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Item 7. Management’s Discussion and Analysis

2023-02-27 compared with 2022-02-28 · 152 added, 126 removed, 156 unchanged (64% of the section changed)

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We disclaim any obligation, except as specifically required by law and the rules of the SEC, to publicly update or revise any such statements to reflect any change in our expectations or in events, conditions or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements.

This section of this Form 10-K generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020 of the Company.

Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

We are a clinical stage biotechnology company leading the field of redosable gene delivery.

This section of this Form 10-K generally discusses 2022, 2021 and 2020 items and year-to-year comparisons between 2022 and 2021, and 2021 and 2020 of the Company ’ s results of operations and cash flows.

We are a biotechnology company focused on developing and commercializing genetic medicines for patients with rare diseases.

Using our patented platform that is based on engineered 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.

We formulate our vectors for non-invasive or minimally invasive routes of administration at a healthcare professional’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 and chronic conditions.

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Refer to Part I, Item 1 - Business for more information about our clinical development pipeline and research programs and the status of our product candidates.

Pipeline Highlights:

• Vyjuvek is a topical gel containing our novel vector designed to deliver two copies of the COL7A1 transgene for the treatment of dystrophic epidermolysis bullosa ("dystrophic EB"), a serious rare skin disease caused by missing or mutated type VII collagen protein ("COL7").

Our randomized, double-blind, placebo-controlled GEM-3 pivotal study was designed to evaluate topical Vyjuvek as compared to placebo in dystrophic EB patients.

On November 29, 2021, we announced positive topline results from the GEM-3 study.

Details of the pivotal study can be found at www.clinicaltrials.gov under NCT identifier NCT04491604.

We expect to file a BLA with the FDA in 1H22, and an MAA with the EMA in 2H22.

During 2Q21, we began enrolling patients into an open label extension ("OLE") study, including patients who participated in the Phase 3 study, as well as new participants who meet all enrollment criteria.

Details of the OLE study can be found at www.clinicaltrials.gov under NCT identifier NCT04917874.

Nothing included on this website shall be deemed incorporated by reference into this Annual Report on Form 10-K.

• KB105 is a topical gel containing our novel vector designed to deliver two copies of the TGM1 transgene for the treatment of TGM1-deficient autosomal recessive congenital ichthyosis ("TGM1-ARCI"), a serious rare skin disorder caused by missing or mutated TGM1 protein.

Pipeline Highlights and Recent Developments:

• B-VEC is a topical gel containing our novel vector designed to deliver two copies of the COL7A1 transgene for the treatment of DEB, a serious rare skin disease caused by missing or mutated COL7 protein.

We submitted a BLA to the FDA for B-VEC for the treatment of DEB in June 2022.

The FDA accepted the BLA in August 2022 granting B-VEC a Priority Review Designation with a PDUFA action date of February 17, 2023.

In January 2023, the FDA notified us, that based on manufacturing information submitted to the Agency on December 20, 2022 in response to an information request from the FDA, the PDUFA date has been revised to May 19, 2023.

In this notification, we were also informed that there will be no Advisory Committee meeting for B-VEC and a REMS program is not needed for the B-VEC application.

Commercial readiness efforts have been underway for the past two years as we prepare for the potential approval of B-VEC by the FDA and the EMA.

In the United States our Medical Science Liaisons have been interacting with and educating HCPs on DEB and the importance of genetic testing in ensuring an accurate diagnosis.

We have completed the build of Krystal Connect, our US in-house patient services call center staffed with Krystal employees, and are ready, pending FDA approval of B-VEC, to assist patients, care givers and HCPs interested in accessing B-VEC.

Additionally, we have hired, trained and deployed commercial field teams who are interacting with physicians, patients, commercial payers across the U.S.

to educate on DEB and to prepare for a U.S.

launch of B-VEC.

We are interacting frequently with the leading physicians in the major markets across Europe and in Japan.

• We submitted a request for MAA with the EMA in November 2022 for B-VEC for the treatment of DEB in patients 6 months and older.

The Company was informed by the EMA in January 2023 to modify the PIP waiver request to include patients between birth and 6 months.

The Company is modifying the application so that the MAA procedure can officially start in the second half of 2023 with an approval expected in early 2024.

• KB105 is a topical gel containing our novel vector designed to deliver two copies of the TGM1 transgene for the treatment of TGM1-ARCI, a serious rare skin disorder caused by missing or mutated TGM1 protein.

A randomized, placebo-controlled Phase 1/2 study is ongoing.

On July 1, 2021, we announced data from the fourth patient dosed in the trial, showing repeat topical KB105 dosing continued to be well tolerated with no adverse events or evidence of immune response.

On July 1, 2021, we announced complete data from the Phase 1 trial, showing repeat topical KB105 dosing continued to be well tolerated with no adverse events or evidence of immune response.

Details of the Phase 1/2 study can be found at www.clinicaltrials.gov under NCT identifier NCT04047732.

Nothing included on this website shall be deemed incorporated by reference into this Annual Report on Form 10-K.

• KB407 is an inhaled (nebulized) formulation of our novel vector designed to deliver two copies of the full-length CFTR transgene for the treatment of cystic fibrosis, a serious rare lung disease caused by missing or mutated cystic fibrosis transmembrane conductance regulator ("CFTR") protein.

On September 29, 2021, we announced that the Bellberry Human Research Ethics Committee in Australia granted approval to conduct a Phase 1 clinical study of inhaled KB407 in patients with cystic fibrosis, and trial initiation is anticipated in 1H22.

More detailed data from the Good Laboratory Practice "GLP" toxicology and biodistribution study was presented at the virtual 2021 North American Cystic Fibrosis Conference that took place November 2-5, 2021.

We plan to submit an IND and initiate a Phase 1 trial in the U.S.

We plan to initiate a Phase 2 study in 1H 2023.

• KB104 is a topical gel formulation of our novel vector designed to deliver two copies of the SPINK5 transgene for the treatment of Netherton Syndrome, a debilitating autosomal recessive skin disorder caused by missing or mutated SPINK5 protein.

We expect to initiate a Phase 1 clinical study in 2022.

• KB408 is an inhaled (nebulized) formulation of our novel vector designed to deliver two copies of the SERPINA1 transgene, that encodes for normal human alpha-1 antitrypsin protein, for the treatment of alpha-1 antitrypsin deficiency.

The FDA has granted KB104 rare pediatric designation for the treatment of Netherton Syndrome.

We plan to file an IND and initiate a clinical trial of KB104 to treat patients with Netherton Syndrome in 2023.

In August 2022, we announced that the FDA had accepted our IND application to evaluate KB407 in a clinical trial to treat patients with cystic fibrosis.

We are closely working with Therapeutics Development Network (“TDN”) of the Cystic Fibrosis Foundation (“CFF”) to validate our Phase 1 clinical protocol and plan on initiating a Phase 1 clinical trial in the US in first half of 2023.

We presented preclinical pharmacology data for KB408 at the European Society of Gene & Cell Therapy Virtual Congress that was held October 19-22, 2021.

We have several other product candidates in various stages of preclinical development.

We are also leveraging the ability of our platform to deliver proteins of interest to cells in the skin in the context of aesthetic medicine via our wholly-owned subsidiary Jeune Aesthetics, Inc ("Jeune").

A Summary description of Jeune’s key product candidate and its status is as follows:

We are planning to file an IND for KB408 to treat AATD patients in 2023.

• KB301 is a solution formulation of our novel vector for intradermal injection designed to deliver two copies of the COL3A1 transgene to address signs of aging or damaged skin caused by declining levels of, or damaged proteins within the extracellular matrix, including type III collagen.

A Phase 1 study is currently ongoing.

We anticipate announcing top line data from the efficacy cohort in 1Q 2022.

We initiated a Phase 1 clinical trial, the PEARL-1 trial, for the treatment of aesthetic skin conditions on August 25, 2020.

The Phase 1 dose-ranging trial evaluated the safety, tolerability, and initial efficacy of intradermal injections of KB301 in adult subjects aged 18-75.

Details of the Phase 1 study can be found at www.clinicaltrials.gov under NCT identifier (NCT04540900).

Nothing included on this website shall be deemed incorporated by reference into this Annual Report on Form 10-K.

Jeune has several other aesthetic medicine product candidates in various stages of preclinical development.

Complete results from Cohort 1 focused on safety were presented at the 2021 SID Annual Meeting.

In March 2022, we announced positive proof-of-concept efficacy and safety data from Cohort 2 of the PEARL-1 study of KB301 for the treatment of aesthetic skin indications.

Cohort 2 is a randomized, double-blind, placebo-controlled clinical trial that evaluated the safety and efficacy of KB301 for the improvement of fine lines and skin texture in the lower and upper cheek and for improvement in skin thickness in the knee.

Cohort 2 enrolled 27 subjects across two trial sites.

Bilateral treatment areas included the neck behind the ear to assess initial safety and on the cheek below and above the zygomatic arch (lower and upper cheek), and around the knee.

Subjects were randomized 2:1 to receive low dose KB301 or placebo in the upper cheek and knee as multiple micro depot injections over the selected treatment area with a 33 G needle.

Subjects receiving KB301 in the lower check were randomized 2:1 to receive either low dose KB301, high dose KB301 or placebo.

Four patients dropped out of the Cohort 2 study – one subject following the initial safety assessment behind the ear, two subjects for unspecified reasons, and one subject due to unevenness in face between active and placebo during the study.

A subset of subjects from the PEARL-1 Cohort 2 trial (Cohort 3) were enrolled into a durability trial to look for duration of effect, reduction of the unevenness in placebo treated sites, and for long term safety monitoring.

Ten subjects from the PEARL-1 Cohort 2 study were enrolled in durability trial, an open-label study to assess duration of effect below the zygomatic arch (the lower cheek area).

The extension cohort enrolled subjects who had received the high dose regimen of KB301 during the efficacy cohort in one or both of their lower cheeks.

Subject Satisfaction Scores and Investigator Assessments were measured monthly for three consecutive visits that correspond to timepoints up to nine-months following administration of the last dose of KB301.

In addition, subjects with placebo-treated lower cheeks were dosed with KB301 during the open-label extension cohort to normalize their appearance.

In November 2022, we announced nine-month durability of effect in Cohort 3 of the PEARL-1 study of KB301.

We are planning to initiate a Phase 2 study in fine lines in 2023.

Jeune Aesthetics has several other aesthetic medicine product candidates in various stages of preclinical development reflected in the chart above in Item 1- Business .

Business Highlights:

• On January 29, 2021, the Company entered into a Purchase and Sale Agreement 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 transaction closed on March 5, 2021.

• On February 1, 2021, the Company completed a public offering of 2,211,538 shares of its common stock, at $65.00 per share.

Net proceeds to the Company from the offering were $134.9 million after deducting underwriting discounts.

• On March 24, 2021, the Company announced the appointment of Dr.

Bhushan Hardas, M.D., MBA as President of Jeune.

• On May 3, 2021, the Company announced the appointment of Andy Orth to the position of Chief Commercial Officer of Krystal Biotech.

• 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 with Whiting-Turner, pursuant to which Whiting-Turner is constructing and managing the construction of ASTRA located in the Pittsburgh, Pennsylvania area.

The ASTRA facility is under construction and expected to be completed and validated in 2022.

• On September 15, 2021, we announced the appointment of Laurent Goux as the General Manager of Europe.

• On October 12, 2021, we announced a collaboration with GeneDx, Inc., a wholly-owned subsidiary of BioReference Laboratories, Inc., an OPKO Health company, to offer no-charge genetic testing for all types of Epidermolysis Bullosa (EB).

The goal of the program, called Krystal Decode DEB TM , is to help patients with the dystrophic form of this genetic condition, also known as dystrophic EB, get a definitive diagnosis sooner, with highly accurate results obtained with a blood or cheek swab sample.

• On December 3, 2021, the Company completed a public offering of 2,866,667 shares of its common stock, which includes 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 and other offering expenses payable by the Company.

• On January 18, 2022, we announced that Jing Marantz, MD, PhD, MBA had resigned from the Board of Directors to accept the position as Chief Business Officer with the Company and E.

Rand Sutherland was appointed as a member of the Board of Directors to fill the vacancy.

The COVID-19 pandemic has prompted governments and businesses to take unprecedented measures, such as restrictions on travel and business operations, temporary closures of businesses, and quarantines.

In an effort to slow the spread of the virus, The Commonwealth of Pennsylvania where the Company’s primary offices, laboratory and manufacturing spaces are located, enacted stay-at-home orders, and sweeping restrictions to travel were initiated by corporations and governments.

Although these restrictions have been lifted, it is not known at this time whether they will be reestablished or the extent to which the Company will be impacted.

The degree of the pandemic’s effect on the Company’s clinical, operational and financial performance will depend on future developments, including additional protective measures that may be implemented by governmental authorities or the Company to protect its employees, or by investigators, caregivers or patients to minimize exposure, all of which are uncertain and difficult to predict.

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.

• In March 2022, we presented additional results from our Phase 3 study of the clinical efficacy and safety of B-VEC for the treatment of DEB at the 2022 American Academy of Dermatology Annual Meeting.

• In March 2022, results from the complete Phase 1/2 study of topical B-VEC for the treatment of DEB were published in Nature Medicine.

• On April 5, 2022, the Company issued and sold 434,782 shares of common stock at a weighted average price of $69.00 per share for net proceeds of $29.1 million after deducting selling commissions of approximately $900 thousand.

• On April 28, 2022, the Company entered into a final settlement agreement with PeriphaGen, Inc.

(“PeriphaGen”) to resolve all claims in the trade secret litigation filed by PeriphaGen in May 2020.

We paid PeriphaGen an upfront payment of $25.0 million for:

(i) the release of all claims in the trade secret litigation with PeriphaGen;

(ii) the acquisition of certain PeriphaGen assets, and (iii) the grant of a license by PeriphaGen for dermatological applications.

Upon approval of the Company's first product by the FDA, the Company will pay PeriphaGen an additional $12.5 million, followed by three additional $12.5 million contingent milestone payments upon reaching $100.0 million in total cumulative sales, $200.0 million in total cumulative sales and $300.0 million in total cumulative sales.

• In April 2022, following feedback from the FDA, we announced that we planned to offer patients with DEB, who were enrolled in the GEM-3 OLE, the opportunity to be dosed in their homes by a health care professional.

• In April 2022, Jeune Aesthetics announced the formation and members of its Scientific Advisory Board, comprised of industry leaders to serve as strategic advisors assisting with program strategy and clinical development.

• In May 2022, we presented new data entitled “GEM-3:

phase 3 safety and immunogenicity results of Beremagene Geperpavec (“B-VEC”), an investigational, topical gene therapy for dystrophic epidermolysis bullosa (DEB)” at the SID 2022 Annual Meeting.

• In December 2022 full results from the GEM-3 trial of B-VEC for DEB were published in the New England Journal of Medicine .

COVID-19 Update

To date the impact of the COVID-19 pandemic on our business and clinical trials in the U.S.

has been minimal.

We will continue to assess the potential impact of the pandemic on our business and operations, including our supply chain and preclinical and clinical trial activities.

Outside of the U.S., we have experienced pandemic-related delays in clinical trial initiation in Australia, and we will continue to closely monitor this rapidly evolving situation.

For additional information regarding the impact of the coronavirus pandemic, please see "Risk Factor - Business interruptions resulting from the pandemic or similar public health crises could cause a disruption of the development efforts of our product candidates and adversely impact our business."

Outside of the U.S., we have experienced pandemic-related delays in clinical trial initiation in Australia, and we will continue to closely monitor the impact that future pandemic developments have on this and our other clinical trials, going forward.

For additional information regarding the impact of the coronavirus pandemic, please see “Risk Factors - Business interruptions resulting from the COVID-19 outbreak or similar public health crises could cause a disruption of the development efforts of our product candidates and adversely impact our business.”

Financial Overview

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In the future, we may generate revenue from product sales, royalties on product sales, or license fees, milestones, or other upfront payments if we enter into any collaborations or license agreements.

We expect that our future revenue will fluctuate from quarter to quarter for many reasons, including the uncertain timing and amount of any such payments and sales.

We expect that our future revenue will fluctuate from quarter to quarter for many reasons, including the uncertain timing and amount of any such sales.

Research and Development Expenses

Research and development expenses consist primarily of costs incurred to advance our preclinical and clinical candidates, which include:

• expenses incurred under agreements with contract manufacturing organizations, consultants and other vendors that conduct our preclinical activities;

• expenses incurred under agreements with contract manufacturing organizations (“CMOs”), consultants and other vendors that conduct our preclinical activities;

• costs of acquiring, developing and manufacturing clinical trial materials and lab supplies;

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We expense internal research and development costs to operations as incurred.

We expense third party costs for research and development activities, such as the manufacturing of preclinical and clinical materials, based on an evaluation of the progress to completion of specific tasks such as manufacturing of drug substance, fill/finish and stability testing, which is provided to us by our vendors.

We expense third-party costs for research and development activities, such as the manufacturing of preclinical and clinical materials, based on an evaluation of the progress to completion of specific tasks such as manufacturing of drug substance, fill/finish and stability testing, which is

provided to us by our vendors.

We expect our research and development expenses will increase as we continue the manufacturing of preclinical and clinical materials and manage the clinical trials of, and seek regulatory approval for, our product candidates and expand our product portfolio.

In the near term, we expect that our research and development expenses will increase as we continue our OLE study for Vyjuvek, our Phase 1/2 clinical trial for KB105, our Phase 1 safety and efficacy study for KB301, and incur preclinical expenses for our other product candidates.

In the near term, we expect that our research and development expenses will increase as we continue our open label extension study for B-VEC, resume dosing with KB105 Phase 1/2 clinical trial, initiate a Phase 2 trial for KB301, initiate Phase 1 trials for KB407, initiate a Phase 1 trial for KB104, and incur preclinical expenses for our other product candidates.

Due to the numerous risks and uncertainties associated with product development, we cannot determine with certainty the duration, costs and timing of clinical trials, and, as a result, the actual costs to complete clinical trials may exceed the expected costs.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and other related costs, including stock-based compensation, for personnel in our executive, commercial, business development and other administrative functions.

General and administrative expenses also include legal fees relating to intellectual property and corporate matters, professional fees for accounting, auditing, tax and consulting services, insurance costs, travel, facility related expenses and other operating costs.

We anticipate that our general and administrative expenses will increase in the future to support the continued research and development of our product candidates and to operate as a public company.

General and administrative expenses consist principally of salaries and other related costs, including stock-based compensation, for personnel in our executive, commercial, business development and other administrative functions.

General and administrative expenses also include professional fees associated with corporate and intellectual property related legal expenses, consulting and accounting services, facility-related costs and expenses associated with obtaining and maintaining patents.

Other general and administrative costs include travel expenses.

We anticipate that our general and administrative expenses will increase in the future to support the continued research and development of our product candidates.

These increases will likely include increased costs for insurance, costs related to the hiring of additional personnel and payments to outside consultants, lawyers and accountants, among other expenses.

Additionally, we anticipate that we will increase our salary and personnel costs and other expenses as a result of our preparation for commercial operations.

Additionally, we anticipate that we will continue to increase our salary and personnel costs and other expenses as a result of our preparation for commercial operations.

ASTRA Capital Expenditures

On March 5, 2021, we closed on the purchase of the building that was constructed to house our second cGMP facility, ASTRA.

We are currently in the process of constructing the interior build-out of this facility and we have entered into a contract with Whiting-Turner who will manage the construction of ASTRA.

In March 2021, we closed on the purchase of the building that was constructed to house our second CGMP facility, ASTRA.

We are currently in the process of constructing the interior build-out of this facility and we have entered into a contract with Whiting-Turner who manages the construction of ASTRA.

Further, 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.

We expect to continue to incur significant capital expenditures related to ASTRA as we construct and validate this facility, which is expected to be completed in 2022.

We expect to continue to incur significant capital expenditures related to ASTRA as we construct and validate the facility, which is expected to be completed in 2023.

Interest Income

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The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.

On an ongoing basis, we evaluate estimates which include, but are not limited to, estimates related to clinical trial and contract manufacturing prepayments and accruals, stock-based compensation expense, construction-in-progress, and reported amounts of related expenses during the period.

On an ongoing basis, we evaluate estimates which include, but are not limited to, estimates related to clinical trial and contract manufacturing prepayments and accruals, 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 during the period.

We base our estimates on historical experience and other market-specific or other relevant assumptions that we believe to be reasonable under the circumstances.

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As part of the process of preparing our financial statements, we are required to estimate our accrued research and development expenses, prepaid assets and other current liabilities.

This process involves reviewing open contracts and commitments, communicating with our personnel to identify services that have been performed for us and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost.

This process involves reviewing open contracts and

commitments, communicating with our personnel to identify services that have been performed for us and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost.

The majority of our service providers invoice us monthly in arrears for services performed or when contractual milestones are met.

We make estimates of our accrued research and development expenses, current assets and other current liabilities as of each balance sheet date in our financial statements based on facts and circumstances known to us at that time.

Examples of estimated accrued research and development expenses, prepaid assets and other current liabilities include fees paid to contract manufacturers made in connection with the manufacturing of preclinical and clinical trials materials.

We make estimates of our accrued research and development expenses, prepaid assets and other current liabilities as of each balance sheet date in our financial statements based on facts and circumstances known to us at that time.

Examples of accrued research and development expenses, prepaid assets and other current liabilities include fees paid to contract manufacturers made in connection with the manufacturing of preclinical and clinical trials materials.

We base our expenses related to clinical manufacturing on our estimates of the services performed pursuant to contracts with the entities producing clinical materials on our behalf.

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We recognize stock-based compensation expense over the requisite service period, which is the vesting period of the award.

Calculating the fair value of stock-based awards requires that we make highly subjective assumptions.

Calculating the fair value of stock-based awards requires that we make assumptions.

We use the Black-Scholes option pricing model to value our stock option awards.

Use of this valuation methodology requires that we make assumptions as to the volatility of our common stock, the risk-free interest rate for a period that approximates the expected term of our stock options and our expected dividend yield.

Once the Company's own sufficient historical volatility data was obtained, the Company eliminated the use of a representative peer group and as of Q4 2021 the Company uses only its own historical volatility data in its estimate of expected volatility given that there is now sufficient amount of historical information regarding the volatility of its own stock price.

Once our own sufficient historical volatility data was obtained, we eliminated the use of a representative peer group and as of Q4 2021 we use only our own historical volatility data in its estimate of expected volatility given that there is now sufficient amount of historical information regarding the volatility of our own stock price.

We use the simplified method to calculate the expected term as prescribed by the SEC Staff Accounting Bulletin No.

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Treasury yield curve in effect at the time of grant for instruments with a similar expected life.

We account for our lease agreements in accordance with FASB ASC Topic 842, Leases ("ASC 842").

As the Company's lease agreements do not provide an implicit rate and as the Company does not have external borrowings, we use an estimated incremental borrowing rate based on the information available at lease commencement in determining the present value of lease payments.

The incremental borrowing rate is the rate of interest that the Company would expect to borrow on a collateralized and fully amortizing basis over a similar term an amount equal to the lease payments in a similar economic environment.

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 ("CIP") and corresponding financial obligation on the consolidated balance sheet.

We account for our lease agreements in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 842, Leases (“ASC 842”).

As our lease agreements do not provide an implicit rate and as we do not have external borrowings, we use an estimated incremental borrowing rate based on the information available at lease commencement in determining the present value of lease payments.

The incremental borrowing rate is the rate of interest that we would expect to borrow on a collateralized and fully amortizing basis over a similar term an amount equal to the lease payments in a similar economic environment.

For lease arrangements where it has been determined that we have control over an asset that is under construction and is thus considered the accounting owner of the asset during the construction period, we record a construction-in-progress asset (“CIP”) and corresponding financial obligation on the consolidated balance sheet.

Once the construction is complete, an assessment will be 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 balance sheet and treat the building 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.

If the sale-leaseback criteria are determined to be met, we will remove the asset and related financial obligation from the balance sheet and treat the building 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 we will depreciate the asset over its estimated useful life for financial reporting purposes.

Results of Operations

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(in thousands) 2022 2021 2020 2022 vs.

2020 2020 vs.

Research and development $ 42,461 $ 27,884 $ 17,936 $ 14,577 $ 9,948

General and administrative 77,735 40,391 15,063 37,344 25,328

Litigation settlement 25,000 — — 25,000 —

Total operating expenses 145,196 68,275 32,999 76,921 35,276

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Research and development expenses increased $14.6 million for the year ended December 31, 2022 compared to the year ended December 31, 2021.

Higher research and development expenses were due to increases in preclinical, clinical and pre-commercial manufacturing activities of $3.3 million, payroll related expenses of approximately $3.1 million which is primarily driven by an increase in personnel to support overall growth and includes a $2.4 million increase in stock-based compensation, an increase in outsourced research and development activities of $2.0 million, travel related expenses associated with our clinical trial sites of $187 thousand, and other research and development expenses of $1.3 million, primarily due to depreciation and rent.

Higher research and development expenses were due to increases in payroll related expenses of $8.9 million which is primarily driven by an increase in personnel to support overall growth and includes a $4.5 million increase in stock-based compensation, an increase in outsourced research and development activities of $2.3 million, an increase in preclinical, clinical and pre-commercial manufacturing activities of $1.0 million, and an increase in other research and development expenses of $2.4 million, primarily due to increases in depreciation and licensing fees.

Research and development expenses increased $9.9 million for the year ended December 31, 2021 compared to the year ended December 31, 2020.

Higher research and development expenses were due to increases in lab supplies of $142 thousand, payroll related expenses of approximately $2.0 million which is primarily driven by an increase in personnel to support overall growth and includes a $417 thousand increase in stock-based compensation, and other research and development expenses of $757 thousand, with a decrease in outsourcing research and development activities of $560 thousand.

General and Administrative Expenses

General and administrative expenses increased $37.3 million for the year ended December 31, 2022 compared to the year ended December 31, 2021.

Higher general and administrative spending was due largely to increased payroll related expenses of approximately $14.7 million which is primarily driven by an increase in personnel to support overall growth and includes an approximate $9.6 million increase in stock-based compensation, commercial preparedness expenses of approximately $3.8 million, legal and professional fees of approximately $3.7 million which is net of $2.1 million of insurance proceeds, software related costs of $1.0 million, medical affairs costs of $508 thousand, insurance costs of $427 thousand and other administrative expenses of 1.2 million.

Higher general and administrative spending was due largely to increased payroll related expenses of approximately $28.8 million which is primarily driven by an increase in personnel to support overall growth and includes an approximate $13.4 million increase in stock-based compensation, increased commercial preparedness expenses of approximately $5.7 million, increased medical affairs costs of $581 thousand, increased travel costs of $536 thousand, and an increase in other administrative expenses of $2.9 million, primarily due to increases in utilities, information technology costs, and conference fees.

These increases were partially offset by a decrease in net legal costs of $1.2 million, which consists of a decrease in legal and professional fees of $2.8 million offset by a decrease in litigation proceeds of approximately $1.6 million, due primarily to the settlement of the PeriphaGen litigation.

General and administrative expenses increased $25.3 million for the year ended December 31, 2021 compared to the year ended December 31, 2020.

Higher general and administrative spending was due largely to increased payroll related expenses of approximately $4.0 million which is primarily driven by an increase in headcount to support overall growth and includes an approximate $1.6 million increase in stock-based compensation, market research related expenses of approximately $2.0 million, legal and professional fees of approximately $1.6 million, insurance expense of $693 thousand and other administrative expenses of $295 thousand.

Litigation settlement

We incurred litigation settlement expenses for the year ended December 31, 2022 of $25.0 million, which consisted of the settlement of litigation with PeriphaGen.

See “Legal Proceedings” in Note 6 of the notes to consolidated financial statements included in this Form 10-K for more information.

Other Income (Expense)

Interest and other income for the year ended December 31, 2021 and 2020 was $197 thousand and $832 thousand, respectively, and consisted of interest and dividend income earned from our cash, cash equivalents and investments.

This decrease was driven by a decline in market interest rates.

Interest expense for the year ended December 31, 2021 and 2020 was $1.5 million and zero, respectively, and related to accretion of the financial obligation for the build to suit lease liability during the year ended December 31, 2021 to a balance that equaled the purchase consideration for ASTRA.

Interest and other income for the year ended December 31, 2020 and 2019 was $832 thousand and $3.0 million, respectively, and consisted of interest and dividend income earned from our cash, cash equivalents and investments.

This decrease was driven by a decline in market rates.

Interest and other income for the year ended December 31, 2022, 2021, and 2020 was $5.2 million, $197 thousand and $832 thousand, respectively, and consisted of realized gains from maturities of our investments, interest, and dividend income earned from our cash, cash equivalents and investments.

Interest expense for the year ended December 31, 2022, 2021 and 2020 was zero, $1.5 million, and zero, respectively.

The 2021 interest expense related to accretion of the financial obligation for the build to suit lease liability during the year ended December 31, 2021 to a balance that equaled the purchase consideration for ASTRA.

Liquidity and Capital Resources

At December 31, 2021, our cash, cash equivalents and short-term investments balance was approximately $438.1 million.

On December 31, 2022, our cash, cash equivalents and short-term investments balance was approximately $379.2 million.

Since operations began, we have incurred operating losses.

Our net losses were $69.6 million and $32.2 million for the years ended December 31, 2021 and 2020, respectively.

Our net losses were $140.0 million, $69.6 million, and $32.2 million for the years ended December 31, 2022, 2021, and 2020 respectively.

At December 31, 2022, we had an accumulated deficit of $280.8 million.

With the net proceeds raised from its public and private securities offerings, 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 will be sufficient to allow us to fund our operations for at least 12 months from the filing date of this Form 10-K.

As the Company continues to incur losses, a transition to profitability is dependent upon the successful development, approval and commercialization of our 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.

Costs related to clinical trials can be unpredictable and therefore there can be no guarantee that we will have sufficient capital to fund our continued clinical studies of Vyjuvek, KB105, KB301 or our planned preclinical studies for our other product candidates, or our operations.

Further, we do not expect to generate any product revenues until 2022, at the earliest, assuming we receive marketing approval for Vyjuvek on the schedule we currently contemplate.

With the net proceeds raised from our previous public offerings, we believe that our cash, cash equivalents and short-term investments will be sufficient to allow us to fund our operations for at least 12 months from the filing date of this Form 10-K.

As we continue to incur losses, a transition to profitability is dependent upon the successful development, approval and commercialization of our product candidates and the achievement of a level of revenues adequate to support our cost structure.

Furthermore, we expect to incur increasing costs associated with satisfying regulatory and quality standards, maintaining product and clinical trials, and furthering our efforts around our current and future product candidates.

We may never achieve profitability, and until we do, the Company will continue to need to raise additional capital or obtain financing from other sources.

Costs related to clinical trials can be unpredictable and therefore there can be no guarantee that we will have sufficient capital to fund our continued clinical studies of B-VEC, KB105, KB301 or our planned clinical and preclinical studies for our other product candidates, or our operations.

Further, we do not expect to generate any product revenues in the first quarter of 2023, assuming we receive marketing approval for B-VEC on the schedule we currently contemplate.

While we are in the process of building out our internal vector manufacturing capacity, some of our manufacturing activities will be contracted out to third parties.

Additionally, we currently utilize third-party contract research organizations to carry out our clinical development activities.

As we seek to obtain regulatory approval for any of our product candidates, we expect to incur significant commercialization expenses as we prepare for product sales, marketing, manufacturing, and distribution.

Our funds may not be sufficient to enable us to conduct pivotal clinical trials for, seek marketing approval for or commercially launch Vyjuvek, KB105, KB301 or any other product candidate.

Accordingly, to obtain marketing approval for and to commercialize this or any other product candidates, we may be required to obtain further funding through public or private equity offerings, debt financings, collaboration and licensing arrangements or other sources.

Additionally, we currently utilize third-party Contract Research Organizations (“CROs”) to carry out some of our clinical development activities.

As we seek to obtain regulatory approval for any of our product candidates, we expect to continue to incur significant manufacturing and commercialization expenses as we prepare for product sales, marketing, commercial manufacturing, packaging, labeling and distribution.

Furthermore, pursuant to our settlement agreement with PeriphaGen, we will be required to pay $12.5 million upon the approval of our first product by the FDA, followed by three additional $12.5 million contingent milestone payments upon reaching $100.0 million in total cumulative sales, $200.0 million in total cumulative sales and $300.0 million in total cumulative sales.

Our funds may not be sufficient to enable us to conduct pivotal clinical trials for, seek marketing approval for or commercially launch B-VEC, KB105, KB301 or any other product candidate.

Accordingly, to obtain marketing approval for and to commercialize these or any other product candidates, we may be required to obtain further funding through public or private equity offerings, debt financings, collaboration and licensing arrangements or other sources.

Adequate additional financing may not be available to us on acceptable terms, if at all.

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Operating Capital Requirements

Our primary uses of capital are, and we expect will continue to be for the near future, compensation and related expenses, manufacturing costs for preclinical and clinical materials, third party clinical trial research and development services, laboratory and related supplies, clinical costs, legal and other regulatory expenses and general overhead costs.

Our primary uses of capital are, and we expect will continue to be for the near future, compensation and related expenses, manufacturing costs for preclinical and clinical materials, third-party clinical trial research and development services, laboratory and related supplies, clinical costs, legal and other regulatory expenses, payments of settlement amounts to PeriphaGen and general overhead costs.

In order to complete the process of obtaining regulatory approval for any of our product candidates and to build the sales, manufacturing, marketing and distribution infrastructure that we believe will be necessary to commercialize our product candidates, if approved, we may require substantial additional funding.

We have based our projections of operating capital requirements on assumptions that may prove to be incorrect and we may use all of our available capital resources sooner than we expect.

Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical products, we are unable to estimate the exact amount of our operating capital requirements.

Because of the numerous risks and uncertainties associated

with research, development and commercialization of pharmaceutical products, we are unable to estimate the exact amount of our operating capital requirements.

Our future funding requirements will depend on many factors, including, but not limited to:

• the timeline and costs of our OLE study for Vyjuvek;

• the timeline and cost of our OLE study for B-VEC;

• the progress, timing and costs of our ongoing Phase 1/2 clinical trials for KB105;

• the progress, results and costs of our Phase 2 clinical trials for KB301;

• the progress, timing, and costs of manufacturing of Vyjuvek;

• the continued development and the filing on an IND application for future product candidates;

• the progress, results and costs of our Phase 1 clinical trials for KB407;

• the progress, timing, and costs of manufacturing of B-VEC;

• the continued development and the filing of an IND application for future product candidates;

• the initiation, scope, progress, timing, costs and results of drug discovery, laboratory testing, manufacturing, preclinical studies and clinical trials for any other product candidates that we may pursue in the future, if any;

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• the outcome, timing and costs of seeking regulatory approvals;

• the costs associated with the manufacturing process development and evaluation of third-party manufacturers;

• the costs of future activities, including product sales, medical affairs, marketing, manufacturing and distribution, in the event we receive marketing approval for our current and future product candidates;

• the costs associated with manufacturing process development and evaluation of third-party manufacturers;

• the extent to which the costs of our product candidates, if approved, will be paid by health maintenance, managed care, pharmacy benefit and similar healthcare management organizations, or will be reimbursed by government authorities, private health coverage insurers and other third-party payors;

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• the extent to which we acquire or in-license other product candidates and technologies.

We expect that we will need to obtain substantial additional funding in order to receive regulatory approval and to commercialize our product candidates.

We may need to obtain substantial additional funding in order to receive regulatory approval and to commercialize our product candidates.

To the extent that we raise additional capital through the sale of common stock, convertible securities or other equity securities, the ownership interests of our existing stockholders may be materially diluted and the terms of these securities could include liquidation or other preferences that could adversely affect the rights of our existing stockholders.

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Operating Leases

Operating lease payments represent the Company's commitments for future minimum rent made under non-cancelable leases for our corporate headquarters in Pittsburgh, PA, office location in Boston, Massachusetts, and for the ground lease associated with our second cGMP manufacturing facility, ASTRA.

The total future payments for our operating lease obligations at December 31, 2021 are $18.2 million, of which $1.4 million is due in the next twelve months and the remaining payments are due over the terms of the respective leases.

Operating lease payments represent our commitments for future minimum rent made under non-cancelable leases for our corporate headquarters in Pittsburgh, Pennsylvania, office location in Boston, Massachusetts, office locations in Switzerland and Netherlands, and for the ground lease associated with our second CGMP manufacturing facility, ASTRA.

total future payments for our operating lease obligations at December 31, 2022 are $17.8 million, of which $1.6 million is due in the next twelve months and the remaining payments are due over the terms of the respective leases.

For additional details regarding our leases, see Note 7 to our consolidated financial statements included in this Annual Report on Form 10-K.

Clinical Supply and Product Manufacturing Agreements

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 Company is obligated to make milestone payments under certain of these agreements.

We enter into various agreements in the normal course of business with CROs, CMOs and other third parties for preclinical research studies, clinical trials and testing and manufacturing services.

We are obligated to make milestone payments under certain of these agreements.

The estimated remaining commitment as of December 31, 2022 under these agreements is approximately $2.1 million, all of which is expected to be due in the next twelve months.

Commercial Preparedness Agreements

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.

We have contracted with various third parties to facilitate, coordinate and perform agreed upon commercial preparedness and 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.

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ASTRA Contractual Obligations

The Company has contracted with various third parties to construct our second cGMP facility, ASTRA.

We have 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.

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Years Ended December 31,

2022 2021 2020

Net cash used in operating activities $ (100,569) $ (47,938) $ (26,083)

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Net cash provided by financing activities 35,347 347,685 118,019

Net increase in cash $ 72,977 $ 80,755

Effect of exchange rate changes on cash and cash equivalents (41) — —

Net change in cash $ (179,346) $ 72,977 $ 80,755

Operating Activities

Net cash used in operating activities for the year December 31, 2021 was $47.9 million and consisted primarily of a net loss of $69.6 million adjusted for non-cash items of $18.1 million made up of depreciation and amortization of $2.8 million and stock-based compensation expense of $15.3 million, build to suit interest expense of $1.5 million, and cash used by decreases in net operating liabilities of approximately $2.1 million.

Net cash used in operating activities for the year ended December 31, 2020 was $26.1 million and consisted primarily of a net loss of $32.2 million adjusted for non-cash items of $5.2 million primarily made up of depreciation and amortization of $1.9 million and stock-based compensation expense of $3.3 million, and cash used by decreases in net operating liabilities of approximately $928 thousand.

Net cash used in operating activities for the year December 31, 2022 was $100.6 million and consisted primarily of a net loss of $140.0 million adjusted for non-cash items of $36.6 million primarily made up of stock-based compensation expense of $33.2 million and depreciation and amortization of $4.1 million, and cash provided by decreases in net working capital of approximately $2.8 million.

Net cash used in operating activities for the year December 31, 2021 was $47.9 million and consisted primarily of a net loss of $69.6 million adjusted for non-cash items of $19.1 million primarily made up of stock-based compensation expense of $15.3 million, depreciation and amortization of $2.8 million and build to suit interest expense of $1.5 million, and cash provided by decreases in net working capital of approximately $2.5 million.

Net cash used in operating activities for the year ended December 31, 2020 was $26.1 million and consisted primarily of a net loss of $32.2 million adjusted for non-cash items of $5.2 million primarily made up of depreciation and amortization of $1.9 million and stock-based compensation expense of $3.3 million, and cash provided by decreases in net working capital of approximately $918 thousand.

Investing Activities

Net cash used in investing activities for the year ended December 31, 2022 was approximately $114.1 million and consisted primarily of purchases of $318.8 million of available-for-sale investment securities, and expenditures of $53.0 million on the build-out of our ASTRA facility, leasehold improvement of new office space, and purchases of computer and laboratory equipment, partially offset by proceeds of $257.7 million from maturities of investments.

Net cash used in investing activities for the year ended December 31, 2021 was approximately $226.8 million and consisted primarily of purchases of $190.5 million of available-for-sale investment securities, and expenditures of $68.3 million on the build-out of our ASTRA facility, leasehold improvement of new office space, and purchases of computer and laboratory equipment, partially offset by proceeds of $32.0 million from maturities of investments.

Net cash used in investing activities for the year ended December 31, 2020 was $11.2 million and consisted primarily of purchases of $3.2 million of short-term available-for-sale investment securities, and expenditures of $14.8 million on the build-out of our ASTRA facility, leasehold improvement of new office space, and purchases of computer and laboratory equipment, partially offset by proceeds of $6.9 million from maturities of short-term investments.

Financing Activities

Net cash provided by financing activities for the year ended December 31, 2022 was $35.3 million and was primarily from proceeds from public offerings of 434,782 shares of our common stock at a weighted average price of $69.00 per share through our at-the-market equity offering program (“ATM”) Program.

Our net proceeds from the offerings were $29.1 million after deducting underwriting discounts and commissions of approximately $900 thousand.

Additionally, we received $7.0 million of proceeds related to the exercise and settlement of employee stock options and restricted stock awards, offset by $649 thousand of taxes paid for the settlement of restricted stock awards.

Net cash provided by financing activities for the year ended December 31, 2021 was $347.7 million and was primarily from proceeds from follow-on public offerings of 2,211,538 shares of its common stock, including 288,461 shares purchased by the underwriters, at $65.00 per share and 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 offerings were $336.8 million after deducting underwriting discounts and commissions of approximately $21.5 million, and other offering expenses payable by the Company of $425 thousand.

Net cash provided by financing activities for the year ended December 31, 2020 was $118.0 million and was primarily from proceeds from our public offering on May 21, 2020 of 2,275,000 shares of our common stock to the public at $55 per

Net proceeds to the Company from the offering were $117.2 million after deducting underwriting and commissions of approximately $7.5 million and other offering expenses of approximately $463 thousand.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated by the SEC.

Our net proceeds from the offerings were $336.8 million after deducting underwriting discounts and commissions of approximately $21.5 million, and other offering expenses payable of $425 thousand.

Net cash provided by financing activities for the year ended December 31, 2020 was $118.0 million and was primarily from proceeds from our public offering in May 2020 of 2,275,000 shares of our common stock to the public at $55 per share.

Our net proceeds from the offering were $117.2 million after deducting underwriting and commissions of approximately $7.5 million and other offering expenses of approximately $463 thousand.

Recent Accounting Pronouncements

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.

See note 2 to our consolidated financial statements.

Qualitative and Quantitative Disclosures About Market Risk

We had cash, cash equivalents and short-term investments of approximately $438.1 million as of December 31, 2021, which consist primarily of money market funds, certificates of deposit, commercial paper, corporate bonds, and government agency securities.

We had cash, cash equivalents and short-term investments of approximately $379.2 million as of December 31, 2022, which consist primarily of money market funds, commercial paper, corporate bonds, and government agency securities.

The investments in these financial instruments are made in accordance with an investment policy which specifies the categories, allocations and ratings of securities we may consider for investment.

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Based on our current investment portfolio, we do not believe that our results of operations or our financial position would be materially affected by an immediate change of 10% in interest rates.

As of December 31, 2022, we have established operations in Europe and Australia and hold cash in Australian Dollars (“AUD”), Swiss Francs (“CHF”), and Euros (“EUR”).

We are subject to foreign exchange rate risk arising from transactions conducted in the aforementioned foreign currencies, however our foreign operations are not currently material to our business.

We do not believe that our results of operations or our financial position would be materially affected by an immediate change of 10% in foreign currency exchange rates.

We do not hold or issue derivatives, derivative commodity instruments or other financial instruments for speculative trading purposes.

Further, we do not believe our cash, cash equivalents and short-term investments has significant risk of default or illiquidity.

Further, we do not believe our cash, cash equivalents and short-term investments have significant risk of default or illiquidity.

While we believe our cash, cash equivalents and short-term investments do not contain excessive risk, we cannot provide absolute assurance that any investments we make in the future will not be subject to adverse changes in market value.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis