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Item 1. Financial Statements

2024-05-06 compared with 2023-11-06 · 215 added, 397 removed, 245 unchanged (71% of the section changed)

2 unchanged sentences

Condensed Consolidated Balance Sheets

(In thousands, except share and per share data) September 30,

(in thousands, except par value)

2024 December 31,

3 unchanged sentences

Accounts receivable, net

46,467 42,040

Prepaid expenses and other current assets 6,485 6,706

9 unchanged sentences

Current portion of lease liability 1,430 1,474

Accrued rebates

Accrued expenses and other current liabilities 29,511 21,511

2 unchanged sentences

Total liabilities 54,054 39,714

Commitments and contingencies (Note 7)

Commitments and contingencies (see note 7)

Stockholders' equity

1 unchanged sentence

$ 0.00001 par value;

80,000,000 shares authorized at September 30, 2023 and December 31, 2022;

28,194,655 shares issued and outstanding at September 30, 2023;

and 25,763,743 shares issued and outstanding at December 31, 2022

80,000 shares authorized as of March 31, 2024 and December 31, 2023;

28,528 and 28,237 shares issued and outstanding as of March 31, 2024 and December 31, 2023, respectively.

Additional paid-in capital 1,068,436 1,047,830

Accumulated other comprehensive loss

( 382 ) ( 728 )

Accumulated other comprehensive (loss) gain

Accumulated deficit ( 268,895 ) ( 269,827 )

Total stockholders’ equity

799,242 778,641

Total liabilities and stockholders’ equity

$ 853,296 $ 818,355

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

Krystal Biotech, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

Three Months Ended

September 30, Nine Months Ended

September 30,

(In thousands, except share and per share data) 2023 2022 2023 2022

Product revenues, net

$ 8,556 $ — $ 8,556 $ —

Condensed Consolidated Statements of Operations and Comprehensive Loss

Three Months Ended March 31,

(in thousands, except per share data)

Product revenue, net

Cost of goods sold 2,419 —

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Loss from operations ( 6,684 ) ( 48,823 )

( 25,993 ) ( 31,451 ) ( 112,865 ) ( 110,425 )

Other income:

Gain from sale of priority review voucher

100,000 — 100,000 —

Interest and other income, net 7,616 3,526

Net income (loss)

Unrealized (loss) gain on available-for-sale securities and currency translation adjustment

$ 932 $ ( 45,297 )

Comprehensive income (loss)

Unrealized (loss) gain on available-for-sale securities and other

Comprehensive loss

$ ( 5 ) $ ( 44,723 )

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Condensed Consolidated Statements of Stockholders’ Equity

Common Stock Additional Paid-in Accumulated Other Comprehensive Accumulated Total

Stockholders'

(In thousands, except shares) Shares Amount Capital Loss

Deficit Equity

Balances at January 1, 2023 25,763,743 $ — $ 803,718 $ ( 728 ) $ ( 280,759 ) $ 522,231

Issuance of common stock, net 42,021 — 2,208 — — 2,208

Shares surrendered for taxes ( 9,551 ) — ( 749 ) — — ( 749 )

Stock-based compensation expense — — 10,599 — — 10,599

Unrealized gain on investments and other — — — 574 — 574

Net loss — — — — ( 45,297 ) ( 45,297 )

Balances at March 31, 2023 25,796,213 $ — $ 815,776 $ ( 154 ) $ ( 326,056 ) $ 489,566

Issuance of common stock, net 2,178,703 — 185,397 — — 185,397

Stock-based compensation expense — — 11,443 — — 11,443

Unrealized (loss) on investments and other — — — ( 82 ) — ( 82 )

Net loss — — — — ( 33,210 ) ( 33,210 )

Balances at June 30, 2023

Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total

Stockholders’ Equity

(in thousands)

Shares Amount

Balances as of January 1, 2024 28,237 $ — $ 1,047,830 $ 638 $ ( 269,827 ) $ 778,641

Issuance of common stock upon exercise of stock options, net

260 — 15,969 — — 15,969

Issuance of common stock, net 219,739 — 13,511 — — 13,511

Stock-based compensation expense — — 8,722 — — 8,722

Unrealized (loss) on investments and other

Vesting of restricted stock units, net of shares withheld for taxes

39 — ( 4,181 ) — — ( 4,181 )

Net income — — — — 80,747 80,747

Balances at September 30, 2023

Shares of restricted stock awards surrendered for taxes

( 8 ) — ( 1,205 ) — — ( 1,205 )

Common Stock Additional Paid-in Accumulated Other Comprehensive Accumulated Total

Stockholders'

(In thousands, except shares) Shares Amount Capital (Loss) Deficit Equity

Balances at January 1, 2022 25,207,985 $ — $ 734,523 $ ( 163 ) $ ( 140,784 ) $ 593,576

Issuance of common stock, net 1,475 — 55 — — 55

Shares surrendered for taxes and forfeitures ( 10,379 ) — ( 649 ) — — ( 649 )

Stock-based compensation expense — — 6,571 — — 6,571

Unrealized (loss) on investments and other — — — ( 1,034 ) — ( 1,034 )

Net loss — — — — ( 49,965 ) ( 49,965 )

Balances at March 31, 2022 25,199,081 $ — $ 740,500 $ ( 1,197 ) $ ( 190,749 ) $ 548,554

Issuance of common stock, net 472,706 — 30,748 — — 30,748

Shares forfeited

Stock-based compensation

— — 10,023 — — 10,023

Stock-based compensation expense — — 8,335 — — 8,335

Unrealized loss on investments and other (1)

Net loss — — — — ( 28,108 ) ( 28,108 )

Balances at June 30, 2022

— — — ( 937 ) — ( 937 )

Issuance of common stock, net 45,377 — 2,176 — — 2,176

Stock-based compensation expense — — 9,195 — — 9,195

— — — — 932 932

Balances as of March 31, 2024 28,528 $ — $ 1,068,436 $ ( 299 ) $ ( 268,895 ) $ 799,242

Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total

Stockholders’ Equity

(in thousands)

Shares Amount

Balances as of January 1, 2023 25,764 $ — $ 803,718 $ ( 728 ) $ ( 280,759 ) $ 522,231

Issuance of common stock upon exercise of stock options, net

42 — 2,208 — — 2,208

Shares of restricted stock awards surrendered for taxes

( 10 ) — ( 749 ) — — ( 749 )

Stock-based compensation

— — 10,599 — — 10,599

Unrealized gain on investments and other (1)

1 unchanged sentence

Net loss — — — — ( 45,297 ) ( 45,297 )

Balances at September 30, 2022

25,709,664 $ — $ 790,954 $ ( 1,475 ) $ ( 248,707 ) $ 540,772

Balances as of March 31, 2023 25,796 $ — $ 815,776 $ ( 154 ) $ ( 326,056 ) $ 489,566

(1) Includes foreign currency translation losses of $ 62 thousand and $ 35 thousand for the three months ended March 31, 2024 and 2023, respectively.

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

1 unchanged sentence

Condensed Consolidated Statements of Cash Flows

Nine Months Ended

September 30,

Three Months Ended March 31,

(in thousands)

1 unchanged sentence

Net income (loss) $ 932 $ ( 45,297 )

Adjustments to reconcile net income (loss) to net cash (used in) operating activities

Gain from sale of priority review voucher

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities

Accretion on marketable securities

( 802 ) ( 606 )

Depreciation and amortization 2,569 2,966

Stock-based compensation expense 30,080 23,678

Loss on disposals of fixed assets — 22

Amortization of operating lease right-of-use assets

Stock-based compensation expense, net

Realized gain on investments

( 1,213 ) ( 809 )

Other, net ( 238 ) 1

6 unchanged sentences

Accrued expenses and other current liabilities ( 5,162 ) ( 3,463 )

Net cash (used in) operating activities ( 81,572 ) ( 78,240 )

Accrued rebates

Accrued litigation settlement 12,500 12,500

Net cash provided by (used in) operating activities

15,888 ( 26,156 )

Investing Activities

Proceeds from sale of priority review voucher

Purchases of property and equipment ( 1,260 ) ( 5,381 )

Purchases of investments ( 88,335 ) ( 145,576 )

Proceeds from maturities of investments 428,620 153,599

Net cash provided by (used in) investing activities

Maturities of investments

63,615 154,520

Financing Activities

Issuance of common stock, net of issuance costs

Net cash (used in) provided by investing activities

( 25,980 ) 3,563

Financing Activities

Proceeds from exercise of stock options, net

Taxes paid for employee tax withholding related to restricted stock units

Taxes paid related to settlement of restricted stock awards

( 1,205 ) ( 749 )

Net cash provided by financing activities 10,583 1,474

3 unchanged sentences

Cash and cash equivalents at end of period $ 359,006 $ 140,745

Supplemental Disclosures of Non-Cash Investing and Financing Activities

Supplemental Disclosures of Non-Cash Investing Activities

Unpaid purchases of property and equipment included in accounts payable and accrued expenses $ 8,456 $ 11,865

Initial recognition of right-of-use assets $ — $ 1,556

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

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(“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 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 an engineered Herpes Simplex Virus-1 (“HSV-1”) vector to deliver therapeutic transgenes to cells of interest in multiple organ systems.

In January 2022, August 2022, December 2022, August 2023, and March 2024 the Company incorporated wholly-owned subsidiaries in Switzerland, Netherlands, France, Germany, and Japan, respectively, for the purpose of establishing initial operations in Europe and Japan for the commercialization of the Company’s product pipeline.

We are a fully integrated, commercial-stage biotechnology company focused on the discovery, development, manufacturing and commercialization of genetic medicines to treat diseases with high unmet medical needs.

Using our patented gene therapy technology platform that is based on engineered herpes simplex virus-1 (“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 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 Current Good Manufacturing Practices ("CGMP") manufacturing facilities.

On May 19, 2023, the Company received U.S.

Food and Drug Administration (“FDA”) approval for its first product, VYJUVEK ® (“VYJUVEK”) for the treatment of Dystrophic Epidermolysis Bullosa (“DEB”) in patients six months or older.

Additionally, the Company received a Rare Pediatric Disease Priority Review Voucher (“PRV”) in connection with the VYJUVEK approval.

VYJUVEK became commercially available upon approval, and we began generating revenue from VYJUVEK product sales in 3Q 2023.

As of September 30, 2023, the Company had an accumulated deficit of $ 278.5 million.

As the Company continues to incur operating losses, a transition to operating profitability is dependent upon the successful commercialization of VYJUVEK as well as successful development, approval, and commercialization of its other product candidates and the achievement of a level of revenues adequate to support the Company’s cost structure.

The Company may never achieve operating profitability and unless and until it does, the Company will continue to need to raise additional capital or obtain financing from other sources.

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

Our vectors are amenable to formulation 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 Current Good Manufacturing Practice (“CGMP”) manufacturing facilities.

As of March 31, 2024, the Company had an accumulated deficit of $ 268.9 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.

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, and may also seek additional capital through arrangements with strategic partners, debt financings, or other sources.

There can be no assurance that additional funding will be available on terms acceptable to the Company, if at all.

1 unchanged sentence

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 $ 562.1 million as of September 30, 2023 will be sufficient to allow the Company to fund its planned operations for at least the next 12 months from the date of this Quarterly Report on Form 10-Q.

The Company believes that its cash, cash equivalents and short-term investments of approximately $ 538.3 million as of March 31, 2024 will be sufficient to allow the Company to fund its planned operations for at least the next 12 months from the date of this Quarterly Report on Form 10-Q.

Summary of Significant Accounting Policies

3 unchanged sentences

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.

The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year.

These unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022, as filed with the U.S.

Securities and Exchange Commission (“SEC”) on February 26, 2024.

8 unchanged sentences

Estimates are used in the following areas, among others:

variable consideration associated with revenue recognition, stock-based compensation expense, accrued expenses, 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 condensed 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 condensed consolidated balance sheets and consist of corporate bonds and government agency securities.

Accrued interest on investments is also classified as short-term investments on the condensed consolidated balance sheets.

As our entire investment portfolio is considered available for use in current operations, we classify all investments as available-for-sale securities.

Available-for-sale securities are carried at fair value, with unrealized gains and losses reported in accumulated other comprehensive loss, which is a separate component of stockholders’ equity in the condensed consolidated balance sheets.

Any premium arising at purchase is amortized to the earliest call date and any discount arising at purchase is accreted to maturity.

Amortization and accretion of premiums and discounts are recorded in interest and other income, net, in the condensed 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 or 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 condensed consolidated financial statements, approximate fair value, primarily due to their short maturities.

Our available-for-sale, short-term and long-term investments are considered to be Level 2 financial instruments.

Revenue Recognition

The Company sells VYJUVEK to a limited number of specialty pharmacies (“SPs”) that mix the medication and administer it to patients in the patient’s home by a healthcare professional and a single specialty distributor (“SD”), that distributes VYJUVEK to hospitals and outpatient clinics where patients are administered the medication at a healthcare professional’s office.

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, rebates and discounts.

The Company’s payment terms are generally 30 to 60 days from the invoice date.

Variable Consideration

Product revenues 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 contracts between the Company and its customers.

– Prompt Pay Discounts:

As an incentive for prompt payment, the Company offers a cash discount to customers.

The Company estimates accrued prompt pay discounts using the most likely amount method.

The Company expects that all eligible customers 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.

The Company estimates accrued government rebates using the expected value method.

The Company accrues estimated rebates based on estimated percentages of VYJUVEK 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 condensed consolidated balance sheets.

– 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 condensed consolidated balance sheets.

– Copay Assistance:

The Company provides copay assistance to qualified patients, 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 condensed consolidated balance sheets.

The Company offers SPs and SDs limited return rights relating to product damage or defect and based on these provisions, the Company believes that there will be minimal returns.

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 revenues 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 September 30, 2023, the credit profiles for the Company’s customer was deemed to be in good standing, and as such an allowance for credit losses was not recorded.

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.

Concentration of Credit Risk and Off-Balance Sheet Risk

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The Company’s accounts receivable, net and marketable securities, which primarily consist of U.S.

government agency securities and treasuries, equity securities, corporate bonds and commercial paper, potentially subject the Company to concentrations of credit risk.

The Company had one customer for the three and nine months ended September 30, 2023 and no product revenues for the three and nine months ended September 30, 2022.

government agency securities and treasuries, corporate bonds and commercial paper, potentially subject the Company to concentrations of credit risk.

As of March 31, 2024, 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.

The Company had one customer for the three months ended March 31, 2024 and no product revenue for the three months ended March 31, 2023.

The Company has no financial instruments with off-balance sheet risk of loss.

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 an impairment is identified.

For the three and nine months ended September 30, 2023 and 2022, there were no inventory impairment adjustments.

As of September 30, 2023, the Company recorded $ 5.3 million of inventory, consisting of raw materials, work-in-process, and finished goods within inventory on the Company’s condensed consolidated balance sheets.

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 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 useful life or remaining life of lease

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

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

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

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

Construction in progress is not depreciated until the asset is placed in service.

Impairment of Long-Lived Assets

The Company evaluates long-lived assets for potential impairment when events or changes in circumstances indicate the carrying value of the assets may not be recoverable.

We review the recoverability of the net book value of long-lived assets whenever events and circumstances indicate ("triggering events") that the net book value of an asset may not be recoverable.

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

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

The Company has no t identified any triggering events or recognized any impairment losses for the three and nine months ended September 30, 2023 and 2022.

The Company accounts for its lease agreements in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification, or ASC, Topic 842, Leases .

Right-of-use lease assets represent the right to use an underlying asset during the lease term and the lease liabilities represent the commitment to make lease payments arising from the lease.

Right-of-use lease assets and obligations are recognized based on the present value of remaining lease payments over the lease term.

As the Company’s existing lease agreements do not provide an implicit rate and as the Company does not have any external borrowings, the Company has used an estimated incremental borrowing rate based on the information available at lease commencement in determining the present value of lease payments.

Operating lease expense is recognized on a straight-line basis over the lease term.

Variable lease expense is recognized in the period in which the obligation for the payment is incurred.

In addition, the Company also has made an accounting policy election to exclude leases with an initial term of twelve months or less from its condensed consolidated balance sheets and to account for lease and non-lease components of its operating leases as a single component.

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 capitalized within prepaid expenses and other current assets on the condensed consolidated balance sheets.

The capitalized amounts are expensed as the related goods are delivered or the services are performed.

In accruing service fees, the Company estimates the time period over which services will be performed and the level of effort to be expended in each period.

These estimates are based on communications with third-party service providers and the Company’s estimates of accrued expenses using information available at each balance sheet date.

If the actual timing of the performance of services or the level of effort varies from the estimate, the Company will adjust the accrual accordingly.

Stock-Based Compensation Expense

The Company applies the fair value recognition provisions of FASB, ASC Topic 718, Compensation—Stock Compensation ("ASC 718"), to account for stock-based compensation.

Compensation costs related to equity awards granted are based on the estimated fair value of the awards on the date of grant.

ASC 718 requires all stock-based payments, including grants of stock options and restricted stock, to be recognized in the consolidated statements of operations based on their grant-date fair values.

Compensation expense for stock options, restricted stock awards, and restricted stock units is recognized on a straight-line basis based on the grant-date fair value over the associated service period of the award, which is generally the vesting term.

Compensation expense for performance-based restricted stock units is recognized for the awards that are probable of vesting over the service period of the award.

On a quarterly basis, management estimates the probable number of performance-based restricted stock units that would vest until such time that the ultimate achievement of the performance criteria are known.

The Company estimates the fair value of its stock options using the Black-Scholes option pricing model, which requires the input of subjective assumptions, including:

(i) the expected stock price volatility;

(ii) the expected term of the award;

(iii) the risk-free interest rate;

and (iv) expected dividends.

The Company estimates stock price volatility by using its own historical data.

The expected term of the Company’s stock options is estimated using the “simplified” method, whereby the expected term equals the arithmetic mean of the vesting term and the original contractual term of the option.

The risk-free interest rates are based on U.S.

Treasury securities with a maturity date commensurate with the expected term of the associated award.

The Company has never paid and does not expect to pay dividends in the foreseeable future.

The Company accounts for forfeitures as they occur.

Stock-based compensation expense recognized in the financial statements is based on awards for which service conditions are expected to be satisfied.

Comprehensive 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 and foreign currency translation are components of other comprehensive gains or losses and are presented net of taxes.

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

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

The Company determined that there were no other-than-temporary impairments during the three and nine months ended September 30, 2023 and 2022.

Summary of Significant Accounting Policies

See Note 2 to our consolidated financial statements included in our 2023 10-K.

There were no material changes to the Company's significant accounting policies during the three months ended March 31, 2024.

Recent Accounting Pronouncements

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

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

There were no accounting pronouncements issued or adopted during the three months ended March 31, 2024 that are expected to have a material impact on the Company’s condensed consolidated financial statements.

In December 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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.

Revenue Recognition

The Company began commercial marketing and sales of VYJUVEK throughout the United States and began recognizing revenue in 3Q 2023.

For the three and nine months ended September 30, 2023 and 2022, the Company recognized net product revenues of $ 8.6 million and zero , respectively.

Accounts receivable balances were $ 9.3 million and zero as of September 30, 2023 and December 31, 2022, respectively.

The following table summarizes changes in allowances and discounts for the three months ended September 30, 2023 (in thousands):

Following FDA approval on May 19, 2023, the Company began commercial marketing and sales of VYJUVEK throughout the United States and began recognizing revenue in the third quarter of 2023.

The following table summarizes changes in allowances and discounts for the three months ended March 31, 2024:

(in thousands)

Other Accruals

Balance as of June 30, 2023

Balance as of December 31, 2023

$ 5,977 $ 858 $ 279 $ 7,114

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( 434 ) ( 953 ) ( 75 ) ( 1,462 )

Balance, as of September 30, 2023

Balance, as of March 31, 2024

$ 11,289 $ 1,470 $ 415 $ 13,174

Rebates and other accruals are included in accrued rebates and accrued expenses and other current liabilities, respectively, on the condensed consolidated balance sheets.

Prompt pay is recorded as an allowance against accounts receivable, net on the condensed consolidated balance sheets.

Provisions for rebates, prompt pay and other accruals are recorded as a reduction to product revenue on the condensed consolidated statements of operations and comprehensive loss.

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 share equivalents outstanding for the period.

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

There were 378,299 and 1,277,313 common share equivalents, in the form of stock options, that have been excluded of from the calculation of diluted net income (loss) per common share for the three and nine months ended September 30, 2023, respectively, as their effect would be anti-dilutive.

There were 3,565,110 common share equivalents outstanding in the form of stock options and unvested restricted stock awards as of September 30, 2022 that were excluded from the calculation of diluted net income (loss) per common share as their effect would be anti-dilutive.

Three Months Ended

September 30, Nine Months Ended

September 30,

(In thousands, except share and per share data) 2023 2022 2023 2022

Common stock equivalents consist of common stock issuable upon (1) exercise of stock options and (2) vesting of restricted stock awards, restricted stock units and performance-based restricted stock units (collectively, “restricted stock”).

For the three months ended March 31, 2024 and 2023, respectively, there were (1) 154 thousand and 3.8 million common stock equivalents outstanding in the form of stock options and (2) 78 thousand and 291 thousand unvested restricted stock, that have each been excluded from the calculation of diluted net income (loss) per common share as their effect would be anti-dilutive.

Three Months Ended March 31,

(in thousands, except per share data)

Net income (loss) $ 932 $ ( 45,297 )

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Dilutive effect of stock options and unvested restricted stock 996 —

850,096 — 572,261 —

Weighted-average diluted common shares 29,291 25,712

28,892,226 25,619,125 27,384,539 25,428,097

Net income (loss) per common share—Basic

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Fair Value Instruments

The following tables show the Company’s cash, cash equivalents and available-for-sale securities by significant investment category as of September 30, 2023 and December 31, 2022, respectively (in thousands):

September 30, 2023

The following tables show the Company’s cash, cash equivalents and available-for-sale securities by significant investment category as of March 31, 2024 and December 31, 2023:

March 31, 2024

(in thousands)

Amortized Cost Gross

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December 31, 2023

(in thousands)

Amortized Cost Gross

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(2) The Company’s long-term marketable securities mature between one year and two years .

See Note 2 to these unaudited condensed consolidated financial statements for additional discussion regarding the Company’s fair value measurements.

Balance Sheet Components

Inventory consisted of the following:

(in thousands)

2024 December 31,

Raw materials $ 4,489 $ 3,154

Work-in-process 6,387 3,204

Finished goods 161 627

Inventory $ 11,037 $ 6,985

Property and Equipment, Net

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

September 30,

Property and equipment, net consisted of the following:

(in thousands)

2024 December 31,

Building and building improvements $ 111,232 $ 111,180

Construction in progress $ 56,074 $ 131,331

Leasehold improvements 25,363 25,068

Manufacturing equipment 25,281 24,905

Construction in progress

Laboratory equipment 3,064 2,339

Furniture and fixtures 1,518 957

Computer equipment and software 1,647 1,614

Furniture and fixtures 1,640 1,632

Total property and equipment 175,132 174,029

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Property and equipment, net $ 160,011 $ 161,202

Depreciation expense was $ 1.2 million and $ 3.5 million for the three and nine months ended September 30, 2023 and $ 669 thousand and $ 1.6 million for the three and nine months ended September 30, 2022, 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, certain 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 during the first half of 2023.

The Company placed additional portions of ASTRA into service during the three months ended September 30, 2023 as it was determined that additional assets were ready for their intended use.

As certain building improvements are not yet complete and certain qualification activities are still underway, the Company will continue to hold the remaining assets within construction in progress until validation has been completed and the assets are ready for their intended use.

Validation of the facility is expected to be completed in 2023.

Depreciation expense was $ 1.4 million and $ 1.1 million for the three months ended March 31, 2024 and 2023, respectively.

Depreciation expense capitalized into inventory was $ 867 thousand and zero for the three months ended March 31, 2024 and 2023, respectively.

In March 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 through 2023 and the first quarter of 2024, 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.

Estimated remaining payments related to ASTRA were $ 8.0 million as of March 31, 2024 and are recorded in accounts payable and accrued expenses and other current liabilities on the condensed consolidated balance sheets.

Accrued Expenses and Other Current Liabilities

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

September 30,

Accrued expenses and other current liabilities consisted of the following as of March 31, 2024 and December 31, 2023:

(in thousands)

2024 December 31,

Accrued litigation settlement $ 12,500 $ —

Accrued construction-in-progress

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Other current liabilities 2,613 2,210

Accrued preclinical and clinical expenses 1,908 1,365

Accrued taxes

Accrued preclinical and clinical expenses 882 1,248

Total $ 29,511 $ 21,511

Commitments and Contingencies

Agreements with Contract Research Organizations and Contract Manufacturing Organizations

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 preclinical and clinical-stage or pre-commercial products.

The agreements with CMOs primarily relate to the manufacturing of our sterile gel that is mixed with in-house produced vectors as part of the final drug product for VYJUVEK.

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 September 30, 2023 under these agreements is approximately $ 2.7 million.

The Company has incurred research and development expenses under these agreements of $ 1.9 million and $ 5.0 million for the three and nine months ended September 30, 2023, respectively, and $ 2.1 million and $ 5.1 million for the three and nine months ended September 30, 2022, respectively.

ASTRA Contractual Obligations

The Company has contracted with various third parties to complete and qualify our second CGMP facility, ASTRA.

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

The estimated remaining commitment as of September 30, 2023 is $ 11.1 million and primarily relates to the remaining building improvements and certain qualification activities of the facility.

The Company has included costs incurred to-date associated with the ongoing build-out of ASTRA within construction in progress, except for the assets of the facility that have been placed in service.

As of September 30, 2023, Substantial Completion, as defined in the Standard Form of Contract for Construction and the corresponding General Conditions of the Contract for Construction (the “Agreement”) with Whiting-Turner Contracting Company (“Whiting-Turner”), the construction manager for ASTRA, had not been achieved.

Whiting-Turner’s work under the Agreement represents a portion of the work necessary to complete construction of the ASTRA facility and, therefore the date of Substantial Completion of Whiting-Turner’s work under the Agreement may not equate to the date of in-service for portions of ASTRA or the date of full facility completion of ASTRA.

The estimated remaining commitments as of March 31, 2024 under these agreements is approximately $ 1.1 million.

The Company has incurred research and development expenses under these agreements of $ 1.5 million for the three months ended March 31, 2024 and $ 2.0 million for the three months ended March 31, 2023.

Legal Proceedings

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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.

As defined in the settlement agreement, cumulative sales shall include all revenue from sales of the Company’s 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 zero and $ 12.5 million for the three and nine months ended September 30, 2023, respectively, and zero and $ 25.0 million for the three and nine months ended September 30, 2022, respectively, under litigation settlement expense on the condensed consolidated statements of operations.

As of September 30, 2023, the Company has not recorded an accrual for the remaining contingent milestone payments.

The Company did no t receive insurance proceeds during the three and nine months ended September 30, 2023 and received zero and $ 768 thousand during the three and nine months ended September 30, 2022, respectively.

The reimbursements have been recorded as a reduction to our legal fees included in selling, general, and administrative expenses on the condensed consolidated statements of operations and within operating activities on the condensed consolidated statements of cash flows.

As of September 30, 2023, future minimum commitments under the Company’s operating leases with lease terms in excess of 12 months were as follows (in thousands):

2023 (remaining three months) $ 413

The Company recorded litigation settlement expense of $ 12.5 million for each of the three months ended March 31, 2024 and 2023 on the condensed consolidated statements of operations and comprehensive loss in accordance with the settlement agreement.

During the three months ended March 31, 2024, in accordance with ASC 450, Contingencies (“ASC 450”), the Company determined that reaching $ 100.0 million in total cumulative sales was probable, and recorded litigation settlement expense of $ 12.5 million relating to the milestone payment, which becomes payable following the filing of the Annual Report on Form 10-K that reports the $ 100.0 million in total cumulative sales.

The Company recorded litigation

settlement expense of $ 12.5 million for the three months ended March 31, 2023, as it determined that FDA approval of B-VEC was probable.

As of March 31, 2024, the Company has not recorded an accrual for the remaining two contingent milestone payments totaling $ 25.0 million.

As of March 31, 2024, future minimum commitments under the Company’s operating leases with lease terms in excess of 12 months were as follows:

(in thousands)

2024 (remaining nine months) $ 1,157

Thereafter 9,438

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Present value of lease liability $ 7,895

Supplemental condensed consolidated balance sheet information related to leases is as follows:

September 30,

2023 December 31, 2022

Operating leases:

Right-of-use assets $ 7,360 $ 8,042

Current portion of lease liability 1,501 1,561

Lease liability 6,819 7,372

Total lease liability $ 8,320 $ 8,933

Weighted average remaining lease term, in years 12.3 12.5

Weighted average discount rate 9.4 % 9.4 %

As of March 31, 2024 and December 31, 2023, the Company's weighted-average remaining lease term for operating leases was 12.2 years and 12.3 years, respectively, and the Company’s weighted-average discount rate for operating leases was 9.5 % as of March 31, 2024 and December 31, 2023.

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

Three Months Ended

September 30, Nine Months Ended

September 30,

2023 2022 2023 2022

Three Months Ended March 31,

(in thousands)

Operating lease expense $ 299 $ 463

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Capitalization

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 nine months ended September 30, 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.

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.

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 $ 0.00001 per share (“Common Stock”), 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 SEC on May 4, 2020 (“2020 Shelf Registration Statement”).

During the three months ended March 31, 2023, no shares of Common Stock were issued pursuant to the 2020 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 (“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 prospectus supplement relating to the New Placement Shares that was filed with the SEC on May 8, 2023.

During the quarter ended September 30, 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.

During the three months ended March 31, 2024, 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.

Stock-Based Compensation

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

In 2017, the Company adopted the 2017 IPO Stock Plan (“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.

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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.

The Company has historically granted stock options and restricted stock awards (“RSAs”) to its employees.

In February 2023, the Company began issuing restricted stock units (“RSUs”) and performance-based restricted stock units (“PSUs” and with RSUs commonly referred to collectively as “restricted stock units”) to certain employees.

Shares remaining available for grant under the Plan were 2.4 million as of March 31, 2024.

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 30,500 and 419,780 stock options to employees, non-employees, and directors of the Company during the three and nine months ended September 30, 2023 and 189,000 and 1,958,000 to employees, non-employees, and directors of the Company during the three and nine months ended September 30, 2022, respectively.

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

Outstanding Weighted-

Price Weighted-

Life (Years) Aggregate

The following table summarizes the Company’s stock option activity for the three months ended March 31, 2024:

Stock Options Outstanding Weighted-average Exercise Price

Weighted-average Remaining Contractual Life (in years)

Aggregate Intrinsic Value (1)

(in thousands)

Outstanding at December 31, 2022 3,582,181 $ 61.50 8.7 $ 64,880

Outstanding as of December 31, 2023

2,606,592 $ 66.39 7.9 $ 150,405

Granted 126,742 $ 155.82

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Cancelled or forfeited ( 245,659 ) $ 67.89

Expired — $ —

Outstanding at September 30, 2023 2,667,260 $ 66.04 8.2 $ 133,648

Exercisable at September 30, 2023 707,277 $ 55.51 7.1 $ 42,793

(1) Aggregate intrinsic value represents the difference between the closing stock price of our common stock on September 30, 2023 and the exercise price of outstanding in-the-money options.

The total intrinsic value (the amount by which the fair market value exceeds the exercise price) of stock options exercised during the three and nine months ended September 30, 2023 was $ 13.5 million and $ 41.4 million, respectively, and during the three and nine months ended September 30, 2022 was $ 1.3 million and $ 2.1 million, respectively.

The weighted-average grant-date fair value per share of options granted to employees, non-employees, and directors during the three and nine months ended September 30, 2023 was $ 85.93 and $ 62.87 , respectively, and during the three and nine months ended September 30, 2022 was $ 49.59 and $ 43.66 , respectively.

There was $ 77.5 million of unrecognized stock-based compensation expense related to employees', non-employees', and directors’ option awards that is expected to be recognized over a weighted-average period of 2.6 years as of September 30, 2023.

The Company has recorded stock-based compensation expense related to the issuance of stock option awards in the condensed consolidated statements of operations for the three and nine months ended September 30, 2023 and 2022, respectively, as follows (in thousands):

Three Months Ended September 30, Nine Months Ended September 30,

Outstanding as of March 31, 2024

2,228,094 $ 71.88 7.7 $ 236,279

Research and development $ 2,033 $ 2,184 $ 6,858 $ 5,547

Selling, general, and administrative

Exercisable as of March 31, 2024

854,224 $ 61.08 6.8 $ 99,815

Total stock-based compensation $ 6,829 $ 8,617 $ 25,739 $ 22,338

The fair value of options was estimated at the date of grant using the Black-Scholes valuation model with the following weighted-average assumptions for the three and nine months ended September 30, 2023 and 2022:

Three Months Ended September 30, Nine Months Ended September 30,

(1) Aggregate intrinsic value represents the difference between the closing stock price of our common stock on December 31, 2023 and March 31, 2024, respectively, and the exercise price of outstanding in-the-money options.

The following table summarizes the Company’s stock option activity for the three months ended March 31, 2023:

Stock Options Outstanding Weighted-average Exercise Price

Weighted-average Remaining Contractual Life (in years)

Aggregate Intrinsic Value (1)

(in thousands)

Outstanding as of December 31, 2022

3,582,181 $ 61.15 8.7 $ 64,880

Expected stock price volatility 74 % 78 % 73 % 78 %

Expected term of the award (years) 6.2 6.2 6.0 6.2

Risk-free interest rate 4.26 % 3.20 % 3.94 % 2.27 %

Weighted average exercise price $ 125.06 $ 70.91 $ 91.38 $ 63.03

Forfeiture rate — % — % — % — %

Dividend yield — % — % — % — %

Restricted Stock Awards

Restricted stock awards ("RSAs") granted to employees vest ratably over a four -year period.

The Company granted zero RSAs to employees of the Company during each of the three and nine months ended September 30, 2023 and September 30, 2022, respectively.

Number of Shares Weighted Average

Non-vested RSAs as of December 31, 2022 66,600 $ 78.89

Granted 287,600 $ 81.83

Vested ( 12,649 ) $ 78.89

Surrendered for taxes ( 9,551 ) $ 78.89

Non-vested RSAs as of September 30, 2023

Exercised ( 42,021 ) $ 53.54

Cancelled or forfeited ( 42,625 ) $ 65.59

Outstanding as of March 31, 2023

3,785,135 $ 62.75 8.5 $ 66,066

There was $ 2.5 million of unrecognized stock-based compensation expense related to employees’ RSAs that is expected to be recognized over a weighted-average period of 1.4 years as of September 30, 2023.

The Company recorded stock-based compensation expense related to RSAs in the condensed consolidated statement of operations for the three and nine months ended September 30, 2023 and 2022, as follows (in thousands):

Three Months Ended September 30, Nine Months Ended September 30,

Exercisable as of March 31, 2023

961,428 $ 55.08 7.6 $ 24,033

Selling, general, and administrative

(1) Aggregate intrinsic value represents the difference between the closing stock price of our common stock on December 31, 2022 and March 31, 2023, respectively, and the exercise price of outstanding in-the-money options.

The total intrinsic value (the amount by which the fair market value exceeds the exercise price) of stock options exercised was $ 24.5 million and $ 1.1 million during the three months ended March 31, 2024 and 2023, respectively.

The weighted-average grant-date fair value per share of options granted to employees, non-employees, and directors was $ 106.92 and $ 56.86 during the three months ended March 31, 2024 and 2023, respectively.

There was $ 63.9 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 2.6 years as of March 31, 2024.

Restricted Stock Awards

The following table summarizes the Company’s RSA activity:

Three Months Ended March 31,

Number of Shares Weighted Average Grant Date Fair Value

Non-vested RSAs, beginning of period

44,400 $ 78.89 66,600 $ 78.89

Total stock-based compensation $ 437 $ 441 $ 1,305 $ 1,340

Vested ( 14,523 ) $ 78.89 ( 12,649 ) $ 78.89

Surrendered for taxes ( 7,677 ) $ 78.89 ( 9,551 ) $ 78.89

Non-vested RSAs, end of period

22,200 $ 78.89 44,400 $ 78.89

There was $ 1.6 million of unrecognized stock-based compensation expense related to employees’ RSAs that is expected to be recognized over a weighted-average period of 11 months as of March 31, 2024.

Restricted Stock Units

Restricted stock units (“RSUs”) granted to employees vest ratably over a four-year period.

The Company granted zero and 186,900 RSUs to employees of the Company during the three and nine months ended September 30, 2023, respectively, and zero RSUs during the three and nine months ended September 30, 2022, respectively.

Number of Shares Weighted Average

Non-vested RSUs as of December 31, 2022 —

The following table summarizes the Company’s RSU activity:

Three Months Ended March 31,

Number of Shares Weighted Average Grant Date Fair Value

Non-vested RSUs, beginning of period

160,900 $ 81.91 —

Granted 223,890 $ 159.59 186,900 $ 81.91

Surrendered or forfeited ( 24,700 ) $ 81.91

Non-vested RSUs as of September 30, 2023

Vested ( 40,075 ) $ 81.91 —

( 14,383 ) $ 86.27 —

There was $ 11.3 million of unrecognized stock-based compensation expense related to employees’ RSU awards that is expected to be recognized over a weighted-average period of 3.4 years as of September 30, 2023.

The Company recorded stock-based compensation expense related to RSUs in the condensed consolidated statement of operations for the three and nine months ended September 30, 2023 and 2022, as follows (in thousands):

Three Months Ended September 30, Nine Months Ended September 30,

Non-vested RSUs, end of period

330,332 $ 134.37 186,900 $ 81.91

Research and Development $ 303 $ — $ 837 $ —

Selling, general, and administrative

Total stock-based compensation $ 673 $ — $ 1,835 $ —

There was $ 43.4 million of unrecognized stock-based compensation expense related to employees’ RSU awards that is expected to be recognized over a weighted-average period of 3.7 years as of March 31, 2024.

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 September 30, 2023, the Company estimates that 100 % of the PSUs granted will be eligible to vest.

The Company granted zero and 60,000 PSUs to employees of the Company during the three and nine months ended September 30, 2023 and zero PSUs during the three and nine months ended September 30, 2022.

Number of Shares Weighted Average

Non-vested PSUs as of December 31, 2022 —

The following table summarizes the Company’s PSU activity:

Three Months Ended March 31,

Number of Shares Weighted Average Grant Date Fair Value

Non-vested PSUs, beginning of period

50,000 $ 81.91 —

Granted 112,500 $ 159.47 60,000 $ 81.91

Surrendered or forfeited ( 10,000 ) $ 81.91

Non-vested PSUs as of September 30, 2023

Vested ( 25,000 ) $ 81.91 —

Non-vested PSUs, end of period

137,500 $ 145.37 60,000 $ 81.91

There was $ 2.9 million of unrecognized stock-based compensation expense related to employees’ PSU awards that is expected to be recognized over a weighted-average period of 1.4 years as of September 30, 2023.

The Company recorded stock-based compensation expense related to PSUs in the condensed consolidated statement of operations for the three and nine months ended September 30, 2023 and 2022 as follows (in thousands):

Three Months Ended September 30, Nine Months Ended September 30,

For the three months ended March 31, 2024, the Company granted 112,500 of PSUs, which 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.

As of the March 31, 2024, the Company estimated that 100 % of the newly granted PSUs will be eligible to vest.

There was $ 19.0 million of unrecognized stock-based compensation expense related to employees’ PSU awards that is expected to be recognized over a weighted-average period of 1.8 years as of March 31, 2024.

Stock-Based Compensation Expense, Net

The Company recorded stock-based compensation expense related to its stock options, RSAs, RSUs, and PSUs in the condensed consolidated statements of operations and comprehensive loss for the three months ended March 31, 2024 and 2023 as follows:

Three Months Ended March 31,

(in thousands)

Research and development

$ 1,868 $ 2,496

Selling, general, and administrative

$ 373 $ — $ 1,201 $ —

Total stock-based compensation $ 9,299 $ 10,437

Shares remaining available for grant under the Plan were 1,489,488 , with a sublimit for incentive stock options of 30,783 , at September 30, 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 three and nine months ended September 30, 2023, the Company capitalized $ 410 thousand and $ 522 thousand, respectively, in inventory.

For the three months ended March 31, 2024 and 2023, the Company capitalized stock-based compensation of $ 724 thousand and zero , respectively, into inventory.

Historically, the Company also capitalized the portion of stock-based compensation related to work performed on the construction of our manufacturing facilities.

There was zero and $ 162 thousand of stock-based compensation that was capitalized in property and equipment during the three and nine months ended September 30, 2023 and $ 137 thousand and $ 423 thousand of stock-based compensation that was capitalized in property and equipment during the three and nine months ended September 30, 2022, respectively.

Gain from 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 condensed consolidated statement of operations as it did not have a carrying value at the time of the sale.

For the three months ended March 31, 2024 and 2023, the Company capitalized stock-based compensation of zero and $ 162 thousand, respectively, into property and equipment, net.

The tax provision for interim periods is calculated using an estimate of the annual effective tax rate, adjusted for discrete items.

If there are any changes to the estimated annual tax rate, the Company will make a cumulative adjustment to the income tax provision in the period the change becomes known.

The Company did not record an income tax provision for the three months ended March 31, 2024 or 2023 as it generated sufficient tax losses, after consideration of discrete items, during each of the periods.

The Company expects to maintain a full valuation allowance against its net deferred tax assets for the year.

Subsequent Events

2 unchanged sentences

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What changed 10-Q

Item 1. Financial Statements