Krystal Biotech, Inc. 10-K

Item 8. Financial Statements and Supplementary Data. INDEX TO FINANCIAL STATEMENTS 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. 199 ) F- 2 Consolidated Balance Sheets as of December 31, 2022 and December 31, 2021 F- 4 Consolidated Statements of Operations and Comprehensive Loss for the Years Ended December 31, 2022, December 31, 2021, and December 31, 2020 F- 5 Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2022, December 31, 2021, and December 31, 2020 F- 6 Consolidated Statements of Cash Flows for the Years Ended December 31, 2022, December 31, 2021, and December 31, 2020 F- 7 Notes to Consolidated Financial Statements F- 8 F-1 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. /s/ KPMG LLP We have served as the Company’s auditor since 2022. Pittsburgh, Pennsylvania February 27, 2023 F-2 Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Krystal Biotech, Inc.: Opinion on the Financial Statements We have audited the accompanying consolidated balance 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 These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Mayer Hoffman McCann P.C. We have served as the Company's auditor since 2017, which ended in 2022. San Diego, California February 28, 2022 F-3 Krystal Biotech, Inc. Consolidated Balance Sheets (In thousands, except shares and par value data) December 31, 2022 December 31, 2021 Assets Current assets Cash and cash equivalents $ 161,900 $ 341,246 Short-term investments 217,271 96,850 Prepaid expenses and other current assets 4,608 4,171 Total current assets 383,779 442,267 Property and equipment, net 161,684 112,355 Long-term investments 4,621 64,371 Right-of-use assets 8,042 7,228 Other non-current assets 324 74 Total assets $ 558,450 $ 626,295 Liabilities and Stockholders' Equity Current liabilities Accounts payable $ 3,981 $ 8,398 Current portion of lease liability 1,561 1,041 Accrued expenses and other current liabilities 23,305 16,297 Total current liabilities 28,847 25,736 Lease liability 7,372 6,983 Total liabilities 36,219 32,719 Commitments and contingencies (Note 6) Stockholders' equity Common stock; $ 0.00001 par value; 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 loss ( 728 ) ( 163 ) Accumulated deficit ( 280,759 ) ( 140,784 ) Total stockholders' equity 522,231 593,576 Total liabilities and stockholders' equity $ 558,450 $ 626,295 The accompanying notes are an integral part of these consolidated financial statements. F-4 Krystal Biotech, Inc. Consolidated Statements of Operations and Comprehensive Loss Year Ended December 31, (In thousands, except share and per share data) 2022 2021 2020 Expenses Research and development $ 42,461 $ 27,884 $ 17,936 General and administrative 77,735 40,391 15,063 Litigation settlement 25,000 — — Total operating expenses 145,196 68,275 32,999 Loss from operations ( 145,196 ) ( 68,275 ) ( 32,999 ) Other Income (Expense) Interest and other income, net 5,221 197 832 Interest expense — ( 1,492 ) — Net loss ( 139,975 ) ( 69,570 ) ( 32,167 ) Unrealized loss on available-for-sale securities and other ( 565 ) ( 169 ) ( 4 ) Comprehensive loss $ ( 140,540 ) $ ( 69,739 ) $ ( 32,171 ) Net loss per common share: Basic and diluted $ ( 5.49 ) $ ( 3.13 ) $ ( 1.71 ) Weighted-average common shares outstanding: Basic and diluted 25,491,721 22,196,846 18,787,161 The accompanying notes are an integral part of these consolidated financial statements. F-5 Krystal Biotech, Inc. Consolidated Statements of Stockholders' Equity (In thousands, except shares) Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Income (loss) Accumulated Deficit Total Stockholders' Equity Shares Amount Balances at January 1, 2020 17,354,310 $ — $ 241,951 $ 10 $ ( 39,047 ) $ 202,914 Issuance of common stock, net 2,359,910 — 118,035 — — 118,035 Stock-based compensation expense — — 3,306 — — 3,306 Unrealized loss on investments and other (1) — — — ( 4 ) — ( 4 ) Net loss — — — — ( 32,167 ) ( 32,167 ) Balances at December 31, 2020 19,714,220 $ — $ 363,292 $ 6 $ ( 71,214 ) $ 292,084 Issuance of common stock, net 5,493,765 — 355,628 — — 355,628 Stock-based compensation expense — — 15,603 — — 15,603 Unrealized loss on investments and other (1) — — — ( 169 ) — ( 169 ) Net loss — — — — ( 69,570 ) ( 69,570 ) 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. F-6 Krystal Biotech, Inc. Consolidated Statements of Cash Flows Years Ended December 31, (In thousands) 2022 2021 2020 Operating Activities Net loss $ ( 139,975 ) $ ( 69,570 ) $ ( 32,167 ) Adjustments to reconcile net loss to net cash used in operating activities Depreciation and amortization 4,055 2,769 1,851 Stock-based compensation expense 33,230 15,319 3,272 Loss on disposal of fixed assets 72 — 33 Non-cash interest expense — 1,492 — Other, net ( 762 ) ( 454 ) 11 Changes in operating assets and liabilities Prepaid expenses and other current assets ( 311 ) ( 691 ) ( 1,922 ) Other non-current assets ( 150 ) 65 ( 934 ) Lease liability ( 647 ) ( 285 ) 685 Accounts payable ( 1,254 ) 712 783 Accrued expenses and other current liabilities 5,173 2,705 2,305 Net cash used in operating activities ( 100,569 ) ( 47,938 ) ( 26,083 ) Investing Activities Purchases of property and equipment ( 52,979 ) ( 68,336 ) ( 14,843 ) Purchases of investments ( 318,781 ) ( 190,462 ) ( 3,205 ) Proceeds from maturities of investments 257,677 32,028 6,867 Net cash used in investing activities ( 114,083 ) ( 226,770 ) ( 11,181 ) Financing Activities 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 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 Cash and cash equivalents at end of year $ 161,900 $ 341,246 $ 268,269 Supplemental Disclosures of Non-Cash Investing and Financing Activities Unpaid purchases of property and equipment $ 14,927 $ 15,363 $ 9,697 Initial recognition of right-of-use assets $ 1,556 $ 4,396 $ 911 The accompanying notes are an integral part of these consolidated financial statements. F-7 Krystal Biotech, Inc. Notes to Consolidated Financial Statements 1. Organization Krystal Biotech, Inc. (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 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 Practice ("CGMP") manufacturing capabilities. Liquidity As of December 31, 2022, the Company had an accumulated deficit of $ 280.8 million. 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 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. 2. Summary of Significant Accounting Policies Basis of Presentation 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 operations. Use of Estimates 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 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 F-8 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. Estimates are used in the following areas, including: stock-based compensation expense, accrued expenses, the fair value of financial instruments, the incremental borrowing rate for lease liabilities, and the valuation allowance included in the deferred income tax calculation. Segment and Geographical Information Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company and the Company’s chief operating decision maker view the Company’s operations and manage its business in one operating segment, which is the business of developing and commercializing pharmaceutical products. 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, 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 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. The Company has no financial instruments with off-balance sheet risk of loss. Cash, Cash Equivalents and Investments Cash and cash equivalents consist of money market funds and bank deposits. Cash equivalents are defined as short-term, highly liquid investments with original maturities of 90 days or less at the date of purchase. Investments with maturities of 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. Accrued interest on investments is also classified as short-term investments. As our entire investment portfolio is considered available for use in current operations, we classify all investments as available-for-sale securities. Available-for-sale securities are carried at fair value, with unrealized gains and losses reported in accumulated other comprehensive loss, which is a separate component of stockholders’ equity in the consolidated balance sheets. Any premium arising at purchase is amortized to the earliest call date and any discount arising at purchase is accreted to maturity. Amortization and accretion of premiums and discounts are recorded in interest and other income, net, or general and administrative expenses in the consolidated statements of operations. Fair Value of Financial Instruments Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. There is a three-level hierarchy that prioritizes the inputs used in determining fair value by their reliability and preferred use, as follows: • Level 1 —Valuations based on quoted prices in active markets for identical assets or liabilities. • Level 2 —Valuations based on quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in inactive markets, or other inputs that are observable, or can be corroborated by observable market data. • Level 3 —Valuations based on inputs that are both significant to the fair value measurement and unobservable. To the extent that a valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized within Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. There have been no significant changes to the valuation methods utilized by the Company during the periods presented. There have been no transfers between Level 1, Level 2, and Level 3 in any periods presented. F-9 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. In addition, Level 2 financial instruments are valued using comparisons to like-kind financial instruments and models that use readily observable market data as their basis. Property and Equipment, net Property and equipment, net, is stated at cost, less accumulated depreciation. Maintenance and repairs that do not improve or extend the lives of the respective assets are expensed to operations as incurred, while costs of major additions and betterments are capitalized. Upon disposal, the related cost and accumulated depreciation is removed from the accounts and any resulting gain or loss is included in the results of operations. Depreciation is recorded using the straight-line method over the estimated useful lives of the respective assets, which are as follows: Computer equipment and software 3 - 7 years Laboratory and manufacturing equipment 3 - 20 years Furniture and fixtures 3 - 7 years 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. Impairment of Long-Lived Assets The Company evaluates long-lived assets for potential impairment when events or changes in circumstances indicate the carrying value of the assets may not be recoverable. 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. Leases The Company accounts for its lease agreements in accordance with FASB ASC Topic 842, Leases . 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 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 consolidated balance sheets and to account for lease and non-lease components of its operating leases as a single component. F-10 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 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. Research and Development Expenses Research and development costs are charged to expense as incurred in performing research and development activities. These costs include employee compensation costs, facilities and overhead, preclinical and clinical activities, 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. The capitalized amounts are expensed as the related goods are delivered or the services are performed. In accruing service fees, the Company estimates the time period over which services will be performed and the level of effort to be expended in each period. These estimates are based on communications with third-party service providers and the Company’s estimates of accrued expenses using information available at each balance sheet date. If the actual timing of the performance of services or the level of effort varies from the estimate, the Company will adjust the accrual accordingly. Stock-Based Compensation Expense The Company applies the fair value recognition provisions of Financial Accounting Standards Board (“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. The Company estimates the fair value of its stock options using the Black-Scholes option pricing model, which requires the input of subjective assumptions, including: (i) the expected stock price volatility; (ii) the expected term of the award; (iii) the risk-free interest rate; and (iv) expected dividends. Once the Company's own sufficient historical volatility data was obtained 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. 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. Income Taxes 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. Valuation allowances are provided when necessary to reduce net deferred tax assets to the amount that is more likely than not to be realized. Based on the available evidence, we are unable, at this time, to support the determination that it is more likely than not that our deferred tax assets will be utilized in the future. Accordingly, we recorded a full valuation allowance as of December 31, 2022 and 2021. We intend to maintain a valuation allowance until sufficient evidence exists to support its reversal. F-11 Krystal Biotech, Inc. Notes to Consolidated Financial Statements — Continued The Company accounts for uncertain tax positions in accordance with the provisions of ASC 740. When uncertain tax positions exist, the Company recognizes the tax benefit of tax positions to the extent that the benefit will more likely than not be realized. The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position as well as consideration of the available facts and circumstances. As of December 31, 2022 and 2021, the Company did not have any significant uncertain tax positions. The Company may recognize interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 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 Comprehensive loss is defined as the change in equity during a period from transactions from non-owner sources. Unrealized gains or losses on available-for-sale securities is a component of other comprehensive gains or losses and is presented net of taxes. We 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 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. 3. Net Loss Per Share Attributable to Common Stockholders Basic net loss per share attributable to common stockholders is calculated by dividing net loss attributable to common stockholders by the weighted average shares outstanding during the period, without consideration for common stock equivalents. Diluted net loss per share attributable to common stockholders is computed by dividing the net loss by the weighted-average number of shares of common stock and common share equivalents outstanding for the period. Common share equivalents consist of common stock issuable upon exercise of stock options and vesting of restricted stock awards. There were 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 shares 25,491,721 22,196,846 18,787,161 Basic and diluted net loss per common share $ ( 5.49 ) $ ( 3.13 ) $ ( 1.71 ) 4. Fair Value Instruments The following tables show the Company’s cash, cash equivalents and available-for-sale securities by significant investment category as of December 31, 2022 and 2021, respectively (in thousands): F-12 Krystal Biotech, Inc. Notes to Consolidated Financial Statements — Continued December 31, 2022 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Aggregate Fair Value Cash and Cash Equivalents Short-term Marketable Securities (1) Long-term Marketable Securities (2) Level 1: Cash and cash equivalents $ 161,900 $ — $ — $ 161,900 $ 161,900 $ — $ — Subtotal 161,900 — — 161,900 161,900 — — Level 2: Commercial paper 63,624 5 ( 23 ) 63,606 — 63,606 — Corporate bonds 82,241 13 ( 419 ) 81,835 — 77,214 4,621 U.S government agency securities 76,683 161 ( 393 ) 76,451 — 76,451 — Subtotal 222,548 179 ( 835 ) 221,892 — 217,271 4,621 Total $ 384,448 $ 179 $ ( 835 ) $ 383,792 $ 161,900 $ 217,271 $ 4,621 December 31, 2021 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Aggregate Fair Value Cash and Cash Equivalents Short-term Marketable Securities (1) Long-term Marketable Securities (2) Level 1: Cash and cash equivalents $ 341,246 $ — $ — $ 341,246 $ 341,246 $ — $ — Subtotal 341,246 — — 341,246 341,246 — — Level 2: Commercial paper 40,469 1 ( 4 ) 40,466 — 40,466 — Corporate bonds 83,300 10 ( 114 ) 83,196 — 35,768 47,428 U.S government agency securities 37,621 — ( 62 ) 37,559 — 20,616 16,943 Subtotal 161,390 11 ( 180 ) 161,221 — 96,850 64,371 Total $ 502,636 $ 11 $ ( 180 ) $ 502,467 $ 341,246 $ 96,850 $ 64,371 (1) The Company’s short-term marketable securities mature in one year or less. (2) The Company’s long-term marketable securities mature between one year and two years . See Note 2 to these consolidated financial statements for additional discussion regarding the Company’s fair value measurements. F-13 Krystal Biotech, Inc. Notes to Consolidated Financial Statements — Continued 5. Balance Sheet Components Property and Equipment, Net Property and equipment, net consist of the following as of December 31, 2022 and 2021, respectively (in thousands): December 31, 2022 December 31, 2021 Construction-in-progress $ 131,331 $ 104,340 Leasehold improvements 24,217 5,723 Furniture and fixtures 957 891 Computer equipment and software 100 85 Laboratory and manufacturing equipment 11,872 5,530 Total property and equipment 168,477 116,569 Accumulated depreciation and amortization ( 6,793 ) ( 4,214 ) Property and equipment, net $ 161,684 $ 112,355 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 as of December 31, 2022 and 2021, respectively (in thousands): December 31, 2022 December 31, 2021 Accrued preclinical and clinical expenses $ 1,365 $ 1,602 Accrued professional fees 3,397 2,011 Accrued payroll and benefits 6,781 2,882 Accrued construction in progress 11,452 9,606 Accrued financing fees — 26 Accrued taxes 43 83 Other current liabilities 267 87 Total $ 23,305 $ 16,297 F-14 Krystal Biotech, Inc. Notes to Consolidated Financial Statements — Continued 6. Commitments and Contingencies 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. On March F-15 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. 7. Leases Lease Agreements 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. 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”). 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. 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 contributions of $ 2.4 million. F-16 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. 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. 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 in October 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): Operating Leases 2023 $ 1,648 2024 1,539 2025 1,277 2026 1,277 2027 1,300 Thereafter 10,762 Future minimum operating lease payments $ 17,803 Less: Interest 8,870 Present value of lease liability $ 8,933 Supplemental balance sheet information related to leases is as follows: December 31, 2022 December 31, 2021 Operating leases: Right-of-use assets $ 8,042 $ 7,228 Current portion of lease liability 1,561 1,041 Lease liability 7,372 6,983 Total lease liability $ 8,933 $ 8,024 Weighted average remaining lease term, in years 12.5 14.4 Weighted average discount rate 9.4 % 9.5 % F-17 Krystal Biotech, Inc. Notes to Consolidated Financial Statements — Continued The components of the Company's lease expense are as follows: Years Ended December 31, 2022 2021 2020 Lease cost: Operating lease expense $ 1,532 $ 1,275 $ 767 Variable lease expense 226 160 57 Total lease expense $ 1,758 $ 1,435 $ 824 8. Capitalization Sale of Common Stock 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. 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. 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. ATM Program 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. 9. Stock-Based Compensation Stock Options 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 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. F-18 Krystal Biotech, Inc. Notes to Consolidated Financial Statements — Continued The following table summarizes the Company’s stock option activity: Stock Options Outstanding Weighted- average Exercise Price Weighted- average Remaining Contractual Life (Years) Aggregate Intrinsic Value (In thousands) (1) Balance at January 1, 2021 853,614 $ 40.31 9.0 $ 16,804 Granted 1,422,450 66.88 Exercised ( 54,260 ) 38.12 Cancelled or forfeited ( 175,750 ) 61.35 Expired ( 2,875 ) 75.82 Balance at December 31, 2021 2,043,179 $ 57.00 9.0 $ 31,331 Granted 2,130,500 64.14 Exercised ( 138,855 ) 50.47 Cancelled or forfeited ( 438,892 ) 59.22 Expired ( 13,751 ) 78.80 Balance at December 31, 2022 3,582,181 $ 61.50 8.7 $ 64,880 Exercisable at December 31, 2022 666,886 $ 49.20 7.5 $ 20,055 (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 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. There was $ 104.4 million of unrecognized stock-based compensation expense related to employees’, non-employees’, and directors’ awards that is expected to be recognized over a weighted-average period of 2.9 years as of December 31, 2022. 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): Years Ended December 31, 2022 2021 2020 Research and development $ 7,897 $ 3,434 $ 994 General and administrative 23,551 10,235 2,278 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 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: Years Ended December 31, 2022 2021 2020 Expected stock price volatility 78 % 72 % 75 % Expected term of the award (years) 6.2 6.2 6.2 Risk-free interest rate 2.42 % 1.10 % 0.64 % Weighted average exercise price $ 64.14 $ 66.88 $ 47.29 Forfeiture Rate — % — % 14.74 % Dividend Yield — % — % — % F-19 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 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: Number of Shares Weighted Average Grant Date Fair Value Non-vested RSAs as of December 31, 2021 98,800 $ 78.89 Granted — — 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 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 469,616 , with a remaining sublimit for incentive stock options of 5,581 , at December 31, 2022. 10. Income Taxes 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 State income tax expense net of federal benefit ( 10,438 ) ( 5,436 ) ( 2,632 ) Credits ( 1,736 ) ( 1,295 ) ( 887 ) Other non-deductible expenses 2,182 675 ( 216 ) Other ( 394 ) ( 55 ) ( 625 ) Total tax expense (benefit) $ — $ — $ — F-20 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, 2022 2021 Deferred tax assets: Net operating loss carryforwards $ 52,569 $ 33,170 Stock compensation 7,445 3,906 Lease liability 2,572 2,344 Depreciation — 679 Accrued expenses 2,206 817 Capitalized costs 14,124 884 Credits 6,708 3,607 Unrealized loss on marketable securities 192 49 Total deferred tax assets 85,816 45,456 Valuation allowance ( 82,513 ) ( 42,732 ) Deferred tax assets $ 3,303 $ 2,724 Deferred tax liabilities: Depreciation ( 137 ) — Right-of-use assets ( 2,312 ) ( 2,111 ) Prepaid expenses ( 854 ) ( 613 ) Total deferred tax liabilities $ ( 3,303 ) $ ( 2,724 ) Net deferred tax assets $ — $ — The Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets. Based on the Company’s history of operating losses, the Company has concluded that it is 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, 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. As of December 31, 2022 and 2021, the Company had state research and development credit carryforwards of approximately $ 457 thousand and $ 321 thousand, respectively. The state tax credit carryforwards will begin to expire in 2032 if not utilized. As of December 31, 2022, the Company had cumulative U.S. federal NOL carryforwards of approximately $ 177.7 million. Of this amount, $ 5.0 million is available to offset future income tax liabilities and will expire in 2037, the remaining $ 172.7 million is available indefinitely to offset future income tax liabilities with no expiration period. As of December 31, 2022, the Company had cumulative U.S. state NOL carryforwards of approximately $ 186.0 million. The state NOLs are available to offset future state income tax liabilities and will begin to expire in 2037. Under the provisions of the Internal Revenue Code, the NOL carryforwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities. NOL carryforwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant shareholders over a three-year period in excess of 50 %, as defined under Internal Revenue Code Sections 382 and 383 of the Internal Revenue Code, respectively, as well as similar state provisions. This could limit the amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities. 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. F-21 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. 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. 11. Subsequent Events The Company evaluates events or transactions that occur after the balance sheet date, but prior to the issuance of the financial statements, to identify matters that require disclosure. The Company concluded that no subsequent events have occurred that would require recognition or disclosure in the consolidated financial statements. F-22 Item 9. 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.