Krystal Biotech, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read together with the unaudited condensed consolidated financial statements and related notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q and with the audited financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, as filed with the SEC on February 27, 2023. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements include all statements that are not historical facts and can be identified by terms such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would,” or similar expressions and the negatives of those terms. These statements relate to future events or to our future operating or financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. Some of such factors include, but are not limited to: • the initiation, timing, cost, progress and results, of our research and development activities, preclinical studies and clinical trials for our product candidates; • the timing, scope or results of regulatory filings and approvals, including timing of final U.S. Food and Drug Administration (“FDA”) and other regulatory approval of our product candidates; • our ability to achieve certain accelerated or orphan drug designations from the FDA; • changes in our estimates regarding the potential market opportunity for our FDA-approved product, VYJUVEK TM (beremagene geperpavec-svdt) (also known as “B-VEC” where not approved), and our product candidates; • our ability to raise capital to fund our operations; • increases in costs associated with our research and development programs for our product candidates; • increases in our general and administrative expenses; • risks related to our ability to successfully develop and commercialize our product candidates; • our ability to identify and develop new product candidates; • our ability to identify, recruit and retain key personnel; • risks related to our marketing and manufacturing capabilities and strategy; • our business model and strategic plans for our business, product candidates and technology; • the cost of building a medical affairs and commercial organization, including a sales force in anticipation of commercialization of any of our product candidates; • the rate and degree of market acceptance and clinical utility of our product candidates and gene therapy, in general; • our competitive position and the success of competing therapies; • our intellectual property position and our ability to protect and enforce our intellectual property; • our financial performance; • our ability to establish and maintain collaborations; • our estimates regarding expenses, future revenue, capital requirements and needs for additional financing; • our ability to successfully avoid or resolve any litigation, intellectual property or other claims, that may be brought against us; 20 • global economic conditions, including the recent rise in inflation and interest rates and recent bank failures; and • the impact of changes in laws and regulations. Forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in (i) Item 1A of Part II of this Quarterly Report on Form 10-Q, (ii) “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, (iii) Exhibit 99.2 to our Form 8-K filed with the Securities and Exchange Commission (“SEC”) on May 19, 2023, and (iv) other filings we make with the SEC from time to time. Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this Quarterly Report. You should read this Quarterly Report completely and with the understanding that our actual future results may be materially different from what we expect. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. Throughout this Form 10-Q, unless the context requires otherwise, all references to “Krystal,” “the Company,” we,” “our,” “us” or similar terms refer to Krystal Biotech, Inc., together with its consolidated subsidiaries. Web links throughout this document are provided for convenience only and are not intended to be active hyperlinks to the referenced websites. No content on the referenced websites shall be deemed incorporated by reference into this Quarterly Report on Form 10-Q. Overview We are a commercial-stage biotechnology company focused on the discovery, development and commercialization of genetic medicines to treat diseases with high unmet medical needs. Our approach leverages our patented platform that is based on engineered Herpes Simplex Virus-1 (“HSV-1”) vector to deliver therapeutic transgenes to cells of interest in multiple organ systems. The cell’s own machinery then transcribes and translates the transgene to treat the disease. We formulate our vectors for non-invasive or minimally invasive routes of administration at a healthcare professional’s office or in the patient’s home by a healthcare professional. Our innovative technology platform is supported by two in-house, commercial scale CGMP manufacturing facilities. 21 Our US FDA Approved Product VYJUVEK On May 19, 2023, the United States Food and Drug Administration (the “FDA”) approved VYJUVEK, the first ever re-dosable gene therapy for treating patients, greater than six months of age or older, suffering from Dystrophic Epidermolysis Bullosa (“DEB”), a rare and severe monogenic disease that affects the skin and mucosal tissues and is caused by one or more mutations in a gene called COL7A1 . VYJUVEK is a redosable topical gel containing our novel vector designed to deliver two copies of the COL7A1 transgene to a patient’s skin cells to produce the COL7 protein. VYJUVEK is the first and only medicine approved by the FDA for the treatment of DEB, both recessive and dominant, that can be administered by a healthcare professional in either a healthcare professional setting or in the home. We possess exclusive, worldwide rights to develop, manufacture, and commercialize VYJUVEK and all our pipeline candidates. Commercialization in the US began immediately following FDA approval, including: (i) accepting Patient Start Forms; (ii) efforts to support physician education and utilization; and (iii) facilitating patients’ access to therapy through Krystal Connect TM , our personalized support program. Through Krystal Connect, we have been accepting Patient Start Forms submitted by healthcare professionals, and we are working with payers for coverage authorization by way of prior authorizations and medical exceptions. As of June 30, 2023, the Company received 121 Patient Start Forms of which 30 Patient Start Forms were generated for patients with dominant DEB. Going forward, we intend to report on the number of Patient Start Forms submitted to Krystal Connect in our quarterly reports for the first three quarters following VYJUVEK approval and then transition to reporting the number of Patients on Therapy starting in Q1 2024. In July 2023, we received a positive opinion from the European Medicines Agency (the “EMA”) Pediatric Committee on the Pediatric Investigation Plan for B-VEC for the treatment of DEB with no additional studies required. We plan to submit a market authorization application to the EMA in the second half of 2023 and anticipate a potential launch in the European Union in the second half of 2024. In July 2023, the Pharmaceuticals and Medical Agency in Japan officially accepted the open label extension study of B-VEC, and we intend to start an open label extension study of B-VEC in Japan in the second half of 2023 and file for approval in Japan in 2024. Pipeline Highlights and Recent Developments Respiratory KB407 is an inhaled (nebulized) formulation of our novel vector designed to deliver two copies of the full-length cystic fibrosis transmembrane conductance regulator ("CFTR") transgene for the treatment of Cystic Fibrosis (“CF”), a serious rare lung disease caused by missing or mutated CFTR protein. On July 3, 2023, we announced that we dosed the first patient in a Phase 1 clinical trial (“CORAL-1/US”) of KB407 for the treatment of CF, regardless of a patient’s underlying genotype, We anticipate announcing data from the Phase 1 study in 2024. Details of the Phase 1 study can be found at www.clinicaltrials.gov under NCT identifier NCT05504837. We faced pandemic, logistical and recruiting challenges with respect to our intended Phase 1 clinical study in Australia (CORAL-AU) and, as we were successful in initiating our CORAL-1/US study prior to the initiation of our CORAL-AU study, we have terminated our study in Australia to focus on completing the Phase 1 study entirely in the US. The Company is using the Aerogen Solo® Nebulizer System and Aerogen® Ultra in its Phase 1 CORAL-1/US study evaluating KB407. KB408 is an inhaled (nebulized) formulation of our novel vector designed to deliver two copies of the SERPINA1 transgene, that encodes for normal human alpha-1 antitrypsin protein, for the treatment of alpha-1 antitrypsin deficiency ("AATD"). We presented preclinical pharmacology data for KB408 at the European Society of Gene & Cell Therapy Virtual Congress that was held October 19-22, 2021. We are planning to file an Investigational New Drug (“IND”) application for KB408 to treat AATD patients in the second half of 2023. Oncology On July 26, 2023, we announced that we expanded our R&D pipeline to oncology, leveraging our prior experience in skin and lung tissue for local delivery of immune boosting cytokines to the tumor microenvironment. Our lead oncology product candidate, KB707, is a modified HSV-1 vector designed to deliver genes encoding both human IL-12 and IL-2 to the tumor microenvironment and promote systemic immune-mediated tumor clearance. KB707 targets solid tumors that are accessible via intratumoral injection or inhalation, and we intend to advance both routes of administration into clinical studies. The FDA has accepted our IND application to evaluate intratumoral injection of KB707 in a clinical trial to treat patients with locally advanced or metastatic solid tumor malignancies. The FDA also granted KB707 fast track designation to 22 delay disease progression in the treatment of patients with anti-PD-1 relapsed/refractory locally advanced or metastatic melanoma. Details of the Phase 1 study can be found www.clinicaltrials.gov under NCT identifier NCT05970497. We expect to dose our first patient in the second half of 2023. We plan to file an amendment to our existing KB707 IND in the second half of 2023 to allow us to evaluate inhaled (nebulized) KB707 in a clinical trial to treat tumors in a patient’s lungs. We expect to dose our first patient with inhaled KB707 in the first half of 2024. Dermatology KB105 is a topical gel containing our novel vector designed to deliver two copies of the TGM1 transgene for the treatment of TGM1-ARCI, a serious rare skin disorder caused by missing or mutated TGM1 protein. In July 2021, we announced complete data from the Phase 1/2 trial, a randomized placebo-controlled study, showing repeat topical KB105 dosing continued to be well tolerated with no adverse events or evidence of immune response. Details of the Phase 1/2 study can be found at www.clinicaltrials.gov under NCT identifier NCT04047732. We are working with the FDA to ensure that we are aligned on the clinical endpoints in the pivotal trial prior to initiating a Phase 2 study in pediatric patients. As such, we now intend to commence the KB105 Phase 2 study in 2024. KB104 is a topical gel formulation of our novel vector designed to deliver two copies of the SPINK5 transgene for the treatment of Netherton Syndrome, a debilitating autosomal recessive skin disorder caused by missing or mutated SPINK5 protein. The FDA has granted KB104 rare pediatric designation for the treatment of Netherton Syndrome. As we continually evaluate the priority of our expanding pipeline portfolio, we now anticipate filing an IND application and initiating a clinical trial of KB104 to treat patients with Netherton Syndrome in late 2024. Aesthetics We are also leveraging the ability of our platform to deliver proteins of interest to cells in the skin in the context of aesthetic medicine via our wholly-owned subsidiary, Jeune Aesthetics, Inc. ("Jeune"). KB301 is a solution formulation of our novel vector for intradermal injection designed to deliver two copies of the COL3A1 transgene to address signs of aging or damaged skin caused by declining levels of, or damaged proteins within the extracellular matrix, including type III collagen. In April 2023, Jeune treated the first subject in the Phase 1, Cohort 3 study of KB301 for the improvement of lateral canthal lines at rest. The Phase 1, Cohort 3 study is being conducted at a single center as an open label study to evaluate two different doses of KB301 in up to 20 subjects. Improvement of lateral canthal lines at rest (“LCL”) was selected as a target indication for KB301 based upon the Phase 1 safety, efficacy and durability studies, which evaluated KB301 in the lower and upper cheek, including the lateral canthal region. Subjects will be followed for three months after KB301 treatment, and Jeune plans to announce results from this study in the second half of 2023. Following completion of this study, Jeune plans to initiate a Phase 2 study of KB301 in LCL. Details of the Phase 1 study can be found at www.clinicaltrials.gov under NCT identifier (NCT04540900). Jeune has several other aesthetic genetic medicine product candidates in various stages of preclinical development. Business Highlights and Recent Developments In May 2023, the Company entered into a securities purchase agreement for the sale of 1,729,729 shares of its common stock at $92.50 per share in a private placement (the “PIPE”) to certain qualified institutional buyers. The PIPE financing was led by Avoro Capital Advisors and Redmile Group, LLC with participation from Braidwell LP and Frazier Life Sciences. Net proceeds from the PIPE were $160.0 million. COVID-19 Update To date the impact of the COVID-19 pandemic on our business and clinical trials in the U.S. has been minimal. Outside of the U.S., we experienced pandemic-related delays in clinical trial initiation in Australia. We will closely monitor any potential impact that future public health crises may have on our clinical trials. For additional information, please see "The effect of the COVID-19 pandemic or similar public health crises on our operations and the operations of our third-party partners could cause a disruption of the development efforts for our product candidates and adversely impact our business" in Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, as filed with the SEC on February 27, 2023. 23 Financial Overview Revenue On May 19, 2023, we received FDA approval for VYJUVEK for the treatment of DEB in patients six months or older. We have not generated any revenue from the sale of products or other sources as of June 30, 2023. VYJUVEK became commercially available upon approval and we expect to begin generating revenue from VYJUVEK product sales in 3Q 2023. Our future revenue will fluctuate from quarter to quarter for many reasons, including the uncertain timing and amount of any such sales. Cost of Goods Sold As noted above, we expect to generate revenue and cost of goods sold for VYJUVEK product sales in 3Q 2023. Due to the timing of FDA approval and the Company’s manufacturing schedule, a majority of the costs associated with VYJUVEK inventory manufactured for the commercial launch was previously expensed as research and development. The Company anticipates that the previously expensed inventory will favorably impact the Company’s gross margin. The Company is still evaluating the impact of previously expensed inventories on future costs of goods sold. Research and Development Expenses Research and development expenses consist primarily of costs incurred to advance our preclinical and clinical candidates, which include: • expenses incurred under agreements with contract manufacturing organizations, contract research organizations, consultants and other vendors that conduct our preclinical activities; • costs of acquiring, developing and manufacturing clinical trial materials and lab supplies; • facility costs, depreciation and other expenses, which include direct expenses for rent and maintenance of facilities and other supplies; and • payroll related expenses, including stock-based compensation expense. We expense internal research and development costs to operations as incurred. We expense third-party costs for research and development activities, such as the manufacturing of preclinical and clinical materials, based on an evaluation of the progress to completion of specific tasks such as manufacturing of drug substance, fill/finish and stability testing, which is provided to us by our vendors. We expect our research and development expenses will increase as we continue the manufacturing of preclinical and clinical materials and manage the clinical trials of, and seek regulatory approval for, our product candidates and expand our product portfolio. In the near term, we expect that our research and development expenses will increase as we resume dosing with KB105 Phase 1/2 clinical trial, continue the Phase 1, Cohort 3 study and initiate a Phase 2 trial for KB301, continue the Phase 1 trial for KB407, initiate a Phase 1 trial for KB707, initiate a Phase 1 trial for KB104, and incur preclinical expenses for our other product candidates. Due to the numerous risks and uncertainties associated with product development, we cannot determine with certainty the duration, costs and timing of clinical trials, and, as a result, the actual costs to complete clinical trials may exceed the expected costs. General and Administrative Expenses General and administrative expenses consist principally of salaries and other related costs, including stock-based compensation for personnel in our executive, commercial, business development and other administrative functions. General and administrative expenses also include professional fees associated with corporate and intellectual property-related legal expenses, consulting and accounting services, facility-related costs and expenses associated with obtaining and maintaining patents. Other general and administrative costs include travel expenses. We anticipate that our general and administrative expenses will increase in the future to support the continued research and development of our product candidates and our commercial and operational goals. These increases will likely include increased costs for insurance, costs related to the hiring of additional personnel and payments to outside consultants, lawyers and accountants, among other expenses. Additionally, we anticipate that we will continue to increase our salary and personnel costs and other expenses as a result of our preparation for commercial operations. ASTRA Capital Expenditures In March 2021, we closed on the purchase of the building that was constructed to house our second CGMP facility, ASTRA and we are currently in the process of completing the interior build-out of this facility.. The Company placed a portion 24 of ASTRA into service during the three and six months ended June 30, 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 certain building improvements 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. Interest and Other Income Interest and other income consists primarily of income earned from our cash, cash equivalents and investments. Critical Accounting Policies, and Significant Judgments and Estimates There have been no significant changes during the three and six months ended June 30, 2023 to our critical accounting policies, significant judgments and estimates as disclosed in our management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2022. 25 Results of Operations Three Months Ended June 30, 2023 and 2022 Three Months Ended June 30, 2023 2022 Change (In thousands) (unaudited) Expenses Research and development $ 12,144 $ 10,890 $ 1,254 General and administrative 25,904 17,863 8,041 Total operating expenses 38,048 28,753 9,295 Loss from operations (38,048) (28,753) (9,295) Other Income Interest and other income, net 4,838 645 4,193 Net loss $ (33,210) $ (28,108) $ (5,102) Research and Development Expenses Research and development expenses increased $1.3 million in the three months ended June 30, 2023 compared to the three months ended June 30, 2022. The increase was primarily due to increased payroll related expenses of $2.3 million, which were primarily driven by an increase in headcount to support overall growth, and includes a $868 thousand increase in stock-based compensation, an increase in depreciation of $644 thousand, and increased other research and development expenses of $188 thousand, which consisted of increased facilities and license and regulatory fees, offset by decreased outsourced research and development costs. The increase was partially offset by decreases in preclinical, clinical and pre-commercial manufacturing expenses of $1.8 million, due to the costs related to the manufacturing of VYJUVEK following FDA approval being recorded as inventory, and fewer receipts of raw materials and lab supplies period over period that were purchased for planned manufacturing runs of the Company’s products. Research and development expenses consist primarily of costs relating to the preclinical and clinical development of our product candidates and preclinical programs. Direct research and development expenses associated with our product candidates or development programs consist of compensation related expenses for our internal resources conducting research and development activities, fees paid to external consultants, contract research organizations, or for costs to support our clinical trials. Indirect research and development expenses that are allocated to our product candidates or programs consist of lab supplies and software fees. A significant portion of our research and development expenses are not allocated to individual product candidates and preclinical programs, as certain expenses benefit multiple product candidates and pre-clinical programs. For example, we do not allocate costs associated with stock-based compensation, manufacturing of preclinical or clinical development products or costs relating to facilities and equipment to individual product candidates and preclinical programs. 26 The following table summarizes our research and development expense by product candidate or program, and for unallocated expenses, by type, for the three months ended June 30, 2023 and 2022: Three Months Ended June 30, (in thousands) 2023 2022 Change VYJUVEK $ 2,130 $ 1,730 $ 400 KB105 10 90 (80) KB407 442 535 (93) KB301 77 160 (83) KB707 943 — 943 Other dermatology programs 6 68 (62) Other respiratory programs 309 535 (226) Other aesthetics programs 1 57 (56) Other research programs 131 233 (102) Other development programs 194 141 53 Stock-based compensation 2,863 1,995 868 Other unallocated manufacturing expenses (1) 3,536 4,369 (833) Other unallocated expenses (2) 1,502 977 525 Research and development expense $ 12,144 $ 10,890 $ 1,254 (1) Unallocated manufacturing expenses consist of shared pre-commercial manufacturing costs, primarily relating to raw materials, contract manufacturing, contract testing, process development, quality control and quality assurance activities and other manufacturing costs which support the development of multiple product candidates in our preclinical and clinical development programs. (2) Other unallocated expenses include rental, storage, depreciation, and other facility related costs that we do not allocate to our individual product candidates. As noted above, research and development expense increased $1.3 million in the three months ended June 30, 2023 compared to the three months ended June 30, 2022. Expenses for VYJUVEK increased $400 thousand, due to increased OLE clinical trial costs, license and regulatory costs and increased allocated research and development expenses. Spending on KB707 programs increased by $943 thousand due primarily to increased internal resources and other payroll related costs to support continued research and increases in contract research expenses. Stock-based compensation increased $868 thousand due to an increase in internal resources to support overall research and development growth. Additionally, other unallocated expenses increased $525 thousand primarily related to increases in depreciation expense. These increases were offset by a decrease in other unallocated manufacturing expenses of $833 thousand due to the costs related to the manufacturing of VYJUVEK following FDA approval being recorded as inventory and fewer receipts of raw materials period over period that were purchased for planned manufacturing runs of the Company’s products. General and Administrative Expenses General and administrative expenses increased $8.0 million in the three months ended June 30, 2023 as compared to the three months ended June 30, 2022. Higher general and administrative spending was due largely to increases in payroll related expenses of approximately $5.9 million, which was primarily driven by an increase in headcount in our commercial and other administrative functions to support overall growth and preparation for commercialization, and includes a $2.3 million increase in stock-based compensation, increased legal and professional costs of $525 thousand, an increase in costs in costs due to preparation for commercialization and launch of VYJUVEK including increased information technology infrastructure costs of $643 thousand, increased software-related costs of $411 thousand, increased marketing costs of $404 thousand, and increased travel related costs of $274 thousand, and an increase in other general and administrative expenses of $165 thousand. These increases were partially offset by a decreased business development costs of $307 thousand. Interest and Other Income Interest and other income for the three months ended June 30, 2023 and 2022 was $4.8 million and $645 thousand, respectively, and consisted of interest and dividend income earned from our cash, cash equivalents and investments. The increase in interest and dividend income is the result of increased investment activity and more favorable interest rates as compared to the prior period. 27 Six Months Ended June 30, 2023 and 2022 Six Months Ended June 30, 2023 2022 Change (In thousands) (unaudited) Expenses Research and development $ 24,432 $ 20,204 $ 4,228 General and administrative 49,939 33,771 16,168 Litigation settlement 12,500 25,000 (12,500) Total operating expenses 86,871 78,975 7,896 Loss from operations (86,871) (78,975) (7,896) Other Income Interest and other income, net 8,364 902 7,462 Net loss $ (78,507) $ (78,073) $ (434) Research and Development Expenses Research and development expenses increased $4.2 million in the six months ended June 30, 2023 compared to the six months ended June 30, 2022. The increase was primarily due to increased payroll related expenses of $4.7 million, which were primarily driven by an increase in headcount to support overall growth, and includes a $2.0 million increase in stock-based compensation, an increase in depreciation of $1.3 million, and increased other research and development expenses of $1.1 million, primarily due to facilities expenses and licenses and regulatory fees. These increases were partially offset by decreases in preclinical, clinical and pre-commercial manufacturing expenses of $2.9 million, due to the costs related to the manufacturing of VYJUVEK following FDA approval being recorded as inventory and and due fewer receipts of raw materials and lab supplies period over period that were purchased for planned manufacturing runs of the Company’s products. The following table summarizes our research and development expense by product candidate or program, and for unallocated expenses, by type, for the six months ended June 30, 2023 and 2022: Six Months Ended June 30, (in thousands) 2023 2022 Change VYJUVEK 4,520 3,332 $ 1,188 KB105 243 106 137 KB407 819 931 (112) KB301 329 382 (53) KB707 1,408 — 1,408 Other dermatology programs 14 67 (53) Other respiratory programs 419 397 22 Other aesthetics programs 14 67 (53) Other research programs 258 440 (182) Other development programs 529 286 243 Stock-based compensation 5,359 3,363 1,996 Other unallocated manufacturing expenses (1) 7,456 8,972 (1,516) Other unallocated expenses (2) 3,064 1,861 1,203 Research and development expense $ 24,432 $ 20,204 $ 4,228 (1) Unallocated manufacturing expenses consist of shared pre-commercial manufacturing costs, primarily relating to raw materials, contract manufacturing, contract testing, process development, quality control and quality assurance activities and other manufacturing costs which support the development of multiple product candidates in our preclinical and clinical development programs. (2) Other unallocated expenses include rental, storage, depreciation, and other facility related costs that we do not allocate to our individual product candidates. 28 As noted above, research and development expense increased $4.2 million in the six months ended June 30, 2023 compared to the six months ended June 30, 2022. Expenses for VYJUVEK increased $1.2 million, due to increased payroll related expenses to support pre-approval activities, clinical trial costs, license and regulatory costs and increased allocated research and development expenses. Due to the expansion of our research and development pipeline to oncology, KB707 spending increased $1.4 million primarily due to increased payroll related costs and increased contract research costs. Stock-based compensation increased $2.0 million due to an increase in internal resources to support overall research and development growth. Additionally, other unallocated expenses increased $1.2 million primarily related to increases in depreciation expense. These increases were offset by a decrease in other unallocated manufacturing expenses of $1.5 million due to the costs related to the manufacturing of VYJUVEK following FDA approval being recorded as inventory and due to fewer receipts of raw materials period over period that were purchased for planned manufacturing runs of the Company’s products. General and Administrative Expenses General and administrative expenses increased $16.2 million in the six months ended June 30, 2023 as compared to the six months ended June 30, 2022. Higher general and administrative spending was due largely to increases in payroll related expenses of approximately $12.9 million, which was primarily driven by an increase in headcount in our commercial and other administrative functions to support overall growth and preparation for commercialization, and includes a $5.2 million increase in stock-based compensation, an increase in costs due to preparation for commercialization and launch of VYJUVEK including increased marketing costs of $1.3 million, increased information technology infrastructure costs of $1.1 million, increased software-related costs of $664 thousand, increased travel related costs of $505 thousand, and an increase in other general and administrative expenses of $557 thousand, which consisted primarily of increased conference costs and utilities costs. These increases were partially offset by decreases in business development costs of $517 thousand and medical affairs costs of $397 thousand. Litigation Settlement Litigation settlement for the six months ended June 30, 2023 and 2022 was $12.5 million and $25.0 million, respectively, and consisted of amounts related to the settlement of litigation with PeriphaGen. See "Legal Proceedings" in Note 6 of the notes to condensed consolidated financial statements included in this Form 10-Q for more information. Interest and Other Income Interest and other income for the six months ended June 30, 2023 and 2022 was $8.4 million and $902 thousand, respectively, and consisted of interest and dividend income earned from our cash, cash equivalents and investments. The increase in interest and dividend income is the result of increased investment activity and more favorable interest rates as compared to the prior period. Liquidity and Capital Resources Overview At June 30, 2023, our cash, cash equivalents and short-term investments balance was approximately $477.5 million. Since operations began, we have incurred operating losses. Our net losses were $33.2 million and $78.5 million for the three and six months ended June 30, 2023, respectively, and $28.1 million and $78.1 million for the three and six months ended June 30, 2022, respectively. At June 30, 2023, we had an accumulated deficit of $359.3 million. We believe that our cash, cash equivalents and short-term investments as of June 30, 2023 will be sufficient to allow us to fund operations for at least 12 months from the filing date of this Quarterly Report on Form 10-Q. As we continue to incur losses, a transition to profitability is dependent upon the successful development, approval and commercialization of our product candidates and the achievement of a level of revenues adequate to support our cost structure. Furthermore, we expect to incur increasing costs associated with satisfying regulatory and quality standards, maintaining product and clinical trials, and furthering our efforts around our current and future product candidates. We may never achieve profitability, and unless and until we do, we will continue to need to raise additional capital or obtain financing from other sources. Costs related to clinical trials can be unpredictable and therefore there can be no guarantee that we will have sufficient capital to fund our commercialization of VYJUVEK, our continued clinical studies of KB105, KB407, KB301 or our planned clinical and preclinical studies for our other product candidates, or our operations. Further, we do not expect to generate any product revenues until the third quarter of 2023, at the earliest. While we are in the process of building out our internal vector manufacturing capacity, some of our manufacturing activities will be contracted out to third parties. Additionally, we currently utilize third-party contract research organizations to carry out some of our clinical development activities. As we seek to obtain regulatory approval for our product candidates, we expect to continue to incur significant manufacturing and commercialization expenses as we prepare for product sales, marketing, commercial manufacturing, packaging, labeling and distribution. 29 Furthermore, pursuant to our settlement agreement with PeriphaGen, we paid $12.5 million upon the approval of VYJUVEK by the FDA, and will be required to pay three additional $12.5 million contingent milestone payments upon reaching $100.0 million in total cumulative sales, $200.0 million in total cumulative sales and $300.0 million in total cumulative sales. Our funds may not be sufficient to enable us to conduct pivotal clinical trials for, seek marketing approval for or commercial launch of VYJUVEK, KB105, KB407, KB301, KB707 or any other product candidate. Accordingly, to obtain marketing approval for and to commercialize these or any other product candidates, we may be required to obtain further funding through public or private equity offerings, debt financings, collaboration and licensing arrangements or other sources. Adequate additional financing may not be available to us on acceptable terms, if at all. Our failure to raise capital when needed could have a negative effect on our financial condition and our ability to pursue our business strategy. Operating Capital Requirements Our primary uses of capital are, and we expect will continue to be for the near future, compensation and related expenses, manufacturing costs for preclinical and clinical materials, third-party clinical trial research and development services, laboratory and related supplies, pre-commercialization costs, legal and other regulatory expenses, payments of settlement amounts to PeriphaGen and general overhead costs. In order to complete the process of obtaining regulatory approval for any of our product candidates and to build the sales, manufacturing, marketing and distribution infrastructure that we believe will be necessary to commercialize our product candidates, if approved, we may require substantial additional funding. We have based our projections of operating capital requirements on assumptions that may prove to be incorrect, and we may use all of our available capital resources sooner than we expect. Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical products, we are unable to estimate the exact amount of our operating capital requirements. Our future funding requirements will depend on many factors, including, but not limited to: • the costs needed to commercialize and market our lead product, VYJUVEK; • the cost of our OLE study for VYJUVEK; • the progress, timing and costs of clinical trials of our current product candidates; • the progress, timing and costs of manufacturing of VYJUVEK and revenue received from commercial sale of VYJUVEK; • the continued development and the filing of an IND application for current and future product candidates; • the initiation, scope, progress, timing, costs and results of drug discovery, laboratory testing, manufacturing, preclinical studies and clinical trials for any product candidates that we may pursue in the future, if any; • the costs of maintaining our own commercial-scale CGMP manufacturing facilities; • the outcome, timing and costs of seeking regulatory approvals; • the costs associated with the manufacturing process development and evaluation of third-party manufacturers; • the extent to which the costs of our product candidates, if approved, will be paid by health maintenance, managed care, pharmacy benefit and similar healthcare management organizations, or will be reimbursed by government authorities, private health coverage insurers and other third-party payors; • the costs of commercialization activities for our current and future product candidates if we receive marketing approval for such product candidates we may develop, including the costs and timing of establishing product sales, medical affairs, marketing, distribution and manufacturing capabilities; • subject to receipt of marketing approval, if any, revenue received from commercial sale of our current and future product candidates; • the terms and timing of any future collaborations, licensing, consulting or other arrangements that we may establish; • the amount and timing of any payments we may be required to make, or that we may receive, in connection with the licensing, filing, prosecution, maintenance, defense and enforcement of any patents or other intellectual property rights, including milestone and royalty payments and patent prosecution fees that we are obligated to pay pursuant to our license agreements; • our current license agreements remaining in effect and our achievement of milestones under those agreements; • our ability to establish and maintain collaborations and licenses on favorable terms, if at all; and • the extent to which we acquire or in-license other product candidates and technologies. 30 We may need to obtain substantial additional funding in order to receive regulatory approval and to commercialize our product candidates. To the extent that we raise additional capital through the sale of common stock, convertible securities or other equity securities, the ownership interests of our existing stockholders may be materially diluted and the terms of these securities could include liquidation or other preferences that could adversely affect the rights of our existing stockholders. In addition, debt financing, if available, would result in increased fixed payment obligations and may involve agreements that include restrictive covenants that limit our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends, that could adversely affect our ability to conduct our business. If we are unable to raise capital when needed or on attractive terms, we could be forced to significantly delay, scale back or discontinue the development or commercialization of our product candidates, seek collaborators at an earlier stage than otherwise would be desirable or on terms that are less favorable than might otherwise be available, and relinquish or license, potentially on unfavorable terms, our rights to our product candidates that we otherwise would seek to develop or commercialize ourselves. Sources and Uses of Cash The following table summarizes our sources and uses of cash for the six months ended June 30, 2023 and 2022 (in thousands): Six Months Ended June 30, 2023 2022 (unaudited) Net cash used in operating activities (60,346) (58,552) Net cash used in investing activities (12,394) (94,132) Net cash provided by financing activities 186,743 30,158 Effect of exchange rate changes on cash and cash equivalents (28) — Net increase (decrease) in cash $ 113,975 $ (122,526) Operating Activities Net cash used in operating activities for the six months ended June 30, 2023 was $60.3 million and consisted primarily of a net loss of $78.5 million adjusted for non-cash items primarily comprised of stock-based compensation expense of $21.8 million, depreciation and amortization of $1.7 million and other adjustments of $2.4 million, and cash used by increases in net working capital of approximately $3.0 million. Net cash used in operating activities for the six months ended June 30, 2022 was $58.6 million and consisted primarily of a net loss of $78.1 million adjusted for non-cash items primarily comprised of depreciation and amortization and stock-based compensation expense of $16.4 million, and including increases from net changes in operating assets and liabilities of approximately $3.1 million. Investing Activities Net cash provided by investing activities for the six months ended June 30, 2023 was $12.4 million and consisted primarily of proceeds of $315.7 million received from the maturities of short-term investments, partially offset by expenditures of $8.2 million on the build-out of our ASTRA facility, leasehold improvement of new office space, and purchases of computer and laboratory equipment, and $320.0 million on the purchase of short-term and long-term investments. Net cash used in investing activities for the six months ended June 30, 2022 was $94.1 million and consisted primarily of expenditures of $33.7 million on the build-out of our ASTRA facility, leasehold improvement of new office space, and purchases of computer and laboratory equipment, $147.3 million on the purchase of short-term and long-term investments, partially offset by proceeds of $86.8 million received from the maturities of short-term investments. Financing Activities Net cash provided by financing activities for the six months ended June 30, 2023 was $186.7 million and consisted primarily of proceeds of $160.0 million received from a private placement equity offering and proceeds of $27.7 million from exercises of stock options, partially offset by $749 thousand used for the employee tax withholding payment for settlement of vested restricted stock awards. Net cash provided by financing activities for the six months ended June 30, 2022 was $30.2 million and consisted primarily of proceeds of $30.8 million received from our ATM Program and exercises of stock options and offset by $649 thousand used for the employee tax withholding payment for settlement of vested restricted stock awards. During the six months 31 ended June 30, 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 underwriting discounts and commissions of approximately $900 thousand. For the six months ended June 30, 2022, the Company received proceeds of $1.7 million from the exercise of stock options. 32