Krystal Biotech, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS Krystal Biotech, Inc. Condensed Consolidated Balance Sheets (unaudited) (In thousands, except share and per share data) March 31, 2023 December 31, 2022 Assets Current assets Cash and cash equivalents $ 140,745 $ 161,900 Short-term investments 209,642 217,271 Prepaid expenses and other current assets 5,042 4,608 Total current assets 355,429 383,779 Property and equipment, net 163,073 161,684 Long-term investments 5,129 4,621 Right-of-use assets 7,814 8,042 Other non-current assets 402 324 Total assets $ 531,847 $ 558,450 Liabilities and Stockholders' Equity Current liabilities Accounts payable $ 4,109 $ 3,981 Current portion of lease liability 1,553 1,561 Accrued expenses and other current liabilities 29,414 23,305 Total current liabilities 35,076 28,847 Lease liability 7,205 7,372 Total liabilities 42,281 36,219 Commitments and contingencies (Note 6) Stockholders' equity Common stock; $ 0.00001 par value; 80,000,000 shares authorized at March 31, 2023 and December 31, 2022; 25,796,213 shares issued and outstanding at March 31, 2023; and 25,763,743 shares issued and outstanding at December 31, 2022 — — Additional paid-in capital 815,776 803,718 Accumulated other comprehensive loss ( 154 ) ( 728 ) Accumulated deficit ( 326,056 ) ( 280,759 ) Total stockholders' equity 489,566 522,231 Total liabilities and stockholders' equity $ 531,847 $ 558,450 The accompanying notes are an integral part of these condensed consolidated financial statements. 3 Krystal Biotech, Inc. Condensed Consolidated Statements of Operations and Comprehensive Loss (unaudited) Three Months Ended March 31, (In thousands, except share and per share data) 2023 2022 Expenses Research and development $ 12,288 $ 9,314 General and administrative 24,035 15,908 Litigation settlement 12,500 25,000 Total operating expenses 48,823 50,222 Loss from operations ( 48,823 ) ( 50,222 ) Other Income Interest and other income, net 3,526 257 Net loss $ ( 45,297 ) $ ( 49,965 ) Unrealized gain (loss) on available-for-sale securities and currency translation adjustment 574 ( 1,034 ) Comprehensive loss $ ( 44,723 ) $ ( 50,999 ) Net loss per common share: Basic and diluted $ ( 1.76 ) $ ( 1.99 ) Weighted-average common shares outstanding: Basic and diluted 25,712,220 25,114,453 The accompanying notes are an integral part of these condensed consolidated financial statements. 4 Krystal Biotech, Inc. Condensed Consolidated Statements of Stockholders' Equity (unaudited) Common Stock Additional Paid-in Accumulated Other Comprehensive Accumulated Total Stockholders' (In thousands, except shares) Shares Amount Capital (Loss) Deficit Equity Balances at January 1, 2023 25,763,743 $ — $ 803,718 $ ( 728 ) $ ( 280,759 ) $ 522,231 Issuance of common stock, net 42,021 — 2,208 — — 2,208 Shares surrendered for taxes ( 9,551 ) — ( 749 ) — ( 749 ) Stock-based compensation expense — — 10,599 — — 10,599 Unrealized gain on investments and other — — — 574 — 574 Net loss — — — — ( 45,297 ) ( 45,297 ) Balances at March 31, 2023 25,796,213 $ — $ 815,776 $ ( 154 ) $ ( 326,056 ) $ 489,566 Common Stock Additional Paid-in Accumulated Other Comprehensive Accumulated Total Stockholders' (In thousands, except shares) Shares Amount Capital (Loss) Deficit Equity Balances at January 1, 2022 25,207,985 $ — $ 734,523 $ ( 163 ) $ ( 140,784 ) $ 593,576 Issuance of common stock, net 1,475 — 55 — — 55 Shares surrendered for taxes and forfeitures ( 10,379 ) — ( 649 ) — ( 649 ) Stock-based compensation expense — — 6,571 — — 6,571 Unrealized (loss) on investments and other — — — ( 1,034 ) — ( 1,034 ) Net loss — — — — ( 49,965 ) ( 49,965 ) Balances at March 31, 2022 25,199,081 $ — $ 740,500 $ ( 1,197 ) $ ( 190,749 ) $ 548,554 The accompanying notes are an integral part of these condensed consolidated financial statements. 5 Krystal Biotech, Inc. Condensed Consolidated Statements of Cash Flows (unaudited) Three Months Ended March 31, (In thousands) 2023 2022 Operating Activities Net loss $ ( 45,297 ) $ ( 49,965 ) Adjustments to reconcile net loss to net cash used in operating activities Depreciation and amortization 705 1,015 Stock-based compensation expense 10,437 6,430 Other, net ( 605 ) ( 135 ) Changes in operating assets and liabilities Prepaid expenses and other current assets ( 327 ) 820 Other non-current assets ( 46 ) 9 Lease liability ( 165 ) ( 126 ) Accounts payable 107 ( 554 ) Accrued expenses and other current liabilities ( 3,465 ) 2,013 Accrued litigation settlement 12,500 25,000 Net cash (used in) operating activities ( 26,156 ) ( 15,493 ) Investing Activities Purchases of property and equipment ( 5,381 ) ( 17,191 ) Purchases of investments ( 145,576 ) ( 62,754 ) Proceeds from maturities of investments 154,520 24,037 Net cash provided by (used in) investing activities 3,563 ( 55,908 ) Financing Activities Issuance of common stock, net 2,223 107 Taxes paid related to settlement of restricted stock awards ( 749 ) ( 649 ) Net cash provided by (used in) financing activities 1,474 ( 542 ) Effect of exchange rate changes on cash and cash equivalents ( 36 ) — Net (decrease) in cash and cash equivalents ( 21,155 ) ( 71,943 ) Cash and cash equivalents at beginning of period 161,900 341,246 Cash and cash equivalents at end of period $ 140,745 $ 269,303 Supplemental Disclosures of Non-Cash Investing and Financing Activities Unpaid purchases of property and equipment included in accounts payable and accrued expenses $ 11,865 $ 14,507 Initial recognition of right-of-use assets $ — $ 1,394 The accompanying notes are an integral part of these condensed consolidated financial statements. 6 Krystal Biotech, Inc. Notes to Condensed Consolidated Financial Statements (unaudited) 1. Organization Krystal Biotech, Inc. (the “Company,” or “we” or other similar pronouns) commenced operations 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 Practices ("CGMP") manufacturing capabilities. Liquidity As of March 31, 2023, the Company had an accumulated deficit of $ 326.1 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, 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 its commercialization capabilities in advance of the potential global regulatory approvals of its lead product, beremagene geperpavec (“B-VEC”). The Company believes that its cash, cash equivalents and short-term investments of approximately $ 350.4 million as of March 31, 2023 will be sufficient to allow the Company to fund its planned operations for at least the next 12 months from the date of this Quarterly Report on Form 10-Q. 2. Summary of Significant Accounting Policies Basis of Presentation The accompanying interim condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”). In the opinion of management, all adjustments, which consist of all normal recurring adjustments necessary for a fair presentation of the Company's financial position and results of operations for the interim periods presented, are reflected in the interim condensed consolidated financial statements. All intercompany balances and transactions have been eliminated in consolidation. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year. These unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022, as filed with the U.S. Securities and Exchange Commission (“SEC”) on February 27, 2023. 7 Use of Estimates The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the condensed consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates. Management considers many factors in developing the estimates and assumptions that are used in the preparation of these financial statements. Management must apply significant judgment in this process. In addition, other factors may affect estimates, including expected business and operational changes, sensitivity and volatility associated with the assumptions used in developing estimates, and whether historical trends are expected to be representative of future trends. The estimation process often may yield a range of potentially reasonable estimates of the ultimate future outcomes and management must select an amount that falls within that range of reasonable estimates. Estimates are used in the following areas: 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 condensed 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 condensed 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 condensed consolidated balance sheets and consist of corporate bonds and government agency securities. Accrued interest on investments is also classified as short-term investments on the condensed consolidated balance sheets. 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 condensed consolidated balance sheets. Any premium arising at purchase is amortized to the earliest call date and any discount arising at purchase is accreted to maturity. Amortization and accretion of premiums and discounts are recorded in interest and other income, net, in the consolidated 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 or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data. 8 • Level 3 — Valuations based on inputs that are both significant to the fair value measurement and unobservable. To the extent that a valuation is based on models or inputs that are less observable, or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized within Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. There have been no significant changes to the valuation methods utilized by the Company during the periods presented. There have been no transfers between Level 1, Level 2, and Level 3 in any periods presented. The carrying amounts of financial instruments consisting of cash and cash equivalents, investments, prepaid expenses and other current assets, accounts payable, accrued expenses and other current liabilities included in the Company’s condensed consolidated financial statements, approximate 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: Buildings and building improvements 7 - 47 years Computer equipment and software 3 - 7 years Manufacturing equipment 3 - 20 years Laboratory equipment 3 - 10 years Furniture and fixtures 3 - 7 years Leasehold improvements lesser of 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. Construction in progress 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 has no t identified any triggering events or recognized any impairment losses for the three months ended March 31, 2023 and 2022, respectively. 9 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 condensed consolidated balance sheets and to account for lease and non-lease components of its operating leases as a single component. For lease arrangements where it has been determined that the Company has control over an asset that is under construction and is thus considered the accounting owner of the asset during the construction period, the Company records a construction in progress asset and corresponding financial obligation on the condensed consolidated balance sheet. Once the construction is complete, an assessment is performed to determine whether the lease meets certain sale-leaseback criteria. If the sale-leaseback criteria are determined to be met, the Company will remove the asset and related financial obligation from the condensed consolidated balance sheet and treat the lease as either an operating or finance lease based on 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 organizations and manufacturing organizations that manufacture materials used in the Company’s ongoing preclinical and clinical studies. Non-refundable advanced payments for goods or services to be received in the future for use in research and development activities are deferred and capitalized. The capitalized amounts are expensed as the related goods are delivered or the services are performed. In accruing service fees, the Company estimates the time period over which services will be performed and the level of effort to be expended in each period. These estimates are based on communications with 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, or ASC, Topic 718, Compensation—Stock Compensation ("ASC 718"), to account for stock-based compensation. Compensation costs related to equity awards 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 for stock options, restricted stock awards, and restricted stock units 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. Compensation expense for performance-based restricted stock units is recognized for the awards that are probable of vesting over the service period of the award. On a quarterly basis, management estimates the probable number of performance-based restricted stock units that would vest until such time that the ultimate achievement of the performance criteria are known. 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. The Company estimates stock price volatility by using its own historical data. The expected term of the Company’s stock options is estimated 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 U.S. Treasury securities with a maturity date commensurate with the expected term of the associated award. The Company has never paid and does not expect 10 to pay dividends in the foreseeable future. The Company accounts for forfeitures as they occur. Stock-based compensation expense recognized in the financial statements is based on awards for which service conditions are expected to be satisfied. Comprehensive Loss Comprehensive loss is defined as the change in equity during a period from transactions from non-owner sources. Unrealized gains or losses on available-for-sale securities is a component of other comprehensive gains or losses and is presented net of taxes. We record reclassifications from other comprehensive gains or losses to interest and other income, net on the condensed 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 three months ended March 31, 2023 and 2022. 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 condensed consolidated financial statements, and no recently issued accounting pronouncements that are expected to have a material impact on the Company’s condensed consolidated 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 3,829,535 and 3,226,962 common share equivalents outstanding as of March 31, 2023 and 2022, respectively, in the form of stock options and unvested restricted stock awards, that have been excluded from the calculation of diluted net loss per common share as their effect would be anti-dilutive for all periods presented. Three Months Ended March 31, (In thousands, except share and per share data) 2023 2022 Numerator: Net loss $ ( 45,297 ) $ ( 49,965 ) Denominator: Weighted-average basic and diluted common shares 25,712,220 25,114,453 Basic and diluted net loss per common share $ ( 1.76 ) $ ( 1.99 ) 11 4. Fair Value Instruments The following tables show the Company’s cash, cash equivalents and available-for-sale securities by significant investment category as of March 31, 2023 and December 31, 2022, respectively (in thousands): March 31, 2023 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 $ 140,745 $ — $ — $ 140,745 $ 140,745 $ — $ — Subtotal 140,745 — — 140,745 140,745 — — Level 2: Commercial paper 97,442 7 ( 18 ) 97,431 — 97,431 — Corporate bonds 49,573 39 ( 106 ) 49,506 — 45,344 4,162 U.S. government agency securities 67,803 221 ( 190 ) 67,834 — 66,867 967 Subtotal 214,818 267 ( 314 ) 214,771 — 209,642 5,129 Total $ 355,563 $ 267 $ ( 314 ) $ 355,516 $ 140,745 $ 209,642 $ 5,129 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 (1) The Company’s short-term marketable securities mature in one year or less. (2) The Company's long-term marketable securities mature between one year and two years . See Note 2 to these unaudited condensed consolidated financial statements for additional discussion regarding the Company’s fair value measurements. 12 5. Balance Sheet Components Property and Equipment, Net Property and equipment, net consist of the following (in thousands): March 31, 2023 December 31, 2022 Construction in progress $ 122,935 $ 131,331 Leasehold improvements 24,442 24,217 Manufacturing equipment 10,236 9,783 Building and building improvements 9,736 — Laboratory equipment 2,108 2,089 Furniture and fixtures 1,164 957 Computer equipment and software 338 100 Total property and equipment 170,959 168,477 Accumulated depreciation ( 7,886 ) ( 6,793 ) Property and equipment, net $ 163,073 $ 161,684 Depreciation expense was $ 1.1 million and $ 462 thousand for the three months ended March 31, 2023 and 2022, respectively. The Company placed a portion of its second commercial scale CGMP facility, ASTRA, into service during the three months ended March 31, 2023 as it was determined that certain assets were ready for their intended use. On March 27, 2023, the Company received the permanent occupancy permit for ASTRA which allowed the Company to begin utilizing certain portions of the building. As a result, assets relating to ASTRA were reclassified from construction in progress to leasehold improvements, manufacturing equipment, buildings and building improvements, furniture and fixtures, or computer equipment and software as of March 31, 2023. As certain building improvements are not yet complete and certain qualification activities are still underway, the Company will continue to hold the remaining assets within construction in progress until validation has been completed and the assets are ready for their intended use. Validation of the facility is expected to be completed in 2023. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consisted of the following (in thousands): March 31, 2023 December 31, 2022 Accrued litigation settlement $ 12,500 $ — Accrued construction in progress 8,407 11,452 Accrued professional fees 3,839 3,397 Accrued payroll and benefits 2,661 6,781 Accrued preclinical and clinical expenses 1,635 1,365 Other current liabilities 321 267 Accrued taxes 51 43 Total $ 29,414 $ 23,305 6. Commitments and Contingencies Agreements with Contract Research Organizations and Contract Manufacturing 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 primarily relate to the manufacturing of our cell and virus banks and for the manufacturing of our sterile gel that is mixed with in-house produced vectors as part of the final drug product for B-VEC. Agreements with third parties may also include research and development consulting activities, clinical- 13 trial agreements, storage, packaging, labeling, and/or testing of our preclinical and clinical-stage or pre-commercial products. The Company is obligated to make milestone payments under certain of these contracts. 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 estimated remaining commitment as of March 31, 2023 under these agreements is approximately $ 2.0 million. The Company has incurred research and development expenses under these agreements of $ 2.0 million and $ 1.8 million for the three months ended March 31, 2023 and 2022, respectively. ASTRA Contractual Obligations The Company has contracted with various third parties to complete the interior build-out of our second CGMP facility, ASTRA. 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 March 31, 2023 is $ 11.9 million and primarily relates to the remaining building improvements and certain qualification activities of the facility. The Company has included costs incurred to-date associated with the ongoing build-out of ASTRA within construction in progress. As of March 31, 2023, Substantial Completion, as defined in the Standard Form of Contract for Construction and the corresponding General Conditions of the Contract for Construction (the “Agreement”) with Whiting-Turner Contracting Company (“Whiting-Turner”), the construction manager for ASTRA, had not been achieved. 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. 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 asserted were used to develop our product candidates, including the vector backbones, and our STAR-D platform. The Company answered the complaint on June 26, 2020 by denying the allegations and brought a counterclaim asking the court to declare that the Company did not misappropriate PeriphaGen’s trade secrets or confidential information, and to further declare that the Company is 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 12, 2022, the Company entered into a binding term sheet to settle the dispute. On April 27, 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 upfront settlement payment of $ 25.0 million under litigation settlement expense on the condensed consolidated statements of operations for the three months ended March 31, 2022. In accordance with ASC Topic 450, Contingencies , the Company has determined that FDA approval of B-VEC is now probable, and accordingly has accrued for an additional $ 12.5 million litigation settlement liability as of March 31, 2023. The remaining contingent milestone payments were not deemed probable due to uncertainty in the achievement of these milestones as of March 31, 2023, and therefore no additional accrual has been recorded. The Company has received $ 0 and $ 768 thousand of insurance proceeds during the three months ended March 31, 2023 and 2022, respectively. The reimbursements have been recorded as an offset to our legal fees included in general and administrative expenses on the condensed consolidated statements of operations and within operating activities on the condensed consolidated statements of cash flows. 14 7. Leases As of March 31, 2023, future minimum commitments under the Company’s operating leases with lease terms in excess of 12 months were as follows (in thousands): Operating Leases 2023 (remaining nine months) $ 1,240 2024 1,539 2025 1,277 2026 1,277 2027 1,300 Thereafter 10,762 Future minimum operating lease payments $ 17,395 Less: Interest 8,637 Present value of lease liability $ 8,758 Supplemental condensed consolidated balance sheet information related to leases is as follows: March 31, 2023 December 31, 2022 Operating leases: Right-of-use assets $ 7,814 $ 8,042 Current portion of lease liability 1,553 1,561 Lease liability 7,205 7,372 Total lease liability $ 8,758 $ 8,933 Weighted average remaining lease term, in years 12.4 12.5 Weighted average discount rate 9.4 % 9.4 % The components of the Company's lease expense are as follows: Three Months Ended March 31, 2023 2022 Lease cost: Operating lease expense $ 463 $ 409 Variable lease expense 59 49 Total lease expense $ 522 $ 458 8. Capitalization ATM Program The Company sold 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 Program") finalized on December 31, 2020, under which Cowen acted as the Company's agent and/or principal and could 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 were made pursuant to the Company's effective "shelf" registration statement on Form S-3. There were no shares issued under the ATM Program during the three months ended March 31, 2023 and 2022. As of March 31, 2023, there was a remaining $ 102.5 million available for issuance under the ATM Program. The ATM Program expired on May 4, 2023. 15 9. Stock-Based Compensation In 2017, the Company adopted the 2017 IPO Stock Plan (the “Plan”), which governs the issuance of stock options and restricted stock 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. The Company has historically granted stock options and restricted stock awards to its employees. In February 2023, the Company began issuing restricted stock units and performance-based restricted stock units to certain employees. Stock Options 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 287,600 and 1,179,500 stock options to employees, non-employees, and directors of the Company during the three months ended March 31, 2023 and 2022, respectively. The following table summarizes the Company’s stock option activity: Stock Options Outstanding Weighted- average Exercise Price Weighted- average Remaining Contractual Life (Years) Aggregate Intrinsic Value (In thousands) (1) Outstanding at December 31, 2022 3,582,181 $ 61.15 8.7 $ 64,880 Granted 287,600 $ 81.83 Exercised ( 42,021 ) $ 53.54 Cancelled or forfeited ( 42,625 ) $ 65.59 Expired — $ — Outstanding at March 31, 2023 3,785,135 $ 62.75 8.5 $ 66,066 Exercisable at March 31, 2023 961,428 $ 55.08 7.6 $ 24,033 (1) Aggregate intrinsic value represents the difference between the closing stock price of our common stock on March 31, 2023 and the exercise price of outstanding in-the-money options. The total intrinsic value (the amount by which the fair market value exceeds the exercise price) of stock options exercised during the three months ended March 31, 2023 and 2022 was $ 1.1 million and $ 36 thousand, respectively The weighted-average grant-date fair value per share of options granted to employees, non-employees, and directors during the three months ended March 31, 2023 and 2022 was $ 56.86 and $ 43.09 , respectively. There was $ 109.2 million of unrecognized stock-based compensation expense related to employees', non-employees', and directors’ option awards that is expected to be recognized over a weighted-average period of 2.8 years as of March 31, 2023. The Company has recorded stock-based compensation expense related to the issuance of stock option awards in the condensed consolidated statements of operations for the three months ended March 31, 2023 and 2022 as follows (in thousands): Three Months Ended March 31, 2023 2022 Research and development $ 2,353 $ 1,368 General and administrative 7,108 4,582 Total stock-based compensation $ 9,461 $ 5,950 The fair value of options was estimated at the date of grant using the Black-Scholes valuation model with the following weighted-average assumptions for the three months ended March 31, 2023 and 2022: 16 Three Months Ended March 31, 2023 2022 Expected stock price volatility 75 % 78 % Expected term of the award (years) 6.2 6.2 Risk-free interest rate 4.06 % 1.79 % Weighted average exercise price $ 81.83 $ 62.53 Forfeiture rate — % — % Dividend yield — % — % Restricted Stock Awards Restricted stock awards ("RSAs") granted to employees vest ratably over a four -year period. The Company granted zero RSAs to employees of the Company during each of the three months ended March 31, 2023 and March 31, 2022. Number of Shares Weighted Average Grant Date Fair Value Non-vested RSAs as of December 31, 2022 66,600 $ 78.89 Granted — $ — Vested ( 12,649 ) $ 78.89 Surrendered for taxes ( 9,551 ) $ 78.89 Non-vested RSAs as of March 31, 2023 $ 44,400 $ 78.89 There was $ 3.3 million of unrecognized stock-based compensation expense related to employees’ RSAs that is expected to be recognized over a weighted-average period of 1.9 years as of March 31, 2023. The Company recorded stock-based compensation expense related to RSAs in the condensed consolidated statement of operations for the three months ended March 31, 2023 and 2022 as follows (in thousands): Three Months Ended March 31, 2023 2022 General and administrative $ 432 $ 480 Total stock-based compensation $ 432 $ 480 Restricted Stock Units Restricted stock units (“RSUs”) granted to employees vest ratably over a four-year period. The Company granted 186,900 and zero RSUs to employees of the Company during the three months ended March 31, 2023, and 2022, respectively. Number of Shares Weighted Average Grant Date Fair Value Non-vested RSUs as of December 31, 2022 — Granted 186,900 $ 81.91 Vested — Surrendered or forfeited — Non-vested RSUs as of March 31, 2023 186,900 $ 81.91 There was $ 15.0 million of unrecognized stock-based compensation expense related to employees’ RSU awards that is expected to be recognized over a weighted-average period of 3.9 years as of March 31, 2023. 17 The Company recorded stock-based compensation expense related to RSUs in the condensed consolidated statement of operations for the three months ended March 31, 2023 and 2022 as follows (in thousands): Three Months Ended March 31, 2023 2022 Research and Development $ 143 $ — General and administrative 186 — Total stock-based compensation $ 329 $ — Performance-Based Restricted Stock Units Performance-based restricted stock units (“PSUs”) granted to employees vest ratably over two years based upon continued service through the vesting date and the achievement of specific regulatory and commercial performance criteria as determined by the Compensation Committee of the Company’s Board of Directors. The performance criteria are to be completed by the end of the year in which the PSU awards were granted. Each PSU represents the right to receive one share of the Company's common stock upon vesting. The Company recognizes stock-based compensation expense for the fair value of the PSU awards relating to the portion of the awards that are probable of vesting over the service period. On a quarterly basis, management estimates the probable number of PSU’s that would vest until such time that the ultimate achievement of the performance criteria are known. As of March 31, 2023, the Company estimates that 100 % of the PSUs granted will be eligible to vest. The Company granted 60,000 and zero PSUs to employees of the Company during the three months ended March 31, 2023 and 2022, respectively. Number of Shares Weighted Average Grant Date Fair Value Non-vested PSUs as of December 31, 2022 — Granted 60,000 $ 81.91 Vested — Surrendered or forfeited — Non-vested PSUs as of March 31, 2023 60,000 $ 81.91 There was $ 4.7 million of unrecognized stock-based compensation expense related to employees’ PSU awards that is expected to be recognized over a weighted-average period of 1.9 years as of March 31, 2023. The Company recorded stock-based compensation expense related to PSUs in the condensed consolidated statement of operations for the three months ended March 31, 2023 and 2022 as follows (in thousands): Three Months Ended March 31, 2023 2022 General and administrative $ 215 $ — Total stock-based compensation $ 215 $ — Shares remaining available for grant under the Company’s stock incentive plan were 1,005,626 , with a sublimit for incentive stock options of 2,629 , at March 31, 2023. We capitalize the portion of stock-based compensation that relates to work performed on the construction of manufacturing facilities. There was $ 162 thousand and $ 141 thousand of stock-based compensation that was capitalized in the three months ended March 31, 2023 and 2022, respectively. 18 10. Subsequent Events The Company evaluates events or transactions that occur after the balance sheet date, but prior to the issuance of the financial statements, to identify matters that require recognition or disclosure. The Company concluded that no subsequent events have occurred that would require recognition or disclosure in the condensed consolidated financial statements. 19