What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2023-02-27 compared with 2022-02-28 · 267 added, 227 removed, 397 unchanged (55% of the section changed)

1 unchanged sentence

INDEX TO FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm (PCAOB ID No.

Report s of Independent Registered Public Accounting F irm s ( KPMG, LLP , Pittsburgh, PA (US Firm) , PCAOB ID No.

185 ) ( Mayer Hoffman McCann P.C.

, San Diego, CA , PCAOB ID No.

Consolidated Balance Sheets as of December 31, 2022 and December 31, 2021

Consolidated Statements of Operations and Comprehensive Loss for the Years Ended December 31, 202 1 and December 31, 20 20

Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 202 1 and December 31, 20 20

Consolidated Statements of Cash Flows for the Years Ended December 31, 202 1 and December 31, 20 20

Consolidated Statements of Operations and Comprehensive Loss for the Years Ended December 31, 2022, December 31, 2021, and December 31, 2020

Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2022, December 31, 2021, and December 31, 2020

Consolidated Statements of Cash Flows for the Years Ended December 31, 2022, December 31, 2021, and December 31, 2020

Notes to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors

Krystal Biotech, Inc.:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheet of Krystal Biotech, Inc.

and subsidiaries (the Company) as of December 31, 2022, the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for the year then ended, and the related notes (collectively, the consolidated financial statements).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022, and the results of its operations and its cash flows for the year ended December 31, 2022, in conformity with U.S.

generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 27, 2023 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We are a public accounting firm registered with the 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 audit 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 consolidated financial statements are free of material misstatement, whether due to error or fraud.

Our audit included performing procedures to assess the risks of material misstatement of the consolidated 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 consolidated financial statements.

Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that our audit provides a reasonable basis for our opinion.

Critical Audit Matters

Critical audit matters are matters arising from the current period audit of the consolidated 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 consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

We determined that there are no critical audit matters.

We have served as the Company’s auditor since 2022.

Pittsburgh, Pennsylvania

February 27, 2023

Report of Independent Registered Public Accounting Firm

To the Board of Directors and

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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.

We have audited the accompanying consolidated balance sheet of Krystal Biotech, Inc.

(the “Company”) as of December 31, 2021, and the related consolidated statements of operations and comprehensive loss, stockholders’ equity and cash flows for the years ended December 31, 2021 and 2020, 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 the results of their operations and their cash flows for the years ended December 31, 2021 and 2020, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

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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.

We have served as the Company's auditor since 2017, which ended in 2022.

San Diego, California

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Consolidated Balance Sheets

(In thousands, except shares and per share data) December 31,

(In thousands, except shares and par value data) December 31,

2022 December 31,

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Accrued expenses and other current liabilities 23,305 16,297

Build-to-suit lease liability — 7,600

Total current liabilities 28,847 25,736

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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

80,000,000 shares authorized at December 31,

2022 and 2021;

25,763,743 and 25,207,985 shares issued and outstanding at December 31, 2022 and 2021, respectively

Additional paid-in capital 803,718 734,523

Accumulated other comprehensive income ( 163 ) 6

Accumulated other comprehensive loss ( 728 ) ( 163 )

Accumulated deficit ( 280,759 ) ( 140,784 )

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General and administrative 77,735 40,391 15,063

Litigation settlement 25,000 — —

Total operating expenses 145,196 68,275 32,999

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Comprehensive

Income Accumulated

Income (loss) Accumulated

Deficit Total

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Balances at December 31, 2021 25,207,985 $ — $ 734,523 $ ( 163 ) $ ( 140,784 ) $ 593,576

Issuance of common stock, net 573,637 — 36,063 — — 36,063

Shares surrendered for taxes and forfeitures ( 17,879 ) — ( 649 ) — — ( 649 )

Stock-based compensation expense — — 33,781 — — 33,781

Unrealized loss on investments and other (1) — — — ( 565 ) — ( 565 )

Net loss — — — — ( 139,975 ) ( 139,975 )

Balances at December 31, 2022 25,763,743 $ — $ 803,718 $ ( 728 ) $ ( 280,759 ) $ 522,231

(1) Includes foreign currency translation loss of $ 78 thousand, gain of $ 7 thousand, and loss of $ 1 thousand for the years ended December 31, 2022, 2021, and 2020, respectively.

The accompanying notes are an integral part of these consolidated financial statements.

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Consolidated Statements of Cash Flows

Year Ended December 31,

Years Ended December 31,

(In thousands) 2022 2021 2020

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Non-cash interest expense — 1,492 —

Other, net ( 762 ) ( 454 ) 11

Changes in operating assets and liabilities

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Proceeds from issuance of common stock, net 35,996 355,645 118,019

Taxes paid related to settlement of restricted stock awards ( 649 ) — —

Repayment of ASTRA build to suit liability — ( 7,960 ) —

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

Net increase in cash and cash equivalents 72,977 80,755

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

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

Cash and cash equivalents at beginning of year 341,246 268,269 187,514

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Initial recognition of right-of-use assets $ 1,556 $ 4,396 $ 911

Unpaid offering costs $ — $ 131

The accompanying notes are an integral part of these consolidated financial statements.

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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 “Company,” or “we” or other similar pronouns) commenced operations in April 2016.

In March 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.

In June 2018, the Company incorporated a wholly-owned subsidiary in Australia for the purpose of undertaking preclinical and clinical studies in Australia.

In April 2019, the Company incorporated Jeune Aesthetics, Inc (“Jeune Aesthetics”), in Delaware, a wholly-owned subsidiary, for the purpose of undertaking preclinical and clinical studies for aesthetic skin conditions.

In January 2022, August 2022, and December 2022, the Company incorporated wholly-owned subsidiaries in Switzerland, Netherlands, and France, respectively, for the purpose of establishing initial operations in Europe for the development and commercialization of Krystal's product pipeline.

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.

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.

Our innovative technology platform is supported by in-house, commercial scale current good manufacturing practices ("cGMP") manufacturing capabilities.

Our innovative technology platform is supported by in-house, commercial scale Current Good Manufacturing Practice ("CGMP") manufacturing capabilities.

As of December 31, 2022, the Company had an accumulated deficit of $ 280.8 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.

Management intends to fund future operations through its on hand cash and cash equivalents, 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.

The Company expects to incur significant costs to expand it's commercialization capabilities in advance of the potential global regulatory approvals of it's lead product, B-VEC.

The Company believes that its cash, cash equivalents and short-term investments of approximately $ 379.2 million as of December 31, 2022 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.

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”).

The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”).

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

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.

The reclassified amounts have no impact on the Company’s previously reported financial position or results of operations.

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.

The preparation of consolidated financial statements in conformity with 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 considers many factors 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.

expected business and operational changes, sensitivity and volatility associated with the assumptions used in developing estimates, and whether historical trends are expected to be

Krystal Biotech, Inc.

Notes to Consolidated Financial Statements — Continued

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.

stock-based compensation expense, accrued expenses, the fair value of financial instruments, the incremental borrowing rate for lease liabilities, and the valuation allowance included in the deferred income tax calculation.

Segment and Geographical Information

Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance.

The Company and the Company’s chief operating decision maker view the Company’s operations and manage its business in one operating segment, which is the business of developing and commercializing pharmaceuticals.

Concentrations of Credit Risk and Off-Balance Sheet Risk

Financial instruments that potentially subject the Company to credit risk consist of cash, cash equivalents and investments.

The Company’s policy is to invest its cash, cash equivalents and investments in money market funds, certificates of deposit, corporate bonds, commercial paper, government agency securities and various other bank deposit accounts.

The Company’s policy is to invest its cash, cash equivalents and investments in money market funds, 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 is exposed to credit risk in the event of default by the financial institutions to the extent amounts recorded on the consolidated 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.

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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 less than one year are classified as short-term investments on the consolidated balance sheets and consist of 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.

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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.

Krystal Biotech, Inc.

Notes to Consolidated Financial Statements — Continued

Amortization and accretion of premiums and discounts are recorded in interest and other income, net, or general and administrative expenses in the consolidated statements of operations.

Fair Value of Financial Instruments

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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.

Krystal Biotech, Inc.

Notes to Consolidated Financial Statements — Continued

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 consolidated financial statements, are reasonable estimates of fair value, primarily due to their short maturities.

Our available-for-sale, short-term and long-term investments, which consist of commercial paper, corporate bonds, and U.S.

government agency securities are considered to be Level 2 financial instruments.

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.

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Furniture and fixtures 3 - 7 years

Leasehold improvement lesser of remaining useful life or remaining life of lease

Leasehold improvements lesser of remaining useful life or remaining life of lease

The Company reviews the estimated useful lives of its property and equipment on a continuing basis.

In evaluating the useful lives, the Company considers how long assets will remain functionally effective, whether the technology continues to be relevant and considers other competitive and economic factors.

If the assessment indicates that the assets will be used for a shorter or longer period than previously anticipated, the useful life of the assets is adjusted, resulting in a change in estimate.

Changes in estimates are accounted for on a prospective basis by depreciating the current carrying values of the assets over their revised remaining useful lives.

A review performed by the Company in the current year indicated that certain pieces of lab equipment would be functional for a longer term than previously estimated and as a result, the Company increased the useful lives of these assets from 7 to 15 years.

This change was effective and accounted for prospectively beginning in Q3 2022.

The effect of this change in useful life estimate did not result in a material change to depreciation expense for the year ended December 31, 2022.

Construction-in-progress (“CIP”) is not depreciated until the asset is placed in service.

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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.

Krystal Biotech, Inc.

Notes to Consolidated Financial Statements — Continued

We review the recoverability of the net book value of long-lived assets whenever events and circumstances indicate ("triggering events") that the net book value of an asset may not be recoverable from the estimated undiscounted future cash flows expected to result from its use and eventual disposition.

In cases where a triggering event occurs and undiscounted expected future cash flows are less than the net book value, we recognize an impairment loss equal to an amount by which the net book value exceeds the fair value of the asset.

Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell.

The Company no t experienced any triggering events or recognized any impairment losses for the years ended December 31, 2022, 2021, and 2020.

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 represent the right to use an underlying asset during the lease term and the lease liabilities represent the 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.

As the Company’s existing lease agreements do not provide an implicit rate and as the Company does not have any external borrowings, the Company has 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.

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 consolidated balance sheets and to account for lease and non-lease components of its operating leases as a single component.

Krystal Biotech, Inc.

Notes to Consolidated Financial Statements — Continued

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 the sale-leaseback criteria are determined to be met, the Company will remove the asset and related financial obligation from the consolidated balance sheet and treat the lease as either an operating or finance lease based on an 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.

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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.

These costs include employee compensation costs, facilities and overhead, preclinical and clinical activities, clinical manufacturing costs, contract management services, regulatory and other related costs.

The Company estimates contract research and manufacturing expenses based on the services performed pursuant to contracts with research organization 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.

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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.

The Company applies the fair value recognition provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718, Compensation—Stock Compensation (“ASC 718”), to account for stock-based compensation.

Compensation costs related to stock options granted are 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 consolidated 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.

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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.

Once the Company's own sufficient historical volatility data was obtained in 2021, the Company eliminated the use of a representative peer group and began using only its own historical volatility data in its estimate of expected volatility.

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.

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 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.

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.

For the years ended December 31, 2022, 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.

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We intend to maintain a valuation allowance until sufficient evidence exists to support its reversal.

Krystal Biotech, Inc.

Notes to Consolidated Financial Statements — Continued

The Company accounts for uncertain tax positions in accordance with the provisions of ASC 740.

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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.

As of December 31, 2022 and 2021, the Company had no accrued interest or penalties related to uncertain tax positions and no amounts have been recognized in the Company’s consolidated statements of operations and comprehensive loss.

Comprehensive Loss

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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.

We record reclassifications from other comprehensive gains or losses to interest and other income, net on the consolidated statements of operations related to realized gains on sales of available-for-sale securities.

The Company reviews its securities quarterly to determine whether an other-than-temporary impairment has occurred.

The Company determined that there were no other-than-temporary impairments during the years ended December 31, 2022, 2021, and 2020.

Recent Accounting Pronouncements

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.

From time to time, new accounting pronouncements are issued by the FASB that the Company adopts as of the specified effective date.

There were no recently adopted accounting pronouncements that had a material impact on the Company's financial statements, and no recently issued accounting pronouncements that are expected to have a material impact on the Company's financial statements.

Net Loss Per Share Attributable to Common Stockholders

1 unchanged sentence

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.

(In thousands, except share and per share data) Year Ended December 31,

Common share equivalents consist of common stock issuable upon exercise of stock options and vesting of restricted stock awards.

There were 3,582,181 , 2,043,179 , and 853,614 common share equivalents outstanding in the form of stock options and 66,600 , 98,800 , and zero unvested restricted stock awards as of December 31, 2022, 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.

(In thousands, except share and per share data) Years Ended December 31,

2022 2021 2020

Net loss per common share $ ( 139,975 ) $ ( 69,570 ) $ ( 32,167 )

Weighted-average basic and diluted common

22,196,846 18,787,161

shares 25,491,721 22,196,846 18,787,161

Basic and diluted net loss per common share $ ( 5.49 ) $ ( 3.13 ) $ ( 1.71 )

Krystal Biotech, Inc.

Notes to Consolidated Financial Statements — Continued

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, 2022 and 2021, respectively (in thousands):

Krystal Biotech, Inc.

Notes to Consolidated Financial Statements — Continued

December 31, 2022

21 unchanged sentences

Subtotal 341,246 — — 341,246 341,246 — —

Certificates of deposit 2,986 7 — 2,993 — 2,993 —

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

7 unchanged sentences

Property and Equipment, Net

Property and equipment, net consist of the following (in thousands):

Property and equipment, net consist of the following as of December 31, 2022 and 2021, respectively (in thousands):

2022 December 31,

7 unchanged sentences

Property and equipment, net $ 161,684 $ 112,355

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.

Depreciation expense was $ 2.6 million, $ 1.8 million and $ 1.5 million for the years ended December 31, 2022, 2021, and 2020, respectively.

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following (in thousands):

Accrued expenses and other current liabilities consisted of the following as of December 31, 2022 and 2021, respectively (in thousands):

2022 December 31,

2 unchanged sentences

Accrued payroll and benefits 6,781 2,882

Accrued taxes 83 40

Accrued construction in progress 11,452 9,606

Accrued financing fees — 26

Accrued taxes 43 83

Other current liabilities 267 87

4 unchanged sentences

Significant Contracts and Agreements

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, 2022 under these agreements is approximately $ 2.1 million.

The Company may also be responsible for the payment of a monthly service fee for project management services for the duration of any agreements.

The Company has incurred research and development expenses under these agreements of $ 6.0 million, $ 5.0 million and $ 4.6 million for the years ended December 31, 2022, 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, B-VEC.

These contracts typically call for the payment of fees for services upon the achievement of certain milestones or as services are rendered.

The estimated remaining commitment as of December 31, 2022 is $ 8.4 million.

The Company has incurred expenses under these activities of $ 14.2 million, $ 6.1 million and $ 1.9 million for the years ended December 31, 2022, 2021, and 2020, respectively.

ASTRA Contractual Obligations

The Company has contracted with various third parties to complete the interior build-out of our second CGMP facility, ASTRA.

Additionally, the Company has 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, 2022 is $ 16.3 million.

The Company has included costs incurred to-date associated with ASTRA within construction-in-progress as of December 31, 2022.

In June 2021, the Company entered into a Standard Form of Contract for Construction and the corresponding General Conditions of the Contract for Construction (collectively, the “Agreement”) with The Whiting-Turner Contracting Company (“Whiting-Turner”), pursuant to which Whiting-Turner is constructing and managing the construction of ASTRA.

Subject to certain conditions in the Agreement, the Company will pay Whiting-Turner a contract price consisting of the cost of work plus a fee equal to 1.75 % of the cost of work.

Effective September 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, which has been amended from time to time for change orders additional work is awarded to Whiting-Turner, is currently $ 85.5 million.

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 may not equate to the date of completion of ASTRA.

The guaranteed maximum price under the Agreement with Whiting-Turner constitutes only a portion of the total estimated cost of building and equipping ASTRA as there are various other third parties engaged in the project for which contracts are not individually material.

Legal Proceedings

In May 2020, a complaint was filed against the Company in the United States District Court for the Western District of Pennsylvania by PeriphaGen, Inc.

(“PeriphaGen”), which also named our Chief Executive Officer and President, R&D, Krish Krishnan and Suma Krishnan, respectively.

The complaint alleged 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 in June 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, the Company 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 March 9, 2022, the court officially ordered the parties to attend mediation on March 11, 2022.

During the course of the mediation process, the parties were able to exchange information, allowing the parties to value their positions.

Krystal Biotech, Inc.

Notes to Consolidated Financial Statements — Continued

12, 2022, the Company entered into a binding term sheet to settle the dispute.

In April 2022, the Company entered into a final settlement agreement and paid PeriphaGen an upfront payment of $ 25.0 million on April 28, 2022 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 U.S.

Food and Drug Administration, 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.

As defined in the settlement agreement, cumulative sales shall include all revenue from sales of the Company products by the Company and its affiliates and licensees, as reported by the Company in its annual Form 10-K filings.

If all milestones are achieved, the total consideration for settling the dispute, acquiring certain assets, and granting of a license from PeriphaGen will be $ 75.0 million.

The Company recorded the $ 25.0 million within litigation settlement expense on the consolidated statements of operations for the year ended December 31, 2022.

The additional contingent milestone payments were not deemed probable due to uncertainty in the achievement of these milestones as of December 31, 2022, and therefore no additional accrual has been recorded.

The Company has received $ 1.1 million and $ 1.6 million of insurance proceeds during fiscal years ending December 31, 2022 and 2021, respectively.

Additionally, the Company had outstanding receivables of zero and $ 560 thousand as of December 31, 2022 and 2021, respectively, recorded within prepaid expenses and other current assets on the consolidated balance sheets, as management determined that the amounts were probable of collection.

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 consolidated statements of cash flows.

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”).

In May 2016, the Company signed an operating lease for laboratory and office space in Pittsburgh, Pennsylvania that commenced in June 2016 and was scheduled to expire in October 2017 (the “2016 Lease”).

The 2016 Lease has been amended several times to increase the area leased, which currently consists of approximately 54,000 square feet and includes the commercial scale CGMP-compliant manufacturing facility, (“ANCORIS”).

As a result of the lease amendments, the 2016 Lease expiration date was extended to October 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.

In September 2022, the Company amended the 2016 Lease (“Short-Term Amendment”) to add a short-term lease for additional office space that commenced in October 2022 and expires on September 2023.

The Short-Term Amendment increased the area leased by approximately 7,000 square feet through September 2023.

Due to the short-term nature of this amendment and the Company's lease accounting policy, the Company did not record a right-of-use asset or corresponding lease liability.

In December 2019, the Company entered into a lease agreement for a second commercial gene therapy facility, (“ASTRA”), in the Pittsburgh, Pennsylvania area (“ASTRA lease”) with Northfield I, LLC (the “Landlord”, “Northfield”, or “Lessor”) with an initial lease term that expired on October 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.

In October 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 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.

Krystal Biotech, Inc.

Notes to Consolidated Financial Statements — Continued

In January 2021, the Company entered into a Purchase and Sale Agreement (“PSA”) for ASTRA with Northfield related to the purchase option exercised by the Company in October 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.

In February 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.

In March 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.

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.

The building continues to be held under construction-in-progress as of December 31, 2022.

The interior of the building is currently under construction and is expected to be completed and validated in 2023.

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.

In December 2021, the Company entered into a 3 year lease agreement for the Boston, Massachusetts office that commenced in January 2022 and expires in January 2025.

In May 2022, the Company entered into a 16 month lease agreement for the Zug, Switzerland office that commenced in September 2022 and expires December 2023.

As of December 31, 2022, future minimum commitments under the Company’s operating leases were as follows (in thousands):

Krystal Biotech, Inc.

Notes to Consolidated Financial Statements — Continued

Operating Leases

3 unchanged sentences

Present value of lease liability $ 8,933

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

2022 December 31,

Operating leases:

5 unchanged sentences

Weighted average discount rate 9.4 % 9.5 %

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

These contracts typically call for the payment of fees for services upon the achievement of certain milestones.

The estimated remaining commitment as of

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.

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.

The components of the Company's lease expense are as follows:

Years Ended December 31,

2022 2021 2020

Operating lease expense $ 1,532 $ 1,275 $ 767

Variable lease expense 226 160 57

Total lease expense $ 1,758 $ 1,435 $ 824

Capitalization

Sale of Common Stock

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.

In December 2021, the Company completed an underwritten public offering of 2,866,667 shares of its common stock, including 200,000 shares purchased by the underwriters pursuant to their option to purchase additional shares, 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.

In February 2021, the Company completed an underwritten public offering of 2,211,538 shares of its common stock, including 288,461 shares purchased by the underwriters pursuant to their option to purchase additional shares, 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.

In May 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.

Krystal Biotech, Inc.

Notes to Consolidated Financial Statements — Continued

The Company sells shares of common stock from time to time pursuant to its previously executed sales agreement (the "Sales Agreement") with Cowen and Company, LLC (“Cowen”) with respect to an at-the-market equity offering program (“ATM”) finalized on December 31, 2020, under which Cowen acts 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 common stock having an aggregate offering price up to $ 150.0 million (“Placement Shares”).

The issuance and sale of the Placement Shares by the Company under the Sales Agreement are made pursuant to the Company's effective “shelf” registration statement on Form S-3.

During 2021, the Company issued and sold 262,500 shares of common stock at a weighted average price of $ 66.50 per share for net proceeds of $ 16.9 million after deducting selling commissions of approximately $ 524 thousand.

During the year ended December 31, 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, resulting in a remaining $ 102.5 million available for issuance under the ATM Program.

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.

In 2017, the Company adopted the 2017 IPO Stock Plan (the “Plan”), which governs the issuance of stock options to employees, certain non-employee consultants, and directors.

Initially, the Company reserved 900 thousand shares for issuance under the Plan with an initial sublimit for incentive stock options of 900 thousand shares.

On an annual basis, the amount of shares available for issuance under the Plan increases by an amount equal to four percent of the total outstanding shares as of the last day of the preceding calendar year.

The sublimit of incentive stock options is not subject to the increase.

Options granted to employees and non-employees vest ratably over a four-year period and stock options granted to directors of the company vest ratably over one -year to three -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 Company granted 2,130,500 and 1,422,450 stock options to employees, non-employees, and directors during the years ended December 31, 2022 and 2021, respectively.

Krystal Biotech, Inc.

Notes to Consolidated Financial Statements — Continued

The following table summarizes the Company’s stock option activity:

7 unchanged sentences

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

6 unchanged sentences

(1) Aggregate intrinsic value represents the difference between the closing stock price of our common stock on December 31, 2022 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 total intrinsic value (the amount by which the fair market value exceeded the exercise price) of stock options exercised during the years ended December 31, 2022 and 2021 was $ 2.9 million and $ 1.3 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, 2022 and 2021 was $ 44.50 and $ 43.05 , respectively.

1 unchanged sentence

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, 2022, 2021, and 2020 as follows (in thousands):

Year Ended December 31,

Years Ended December 31,

2022 2021 2020

Research and development $ 7,897 $ 3,434 $ 994

1 unchanged sentence

Total stock-based compensation $ 31,448 $ 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.

We capitalize the portion of stock-based compensation that relates to work performed on the construction of manufacturing facilities.

There was $ 551 thousand, $ 284 thousand, and $ 34 thousand of stock-based compensation that was capitalized in the years ended December 31, 2022, 2021, 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, 2022, 2021, and 2020:

Krystal Biotech, Inc.

Notes to Consolidated Financial Statements — Continued

Year Ended December 31,

Years Ended December 31,

2022 2021 2020

Expected stock price volatility 78 % 72 % 75 %

3 unchanged sentences

Forfeiture Rate — % — % 14.74 %

Dividend Yield — % — % — %

Krystal Biotech, Inc.

Notes to Consolidated Financial Statements — Continued

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 Company granted zero and 98,800 RSAs to employees of the Company during the year ended December 31, 2022 and 2021 respectively.

The following table summarizes the Company’s RSA activity:

1 unchanged sentence

Non-vested RSAs as of December 31, 2021

Granted 98,800 $ 78.89

Forfeited — $ —

98,800 $ 78.89

Vested ( 14,321 ) 78.89

Surrendered or forfeited ( 17,879 ) 78.89

Non-vested RSAs as of December 31, 2022

66,600 $ 78.89

There was $ 3.8 million of unrecognized stock-based compensation expense related to employees’ awards that is expected to be recognized over a weighted-average period of 2.2 years as of December 31, 2022.

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,

The Company recorded the following stock-based compensation expense related to RSAs within general and administrative expenses in the accompanying consolidated statements of operations (in thousands):

Years Ended December 31,

2022 2021 2020

General and administrative $ 1,782 $ 1,650 $ —

Total stock-based compensation $ 1,782 $ 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.

Krystal Biotech, Inc.

Notes to Consolidated Financial Statements — Continued

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,

Federal income tax expense (benefit) at statutory rate $ ( 14,578 ) $ ( 6,752 )

Shares remaining available for grant under the Company's stock incentive plan were 469,616 , with a remaining sublimit for incentive stock options of 5,581 , at December 31, 2022.

The Company did no t record a current or deferred income tax expense or benefit for the years ended December 31, 2022 and 2021 due to the valuation allowance position.

A reconciliation of income tax (benefit) expense computed at the statutory federal and state income tax rate for the year to income tax (benefit) expense as reflected in our financial statements for years ended December 31, 2022, 2021 and 2020 are as follows (in thousands):

Years Ended December 31,

2022 2021 2020

Federal income tax (benefit) at statutory rate $ ( 29,395 ) $ ( 14,578 ) $ ( 6,752 )

Change in valuation allowance 39,781 20,689 11,112

4 unchanged sentences

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):

Krystal Biotech, Inc.

Notes to Consolidated Financial Statements — Continued

The significant components of the Company’s deferred tax assets and liabilities as of December 31, 2022 and 2021 are as follows (in thousands):

December 31, December 31,

2 unchanged sentences

Stock compensation 7,445 3,906

Build-to-suit lease liability — 2,893

Lease liability 2,572 2,344

3 unchanged sentences

Credits 6,708 3,607

Unrealized loss on marketable securities 192 49

Total deferred tax assets 85,816 45,456

2 unchanged sentences

Deferred tax liabilities:

ASTRA capitalized construction costs — ( 2,893 )

Depreciation ( 137 ) —

Right-of-use assets ( 2,312 ) ( 2,111 )

Prepaid expenses ( 854 ) ( 613 )

Unrealized loss on marketable securities 49 ( 2 )

Total deferred tax liabilities $ ( 3,303 ) $ ( 2,724 )

1 unchanged sentence

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.

Based on the Company’s history of operating losses, the Company has concluded that it is not more likely than not that the benefit of its deferred tax assets will be realized.

Accordingly, the Company has provided a full valuation allowance for deferred tax assets as of December 31, 2022 and 2021.

As of December 31, 2022 and 2021, the Company had federal research and development credit carryforwards of approximately $ 2.0 million and $ 2.4 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.

As of December 31, 2022 and 2021, the Company also had orphan drug tax credit carryforwards of approximately $ 4.4 million and $ 910 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.

Krystal Biotech, Inc.

Notes to Consolidated Financial Statements — Continued

As of December 31, 2022 and 2021, the Company had state research and development credit carryforwards of approximately $ 457 thousand and $ 321 thousand, respectively.

9 unchanged sentences

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.

No deferred tax assets have been recognized on our consolidated balance sheets related to these NOLs, as they are fully offset by a valuation allowance.

If we have previously had, or have in the future, one or more Section 382 “ownership changes,” including in connection with our initial public offering or another offering, or if we do not generate sufficient taxable income, we may not be able to utilize a material portion of our NOLs, even if we achieve profitability.

Krystal Biotech, Inc.

Notes to Consolidated Financial Statements — Continued

The Company files income tax returns in the United States at the federal and state level and in foreign jurisdictions in which the Company conducts business activities.

The federal and state income tax returns are subject to tax examinations for the tax year ended December 31, 2019, 2020 and 2021.

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.

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.

Additionally, the Company is subject to tax examinations by taxing authorities in foreign jurisdictions where it has business operations.

At this time, the Company is not undergoing examination by the Internal Revenue Service or any foreign taxing authorities.

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.

The Company concluded that no subsequent events have occurred that would require recognition or disclosure in the consolidated financial statements.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

As previously reported in the Company’s Current Report on Form 8-K filed on May 26, 2022, effective May 24, 2022, the Audit Committee of the Company's Board of Directors dismissed Mayer Hoffman McCann P.C.

as the Company's independent registered public accounting firm effective immediately and approved the engagement of KPMG LLP as the Company's new independent registered public accounting firm, commencing for its quarter ending June 30, 2022 and the Company's fiscal year ending December 31, 2022.

For more information, please refer to the Company’s Current Report on Form 8-K filed on May 26, 2022.

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 8. Financial Statements and Supplementary Data