Krystal Biotech, Inc. 10-K

Item 8. Financial Statements and Supplementary Data. INDEX TO FINANCIAL STATEMENTS Reports of Independent Registered Public Accounting F irms ( KPMG, LLP , Pittsburgh, PA (US Firm), PCAOB ID No. 185 ) ( Mayer Hoffman McCann P.C. , San Diego, CA , PCAOB ID No. 199 ) F- 2 Consolidated Balance Sheets as of December 31, 2023 and December 31, 2022 F- 4 Consolidated Statements of Operations and Comprehensive Income ( Loss ) for the Years Ended December 31, 2023, December 31, 2022, and December 31, 2021 F- 5 Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2023, December 31, 2022, and December 31, 2021 F- 6 Consolidated Statements of Cash Flows for the Years Ended December 31, 2023, December 31, 2022, and December 31, 2021 F- 7 Notes to Consolidated Financial Statements F- 8 F-1 Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors Krystal Biotech, Inc.: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Krystal Biotech, Inc. and subsidiaries (the Company) as of December 31, 2023 and 2022, the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2023, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 26, 2024 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters Critical audit matters are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters. /s/ KPMG LLP We have served as the Company’s auditor since 2022. Pittsburgh, Pennsylvania February 26, 2024 F-2 Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Krystal Biotech, Inc.: Opinion on the Financial Statements We have audited the accompanying consolidated statements of operations and comprehensive loss, stockholders’ equity and cash flows of Krystal Biotech, Inc. (the “Company”) for the year ended December 31, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the results of the Company’s operations and their cash flows for the year ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion. We have served as the Company's auditor since 2017, which ended in 2022. /s/ Mayer Hoffman McCann P.C. San Diego, California February 28, 2022 F-3 Krystal Biotech, Inc. Consolidated Balance Sheets (In thousands, except shares and par value data) December 31, 2023 December 31, 2022 Assets Current assets Cash and cash equivalents $ 358,328 $ 161,900 Short-term investments 173,850 217,271 Accounts receivable, net 42,040 — Inventory 6,985 — Prepaid expenses and other current assets 6,706 4,608 Total current assets 587,909 383,779 Property and equipment, net 161,202 161,684 Long-term investments 61,954 4,621 Right-of-use assets 7,027 8,042 Other non-current assets 263 324 Total assets $ 818,355 $ 558,450 Liabilities and Stockholders' Equity Current liabilities Accounts payable $ 4,132 $ 3,981 Current portion of lease liability 1,474 1,561 Accrued expenses and other current liabilities 27,488 23,305 Total current liabilities 33,094 28,847 Lease liability 6,620 7,372 Total liabilities 39,714 36,219 Commitments and contingencies (Note 7) Stockholders' equity Common stock; $ 0.00001 par value; 80,000,000 shares authorized at December 31, 2023 and 2022; 28,236,673 and 25,763,743 shares issued and outstanding at December 31, 2023 and 2022, respectively — — Additional paid-in capital 1,047,830 803,718 Accumulated other comprehensive gain (loss) 638 ( 728 ) Accumulated deficit ( 269,827 ) ( 280,759 ) Total stockholders' equity 778,641 522,231 Total liabilities and stockholders' equity $ 818,355 $ 558,450 The accompanying notes are an integral part of these consolidated financial statements. F-4 Krystal Biotech, Inc. Consolidated Statements of Operations and Comprehensive Income (Loss) Year Ended December 31, (In thousands, except share and per share data) 2023 2022 2021 Product revenue, net $ 50,699 $ — $ — Expenses Cost of goods sold 3,094 — — Research and development 46,431 42,461 27,884 Selling, general and administrative 98,401 77,735 40,391 Litigation settlement 12,500 25,000 — Total operating expenses 160,426 145,196 68,275 Loss from operations ( 109,727 ) ( 145,196 ) ( 68,275 ) Other income (expense) Gain from sale of priority review voucher 100,000 — — Interest and other income, net 22,624 5,221 197 Interest expense — — ( 1,492 ) Income (loss) before income taxes 12,897 ( 139,975 ) ( 69,570 ) Income tax expense ( 1,965 ) — — Net income (loss) 10,932 ( 139,975 ) ( 69,570 ) Unrealized income (loss) on available-for-sale securities and other 1,366 ( 565 ) ( 169 ) Comprehensive income (loss) $ 12,298 $ ( 140,540 ) $ ( 69,739 ) Net income (loss) per common share: Basic $ 0.40 $ ( 5.49 ) $ ( 3.13 ) Diluted $ 0.39 $ ( 5.49 ) $ ( 3.13 ) Weighted-average common shares outstanding: Basic 27,154,190 25,491,721 22,196,846 Diluted 27,751,809 25,491,721 22,196,846 The accompanying notes are an integral part of these consolidated financial statements. F-5 Krystal Biotech, Inc. Consolidated Statements of Stockholders' Equity (In thousands, except shares) Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Stockholders' Equity Shares Amount Balances at January 1, 2021 19,714,220 $ — $ 363,292 $ 6 $ ( 71,214 ) $ 292,084 Issuance of common stock, net 5,493,765 — 355,628 — — 355,628 Stock-based compensation expense — — 15,603 — — 15,603 Unrealized loss on investments and other (1) — — — ( 169 ) — ( 169 ) Net loss — — — — ( 69,570 ) ( 69,570 ) Balances at December 31, 2021 25,207,985 $ — $ 734,523 $ ( 163 ) $ ( 140,784 ) $ 593,576 Issuance of common stock, net 573,637 — 36,063 — — 36,063 Shares surrendered for taxes and forfeitures ( 17,879 ) — ( 649 ) — — ( 649 ) Stock-based compensation expense — — 33,781 — — 33,781 Unrealized loss on investments and other (1) — — — ( 565 ) — ( 565 ) Net loss — — — — ( 139,975 ) ( 139,975 ) Balances at December 31, 2022 25,763,743 $ — $ 803,718 $ ( 728 ) $ ( 280,759 ) $ 522,231 Issuance of common stock, net 2,482,481 — 203,682 — — 203,682 Shares surrendered for taxes ( 9,551 ) — ( 749 ) — — ( 749 ) Stock-based compensation expense — — 41,179 — — 41,179 Unrealized gain on investments and other (1) — — — 1,366 — 1,366 Net income — — — — 10,932 10,932 Balances at December 31, 2023 28,236,673 $ — $ 1,047,830 $ 638 $ ( 269,827 ) $ 778,641 (1) Includes foreign currency translation losses of $ 66 thousand and $ 78 thousand, and a gain of $ 7 thousand for the years ended December 31, 2023, 2022, and 2021, respectively. The accompanying notes are an integral part of these consolidated financial statements. F-6 Krystal Biotech, Inc. Consolidated Statements of Cash Flows Years Ended December 31, (In thousands) 2023 2022 2021 Operating Activities Net income (loss) $ 10,932 $ ( 139,975 ) $ ( 69,570 ) Adjustments to reconcile net income (loss) to net cash used in operating activities Gain from sale of priority review voucher ( 100,000 ) — — Depreciation 5,007 2,643 1,849 (Accretion) amortization ( 1,278 ) 1,412 920 Stock-based compensation expense 39,933 33,230 15,319 Loss on disposal of fixed assets 27 72 — Non-cash interest expense — — 1,492 Realized gain on investments ( 5,092 ) ( 570 ) — Other, net ( 451 ) ( 192 ) ( 454 ) Changes in operating assets and liabilities Accounts receivable ( 42,040 ) — — Inventory ( 4,475 ) — — Prepaid expenses and other current assets ( 908 ) ( 311 ) ( 691 ) Other non-current assets ( 64 ) ( 150 ) 65 Lease liability ( 829 ) ( 647 ) ( 285 ) Accounts payable ( 101 ) ( 1,254 ) 712 Accrued rebates 5,977 — — Accrued expenses and other current liabilities 4,558 5,173 2,705 Net cash used in operating activities ( 88,804 ) ( 100,569 ) ( 47,938 ) Investing Activities Proceeds from sale of priority review voucher 100,000 — — Purchases of property and equipment ( 11,799 ) ( 52,979 ) ( 68,336 ) Purchases of investments ( 508,776 ) ( 318,781 ) ( 190,462 ) Maturities of investments 503,213 257,677 32,028 Net cash provided by (used in) investing activities 82,638 ( 114,083 ) ( 226,770 ) Financing Activities Issuance of common stock, net of issuance costs 203,499 35,996 355,645 Taxes paid related to settlement of restricted stock awards ( 749 ) ( 649 ) — Repayment of ASTRA build-to-suit liability — — ( 7,960 ) Net cash provided by financing activities 202,750 35,347 347,685 Effect of exchange rate changes on cash and cash equivalents ( 156 ) ( 41 ) — Net change in cash and cash equivalents 196,428 ( 179,346 ) 72,977 Cash and cash equivalents at beginning of year 161,900 341,246 268,269 Cash and cash equivalents at end of year $ 358,328 $ 161,900 $ 341,246 Supplemental Disclosures of Non-Cash Investing and Financing Activities Unpaid purchases of property and equipment $ 8,602 $ 14,927 $ 15,363 Initial recognition of right-of-use assets $ — $ 1,556 $ 4,396 The accompanying notes are an integral part of these consolidated financial statements. F-7 Krystal Biotech, Inc. Notes to Consolidated Financial Statements 1. Organization Krystal Biotech, Inc. (the “Company,” or “we” or other similar pronouns) commenced operations in April 2016. In March 2017, the Company converted from a California limited liability company to a Delaware C-corporation, and changed its name from Krystal Biotech LLC to Krystal Biotech, Inc. In June 2018, the Company incorporated a wholly-owned subsidiary in Australia for the purpose of undertaking preclinical and clinical studies in Australia. In April 2019, the Company incorporated Jeune Aesthetics, Inc (“Jeune Aesthetics”), in Delaware, a wholly-owned subsidiary, for the purpose of undertaking preclinical and clinical studies for aesthetic skin conditions. In January 2022, August 2022, December 2022, and August 2023, the Company incorporated wholly-owned subsidiaries in Switzerland, Netherlands, France, and Germany respectively, for the purpose of establishing initial operations in Europe for the commercialization of the Company’s product pipeline. We are a fully integrated, commercial-stage biotechnology company focused on the discovery, development, and commercialization of genetic medicines to treat diseases with high unmet medical needs. Our first commercial product, VYJUVEK ® , was approved by the FDA on May 19, 2023 for the treatment of DEB, and we subsequently initiated our U.S. commercial launch. VYJUVEK is the first medicine approved by the FDA for the treatment of DEB. Using our patented gene therapy technology 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 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 and serious diseases. Our innovative technology platform is supported by an in-house, FDA-inspected commercial scale Current Good Manufacturing Practice (“CGMP”) manufacturing facility and a second, completed and qualified, commercial scale CGMP facility to support future expansion. Liquidity As of December 31, 2023, the Company had an accumulated deficit of $ 269.8 million. Our transition to operating profitability is dependent upon the continued successful commercialization of VYJUVEK as well as successful development, approval, and commercialization of our other product candidates and the achievement of a level of revenue adequate to support the Company’s cost structure. Management intends to fund future operations through its on hand cash and cash equivalents, revenue generated from the sale of VYJUVEK, 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 further its pipeline and to expand its commercialization capabilities in advance of the potential global regulatory approvals of VYJUVEK. The Company believes that its cash, cash equivalents and short-term investments of approximately $ 532.2 million as of December 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 Annual Report on Form 10-K. 2. Summary of Significant Accounting Policies Basis of Presentation The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”). All intercompany balances and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current period presentation. The reclassified amounts have no impact on the Company’s previously reported financial position or results of operations. Use of Estimates The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates. Management considers many factors in developing the estimates and F-8 Krystal Biotech, Inc. Notes to Consolidated Financial Statements — Continued 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. If actual results in the future vary from the Company’s estimates, the Company will adjust these estimates in the period these variances become known. Estimates are used in the following areas, among others: variable consideration associated with revenue recognition, stock-based compensation expense, accrued expenses, the fair value of financial instruments, 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. Cash, Cash Equivalents and Investments Cash and cash equivalents consist of money market funds and bank deposits. Cash equivalents are defined as short-term, highly liquid investments with original maturities of 90 days or less at the date of purchase. Investments with maturities of less than one year are classified as short-term investments on the consolidated balance sheets and consist of commercial paper, corporate bonds, and U.S. government agency securities. Investments with maturities of greater than one year are classified as long-term investments on the consolidated balance sheets and consist of corporate bonds and U.S. government agency securities. Accrued interest on investments is also classified as short-term investments. As our entire investment portfolio is considered available for use in current operations, we classify all investments as available-for-sale securities. Available-for-sale securities are carried at fair value, with unrealized gains and losses reported in accumulated other comprehensive gain (loss), which is a separate component of stockholders’ equity in the consolidated balance sheets. Any premium arising at purchase is amortized to the earliest call date and any discount arising at purchase is accreted to maturity. Amortization and accretion of premiums and discounts are recorded in interest and other income, net in the consolidated statements of operations and comprehensive income (loss). Fair Value of Financial Instruments Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. There is a three-level hierarchy that prioritizes the inputs used in determining fair value by their reliability and preferred use, as follows: • Level 1 —Valuations based on quoted prices in active markets for identical assets or liabilities. • Level 2 —Valuations based on quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in inactive markets, or other inputs that are observable, or can be corroborated by observable market data. • Level 3 —Valuations based on inputs that are both significant to the fair value measurement and unobservable. To the extent that a valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized within Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. There have been no significant changes to the valuation methods utilized by the Company during the periods presented. There have been no transfers between Level 1, Level 2, and Level 3 in any periods presented. The carrying amounts of financial instruments consisting of cash and cash equivalents, investments, accounts receivable, net, prepaid expenses and other current assets, accounts payable, accrued expenses and other current liabilities included in the Company’s consolidated financial statements, are reasonable estimates of fair value, primarily due to their short maturities. Our available-for-sale, short-term and long-term investments, which consist of commercial paper, corporate bonds, and U.S. government agency securities are considered to be Level 2 financial instruments. The fair value of Level 2 financial assets F-9 Krystal Biotech, Inc. Notes to Consolidated Financial Statements — Continued 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. Revenue Recognition The Company has contracted to sell VYJUVEK to a limited number of specialty pharmacy providers (“SPs”) that mix the medication and administer it to patients in the patient’s home by a healthcare professional and through a single specialty distributor (“SD”) to hospitals and outpatient clinics where patients are administered the medication at a healthcare professional’s office. The Company entered into a third-party logistics distribution agreement to engage a logistics agent (the “3PL Agent”) to distribute the Company’s products to its customers. The 3PL Agent provides services to the Company that include storage, shipping and distribution, processing product returns, as well as customer service, order to cash, and logistics support. The Company and an affiliate of the 3PL Agent (the Title Company) entered into a Title Model Amendment (the Title Amendment) to the 3PL Agreement so that the Title Company may purchase and take title to the product and sell the product to the SPs who have contracted to purchase the product from the Company or SD who has contracted to deliver the product to our customers. Although, under the Title Amendment the Title Company takes title to the product, the economic substance of the transaction provides that the Title Company does not possess the risk of loss or participate in the significant risks and rewards of ownership of the product. The Title Company also lacks the ability to control, direct the use of, and obtain substantially all of the remaining benefits from the product. Accordingly, the Company does not recognize revenue on the transfer of the goods until the goods are sold from the Title Company to the SPs or delivered by the SD. Revenue is recognized upon transfer of control of the product to the customer. The Company recognizes product revenue under ASC Topic 606, Revenue from Contracts with Customers (“Topic 606”). Under Topic 606, the Company is required to complete the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price, including variable consideration, if any; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company recognizes revenue when the customer obtains control of the product, which occurs at a point in time, upon delivery to the customer. Sales and other taxes collected concurrent with revenue-producing activities are excluded from revenue. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring VYJUVEK and is generally based upon a list or fixed price less allowances for returns, copay assistance, rebates and discounts. The Company’s payment terms are generally 80 days from the invoice date. Variable Consideration Product revenue, net is recorded at the net sales price, or transaction price, upon delivery and transfer of control to the customer, and includes an estimate of variable consideration, which results from discounts, rebates, and returns that are offered within our contracts. – Prompt Pay Discounts: As an incentive for prompt payment, the Company offers cash discounts to its counterparties. The Company estimates accrued prompt pay discounts using the most likely amount method. The Company expects that all eligible counterparties will comply with the contractual terms to earn the discount. The Company records the discount as an allowance against accounts receivable, net and a reduction of revenue. – Government Rebates: The Company participates in certain government rebate programs including Medicaid, Medicare and Tricare. The Company estimates accrued government rebates using the expected value method. The Company accrues estimated rebates based on estimated percentages of VYJUVEK that will be prescribed to qualified patients, estimated rebate percentages and estimated levels of inventory in the distribution channel that will be prescribed to qualified patients and records the rebates as a reduction of revenue. Accrued government rebates are recorded as a reduction of revenue and are included in other accrued liabilities on the consolidated balance sheets. For Medicare, the Company also estimates the accrued liability based on the number of patients in the prescription drug coverage gap under the Medicare Part D program. – Commercial Rebates: The Company participates in certain commercial rebate programs. Under these rebate programs, the Company pays a rebate to the commercial entity or third-party administrator of the program. Accrued commercial rebates are estimated using the expected value method. The Company accrues estimated rebates based on contract prices, estimated percentages of VYJUVEK that will be prescribed to qualified patients and estimated levels of inventory in the distribution channel. Accrued commercial rebates are recorded as a reduction of revenue and are included in other accrued liabilities on the consolidated balance sheets. F-10 Krystal Biotech, Inc. Notes to Consolidated Financial Statements — Continued – Copay Assistance: The Company provides copay assistance to qualified patients with commercial insurance in states that allow copay assistance, helping them meet copay obligations to their insurance provider. The Company reimburses pharmacies for this discount through third-party vendors. The Company estimates copay assistance costs using the expected value method. The estimate is based on contract prices, estimated percentages of VYJUVEK that will be prescribed to qualified patients, average assistance paid based on reporting from third-party vendors and estimated levels of inventory in the distribution channel. Copay assistance costs are recorded as reductions to revenue and are accrued in other accrued liabilities on the consolidated balance sheets. – Product Returns: The Company offers SPs and SDs limited return rights relating only to product damage or defects identified upon receipt, and therefore the Company expects minimal returns. Returns are estimated taking into consideration several factors including these limited product return rights, historical return activity, and other relevant factors.. There were no returns for the year ended December 31, 2023. Variable consideration is estimated and reduces the transaction price to reflect the Company’s best estimate of the amount of consideration to which the Company is entitled based on the terms of the contracts and are recorded in the same period the related product revenue is recognized. The amount of variable consideration that is included in the transaction price may be constrained and is included in the net sales price only to the extent that it is considered probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. Actual amounts of consideration ultimately received may differ from the Company’s estimates. If actual results in the future vary from the Company’s estimates, the Company will adjust these estimates in the period these variances become known. Cost of Goods Sold Cost of goods sold includes direct and indirect costs related to the manufacturing of VYJUVEK. These costs consist of manufacturing costs, personnel costs including stock-based compensation, facility costs, and other indirect overhead costs. Cost of goods sold may also include period costs related to certain manufacturing services and inventory adjustment charges. Accounts Receivable Accounts receivable is recorded net of allowances for prompt payment discounts, returns, and credit losses. The Company estimates an allowance for credit losses by considering factors such as credit quality, the age of the accounts receivable balances, and current economic conditions that may affect a customer’s ability to pay. As of December 31, 2023, the credit profile for the Company’s counterparty was deemed to be in good standing, and as such an allowance for credit losses was not recorded. Concentration of Credit Risk and Off-Balance Sheet Risk Financial instruments that subject the Company to credit risk primarily consist of cash and cash equivalents, short-term investments, long-term investments, and accounts receivable, net. The Company maintains its cash and cash equivalent balances with high-quality financial institutions and, consequently, the Company believes that such funds are subject to minimal credit risk. The Company is exposed to credit risk in the event of default by the financial institutions to the extent amounts recorded on the consolidated balance sheets are in excess of insured limits. The Company has not experienced any credit losses in such accounts and does not believe it is exposed to any significant credit risk on these funds. The Company’s accounts receivable, net and marketable securities, which primarily consist of U.S. government agency securities and treasuries, corporate bonds and commercial paper, potentially subject the Company to concentrations of credit risk. The Company had one customer for the year ended December 31, 2023 and no product revenue for the years ended December 31, 2022 and 2021. The Company has no financial instruments with off-balance sheet risk of loss. Inventories The Company capitalizes inventory costs associated with products when future economic benefit is expected to be realized. These costs consist of raw materials, manufacturing-related costs, personnel costs including stock-based compensation, facility costs, and other indirect overhead costs. Prior to receiving FDA approval for VYJUVEK in May 2023, the Company expensed costs related to inventory for clinical and pre-commercial purposes directly to research and development expense. Following the FDA’s approval of VYJUVEK, the Company began capitalizing inventory related to commercialized products held for sale, in-process of production for sale, and raw materials to be used in the manufacturing of inventory. The Company values its inventories at the lower-of-cost and net realizable value, on a first-in, first-out (“FIFO”) basis. The Company adjusts the net realizable value of any excess, obsolete or unsalable inventories in the period in which they are identified. For the years ended December 31, 2023, 2022, and 2021, there were no inventory write-downs. See Note 6. F-11 Krystal Biotech, Inc. Notes to Consolidated Financial Statements — Continued 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 - 15 years Furniture and fixtures 3 - 7 years Leasehold improvements lesser of remaining useful life or remaining life of lease The Company reviews the estimated useful lives of its property and equipment on a continuing basis. In evaluating the useful lives, the Company considers how long assets will remain functionally effective, whether the technology continues to be relevant and considers other competitive and economic factors. If the assessment indicates that the assets will be used for a shorter or longer period than previously anticipated, the useful life of the assets is adjusted, resulting in a change in estimate. Changes in estimates are accounted for on a prospective basis by depreciating the current carrying values of the assets over their revised remaining useful lives. Construction-in-progress (“CIP”) is not depreciated until the asset is placed in service. Impairment of Long-Lived Assets The Company evaluates long-lived assets for potential impairment when events or changes in circumstances indicate the carrying value of the assets may not be recoverable. We review the recoverability of the net book value of long-lived assets whenever events and circumstances indicate ("triggering events") that the net book value of an asset may not be recoverable from the estimated undiscounted future cash flows expected to result from its use and eventual disposition. In cases where a triggering event occurs and undiscounted expected future cash flows are less than the net book value, we recognize an impairment loss equal to an amount by which the net book value exceeds the fair value of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell. The Company has no t experienced any triggering events or recognized any impairment losses for the years ended December 31, 2023, 2022, and 2021. Leases The Company accounts for its lease agreements in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 842, Leases . Right-of-use lease assets represent the right to use an underlying asset during the lease term and the lease liabilities represent the commitment to make lease payments arising from the lease. Right-of-use lease assets and obligations are recognized based on the present value of remaining lease payments over the lease term. As the Company’s existing lease agreements do not provide an implicit rate and as the Company does not have any external borrowings, the Company has used an estimated incremental borrowing rate based on the information available at lease commencement in determining the present value of lease payments. Operating lease expense is recognized on a straight-line basis over the lease term. Variable lease expense is recognized in the period in which the obligation for the payment is incurred. In addition, the Company also has made an accounting policy election to exclude leases with an initial term of twelve months or less from its consolidated balance sheets and to account for lease and non-lease components of its operating leases as a single component. 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. F-12 Krystal Biotech, Inc. Notes to Consolidated Financial Statements — Continued 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 FASB ASC Topic 718, Compensation—Stock Compensation (“ASC 718”), to account for stock-based compensation. Compensation costs related to stock options granted are based on the estimated fair value of the awards on the date of grant. ASC 718 requires all stock-based payments, including grants of stock options and restricted stock, to be recognized in the consolidated statements of operations and comprehensive income (loss) 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. Once the Company's own sufficient historical volatility data was available in 2021, the Company eliminated the use of a representative peer group and began using only its own historical volatility data in its estimate of expected volatility. The Company estimates the expected term of its stock options using the “simplified” method, whereby the expected term equals the arithmetic mean of the vesting term and the original contractual term of the option. The risk-free interest rates are based on US Treasury securities with a maturity date commensurate with the expected term of the associated award. The Company has never paid and does not expect to pay dividends in the foreseeable future. The Company accounts for forfeitures as they occur. Stock-based compensation expense recognized in the financial statements is based on awards for which service conditions are expected to be satisfied. Income Taxes For the years ended December 31, 2023, 2022, and 2021, income taxes were recorded in accordance with FASB ASC Topic 740, Income Taxes (“ASC 740”), which provides for deferred taxes using an asset and liability approach. Under this method, we record deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities using enacted tax rates expected to be in effect when the differences are expected to reverse. Valuation allowances are provided when necessary to reduce net deferred tax assets to the amount that is more likely than not to be realized. Based on the available evidence, we are unable, at this time, to support the determination that it is more likely than not that our deferred tax assets will be utilized in the future. Accordingly, we recorded a full valuation allowance as of December 31, 2023 and 2022. We intend to maintain a valuation allowance until sufficient evidence exists to support its reversal. The Company accounts for uncertain tax positions in accordance with the provisions of ASC 740. When uncertain tax positions exist, the Company recognizes the tax benefit of tax positions to the extent that the benefit will more likely than not be realized. The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position as well as consideration of the available facts and circumstances. As of December 31, 2023 and 2022, the Company did not have any significant uncertain tax positions. The Company may recognize interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2023 and 2022, the Company had no accrued interest or penalties related to uncertain tax positions and no amounts have been recognized in the Company’s consolidated statements of operations and comprehensive income (loss). Comprehensive Income (Loss) Comprehensive income (loss) is defined as the change in equity during a period from transactions from non-owner sources. Unrealized gains or losses on available-for-sale securities is a component of other comprehensive gains or losses and is presented net of taxes. We record reclassifications from other comprehensive gains or losses to interest and other income, net on the consolidated statements of operations and comprehensive income (loss) related to realized gains on sales of available-for-sale securities. F-13 Krystal Biotech, Inc. Notes to Consolidated Financial Statements — Continued The Company reviews its securities quarterly to determine whether an other-than-temporary impairment has occurred. The Company determined that there were no other-than-temporary impairments during the years ended December 31, 2023, 2022, and 2021. Recent Accounting Pronouncements In December 2023, the FASB issued ASU 2023-09 “Income Taxes (Topic 740): Improvements to Income Tax Disclosures” . The purpose of this guidance is to enhance the transparency and usefulness of income tax disclosures and provide comprehensive income tax information, particularly in relation to rate reconciliation and income taxes paid in the U.S. and foreign jurisdictions. This new standard will be effective for fiscal years starting after December 15, 2024, with the option to apply it retrospectively. Early adoption is also allowed. Currently, the company is assessing the potential impact of this guidance on its consolidated financial statement disclosures. In November 2023, the FASB issued Accounting Standard Update (“ASU”) No. 2023-07: Improvements to Reportable Segment Disclosures . This new standard requires public entities to disclose significant segment expenses and additional segment items annually and in interim periods, and to provide all reported segment profit or loss information and assets currently required each year. The standard also requires disclosure of the Chief Operating Decision Maker's title and position. The standard does not change the manner in which public entities identify their operating segments, aggregate them, or apply the quantitative thresholds for determining their reportable segments. The new standard applies for fiscal years starting after December 15, 2023 and interim periods starting after December 15, 2024, with early adoption permitted. The Company has determined it operates as a single segment, therefore, we anticipate that this ASU will minimally impact our disclosed information and will not impact our consolidated balance sheets, consolidated statements of operations and comprehensive income (loss), consolidated statements of stockholders’ equity, or consolidated statements of cash flows. There were no recently adopted accounting pronouncements that had a material impact on the Company's consolidated financial statements, and no additional recently issued accounting pronouncements that are expected to have a material impact on the Company's consolidated financial statements. 3. Revenue Recognition The Company began commercial marketing and sales of VYJUVEK throughout the United States and began recognizing revenue in 2023. For the years ended December 31, 2023, 2022, 2021, the Company recognized net product revenue of 50.7 million, zero , and zero , respectively. Accounts receivable, net balances were 42.0 million and zero as of December 31, 2023 and 2022, respectively. The following table summarizes changes in allowances and discounts for the year ended December 31, 2023 (in thousands): Rebates Prompt Pay Other Accruals Total Balance as of December 31, 2022 $ — $ — $ — $ — Provision 5,990 1,164 323 7,477 Payments/Credits ( 13 ) ( 306 ) ( 44 ) ( 363 ) Balance, as of December 31, 2023 $ 5,977 $ 858 $ 279 $ 7,114 4. Net Income (Loss) Per Share Attributable to Common Stockholders Basic net income (loss) per share attributable to common stockholders is calculated by dividing net income (loss) attributable to common stockholders by the weighted average shares outstanding during the period, without consideration for common stock equivalents. Diluted net income (loss) per share attributable to common stockholders is computed by dividing the net income (loss) by the weighted-average number of shares of common stock and common stock equivalents outstanding for the period. Common stock equivalents consist of common stock issuable upon exercise of stock options and vesting of restricted stock awards, restricted stock units, and performance-based restricted stock units. There were 896,745 , 3,582,181 , and 2,043,179 common stock equivalents outstanding in the form of stock options and zero , 66,600 , and 98,800 unvested restricted stock awards as of December 31, 2023, 2022 and 2021, respectively, that have been excluded from the calculation of diluted net income (loss) per common share as their effect would be anti-dilutive. F-14 Years Ended December 31, (In thousands, except share and per share data) 2023 2022 2021 Numerator: Net income (loss) $ 10,932 $ ( 139,975 ) $ ( 69,570 ) Denominator: Weighted-average basic common shares 27,154,190 25,491,721 22,196,846 Dilutive effect of stock options and unvested restricted stock 597,619 — — Weighted-average diluted common shares 27,751,809 25,491,721 22,196,846 Net income (loss) per common share — Basic $ 0.40 $ ( 5.49 ) $ ( 3.13 ) Net income (loss) per common share — Diluted $ 0.39 $ ( 5.49 ) $ ( 3.13 ) 5. Fair Value Instruments The following tables show the Company’s cash, cash equivalents and available-for-sale securities by significant investment category as of December 31, 2023 and 2022, respectively (in thousands): December 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 $ 358,328 $ — $ — $ 358,328 $ 358,328 $ — $ — Subtotal 358,328 — — 358,328 358,328 — — Level 2: Commercial paper 17,124 5 ( 1 ) 17,128 — 17,128 — Corporate bonds 111,824 407 ( 27 ) 112,204 — 70,996 41,208 U.S government agency securities and treasuries 106,079 423 ( 30 ) 106,472 — 85,726 20,746 Subtotal 235,027 835 ( 58 ) 235,804 — 173,850 61,954 Total $ 593,355 $ 835 $ ( 58 ) $ 594,132 $ 358,328 $ 173,850 $ 61,954 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 and treasuries 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 consolidated financial statements for additional discussion regarding the Company’s fair value measurements. F-15 Krystal Biotech, Inc. Notes to Consolidated Financial Statements — Continued 6. Balance Sheet Components Inventory Inventory consisted of the following as of December 31, 2023 and 2022, respectively (in thousands): December 31, 2023 December 31, 2022 Raw materials $ 3,154 $ — Work-in-process 3,204 — Finished goods 627 — Inventory $ 6,985 $ — Property and Equipment, Net Property and equipment, net consisted of the following as of December 31, 2023 and 2022, respectively (in thousands): December 31, 2023 December 31, 2022 Building and building improvements $ 111,180 $ — Leasehold improvements 25,068 24,217 Manufacturing equipment 24,905 9,783 Construction-in-progress 7,291 131,331 Laboratory equipment 2,339 2,089 Furniture and fixtures 1,632 957 Computer equipment and software 1,614 100 Total property and equipment 174,029 168,477 Accumulated depreciation ( 12,827 ) ( 6,793 ) Property and equipment, net $ 161,202 $ 161,684 Depreciation expense was $ 5.0 million, $ 2.6 million and $ 1.8 million for the years ended December 31, 2023, 2022, and 2021, respectively. On March 27, 2023, the Company received the permanent occupancy permit for its second commercial scale CGMP facility, ASTRA, which allowed the Company to begin utilizing certain portions of the building. As a result and as qualification of assets occurred throughout 2023, the majority of 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 it was determined that assets were ready for their intended use. As certain pieces of equipment are not yet qualified, the Company will continue to hold the remaining assets within construction in progress until qualification has been completed and the assets are ready for their intended use. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consisted of the following as of December 31, 2023 and 2022, respectively (in thousands): December 31, 2023 December 31, 2022 Accrued payroll and benefits $ 8,778 $ 6,781 Accrued rebates 5,977 — Accrued construction in progress 5,182 11,452 Accrued taxes 2,283 43 Other current liabilities 2,210 267 Accrued professional fees 1,810 3,397 Accrued preclinical and clinical expenses 1,248 1,365 Total $ 27,488 $ 23,305 F-16 Krystal Biotech, Inc. Notes to Consolidated Financial Statements — Continued 7. Commitments and Contingencies Agreements with Contract Manufacturing Organizations and Contract Research Organizations The Company enters into various agreements in the normal course of business with Contract Research Organizations (“CROs”), Contract Manufacturing Organizations (“CMOs”) and other third parties for preclinical research studies, clinical trials and testing and manufacturing services. The agreements with CMOs 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 VYJUVEK. Agreements with third parties may also include research and development consulting activities, clinical-trial agreements, storage, packaging, labeling, and/or testing of our pre-commercial and clinical-stage 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 December 31, 2023 under these agreements is approximately $ 1.7 million. The Company has incurred research and development expenses under these agreements of $ 5.2 million, $ 6.0 million and $ 5.0 million for the years ended December 31, 2023, 2022, and 2021, respectively. ASTRA Contractual Obligations The Company has contracted with various third parties to complete and qualify our second CGMP facility, ASTRA. The estimated remaining commitment as of December 31, 2023 is $ 8.2 million and primarily relates to building improvements and certain qualification activities of the facility that have been completed and placed into service as of December 31, 2023. 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") alleging breach of contract and misappropriation of trade secrets. On April 27, 2022, the Company and PeriphaGen entered into a final settlement agreement, and the Company 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. In accordance with the settlement agreement, on June 15, 2023, the Company paid PeriphaGen an additional $ 12.5 million following the FDA’s approval of VYJUVEK. The settlement agreement requires the Company 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. 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, of which $ 37.5 million has been paid. The Company recorded the settlement payments of $ 12.5 million, $ 25.0 million, and zero for the year ended December 31, 2023, 2022, and 2021, respectively, under litigation settlement expense on the consolidated statements of operations and comprehensive income (loss). The additional contingent milestone payments were not deemed probable due to uncertainty in the achievement of these milestones as of December 31, 2023, and therefore no additional accrual has been recorded. The Company has received zero , $ 1.1 million, $ 1.6 million, of insurance proceeds during fiscal years ending December 31, 2023, 2022, and 2021 respectively. The reimbursements have been recorded as an offset to our legal fees included in selling, general and administrative expenses on the consolidated statements of operations and comprehensive income (loss) and within operating activities on the consolidated statements of cash flows. 8. Leases Lease Agreements In May 2016, the Company signed an operating lease for laboratory and office space in Pittsburgh, Pennsylvania that commenced in June 2016 and was scheduled to expire in October 2017 (the “2016 Lease”). The 2016 Lease has been amended several times to increase the area leased, which currently consists of approximately 54,000 square feet and includes the commercial scale CGMP-compliant manufacturing facility (“ANCORIS”). As a result of the lease amendments, the 2016 Lease expiration date was extended to October 2031. In September 2022, the Company amended the 2016 Lease (“Short-Term Amendment”) to add a 12 month lease for additional office space that commenced in October 2022 and subsequently amended the lease again in September 2023, which commenced in October 2023 and extended the lease until September 2024. The Short-Term Amendment increased the area leased by approximately 7,000 square feet through September 2024. Due to the short-term nature of these amendments and the Company's lease accounting policy, the Company did not record a right-of-use asset or corresponding lease liability. F-17 Krystal Biotech, Inc. Notes to Consolidated Financial Statements — Continued In December 2019, the Company entered into a lease agreement for a second commercial gene therapy facility, (“ASTRA”), in the Pittsburgh, Pennsylvania area (“ASTRA lease”) with Northfield I, LLC (the “Landlord”, “Northfield”, or “Lessor”) with an initial lease term that expired on October 2035. The ASTRA lease contained an option (“Purchase Option”) to purchase the building, related improvements and take corresponding assignment of the Landlord's rights under its existing Ground Lease (the “Ground Lease”). In October 2020, the Company was provided with notice that the initial delivery conditions of the building had been met, including completion of the building shell, interior slab, and exterior doors, and the Company gave the Landlord notice of its intent to purchase ASTRA for approximately $ 9.4 million, subject to the parties entering into a commercially reasonable purchase and sale agreement. As a result of the Company's ability to exercise its option to purchase ASTRA, the Company obtained control over the construction in progress of ASTRA. The Company recorded a $ 10.0 million CIP asset and a corresponding build-to-suit lease liability related to the costs incurred by the Landlord, offset by the previous cash contributions of $ 2.4 million. In January 2021, the Company entered into a Purchase and Sale Agreement (“PSA”) for ASTRA with Northfield related to the purchase option exercised by the Company in October 2020, for a purchase price of $ 9.4 million. The Company held approximately $ 1.5 million on deposit with Northfield under the existing lease agreement and applied this deposit as a credit against the purchase price at closing. In February 2021, Northfield delivered the space as substantially complete and made the space available for access by the Company, thus triggering lease commencement. As a result, the Company concluded that this transaction did not qualify for sale-leaseback accounting because it did not meet the definition of a sale. As control did not transfer to the Lessor at lease commencement, the transaction continued to be accounted for as construction in progress and a financing obligation. In March 2021, the purchase closed and the Company determined that reclassification of the construction in progress to buildings and leasehold improvements was not appropriate as the interior of the building was not yet ready for its intended use. From construction completion to the closing of the purchase, the Company recognized interest expense to accrete the financial obligation to a balance that equaled the cash consideration that was paid upon the close of purchase. The building was placed into service as of December 31, 2023. For more information about the expected construction costs associated with ASTRA, see “ASTRA Contractual Obligations” above. As part of the transaction, the Company also became the accounting owner of the Ground Lease, due to obtaining control over ASTRA. When the PSA was finalized, the Company took assignment of the Lessor's Ground Lease, in accordance with the Purchase Option, of which lease payments are based on annual payments of $ 82 thousand, and are subject to a cumulative 10 % escalation clause every 5 years through 2071. In December 2021, the Company entered into a 3 year lease agreement for the Boston, Massachusetts office that commenced in January 2022 and expires in January 2025. In May 2022, the Company entered into a 16 month lease agreement for the Zug, Switzerland office that commenced in September 2022 and ended in December 2023. In September 2023, the Company entered into a 12 month lease that commenced January 2024 and expires in December 2024. Due to the short-term nature of the agreement and the Company’s lease accounting policy, the Company did not record a right-of-use asset or corresponding lease liability. As of December 31, 2023, future minimum commitments under the Company’s operating leases were as follows (in thousands): Operating Leases 2024 $ 1,539 2025 1,277 2026 1,277 2027 1,300 2028 1,325 Thereafter 9,438 Future minimum operating lease payments $ 16,156 Less: Interest ( 8,062 ) Present value of lease liability $ 8,094 F-18 Krystal Biotech, Inc. Notes to Consolidated Financial Statements — Continued Supplemental balance sheet information related to leases is as follows: December 31, 2023 December 31, 2022 Operating leases: Right-of-use assets $ 7,027 $ 8,042 Current portion of lease liability 1,474 1,561 Lease liability 6,620 7,372 Total lease liability $ 8,094 $ 8,933 Weighted average remaining lease term, in years 12.3 12.5 Weighted average discount rate 9.5 % 9.4 % The components of the Company's lease expense are as follows: Years Ended December 31, 2023 2022 2021 Lease cost: Operating lease expense $ 1,596 $ 1,532 $ 1,275 Variable lease expense 203 226 160 Total lease expense $ 1,799 $ 1,758 $ 1,435 9. Capitalization Public Sale of Common Stock In December 2021, the Company completed an underwritten public offering of 2,866,667 shares of its common stock, including 200,000 shares purchased by the underwriters pursuant to their option to purchase additional shares, at $ 75.00 per share. Net proceeds to the Company from the offering were $ 201.9 million after deducting underwriting discounts and commissions of approximately $ 12.9 million, and other offering expenses payable by the Company of $ 227 thousand. In February 2021, the Company completed an underwritten public offering of 2,211,538 shares of its common stock, including 288,461 shares purchased by the underwriters pursuant to their option to purchase additional shares, at $ 65.00 per share. Net proceeds to the Company from the offering were $ 134.9 million after deducting underwriting discounts and commissions of approximately $ 8.6 million, and other offering expenses payable by the Company of $ 198 thousand. ATM Program On December 31, 2020, the Company entered into a sales agreement with Cowen and Company, LLC ("Cowen") with respect to an at-the-market equity offering program ("2020 ATM Program"), under which the Company issued and sold from time to time through Cowen, acting as agent and/or principal, shares of its common stock, par value $ 0.0001 per share, having an aggregate offering price up to $ 150.0 million ("Placement Shares"). The issuance and sale of the Placement Shares were made pursuant to the Company's effective "shelf" registration statement on Form S-3 that was filed with the Securities and Exchange Commission (the “SEC”) on May 4, 2020 (the “2020 Shelf Registration Statement”). During the year ended December 31, 2022, the Company issued and sold 434,782 Placement Shares at a weighted average price of $ 69.00 per share for net proceeds of $ 29.1 million after deducting selling commissions of approximately $ 900 thousand. During the year ended December 31, 2021, 262,500 shares of common stock were issued pursuant to the ATM Program at a weighted average price of $ 66.50 per share for net proceeds of $ 16.9 million after deducting underwriting discounts and commissions of approximately $ 524 thousand, The Company’s 2020 Shelf Registration Statement expired on May 4, 2023, and the Company put in place a new at-the-market equity offering program under substantially the same terms as the 2020 ATM Program (the “New ATM Program”). Accordingly, on May 8, 2023, the Company entered into a new sales agreement with Cowen to issue and sell shares of the Company’s common stock having an aggregate offering price of up to $ 150.0 million (the “New Placement Shares”) from time to time, under which Cowen will act as the Company’s agent and/or principal. The New Placement Shares will be offered and sold pursuant to the Company’s effective shelf registration statement on Form S-3 filed with the SEC on April 6, 2023, and a F-19 Krystal Biotech, Inc. Notes to Consolidated Financial Statements — Continued prospectus supplement relating to the New Placement Shares that was filed with the SEC on May 8, 2023. During the year ended December 31, 2023, no shares of common stock were issued pursuant to the New ATM Program, resulting in $ 150.0 million available for issuance under the New ATM Program. 2023 Private Placement Offering On May 22, 2023 and May 23, 2023, the Company sold 1,720,100 and 9,629 shares of common stock, respectively, in a private placement to certain institutional investors at a price of $ 92.50 per share for aggregate net proceeds of $ 160.0 million. In addition, the Company entered into a Registration Rights Agreement with the investors (“Registration Rights Agreement”) that required the Company to file a registration statement with the SEC within 60 days of the date of the Registration Rights Agreement registering the resale of the shares of common stock issued in the private placement. On July 18, 2023, the Company filed the resale registration statement on Form S-3ASR with the SEC, which became effective upon filing. 10. Stock-Based Compensation In 2017, the Company adopted the 2017 IPO Stock Plan (the “Plan”), which governs the issuance of equity awards 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 435,280 and 2,130,500 stock options to employees, non-employees, and directors during the years ended December 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) Balance at January 1, 2022 2,043,179 $ 57.00 9.0 $ 31,331 Granted 2,130,500 64.14 Exercised ( 138,855 ) 50.47 Cancelled or forfeited ( 438,892 ) 59.22 Expired ( 13,751 ) 78.80 Balance at December 31, 2022 3,582,181 $ 61.50 8.7 $ 64,880 Granted 435,280 92.14 Exercised ( 752,752 ) 58.15 Cancelled or forfeited ( 658,117 ) 64.29 Expired — — Balance at December 31, 2023 2,606,592 $ 66.39 7.9 $ 150,405 Exercisable at December 31, 2023 778,411 $ 57.20 6.9 $ 52,048 (1) Aggregate intrinsic value represents the difference between the closing stock price of our common stock on December 31, 2023 and the exercise price of outstanding in-the-money options. The total intrinsic value (the amount by which the fair market value exceeded the exercise price) of stock options exercised during the years ended December 31, 2023 and 2022 was $ 43.8 million and $ 2.9 million, respectively. The weighted-average grant-date fair value per share of options granted to employees, non-employees, and directors during the years ended December 31, 2023 and 2022 was $ 63.38 and $ 44.50 , respectively. There was $ 68.5 million of unrecognized stock-based compensation expense related to employees’, non-employees’, and directors’ options that is expected to be recognized over a weighted-average period of 2.4 years as of December 31, 2023. F-20 Krystal Biotech, Inc. Notes to Consolidated Financial Statements — Continued The Company has recorded aggregate stock-based compensation expense related to the issuance of stock option awards in the consolidated statements of operations and comprehensive income (loss) for the years ended December 31, 2023, 2022, and 2021 as follows (in thousands): Years Ended December 31, 2023 2022 2021 Research and development $ 8,942 $ 7,897 $ 3,434 Selling, general and administrative 24,988 23,551 10,235 Total stock-based compensation $ 33,930 $ 31,448 $ 13,669 The fair value of options granted was estimated at the date of grant using the Black-Scholes valuation model with the following weighted-average assumptions for the years ended December 31, 2023, 2022, and 2021: Years Ended December 31, 2023 2022 2021 Expected stock price volatility 73 % 78 % 72 % Expected term of the award (years) 6.0 6.2 6.2 Risk-free interest rate 3.96 % 2.42 % 1.10 % Weighted average exercise price $ 92.14 $ 64.14 $ 66.88 Forfeiture Rate — % — % — % Dividend Yield — % — % — % Restricted Stock Awards Restricted stock awards (“RSAs”) granted to employees vest ratably over a four-year period. The Company granted no RSAs to employees of the Company for each of the years ended December 31, 2023 and 2022 respectively. The following table summarizes the Company’s RSA activity: Number of Shares Weighted Average Grant Date Fair Value Non-vested RSAs as of December 31, 2021 98,800 $ 78.89 Granted — $ — Vested ( 14,321 ) $ 78.89 Surrendered or forfeited ( 17,879 ) $ 78.89 Non-vested RSAs as of December 31, 2022 66,600 $ 78.89 Granted — $ — Vested ( 12,649 ) $ 78.89 Surrendered or forfeited ( 9,551 ) $ 78.89 Non-vested RSAs as of December 31, 2023 44,400 $ 78.89 There was $ 2.0 million of unrecognized stock-based compensation expense related to employees’ awards that is expected to be recognized over a weighted-average period of 1.2 years as of December 31, 2023. The Company recorded the following stock-based compensation expense related to RSAs in the consolidated statements of operations and comprehensive income (loss) for the years ended December 31, 2023, 2022, and 2021 as follows (in thousands): F-21 Krystal Biotech, Inc. Notes to Consolidated Financial Statements — Continued Years Ended December 31, 2023 2022 2021 Selling, general and administrative $ 1,747 $ 1,782 $ 1,650 Total stock-based compensation $ 1,747 $ 1,782 $ 1,650 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 years ended December 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 ( 26,000 ) $ 81.91 Non-vested RSUs as of December 31, 2023 160,900 $ 81.91 There was $ 10.4 million of unrecognized stock-based compensation expense related to employees’ RSU awards that is expected to be recognized over a weighted-average period of 3.2 years as of December 31, 2023. The Company recorded stock-based compensation expense related to RSUs in the consolidated statements of operations and comprehensive income (loss) for the years ended December 31, 2023, 2022, and 2021 as follows (in thousands): Years Ended December 31, 2023 2022 2021 Research and development $ 1,112 $ — $ — Selling, general and administrative 1,427 — — Total stock-based compensation $ 2,539 $ — $ — 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 December 31, 2023, the Company determined 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 years ended December 31, 2023 and 2022. 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 ( 10,000 ) $ 81.91 Non-vested PSUs as of December 31, 2023 50,000 $ 81.91 F-22 Krystal Biotech, Inc. Notes to Consolidated Financial Statements — Continued There was $ 2.4 million of unrecognized stock-based compensation expense related to employees’ PSU awards that is expected to be recognized over a weighted-average period of 1.2 years as of December 31, 2023. The Company recorded stock-based compensation expense related to PSUs in the consolidated statements of operations and comprehensive income (loss) for the years ended December 31, 2023, 2022, and 2021 as follows (in thousands): Years Ended December 31, 2023 2022 2021 Selling, general and administrative $ 1,717 $ — $ — Total stock-based compensation $ 1,717 $ — $ — Shares remaining available for grant under the Plan were 1,509,438 , with a sublimit for incentive stock options of 22,786 , at December 31, 2023. After the FDA approval of VYJUVEK on May 19, 2023, the Company began capitalizing stock-based compensation associated with the allocation of labor costs related to work performed to manufacture VYJUVEK. For the years ended December 31, 2023, 2022 and 2021, the Company capitalized $ 1.1 million, zero , and zero , respectively, in inventory. Historically, the Company also capitalized the portion of stock-based compensation related to work performed on the construction of our manufacturing facilities. For the years ended December 31, 2023, 2022 and 2021, the Company capitalized $ 162 thousand, $ 551 thousand, and $ 284 thousand, respectively, of stock-based compensation in property and equipment . 11. Income Taxes Our income (loss) before income taxes by jurisdiction consisted of the following: Years Ended December 31, 2023 2022 2021 U.S. $ 7,795 $ ( 135,691 ) $ ( 69,570 ) Foreign 5,102 ( 4,284 ) — Income (loss) before income taxes $ 12,897 $ ( 139,975 ) $ ( 69,570 ) The provision (benefit) for income taxes consists of the following: Years Ended December 31, 2023 2022 2021 Federal $ 125 $ — $ — State 1,702 $ — $ — Foreign 138 $ — $ — Total Tax Provision $ 1,965 $ — $ — F-23 Krystal Biotech, Inc. Notes to Consolidated Financial Statements — Continued A reconciliation of income tax expense (benefit) computed at the statutory federal and state income tax rate for the year to income tax expense as reflected in our financial statements for years ended December 31, 2023, 2022 and 2021 are as follows (in thousands): Years Ended December 31, 2023 2022 2021 Federal income tax expense (benefit) at statutory rate $ 2,708 $ ( 29,395 ) $ ( 14,578 ) Change in valuation allowance ( 5,457 ) 39,781 20,689 State income tax expense (benefit) net of federal benefit 7,546 ( 10,438 ) ( 5,436 ) Credits ( 4,458 ) ( 3,167 ) ( 1,259 ) Stock Compensation ( 1,715 ) 2,152 724 Section 162(m) limitation 2,674 620 — GILTI 623 — — Other non-deductible expenses 136 30 ( 49 ) Other ( 92 ) 417 ( 91 ) Total tax expense $ 1,965 $ — $ — The significant components of the Company’s deferred tax assets and liabilities as of December 31, 2023 and 2022 are as follows (in thousands): December 31, December 31, 2023 2022 Deferred tax assets: Net operating loss carryforwards $ 39,973 $ 52,569 Stock compensation 7,417 7,445 Lease liability 2,056 2,572 Accrued expenses 2,091 2,206 Section 174 R&D capitalization 20,006 5,782 Intangible assets 9,755 8,342 Credits 10,299 6,708 Unrealized loss on marketable securities — 192 Total deferred tax assets 91,597 85,816 Valuation allowance ( 76,995 ) ( 82,513 ) Deferred tax assets $ 14,602 $ 3,303 Deferred tax liabilities: Depreciation ( 11,537 ) ( 137 ) Right-of-use assets ( 1,778 ) ( 2,312 ) Prepaid expenses ( 1,090 ) ( 854 ) Unrealized gain on marketable securities ( 197 ) — Total deferred tax liabilities $ ( 14,602 ) $ ( 3,303 ) Net deferred tax assets $ — $ — The Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets. Based on the Company’s history of operating losses, the Company has concluded that it is not more likely than not that the benefit of its deferred tax assets will be realized. Accordingly, the Company has provided a full valuation allowance for deferred tax assets as of December 31, 2023 and 2022. As of December 31, 2023 and 2022, the Company had federal research and development credit carryforwards of approximately $ 4.8 million and $ 2.0 million, respectively. The federal tax credit carryforwards will begin to expire in 2039 if not utilized. As of December 31, 2023 and 2022, the Company also had orphan drug tax credit carryforwards of approximately $ 5.5 million and $ 4.4 million, respectively. The orphan drug tax credit carryforwards will begin to expire in 2039 if not utilized. F-24 Krystal Biotech, Inc. Notes to Consolidated Financial Statements — Continued As of December 31, 2023, the Company fully utilized its state research and development credit carryforwards and as of December 31, 2022, the Company had $ 457 thousand of state research and development credit carryforwards. As of December 31, 2023, the Company had cumulative U.S. federal NOL carryforwards of approximately $ 138.2 million. The federal NOL carryforwards are available indefinitely to offset future income tax liabilities with no expiration period. As of December 31, 2023, the Company had cumulative U.S. state NOL carryforwards of approximately $ 186.0 million. The state NOLs are available to offset future state income tax liabilities and will begin to expire in 2037. Under the provisions of the Internal Revenue Code, the NOL carryforwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities. NOL carryforwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant shareholders over a three-year period in excess of 50 %, as defined under Internal Revenue Code Sections 382 and 383 of the Internal Revenue Code, respectively, as well as similar state provisions. This could limit the amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities. No deferred tax assets have been recognized on our consolidated balance sheets related to these NOLs, as they are fully offset by a valuation allowance. If we have previously had, or have in the future, one or more Section 382 “ownership changes,” including in connection with our initial public offering or another offering, or if we do not generate sufficient taxable income, we may not be able to utilize a material portion of our NOLs, even if we achieve profitability. The Company files income tax returns in the United States at the federal and state level and in foreign jurisdictions in which the Company conducts business activities. The federal and state income tax returns are subject to tax examinations for the tax year ended December 31, 2022, 2021, 2020. To the extent the Company has tax attribute carryforwards, the tax years in which the attribute was generated may still be adjusted upon examination by the Internal Revenue Service or state tax authorities to the extent utilized in a future period. Additionally, the Company is subject to tax examinations by taxing authorities in foreign jurisdictions where it has business operations. At this time, the Company is not undergoing examination by the Internal Revenue Service or any state or foreign taxing authorities. 12. Gain on Sale of Priority Review Voucher In August 2023, the Company entered into an agreement to sell the rare pediatric disease voucher (“PRV”), which was awarded to the Company in connection with the FDA’s approval of VYJUVEK. The transaction closed in August 2023 and was not subject to any commissions or closing costs. The proceeds of $ 100.0 million from the sale of the PRV were recorded as a gain from sale of priority review voucher on the Company’s consolidated statement of operations as it did not have a carrying value at the time of the sale, and as proceeds from sale of priority review voucher on the Company’s consolidated statement of cash flows. 13. Subsequent Events The Company evaluates events or transactions that occur after the balance sheet date, but prior to the issuance of the financial statements, to identify matters that require disclosure. The Company concluded that no subsequent events have occurred that would require recognition or disclosure in the consolidated financial statements. F-25 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.