Krystal Biotech, Inc. 10-K

Item 8. Financial Statements and Supplementary Data. INDEX TO FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm (PCAOB ID No. 199 ) F- 2 Consolidated Balance Sheets as of December 31, 202 1 and December 31, 20 20 F- 3 Consolidated Statements of Operations and Comprehensive Loss for the Years Ended December 31, 202 1 and December 31, 20 20 F- 4 Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 202 1 and December 31, 20 20 F- 5 Consolidated Statements of Cash Flows for the Years Ended December 31, 202 1 and December 31, 20 20 F- 6 Notes to Consolidated Financial Statements F- 7 F-1 Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Krystal Biotech, Inc.: Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Krystal Biotech, Inc. (the “Company”) as of December 31, 2021 and 2020, and the related consolidated statements of operations and comprehensive loss, stockholders’ equity and cash flows for each of the years in the two-year period ended December 31, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in the 2013 Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated February 28, 2022 expressed an unqualified opinion on the Company's internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there were no critical audit matters. /s/ Mayer Hoffman McCann P.C. We have served as the Company's auditor since 2017. San Diego, California February 28, 2022 F-2 Krystal Biotech, Inc. Consolidated Balance Sheets (In thousands, except shares and per share data) December 31, 2021 December 31, 2020 Assets Current assets Cash and cash equivalents $ 341,246 $ 268,269 Short-term investments 96,850 2,993 Prepaid expenses and other current assets 4,171 3,796 Total current assets 442,267 275,058 Property and equipment, net 112,355 30,876 Long-term investments 64,371 — Right-of-use assets 7,228 3,298 Other non-current assets 74 1,612 Total assets $ 626,295 $ 310,844 Liabilities and Stockholders' Equity Current liabilities Accounts payable $ 8,398 $ 2,105 Current portion of lease liability 1,041 638 Accrued expenses and other current liabilities 16,297 5,109 Build-to-suit lease liability — 7,600 Total current liabilities 25,736 15,452 Lease liability 6,983 3,308 Total liabilities 32,719 18,760 Commitments and contingencies (Note 6) Stockholders' equity Preferred stock; $ 0.00001 par value; 20,000,000 shares authorized at December 31, 2021 and 2020; 2,061,773 shares issued, and no shares outstanding at December 31, 2021 and 2020 — — Common stock; $ 0.00001 par value; 80,000,000 shares authorized at December 31, 2021 and 2020; 25,207,985 and 19,714,220 shares issued and outstanding at December 31, 2021 and 2020, respectively — — Additional paid-in capital 734,523 363,292 Accumulated other comprehensive income ( 163 ) 6 Accumulated deficit ( 140,784 ) ( 71,214 ) Total stockholders' equity 593,576 292,084 Total liabilities and stockholders' equity $ 626,295 $ 310,844 The accompanying notes are an integral part of these consolidated financial statements. F-3 Krystal Biotech, Inc. Consolidated Statements of Operations and Comprehensive Loss Year Ended December 31, (In thousands, except share and per share data) 2021 2020 Expenses Research and development $ 27,884 $ 17,936 General and administrative 40,391 15,063 Total operating expenses 68,275 32,999 Loss from operations ( 68,275 ) ( 32,999 ) Other Income (Expense) Interest and other income, net 197 832 Interest expense ( 1,492 ) — Net loss ( 69,570 ) ( 32,167 ) Unrealized loss on available-for-sale securities and other ( 169 ) ( 4 ) Comprehensive loss $ ( 69,739 ) $ ( 32,171 ) Net loss per common share: Basic and diluted $ ( 3.13 ) $ ( 1.71 ) Weighted-average common shares outstanding: Basic and diluted 22,196,846 18,787,161 The accompanying notes are an integral part of these consolidated financial statements. F-4 Krystal Biotech, Inc. Consolidated Statements of Stockholders' Equity (In thousands, except shares) Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Income Accumulated Deficit Total Stockholders' Equity Shares Amount Balances at January 1, 2019 17,354,310 $ — $ 241,951 $ 10 $ ( 39,047 ) $ 202,914 Issuance of common stock, net 2,359,910 — 118,035 — — 118,035 Stock-based compensation expense — — 3,306 — — 3,306 Unrealized loss on investments and other — — — ( 4 ) — ( 4 ) Net loss — — — — ( 32,167 ) ( 32,167 ) Balances at December 31, 2020 19,714,220 $ — $ 363,292 $ 6 $ ( 71,214 ) $ 292,084 Issuance of common stock, net 5,493,765 — 355,628 — — 355,628 Stock-based compensation expense — — 15,603 — — 15,603 Unrealized loss on investments and other — — — ( 169 ) — ( 169 ) Net loss — — — — ( 69,570 ) ( 69,570 ) Balances at December 31, 2021 25,207,985 $ — $ 734,523 $ ( 163 ) $ ( 140,784 ) $ 593,576 The accompanying notes are an integral part of these consolidated financial statements. F-5 Krystal Biotech, Inc. Consolidated Statements of Cash Flows Year Ended December 31, (In thousands) 2021 2020 Operating Activities Net loss $ ( 69,570 ) $ ( 32,167 ) Adjustments to reconcile net loss to net cash used in operating activities Depreciation and amortization 2,769 1,851 Stock-based compensation expense 15,319 3,272 Loss on disposal of fixed assets — 33 Non-cash interest expense 1,492 — Changes in operating assets and liabilities Prepaid expenses and other current assets ( 1,145 ) ( 1,911 ) Other non-current assets 65 ( 934 ) Lease liability ( 285 ) 685 Accounts payable 712 783 Accrued expenses and other current liabilities 2,705 2,305 Net cash used in operating activities ( 47,938 ) ( 26,083 ) Investing Activities Purchases of property and equipment ( 68,336 ) ( 14,843 ) Purchases of investments ( 190,462 ) ( 3,205 ) Proceeds from maturities of investments 32,028 6,867 Net cash used in investing activities ( 226,770 ) ( 11,181 ) Financing Activities Proceeds from issuance of common stock, net 355,645 118,019 Repayment of ASTRA build to suit liability ( 7,960 ) — Net cash provided by financing activities 347,685 118,019 Net increase in cash and cash equivalents 72,977 80,755 Cash and cash equivalents at beginning of year 268,269 187,514 Cash and cash equivalents at end of year $ 341,246 $ 268,269 Supplemental Disclosures of Non-Cash Investing and Financing Activities Unpaid purchases of property and equipment $ 15,363 $ 9,697 Initial recognition of right-of-use assets $ 4,396 $ 911 Unpaid offering costs $ — $ 131 The accompanying notes are an integral part of these consolidated financial statements. F-6 Krystal Biotech, Inc. Notes to Consolidated Financial Statements 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 Aesthetics, Inc, formerly known as Jeune, Inc., 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 delivery. 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. Our goal is to develop easy to use medicines to dramatically improve the lives of patients living with rare diseases and chronic conditions. Our innovative technology platform is supported by in-house, commercial scale current good manufacturing practices ("cGMP") manufacturing capabilities. Liquidity As of December 31, 2021, the Company had an accumulated deficit of $ 140.8 million. With the net proceeds raised from its public, including the public offerings of its common stock completed in February and December of 2021, the Company believes that its cash, cash equivalents and short-term investments of approximately $ 438.1 million as of December 31, 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 Annual Report on Form 10-K. 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 commercialize product candidates. 2. Summary of Significant Accounting Policies Basis of Presentation The accompanying 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 U.S. 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. Risks and Uncertainties F-7 Krystal Biotech, Inc. Notes to Consolidated Financial Statements — Continued 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. To date the impact of the pandemic on our business and clinical trials in the U.S. has been minimal and the increased vaccination rates in the U.S. are encouraging. Outside of the U.S., the Company has experienced pandemic-related delays in clinical trial initiation in Australia. The Company will continue to evaluate the impact that these events could have on the operations, including our supply chain and preclinical and clinical trial activities, financial position, and the results of operations and cash flows during fiscal year 2022. Use of Estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts in the 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, construction in progress, 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 investments is 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. Any premium arising at purchase is amortized to the earliest call date and any discount arising at purchase is accreted to maturity. Amortization and accretion of premiums and discounts are recorded in interest and other income, net in the consolidated statement of operations. F-8 Krystal Biotech, Inc. Notes to Consolidated Financial Statements — Continued 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 and 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 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 - 5 years Laboratory and manufacturing equipment 3 - 7 years Furniture and fixtures 3 - 7 years Leasehold improvement lesser of remaining useful life or remaining life of lease 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 years ended December 31, 2021 and 2020. Leases F-9 Krystal Biotech, Inc. Notes to Consolidated Financial Statements — Continued The Company accounts for its lease agreements in accordance with FASB ASC Topic 842, Leases. 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 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. 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. 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 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 applies the fair value recognition provisions of Financial Accounting Standards Board Accounting Standards Codification, or ASC, Topic 718, Compensation—Stock Compensation ("ASC 718"), to account for stock-based compensation. Compensation costs related to stock options granted is based on the estimated fair value of the awards on the date of grant. 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. Once the Company's own sufficient historical volatility data was obtained, the Company eliminated the use of a representative peer group and uses only its own historical volatility data in its estimate of expected volatility given that there is now a sufficient amount of historical information regarding the volatility of its own stock price. The Company estimates the expected term of its 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 US Treasury securities with a maturity date commensurate with the expected term of the associated award. The F-10 Krystal Biotech, Inc. Notes to Consolidated Financial Statements — Continued 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. Income Taxes For the year ended December 31, 2021 and 2020, income taxes were recorded in accordance with FASB ASC Topic 740, Income Taxes (“ASC 740”), which provides for deferred taxes using an asset and liability approach. Under this method, we record deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities using enacted tax rates expected to be in effect when the differences are expected to reverse. Valuation allowances are provided when necessary to reduce net deferred tax assets to the amount that is more likely than not to be realized. Based on the available evidence, we are unable, at this time, to support the determination that it is more likely than not that our deferred tax assets will be utilized in the future. Accordingly, we recorded a full valuation allowance as of December 31, 2021 and 2020. We intend to maintain a valuation allowance until sufficient evidence exists to support its reversal. The Company accounts for uncertain tax positions in accordance with the provisions of ASC 740. When uncertain tax positions exist, the Company recognizes the tax benefit of tax positions to the extent that the benefit will more likely than not be realized. The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position as well as consideration of the available facts and circumstances. As of December 31, 2021 and 2020, the Company did not have any significant uncertain tax positions. The Company may recognize interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2021 and 2020, the Company had no accrued interest or penalties related to uncertain tax positions and no amounts have been recognized in the Company’s statements of operations and comprehensive loss. 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. Stock options are common share equivalents. There were 2,043,179 and 853,614 common share equivalents outstanding in the form of stock options and 98,800 and zero common share equivalents outstanding in the form of restricted stock awards as of December 31, 2021 and 2020, respectively, 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. F-11 (In thousands, except share and per share data) Year Ended December 31, 2021 2020 Numerator: Net loss per common share $ ( 69,570 ) $ ( 32,167 ) Denominator: Weighted-average basic and diluted common shares 22,196,846 18,787,161 Basic and diluted net loss per common share $ ( 3.13 ) $ ( 1.71 ) F-12 Krystal Biotech, Inc. Notes to Consolidated Financial Statements — Continued 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 December 31, 2021 and 2020, respectively (in thousands): December 31, 2021 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 $ 341,246 $ — $ — $ 341,246 $ 341,246 $ — $ — Subtotal 341,246 — — 341,246 341,246 — — Level 2: Commercial paper 40,469 1 ( 4 ) 40,466 — 40,466 — Corporate bonds 83,300 10 ( 114 ) 83,196 — 35,768 47,428 U.S government agency securities 37,621 — ( 62 ) 37,559 — 20,616 16,943 Subtotal 161,390 11 ( 180 ) 161,221 — 96,850 64,371 Total $ 502,636 $ 11 $ ( 180 ) $ 502,467 $ 341,246 $ 96,850 $ 64,371 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 consolidated financial statements for additional discussion regarding the Company’s fair value measurements. F-13 Krystal Biotech, Inc. Notes to Consolidated Financial Statements — Continued 5. Balance Sheet Components Property and Equipment, Net Property and equipment, net consist of the following (in thousands): December 31, 2021 December 31, 2020 Construction-in-progress $ 104,340 $ 23,031 Leasehold improvements 5,723 4,631 Furniture and fixtures 891 870 Computer equipment and software 85 82 Laboratory and manufacturing equipment 5,530 4,630 Total property and equipment 116,569 33,244 Accumulated depreciation and amortization ( 4,214 ) ( 2,368 ) Property and equipment, net $ 112,355 $ 30,876 Depreciation expense was $ 1.8 million and $ 1.5 million for the years ended December 31, 2021 and 2020, respectively. Refer to Note 6 for further discussion over construction-in-progress. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consisted of the following (in thousands): December 31, 2021 December 31, 2020 Accrued preclinical and clinical expenses $ 1,602 $ 1,179 Accrued professional fees 2,011 1,198 Accrued payroll and benefits 2,882 1,486 Accrued taxes 83 40 Accrued construction in progress 9,606 1,049 Accrued financing fees 26 131 Other current liabilities 87 26 Total $ 16,297 $ 5,109 F-14 Krystal Biotech, Inc. Notes to Consolidated Financial Statements — Continued 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 44,000 square feet and includes the commercial scale cGMP-compliant manufacturing facility, ANCORIS. 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 "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 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 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 December 31, 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 Obligations" 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 December 31, 2021, future minimum commitments under the Company’s operating leases were as follows (in thousands): F-15 Krystal Biotech, Inc. Notes to Consolidated Financial Statements — Continued Operating Leases 2022 $ 1,094 2023 1,114 2024 1,135 2025 1,162 2026 1,186 Thereafter 11,600 Future minimum operating lease payments $ 17,291 Less: Interest 9,267 Present value of lease liability $ 8,024 On December 15, 2021, the Company entered into a 3 year lease agreement for our Boston, Massachusetts office (the "Boston Lease") location that commences in January 2022 and expires in January 2025. As of December 31, 2021, the Company has not recorded a right-of-use asset or corresponding lease liability as the Company has not yet gained control over the Boston Lease. Future minimum operating lease payments under this lease are $ 280 thousand, $ 311 thousand, $ 316 thousand, and $ 26 thousand for the years ending 2022, 2023, 2024, and 2025, respectively. Supplemental balance sheet information related to leases is as follows: December 31, 2021 December 31, 2020 Operating leases: Right-of-use assets $ 7,228 $ 3,298 Current portion of lease liability 1,041 638 Lease liability 6,983 3,308 Total lease liability $ 8,024 $ 3,946 Weighted average remaining lease term, in years 14.4 16.4 Weighted average discount rate 9.5 % 9.4 % The Company recorded operating lease costs of $ 1.3 million and $ 767 thousand for the years ended December 31, 2021 and 2020, respectively, and variable lease costs of $ 160 thousand and $ 57 thousand for the years ended December 31, 2021 and 2020, respectively. Agreements with Contract Manufacturing Organizations and Contract Research Organizations The Company enters into various agreements in the normal course of business with Contract Research Organizations ("CROs"), Contract Manufacturing Organizations ("CMOs") and other third parties for preclinical research studies, clinical trials and testing and manufacturing services. The agreements with CMOs relate to the manufacturing of sterile gel that is mixed with in-house produced vectors as part of the final drug product applied in certain of our clinical trials. These agreements may also include research and development activities, storage, packaging, labeling, 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 December 31, 2021 under these agreements is approximately $ 3.0 million. The Company has incurred expenses under these agreements of $ 5.0 million and $ 4.6 million for the years ended December 31, 2021 and 2020, respectively. Commercial Preparedness Activities The Company has contracted with various third parties to facilitate, coordinate and perform agreed upon commercial preparedness and market research activities relating to our lead product candidate, Vyjuvek. These contracts typically call for the payment of fees for services upon the achievement of certain milestones. The estimated remaining commitment as of F-16 Krystal Biotech, Inc. Notes to Consolidated Financial Statements — Continued December 31, 2021 is $ 2.4 million. The Company has incurred expenses under these activities of $ 6.1 million and $ 1.9 million for the years ended December 31, 2021 and 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 December 31, 2021 is $ 24.7 million. The Company has included costs incurred to-date associated with ASTRA within construction in progress as of December 31, 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 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. Effective September 13, 2021, the Company entered into a guaranteed maximum price amendment (the "Amendment") to the Agreement to set forth the guaranteed maximum price, as well as the date by which Whiting-Turner is to achieve Substantial Completion (as defined in the Agreement). Under the Amendment, the guaranteed maximum price to be paid by the Company is $ 80.8 million, subject to certain additions and deductions by change orders as provided by the Agreement. Whiting-Turner’s work under the Agreement represents a portion of the work necessary to complete construction of the ASTRA facility and, therefore the date of Substantial Completion of Whiting-Turner’s work under the Agreement does not equate to the date of completion of ASTRA. The guaranteed maximum price under the Agreement constitutes only a portion of the total estimated cost of building and equipping ASTRA. 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. ("PeriphaGen"), 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. The court determined 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. PeriphaGen is seeking monetary damages, injunctive relief, attorneys' fees and costs. 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. The Company has received insurance proceeds during fiscal year 2021 relating to legal defense costs and expenses associated with the PeriphaGen litigation. During the year ended December 31, 2021, the Company has received $ 1.6 million of insurance proceeds and we have recorded an additional $ 560 thousand as a receivable within Prepaid Expenses and Other Current Assets on the Consolidated Balance Sheet as management determined that the amount was probable of collection. Of the amount recorded as a receivable, $ 403 thousand was received in January 2022 and $ 157 thousand is estimated to be received in the second quarter. The reimbursements have been recorded as an offset to our legal fees included in General and Administrative expenses on the Consolidated Statements of Operations and within Operating Activities on the Condensed Consolidated Statements of Cash Flows. 7. Capitalization Sale of Common Stock F-17 Krystal Biotech, Inc. Notes to Consolidated Financial Statements — Continued On December 3, 2021, the Company completed a public offering of 2,866,667 shares of its common stock, including 200,000 shares purchased by the underwriters, at $ 75.00 per share. Net proceeds to the Company from the offering were $ 201.9 million after deducting underwriting discounts and commissions of approximately $ 12.9 million, and other offering expenses payable by the Company of $ 227 thousand. 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, 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 year ended December 31, 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 $ 16.9 million after deducting underwriting discounts and commissions of approximately $ 524 thousand, 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. F-18 Krystal Biotech, Inc. Notes to Consolidated Financial Statements — Continued 8. Stock-Based Compensation Stock Options Options granted to employees and non-employees vest ratably over a four-year period 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 1,422,450 and 891,250 stock options to employees, non-employees, and directors during the year ended December 31, 2021 and 2020, 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) Balance at January 1, 2020 420,766 $ 17.71 8.4 $ 15,859 Granted 891,250 47.29 Exercised ( 84,285 ) 10.45 Cancelled or forfeited ( 374,117 ) 38.24 Expired — — Balance at December 31, 2020 853,614 $ 40.31 9.0 $ 16,804 Granted 1,422,450 66.88 Exercised ( 54,260 ) 38.12 Cancelled or forfeited ( 175,750 ) 61.35 Expired ( 2,875 ) 75.82 Balance at December 31, 2021 2,043,179 $ 57.00 9.0 $ 31,331 Exercisable at December 31, 2021 307,250 $ 33.00 7.5 $ 11,354 (1) Aggregate intrinsic value represents the difference between the closing stock price of our common stock on December 31, 2021 and the exercise price of outstanding in-the-money options. The total intrinsic value (the amount by which the fair market value exceeded the exercise price) of stock options exercised during the year ended December 31, 2021 and 2020 was $ 1.3 million and $ 3.1 million, respectively. The weighted-average grant-date fair value per share of options granted to employees, non-employees, and directors during the years ended December 31, 2021 and 2020 was $ 43.05 and $ 30.99 , respectively. There was $ 59.1 million of unrecognized stock-based compensation expense related to employees’, non-employees’, and directors’ awards that is expected to be recognized over a weighted-average period of 3.2 years as of December 31, 2021. The Company has recorded aggregate stock-based compensation expense related to the issuance of stock option awards in the Consolidated Statements of Operations for the years ended December 31, 2021 and 2020 as follows (in thousands): Year Ended December 31, 2021 2020 Research and development $ 3,434 $ 994 General and administrative 10,235 2,278 Total stock-based compensation $ 13,669 $ 3,272 We capitalize the portion of stock-based compensation that relates to work performed on the construction of new buildings. There was $ 284 thousand and $ 34 thousand of stock-based compensation that was capitalized in the years ended December 31, 2021 and 2020, respectively. The Company recorded stock-based compensation expense of $ 13.7 million and $ 3.3 million for the years ended December 31, 2021 and 2020, respectively. The fair value of options granted was estimated at the date of grant using the Black-Scholes valuation model with the following weighted-average assumptions for the years ended December 31, 2021 and 2020: F-19 Krystal Biotech, Inc. Notes to Consolidated Financial Statements — Continued Year Ended December 31, 2021 2020 Expected stock price volatility 72 % 75 % Expected term of the award (years) 6.2 6.2 Risk-free interest rate 1.10 % 0.64 % Weighted average exercise price $ 66.88 $ 47.29 Forfeiture Rate — % 14.74 % Restricted Stock Awards Restricted stock awards ("RSAs") granted to employees vest ratably over a four-year period. The Company granted 98,800 and zero RSAs to employees of the Company during the year ended December 31, 2021and 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 December 31, 2021 98,800 $ 78.89 There was $ 6.1 million of unrecognized stock-based compensation expense related to employees’ awards that is expected to be recognized over a weighted-average period of 3.2 years as of December 31, 2021. The Company recorded stock-based compensation expense related to RSAs of $ 1.7 million and zero for the year ended December 31, 2021 and 2020, respectively, within General and Administrative expenses in the accompanying Consolidated Statements of Operations (in thousands): Year Ended December 31, 2021 General and administrative $ 1,650 Total stock-based compensation $ 1,650 Shares remaining available for grant under the Company's stock incentive plan were 1,135,606 , with a sublimit for incentive stock options of 315,383 , at December 31, 2021. F-20 Krystal Biotech, Inc. Notes to Consolidated Financial Statements — Continued 9. Income Taxes We did no t record a current or deferred income tax expense or benefit for the years ended December 31, 2021 and 2020 due to the Valuation Allowance position. A reconciliation of income tax expense (benefit) computed at the statutory federal and state income tax rate for the year to income tax expense (benefit) as reflected in our financial statements for years ended December 31, 2021 and 2020 are as follows (in thousands): December 31, December 31, 2021 2020 Federal income tax expense (benefit) at statutory rate $ ( 14,578 ) $ ( 6,752 ) Change in valuation allowance 20,689 11,112 State income tax expense net of federal benefit ( 5,436 ) ( 2,632 ) Credits ( 1,295 ) ( 887 ) Other non-deductible expenses 675 ( 216 ) Other ( 55 ) ( 625 ) Total tax expense (benefit) $ — $ — The significant components of the Company’s deferred tax assets as of December 31, 2021 and 2020 are as follows (in thousands): December 31, December 31, 2021 2020 Deferred tax assets: Net operating loss carryforwards $ 33,170 $ 19,189 Stock compensation 3,906 664 Build-to-suit lease liability — 2,893 Lease liability 2,344 1,142 Depreciation 679 123 Accrued expenses 817 46 Capitalized costs 884 — Credits 3,607 2,311 Total deferred tax assets 45,407 26,368 Valuation allowance ( 42,732 ) ( 22,043 ) Deferred tax assets 2,675 4,325 Deferred tax liabilities: ASTRA capitalized construction costs — ( 2,893 ) Right-of-use assets ( 2,111 ) ( 954 ) Prepaid expenses ( 613 ) ( 476 ) Unrealized loss on marketable securities 49 ( 2 ) Total deferred tax liabilities ( 2,675 ) ( 4,325 ) Net deferred tax assets $ — $ — The Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets. Based on the Company’s history of operating losses, the Company has concluded that it is more likely than not that the benefit of its deferred tax assets will not be realized. Accordingly, the Company has provided a full valuation allowance for deferred tax assets as of December 31, 2021. As of December 31, 2021 and 2020, the Company had federal research and development credit carryforwards of approximately $ 2.4 million and $ 1.4 million, respectively. The federal tax credit carryforwards will begin to expire in 2039 if not utilized. As of December 31, 2021 and 2020, the Company also had orphan drug tax credit carryforwards of approximately $ 910 thousand and $ 724 thousand, respectively. The orphan drug tax credit carryforwards will begin to expire in 2038 if not utilized. The Company has not completed a formal research and development credit analysis, and as such, when an analysis is finalized, the Company plans to update its research and development credit carryforward and orphan drug tax credit carryforwards. F-21 Krystal Biotech, Inc. Notes to Consolidated Financial Statements — Continued As of December 31, 2021 and 2020, the Company had state research and development credit carryforwards of approximately $ 321 thousand and $ 226 thousand, respectively. The state tax credit carryforwards will begin to expire in 2032 if not utilized. As of December 31, 2021, the Company had cumulative U.S. federal NOL carryforwards of approximately $ 114.0 million. Of this amount, $ 5.0 million is available to offset future income tax liabilities and will expire in 2037, the remaining $ 109.0 million is available indefinitely to offset future income tax liabilities with no expiration period. As of December 31, 2021, the Company had cumulative U.S. state NOL carryforwards of approximately $ 117.1 million. The state NOLs are available to offset future state income tax liabilities and will begin to expire in 2037. Under the provisions of the Internal Revenue Code, the NOL carryforwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities. NOL carryforwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant shareholders over a three-year period in excess of 50 %, as defined under Internal Revenue Code Sections 382 and 383 of the Internal Revenue Code, respectively, as well as similar state provisions. This could limit the amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities. The amount of the annual limitation is determined based on the value of the Company immediately prior to the ownership change. Subsequent ownership changes may further affect the limitation in future years. The Company has completed several financings since its inception which may have resulted in a change in control as defined by Sections 382 and 383 of the Internal Revenue Code, or could result in a change in control in the future. The Company files income tax returns in the United States at the federal level and in states in which the Company conducts business activities. The federal and state income tax returns are generally subject to tax examinations for the tax year ended December 31, 2018, 2019 and 2020. To the extent the Company has tax attribute carryforwards, the tax years in which the attribute was generated may still be adjusted upon examination by the Internal Revenue Service or state tax authorities to the extent utilized in a future period. 10. 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. 11. 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. On January 7, 2022, the Company incorporated Krystal Biotech Switzerland GmbH, for the purpose of establishing initial operations in Europe for the development and commercialization of Krystal's pipeline. F-22 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None