, 2020, the court ruled on Messrs. Wechuck and Krisky's motion to dismiss our third-party complaint. The court determined that our claims for contribution and indemnification based on PeriphaGen's state law claims for unfair competition and misappropriation of trade secrets can proceed. Our breach of contract claim will also go forward in full. Fact discovery is ongoing. 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 February 1, 2021, the Company completed a public offering of 2,211,538 shares of its common stock, including 288,461 shares purchased by the underwriters, at $ 65.00 per share. Net proceeds to the Company from the offering were $ 134.9 million after deducting underwriting discounts and commissions of approximately $ 8.6 million, and other offering expenses payable by the Company of $ 198 thousand. On December 31, 2020, the Company entered into a sales agreement (the "Sales Agreement") with Cowen and Company, LLC ("Cowen") with respect to an at-the-market equity offering program ("ATM Program"), under which Cowen will act as the Company's agent and/or principal and may issue and sell from time to time, during the term of the Sales Agreement, shares of our common stock, par value $ 0.0001 per share, having an aggregate offering price up to $ 150.0 million ("Placement Shares"). Related offering expenses payable by the Company were $ 172 thousand. The issuance and sale of the Placement Shares by the Company under the Sales Agreement will be made pursuant to the Company's effective "shelf" registration statement on Form S-3. During the six months ended June 30, 2021, 262,500 shares of common stock were issued pursuant to the ATM Program at a weighted average price of $ 66.50 per share for net proceeds of $ 17.5 million, resulting in a remaining $ 132.5 million available for issuance under the ATM 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. 8. Stock-Based Compensation Stock Options Stock options granted to employees vest ratably over four-year periods and options granted to directors of the company vest ratably over one year to four-year periods. Stock options have a life of ten years . The Company granted 297,500 and 799,950 stock options to employees and directors of the Company during the three and six months ended June 30, 2021, respectively, and 315,400 and 544,400 stock options to employees and directors of the Company during the three and six months ended June 30, 2020, respectively. The following table summarizes the Company’s stock option activity: 16 Stock Options Outstanding Weighted- average Exercise Price Weighted- average Remaining Contractual Life (Years) Aggregate Intrinsic Value (In thousands) (1) Outstanding at December 31, 2020 853,614 $ 40.31 9.0 $ 16,804 Granted 799,950 $ 73.42 Exercised ( 16,874 ) $ 21.41 Cancelled or forfeited ( 46,525 ) $ 53.79 Outstanding at June 30, 2021 1,590,165 $ 56.77 9.0 $ 22,838 Exercisable at June 30, 2021 253,189 $ 29.73 6.9 $ 9,690 (1) Aggregate intrinsic value represents the difference between the closing stock price of our common stock on June 30, 2021 and the exercise price of outstanding in-the-money options. The total intrinsic value (the amount by which the fair market value exceed the exercise price) of stock options exercised during the three and six months ended June 30, 2021 was $ 808 thousand and $ 872 thousand, respectively, and during the three and six months ended June 30, 2020 was $ 656 thousand and $ 1.2 million, respectively. The weighted-average grant-date fair value per share of options granted to employees during the three and six months ended June 30, 2021 was $ 42.53 and $ 47.25 , respectively, and during the three and six months ended June 30, 2020 was $ 29.78 and $ 31.71 , respectively. There was $ 49.0 million of unrecognized stock-based compensation expense related to employees’ option awards that is expected to be recognized over a weighted-average period of 3.4 years as of June 30, 2021. The Company has recorded aggregate stock-based compensation expense related to the issuance of stock option awards in the condensed consolidated statements of operations for the three and six months ended June 30, 2021 and 2020 as follows (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 (unaudited) (unaudited) Research and development $ 1,084 $ 181 $ 1,600 $ 370 General and administrative 2,625 626 4,240 976 Total stock-based compensation $ 3,709 $ 807 $ 5,840 $ 1,346 We capitalize the portion of stock-based compensation that relates to work performed on the construction of new buildings. There was $ 66 thousand and $ 103 thousand of stock-based compensation that was capitalized in the three and six months ended June 30, 2021, respectively, and zero of stock-based compensation that was capitalized in the three and six months ended June 30, 2020, respectively. The Company recorded stock-based compensation expense of $ 3.7 million and $ 5.8 million for the three and six months ended June 30, 2021, respectively, and $ 807 thousand and $ 1.3 million for the three and six months ended June 30, 2020, 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 six months ended June 30, 2021 and 2020: Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Expected stock price volatility 72 % 76 % 72 % 75 % Expected term of the award (years) 6.10 6.18 6.18 6.20 Risk-free interest rate 1.05 % 0.41 % 1.02 % 0.78 % Weighted average exercise price $ 66.58 $ 45.07 $ 73.42 $ 48.09 Forfeiture rate — % 6.42 % — % 6.42 % 17 Restricted Stock Awards Restricted stock awards ("RSAs") granted to employees vest ratably over a four-year period. Restricted stock awards have a life of ten years . The Company granted zero and 98,800 RSAs to employees of the Company during the three and six months ended June 30, 2021, respectively, and zero RSAs to employees of the Company during the three and six months ended June 30, 2020, respectively. The following table summarizes the Company’s RSA activity: Number of Shares Weighted Average Grant Date Fair Value Non-vested RSAs as of December 31, 2020 — $ — Granted 98,800 $ 78.89 Vested — $ — Forfeited — $ — Non-vested RSAs as of June 30, 2021 98,800 $ 78.89 As of June 30, 2021, 98,800 RSAs were outstanding. The fair value of each restricted stock was $ 78.89 reflecting the closing price of our common stock on the grant date. The Company recorded stock-based compensation expense related to RSAs of $ 486 thousand and $ 668 thousand for the three and six months ended June 30, 2021 and zero for the three and six months ended June 30, 2020, respectively, within general and administrative expenses in the accompanying condensed consolidated statements of operations (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 (unaudited) (unaudited) General and administrative $ 486 $ — $ 668 $ — Total stock-based compensation $ 486 $ — $ 668 $ — Shares remaining available for grant under the Company’s stock incentive plan were 1,626,006 , with a sublimit for incentive stock options of 379,566 , at June 30, 2021. 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 full in January 2020. 10. 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 disclosure. The Company concluded that no subsequent events have occurred that would require recognition or disclosure in the condensed consolidated financial statements. 18