Krystal Biotech, Inc. 10-K

Item 8. Financial Statements and Supplementary Data. INDEX TO FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm (KPMG, LLP, Pittsburgh, PA (US Firm), PCAOB ID No. 185 ) F- 2 Consolidated Balance Sheets as of December 31, 2025 and 2024 F- 4 Consolidated Statements of Operations and Comprehensive Income for the Years Ended December 31, 2025, 2024 and 2023 F- 5 Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2025, 2024 and 2023 F- 6 Consolidated Statements of Cash Flows for the Years Ended December 31, 2025, 2024 and 2023 F- 7 Notes to Consolidated Financial Statements F- 9 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, 2025 and 2024, the related consolidated statements of operations and comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2025, 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, 2025 and 2024, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2025, 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, 2025, 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 17, 2026 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 Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Evaluation of the sufficiency of audit evidence over the Medicaid rebate accrual As discussed in Notes 2 and 3 to the consolidated financial statements, the Company recognizes product revenue on sales of VYJUVEK when the customer obtains control of the product, which occurs at a point in time, upon delivery to the customer. Product revenue, net is recorded at the net sales price, or transaction price, and includes an estimate of variable consideration, which results from discounts, rebates and returns that are offered within the Company's contracts. Government rebates, which include Medicaid, are accrued 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 are recorded as a reduction of revenue. Rebates were $61.9 million as of December 31, 2025, of which a portion relates to the Medicaid rebate accrual. We identified the evaluation of the sufficiency of audit evidence over the Medicaid rebate accrual as a critical audit matter. Subjective auditor judgment was required to evaluate the Medicaid rebate accrual because of the audit effort involved in determining the nature and extent of procedures to be performed. The following are the primary procedures we performed to address the critical audit matter. We applied auditor judgment to determine the nature and extent of procedures to be performed over the Medicaid rebate accrual. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s Medicaid rebate accrual process. F-2 We evaluated the relevance and reliability of the historical customer data used by the Company in developing the estimate of the Medicaid rebate accrual by performing a trend analytic over the estimated percentages of VYJUVEK that will be prescribed to qualified patients. We evaluated the Company’s ability to accurately estimate the Medicaid rebate accrual by comparing the estimated Medicaid rebate accrual to the actual invoiced amounts that were paid by the Company throughout the period. We developed an independent estimate of the Medicaid rebate accrual by confirming the year-to-date units delivered to the customer and vouching payments made during the year, and compared the result to the Company’s estimated Medicaid rebate accrual. We assessed the sufficiency of evidence obtained over the Medicaid rebate accrual by assessing the results of procedures performed, including the appropriateness of the nature and extent of audit effort. /s/ KPMG LLP We have served as the Company’s auditor since 2022. Pittsburgh , Pennsylvania February 17, 2026 F-3 Krystal Biotech, Inc. Consolidated Balance Sheets December 31, (in thousands, except par value) 2025 2024 Assets Current assets Cash and cash equivalents $ 496,304 $ 344,865 Short-term investments 331,487 252,652 Accounts receivable, net 127,425 104,746 Inventory 40,475 26,508 Prepaid taxes 14,006 1,617 Prepaid expenses and other current assets 14,905 11,657 Total current assets 1,024,602 742,045 Property and equipment, net 150,776 155,168 Long-term investments 128,066 152,114 Right-of-use assets 7,239 6,280 Deferred tax asset, net of valuation allowance 22,824 — Other non-current assets 287 231 Total assets $ 1,333,794 $ 1,055,838 Liabilities and Stockholders’ Equity Current liabilities Accounts payable $ 3,238 $ 4,985 Current portion of lease liability 1,771 1,217 Accrued rebates 58,181 36,804 Accrued expenses and other current liabilities 39,752 58,989 Total current liabilities 102,942 101,995 Lease liability 7,568 6,044 Other long-term liabilities 3,724 1,419 Total liabilities 114,234 109,458 Commitments and contingencies (see note 7) Stockholders' equity Common stock; $ 0.00001 par value; 80,000 shares authorized as of December 31, 2025 and 2024; 29,192 and 28,794 shares issued and outstanding as of December 31, 2025 and 2024, respectively. — — Additional paid-in capital 1,194,261 1,127,238 Accumulated other comprehensive income (loss) 1,136 ( 190 ) Retained earnings (accumulated deficit) 24,163 ( 180,668 ) Total stockholders’ equity 1,219,560 946,380 Total liabilities and stockholders’ equity $ 1,333,794 $ 1,055,838 The accompanying notes are an integral part of these consolidated financial statements. F-4 Krystal Biotech, Inc. Consolidated Statements of Operations and Comprehensive Income Years Ended December 31, (in thousands, except per share data) 2025 2024 2023 Product revenue, net $ 389,130 $ 290,515 $ 50,699 Operating expenses Cost of goods sold 23,049 20,061 3,094 Research and development 58,045 53,580 46,433 Selling, general and administrative 146,741 113,626 98,289 Litigation settlement — 37,500 12,500 Total operating expenses 227,835 224,767 160,316 Income (loss) from operations 161,295 65,748 ( 109,617 ) Other income Gain from sale of priority review voucher — — 100,000 Interest and other income, net 28,176 29,608 22,514 Income before income taxes 189,471 95,356 12,897 Income tax benefit (expense) 15,360 ( 6,197 ) ( 1,965 ) Net income 204,831 89,159 10,932 Unrealized gain (loss) on available-for-sale securities, net of tax 642 ( 440 ) 1,432 Foreign currency translation 684 ( 388 ) ( 66 ) Comprehensive income $ 206,157 $ 88,331 $ 12,298 Net income per common share: Basic $ 7.08 $ 3.12 $ 0.40 Diluted $ 6.84 $ 3.00 $ 0.39 Weighted-average common shares outstanding: Basic 28,944 28,592 27,154 Diluted 29,951 29,740 27,752 The accompanying notes are an integral part of these consolidated financial statements. F-5 Krystal Biotech, Inc. Consolidated Statements of Stockholders' Equity Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings (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 pursuant to ATM Program, net of offering costs 1,730 — 159,909 — — 159,909 Issuance of common stock upon exercise of stock options 753 — 43,773 — — 43,773 Shares of restricted stock awards surrendered for taxes ( 10 ) — ( 749 ) — — ( 749 ) Stock-based compensation — — 41,179 — — 41,179 Unrealized gain on investments — — — 1,432 — 1,432 Foreign currency translation — — — ( 66 ) — ( 66 ) Net income — — — — 10,932 10,932 Balances as of December 31, 2023 28,237 $ — $ 1,047,830 $ 638 $ ( 269,827 ) $ 778,641 Issuance of common stock in private placement offering, net of offering costs 526 — 32,400 — — 32,400 Issuance of common stock upon exercise of stock options 39 — ( 4,181 ) — — ( 4,181 ) Shares of restricted stock awards surrendered for taxes ( 8 ) — ( 1,205 ) — — ( 1,205 ) Stock-based compensation — — 52,394 — — 52,394 Unrealized (loss) on investments — — — ( 440 ) — ( 440 ) Foreign currency translation — — — ( 388 ) — ( 388 ) Net income — — — — 89,159 89,159 Balances as of December 31, 2024 28,794 $ — $ 1,127,238 $ ( 190 ) $ ( 180,668 ) $ 946,380 Issuance of common stock upon exercise of stock options 310 — 22,661 — — 22,661 Vesting of restricted stock units, net of shares withheld for taxes 98 — ( 12,144 ) — — ( 12,144 ) Shares of restricted stock awards surrendered for taxes ( 10 ) — ( 1,812 ) — — ( 1,812 ) Stock-based compensation — — 58,318 — — 58,318 Unrealized gain on investments, net of tax — — — 642 — 642 Foreign currency translation — — — 684 — 684 Net income — — — — 204,831 204,831 Balances as of December 31, 2025 29,192 $ — $ 1,194,261 $ 1,136 $ 24,163 $ 1,219,560 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) 2025 2024 2023 Operating Activities Net income $ 204,831 $ 89,159 $ 10,932 Adjustments to reconcile net income to net cash used in operating activities Gain from sale of priority review voucher — — ( 100,000 ) Deferred tax asset ( 22,845 ) — — Depreciation 5,724 5,967 5,007 Accretion of marketable securities ( 498 ) ( 1,706 ) ( 2,183 ) Amortization of operating lease right-of-use assets 827 747 904 Stock-based compensation expense, net 54,514 49,127 39,933 Realized gain on investments ( 5,953 ) ( 6,069 ) ( 5,092 ) Other, net 684 652 217 Changes in operating assets and liabilities Accounts receivable, net ( 22,124 ) ( 62,706 ) ( 42,040 ) Inventory ( 6,286 ) ( 11,907 ) ( 4,475 ) Prepaid taxes ( 12,389 ) ( 1,617 ) — Prepaid expenses and other assets ( 2,270 ) ( 7,292 ) ( 1,612 ) Lease liability ( 578 ) ( 833 ) ( 829 ) Other long-term liabilities 2,280 1,419 — Accounts payable 826 1,011 ( 101 ) Accrued rebates 21,268 30,827 5,977 Accrued expenses and other current liabilities 14,104 5,391 4,558 Accrued legal settlement ( 31,250 ) 31,250 — Net cash provided by (used in) operating activities 200,865 123,420 ( 88,804 ) Investing Activities Proceeds from disposal of assets 435 — — Proceeds from sale of priority review voucher — — 100,000 Purchases of property and equipment ( 11,951 ) ( 4,238 ) ( 11,799 ) Purchases of investments ( 422,540 ) ( 457,740 ) ( 508,776 ) Maturities of investments 375,639 298,539 503,213 Net cash (used in) provided by investing activities ( 58,417 ) ( 163,439 ) 82,638 Financing Activities Proceeds from issuance of common stock, net — — 159,726 Proceeds from exercise of stock options 22,661 32,400 43,773 Taxes paid for employee tax withholding related to restricted stock units ( 12,144 ) ( 4,181 ) — Taxes paid related to settlement of restricted stock awards ( 1,812 ) ( 1,205 ) ( 749 ) Net cash provided by financing activities 8,705 27,014 202,750 Effect of exchange rate changes on cash and cash equivalents 286 ( 458 ) ( 156 ) Net change in cash and cash equivalents 151,439 ( 13,463 ) 196,428 Cash and cash equivalents at beginning of year 344,865 358,328 161,900 Cash and cash equivalents at end of year $ 496,304 $ 344,865 $ 358,328 Supplemental Disclosures of Non-Cash Investing and Financing Activities Unpaid purchases of property and equipment $ 3,067 $ 8,497 $ 8,602 Initial recognition of right-of-use assets $ 1,786 $ — $ — Supplemental Disclosure of Cash Flow Information Income taxes paid $ 15,673 $ 5,665 $ — F-7 The accompanying notes are an integral part of these consolidated financial statements. F-8 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, we converted from a California limited liability company to a Delaware C-corporation, and changed our name from Krystal Biotech LLC to Krystal Biotech, Inc. In April 2019, we incorporated Jeune Aesthetics, Inc. (“Jeune Aesthetics”), a wholly-owned subsidiary, in Delaware, for the purpose of undertaking preclinical and clinical studies for aesthetic skin conditions. In January 2022, August 2022, December 2022, August 2023, March 2024, November 2024, December 2024 and July 2025 we incorporated wholly-owned subsidiaries in Switzerland, Netherlands, France, Germany, Japan, Italy, Spain, and the UK, respectively, for the purpose of establishing operations in Europe and Japan for the commercialization of VYJUVEK ® and our product pipeline. We are a fully integrated, commercial-stage, global 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. 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. Our innovative technology platform is supported by two in-house, commercial scale Current Good Manufacturing Practice (“CGMP”) manufacturing facilities. Liquidity As of December 31, 2025, the Company had a retained earnings balance of $ 24.2 million. Our operating profitability is dependent upon the continued successful commercialization of VYJUVEK, our U.S. Food and Drug Administration (“FDA”), European Commission (“EC”), and Japan’s Ministry of Health, Labour, and Welfare (“MHLW”) approved product, as well as successful development, approval and commercialization of our product candidates. Management intends to fund future operations through its on hand cash and cash equivalents and revenue generated from the sale of VYJUVEK, and may also seek additional capital through arrangements with strategic partners, the sale of equity, debt financings or other sources. 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 in connection with, among other things, advancing its product pipeline, expanding its commercialization capabilities, and complying with EU post-authorization regulatory requirements and EU member state–specific pricing, reimbursement, and market access activities. The Company believes that its cash, cash equivalents and short-term investments of approximately $ 827.8 million as of December 31, 2025 will be sufficient to allow the Company to fund its planned operations for at least the next 12 months from the date of this Annual Report on Form 10-K. 2. Summary of Significant Accounting Policies Basis of Presentation The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”). All intercompany balances and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current period presentation. The reclassified amounts have no impact on the Company’s previously reported financial position or results of operations. Use of Estimates The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates. Management considers many factors in developing the estimates and assumptions that are used in the preparation of these financial statements. Management must apply significant judgment in this process. In addition, other factors may affect estimates, including: expected business and operational changes, sensitivity and volatility associated with the assumptions used in developing estimates, and whether historical trends are expected to be 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 F-9 Krystal Biotech, Inc. Notes to Consolidated Financial Statements—Continued become known. Estimates are used in the following areas, among others: variable consideration associated with revenue recognition, stock-based compensation expense, accrued expenses, and income taxes. 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 operates as one operating segment, which is focused on the discovery, development, manufacturing and commercialization of pharmaceutical products. See Note 13 to these consolidated financial statements for additional discussion. 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 and treasuries. 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 and treasuries. Accrued interest on investments is also classified as short-term investments on the consolidated balance sheets. As the Company’s entire investment portfolio is considered available for use in current operations, it classifies 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 income, which is a separate component of stockholders’ equity on 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 on the consolidated statements of operations and comprehensive income.The Company evaluates its available-for-sale debt securities on a quarterly basis to determine whether a decline in fair value below amortized cost is attributable to credit-related factors. During the years ended December 31, 2025, 2024 and 2023, the Company concluded that no allowances for credit losses on investments were required. 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 (1) significant changes to the valuation methods utilized by the Company or (2) transfers between Level 1, Level 2 and Level 3 during the years ended December 31, 2025, 2024 and 2023. 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, accrued rebates, and other current liabilities included in the Company’s consolidated balance sheets, 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 and treasuries are considered to be Level 2 financial instruments. The fair value of Level 2 financial assets is determined using inputs that are observable in the market or can be derived principally from or corroborated by observable market data such as pricing for similar securities, recently executed transactions, cash flow models with yield curves, and benchmark securities. In addition, Level 2 financial instruments are valued using comparisons to like-kind financial instruments and models that use readily observable market data as their basis. F-10 Krystal Biotech, Inc. Notes to Consolidated Financial Statements—Continued Revenue Recognition The Company recognizes product revenue in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), Topic 606, Revenue from Contracts with Customers (“ASC 606”). Under ASC 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. Revenue is recognized when the Company satisfies a performance obligation by transferring control of the promised good to the customer. The only performance obligation in the Company’s contracts with customers is the timely delivery of the product to the customer’s designated location. The Company sells VYJUVEK to a limited number of specialty pharmacy (“SPs”) providers that mix the medication to be administered at a healthcare professional’s office or in the patient’s home and to a limited number of hospitals or specialty distributors (“SDs”) who deliver to hospitals where patients are administered the medication in a healthcare setting. Revenue is recognized when the customer obtains control of the product, which occurs at a point in time, upon delivery to the customer. 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 price and is recorded at the net sales price upon delivery and transfer of control to the customer, and includes an estimate of variable consideration, which results from discounts, rebates, copay assistance, and returns that are offered within contracts between the Company and its customers. These reserves, representing the Company’s best estimates of the amount of consideration to which the Company is entitled, are based on the terms of the contract. Variable Consideration Variable consideration 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 is 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 our estimates. If actual results in the future vary from our estimates, the Company will adjust these estimates in the period these variances become known. The following are the Company’s significant categories of variable consideration: • Prompt Pay Discounts : As an incentive for prompt payment, the Company may offer 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 a reduction of revenue on the consolidated statements of operations and as an allowance against accounts receivable, net on the consolidated balance sheets. • Government Rebates : The Company participates in certain government rebate programs including Medicaid, Medicare and Tricare. For Medicare, the Company estimates the accrued liability based on the estimated number of patients in the prescription drug coverage gap under the Medicare Part D program. The Company also estimates accrued government rebates using the expected value method 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 on the consolidated statements of operations and accrued rebates and other long-term liabilities on the 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 based on 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 on the consolidated statements of operations and are included in accrued rebates on the consolidated balance sheets • Product Returns: The Company offers 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. The Company has not experienced significant product returns to date, and accordingly no allowance for returns was recorded for the year ended December 31, 2025. F-11 Krystal Biotech, Inc. Notes to Consolidated Financial Statements—Continued 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. Prior to receiving FDA approval in May 2023, costs associated with the manufacturing of VYJUVEK were expensed as research and development expenses. Accounts Receivable Accounts receivable represents amounts arising from product sales and 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. The Company has no historical write-offs of its accounts receivable and its payment terms are generally 90 days or less from the invoice date. The Company evaluates the creditworthiness of each counterparty on a regular basis. As of December 31, 2025, the credit profiles for these counterparties were 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 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 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 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, 2025, 2024 and 2023, there were no inventory write-downs. See Note 6 to these consolidated financial statements for additional discussion. 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 - 30 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 F-12 Krystal Biotech, Inc. Notes to Consolidated Financial Statements—Continued 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. The Company reviews 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, the Company recognizes 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 not experienced any triggering events or recognized any impairment losses for the years ended December 31, 2025, 2024 and 2023. 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, contract research and manufacturing expenses. The Company estimates contract research and manufacturing expenses based on the services performed pursuant to contracts with research organizations in the Company’s ongoing preclinical and clinical studies. Non-refundable advanced payments for goods or services to be received in the future for use in research and development activities are deferred and capitalized. The capitalized amounts are expensed as the related goods are delivered or the services are performed. In accruing service fees, the Company estimates the time period over which services will be performed and the level of effort to be expended in each period. These estimates are based on communications with third-party service providers and the Company’s estimates of accrued expenses using information available at each balance sheet date. If the actual timing of the performance of services or the level of effort varies from the estimate, the Company will adjust the accrual accordingly. Stock-Based Compensation Expense The Company has applied the fair value recognition provisions of Financial Accounting Standards Board Accounting Standards Codification, or ASC, Topic 718, Compensation—Stock Compensation (“ASC 718”), to account for stock-based compensation. The Company recognizes compensation costs related to stock-based awards 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 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. F-13 Krystal Biotech, Inc. Notes to Consolidated Financial Statements—Continued 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. Foreign Currency Transaction Gain (Loss) Gains and losses arising from transactions denominated in currencies other than U.S. dollars are recorded in interest and other income, net on the statement of operations and comprehensive income. The Company recorded losses of $ 1.2 million for the year ended December 31, 2025, and immaterial losses for the years ended December 31, 2024 and 2023. Income Taxes The Company accounts for income taxes 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, the Company records 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. As of December 31, 2025, after weighing all available evidence, including three-year cumulative income and forecasted future income, the Company is able to support the realizability of its deferred tax assets, except certain state tax attributes. Accordingly, except for certain state net operating loss and tax credits, the Company recorded no valuation allowance as of December 31, 2025 attributable to its deferred tax assets. The Company recorded a full valuation allowance as of December 31, 2024. The Company intends to continue assessing the realizability of the remaining valuation allowance until sufficient evidence exists to support its reversal. The Company accounts for unrecognized tax benefits in accordance with the provisions of ASC 740. When unrecognized tax benefits 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. See Note 11 to these consolidated financial statements for additional discussion. Comprehensive Income Comprehensive income 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. The Company records reclassifications from other comprehensive gains or losses to interest and other income, net on the consolidated statements of operations and comprehensive income related to realized gains on sales of available-for-sale securities. Recently Issued Accounting Pronouncements, Not Yet Adopted In November 2024, the FASB issued ASU 2024-03 Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses. This standard calls for enhanced disclosures about components of expense captions on the face of the income statement. This standard will be effective for fiscal years beginning after December 15, 2026, with the option to apply it retrospectively. Early adoption is allowed. Currently, the Company is assessing the potential impact of this guidance on its consolidated financial statement disclosures. In December 2025, the FASB issued ASU 2025-11 Interim Reporting (Topic 270): Narrow-Scope Improvements. This standard clarifies current interim reporting requirements on Topic 270 and introduces a disclosure principle requiring entities to disclose events since the end of the last annual reporting period that have a material impact on the entity. This standard will be effective for fiscal years beginning after December 15, 2027, with the option to apply it retrospectively. Early adoption is allowed. Currently, the Company is assessing the potential impact of this guidance on its consolidated financial statement disclosures. Recently Adopted 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. The Company adopted ASU 2023-09 during the year ended December 31, 2025. See Note 11 to these consolidated financial statements for additional discussion. F-14 Krystal Biotech, Inc. Notes to Consolidated Financial Statements—Continued 3. Product Revenue, Accounts Receivable and Reserves for Product Sales Following FDA approval in May 2023, the Company began commercial marketing and sales of VYJUVEK and began recognizing revenue in the third quarter of 2023. The Company’s product revenue, net of sales discounts and allowances totaled $ 389.1 million, $ 290.5 million and $ 50.7 million for the years ended December 31, 2025, 2024 and 2023, respectively. For the years ended December 31, 2025, 2024, and 2023, approximately 75 %, 87 % and 100 %, respectively, of the Company’s product revenue, net was generated from a single customer in the U.S. No other customer exceeded 10% of the Company’s product revenue, net. The Company’s accounts receivable, net balance relating to VYJUVEK sales was $ 127.4 million and $ 104.7 million as of December 31, 2025 and 2024, respectively. Net product revenue receivable from the Company’s customers who individually accounted for 10% or more of net product revenue receivable consisted of the following: Percent of Net Product Revenue Receivable Year Ended December 31, 2025 2024 Customer A 66 % 81 % Customer B 14 % 13 % The following table summarizes changes in allowances and discounts: (in thousands) Rebates Prompt Pay Other Accruals Total Balance as of December 31, 2023 $ 5,977 $ 858 $ 279 $ 7,114 Provision 45,853 9,212 420 55,485 Payments/Credits ( 13,607 ) ( 7,500 ) ( 373 ) ( 21,480 ) Balance as of December 31, 2024 $ 38,223 $ 2,570 $ 326 $ 41,119 Provision 65,273 13,478 507 79,258 Payments/Credits ( 41,591 ) ( 10,214 ) ( 455 ) ( 52,260 ) Balance as of December 31, 2025 $ 61,905 $ 5,834 $ 378 $ 68,117 Rebates are included in accrued rebates and other long-term liabilities on the consolidated balance sheets. Prompt pay discount is recorded as an allowance against accounts receivable, net on the consolidated balance sheets. Other long-term liabilities include $ 3.7 million of long-term accrued rebates. Other accruals are included in accrued expenses and other current liabilities on the consolidated balance sheets. Provisions for rebates, prompt pay discount and other accruals are recorded as reductions to product revenue, net on the consolidated statements of operations and comprehensive income. 4. Net Income Per Share Attributable to Common Stockholders Basic net income per share attributable to common stockholders is calculated by dividing net income attributable to common stockholders by the weighted-average shares outstanding during the period, without consideration for common stock equivalents. Diluted net income per share attributable to common stockholders is computed by dividing the net income 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 (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 years ended December 31, 2025, 2024 and 2023, there were (1) 571 thousand, 236 thousand and 897 thousand, respectively, common stock equivalents outstanding in the form of stock options, and (2) 1 thousand, 1 thousand and zero , respectively, in unvested restricted stock that have been excluded from the calculation of diluted net income per common share as their effect would be anti-dilutive. F-15 Years Ended December 31, (in thousands, except per share data) 2025 2024 2023 Numerator: Net income $ 204,831 $ 89,159 $ 10,932 Denominator: Weighted-average basic common shares 28,944 28,592 27,154 Dilutive effect of stock options and unvested restricted stock 1,007 1,148 598 Weighted-average diluted common shares 29,951 29,740 27,752 Net income per common share—basic $ 7.08 $ 3.12 $ 0.40 Net income per common share—diluted $ 6.84 $ 3.00 $ 0.39 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, 2025 and 2024: December 31, 2025 (in thousands) 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 $ 496,304 $ — $ — $ 496,304 $ 496,304 $ — $ — Subtotal 496,304 — — 496,304 496,304 — — Level 2: Commercial paper 12,887 2 ( 1 ) 12,888 12,888 — Corporate bonds 211,268 535 ( 6 ) 211,797 142,801 68,996 U.S government agency securities and treasuries 234,216 653 ( 1 ) 234,868 175,798 59,070 Subtotal 458,371 1,190 ( 8 ) 459,553 — 331,487 128,066 Total $ 954,675 $ 1,190 $ ( 8 ) $ 955,857 $ 496,304 $ 331,487 $ 128,066 December 31, 2024 (in thousands) 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 $ 344,865 $ — $ — $ 344,865 $ 344,865 $ — $ — Subtotal 344,865 — — 344,865 344,865 — — Level 2: Commercial paper 15,373 4 ( 8 ) 15,369 — 15,369 — Corporate bonds 177,771 423 ( 225 ) 177,969 — 86,693 91,276 U.S government agency securities and treasuries 211,283 318 ( 173 ) 211,428 — 150,590 60,838 Subtotal 404,427 745 ( 406 ) 404,766 — 252,652 152,114 Total $ 749,292 $ 745 $ ( 406 ) $ 749,631 $ 344,865 $ 252,652 $ 152,114 (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-16 Krystal Biotech, Inc. Notes to Consolidated Financial Statements—Continued 6. Balance Sheet Components Inventory Inventory consisted of the following: December 31, (in thousands) 2025 2024 Raw materials $ 15,938 $ 13,639 Work-in-process 15,224 10,743 Finished goods 9,313 2,126 Inventory $ 40,475 $ 26,508 Property and Equipment, Net Property and equipment, net consisted of the following: December 31, (in thousands) 2025 2024 Building and building improvements 109,242 111,444 Manufacturing equipment 29,279 27,161 Leasehold improvements 27,227 25,673 Construction in progress 8,108 5,778 Laboratory equipment 3,490 3,183 Computer equipment and software 2,559 2,032 Furniture and fixtures 2,152 1,816 Total property and equipment 182,057 177,087 Accumulated depreciation ( 31,281 ) ( 21,919 ) Property and equipment, net $ 150,776 $ 155,168 Depreciation expense was $ 5.7 million, $ 6.0 million and $ 5.0 million for the years ended December 31, 2025, 2024 and 2023, respectively. Depreciation expense capitalized into inventory was $ 4.1 million, $ 3.5 million and $ 1.1 million for the years ended December 31, 2025, 2024 and 2023, respectively. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consisted of the following: December 31, (in thousands) 2025 2024 Accrued payroll and benefits 11,457 9,558 Accrued taxes 10,919 4,288 Accrued professional fees 5,936 2,659 Accrued preclinical and clinical expenses 4,667 2,537 Other current liabilities 3,579 2,403 Accrued construction in progress 2,189 5,077 Accrued inventory 1,005 1,217 Accrued litigation settlement — 31,250 Total $ 39,752 $ 58,989 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 Manufacturing Organizations (“CMOs”), Contract Research Organizations (“CROs”) 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 sterile gel that is mixed with in-house produced vectors as part of the final drug product for VYJUVEK. Agreements with third F-17 Krystal Biotech, Inc. Notes to Consolidated Financial Statements—Continued parties may also include research and development consulting activities, clinical-trial agreements, testing of our clinical-stage, pre-commercial and commercial stage products and/or storage, packaging and labeling. The Company is obligated to make milestone payments under certain of these contracts. The Company has incurred research and development expenses related to commitments under these agreements of $ 9.3 million, $ 7.1 million and $ 5.2 million for the years ended December 31, 2025, 2024 and 2023, respectively. Legal Proceedings In the ordinary course of business, the Company may be subject from time to time to various proceedings, lawsuits, disputes, or claims. In accordance with FASB ASC Topic 450, Contingencies (“ASC 450”), the Company accrues a liability for legal contingencies when it is probable that a liability has been incurred, and the amount of the loss can be reasonably estimated. If there is at least a reasonable possibility that a loss may be incurred, ASC 450 requires disclosure of a loss contingency. For the year ended December 31, 2025, no loss contingency exists. In May 2020, PeriphaGen, Inc. (“PeriphaGen”) commenced litigation against the Company alleging breach of contract and misappropriation of trade secrets. In April 2022, the Company and PeriphaGen entered into a final settlement agreement. In exchange for an upfront payment of $ 25.0 million and four contingent milestone payments of $ 12.5 million each, PeriphaGen (i) released all claims in the litigation; (ii) transferred certain assets to the Company and (iii) granted the Company a license for dermatological applications. During the year ended December 31, 2025, the Company paid $ 31.25 million, and together with the $ 43.75 million paid prior to 2025, has fully paid the $ 75.0 million of total consideration in connection with the settlement of the PeriphaGen litigation. The Company recorded litigation settlement expense for the contingent milestone payments of zero , $ 37.5 million and $ 12.5 million for the years ended December 31, 2025, 2024, and 2023, respectively, on the consolidated statements of operations and comprehensive income. In the first quarter of 2025, the Company and certain of its employees received subpoenas from the U.S. Department of Justice requesting that the Company produce certain documents regarding its sponsored genetic testing program relating to VYJUVEK and commercial practices relating thereto. The Company is cooperating and providing information in response to the subpoenas. It is not possible to estimate the amount of any loss or range of possible loss that might result from this inquiry, and because the final outcome cannot be predicted with certainty, unfavorable or unexpected developments or outcomes could result in a material impact to the Company’s results of operations. On September 18, 2025, a stockholder filed a derivative complaint in the Court of Chancery of the state of Delaware naming the Company’s directors as defendants and the Company as a nominal defendant. The complaint alleges claims for breach of fiduciary duty, unjust enrichment, and waste of corporate assets based on allegedly excessive non-employee director compensation in each of 2021 through 2024. The complaint seeks unspecified damages in favor of the Company, restitution of compensation and other benefits from the individual defendants, reforms and improvements to the Company’s corporate governance and internal procedures, and the award of costs and disbursements of the complaint, including reasonable attorneys’ fees. The parties have reached an agreement in principle on settlement terms but must still negotiate and execute a definitive settlement agreement, which will be filed with the Delaware Court of Chancery and is subject to court approval. If approved, the Company will adopt, implement, and maintain certain corporate governance reforms for a period of five ( 5 ) years. At this time, the Company cannot reasonably estimate the likelihood of an unfavorable outcome or estimate the potential loss, if any. 8. Leases Lease Agreements The Company’s operating leases primarily consist of leased office, manufacturing and laboratory space. The Company has an operating lease for laboratory and office space in Pittsburgh, Pennsylvania that commenced in June 2016 (the “Wharton Lease”). The Wharton Lease currently consists of approximately 67,000 square feet of office, lab, manufacturing, and warehouse space, including our commercial scale CGMP-compliant manufacturing facility (“ANCORIS”) for a term ending on October 31, 2031. In January 2021, in connection with the Company’s second commercial gene therapy manufacturing facility (“ASTRA”) in the Pittsburgh, Pennsylvania area, the Company entered into a ground lease with a term ending on January 31, 2071. F-18 Krystal Biotech, Inc. Notes to Consolidated Financial Statements—Continued As of December 31, 2025, future minimum commitments under the Company’s operating leases were as follows: (in thousands) December 31, 2025 2026 $ 1,864 2027 1,919 2028 1,954 2029 1,990 2030 2,016 Thereafter 7,279 Future minimum operating lease payments 17,021 Less: Interest ( 7,682 ) Present value of lease liability $ 9,339 As of December 31, 2025 and 2024, the Company's weighted-average remaining lease term for operating leases was 10.1 years and 12.2 years, respectively, and the Company’s weighted-average discount rate for operating leases was 9.7 % and 9.5 % as of December 31, 2025 and 2024, respectively. The components of the Company's lease expense are as follows: Years Ended December 31, (in thousands) 2025 2024 2023 Lease cost: Operating lease expense $ 1,594 $ 1,215 $ 1,596 Variable lease expense 226 210 203 Total lease expense $ 1,820 $ 1,425 $ 1,799 9. Capitalization ATM Program The Company has an effective shelf registration statement on Form S-3 that expires on April 6, 2026. The Company has a $ 150 million at-the-market offering ("ATM") program under that shelf registration statement that has never been utilized. The Company does not currently intend to renew the ATM program after the shelf registration statement expires. 2023 Private Placement Offering In May 2023, the Company sold an aggregate of 1,729,729 shares of our common stock in private placements to certain institutional investors at a price of $ 92.50 per share for aggregate net proceeds of $ 160.0 million. 10. Stock-Based Compensation In 2017, the Company adopted the 2017 IPO Stock Incentive 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. 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 of common stock 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, restricted stock awards (“RSAs”), restricted stock units (“RSUs”) and performance-based restricted stock units (“PSUs”) to certain employees. Shares remaining available for grant under the Plan were 2.0 million at December 31, 2025 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 or three-year periods. Stock options have a life of ten years . F-19 Krystal Biotech, Inc. Notes to Consolidated Financial Statements—Continued The following table summarizes the Company’s stock option activity for the years ended December 31, 2025 and 2024: Stock Options Outstanding Weighted- Average Exercise Price Weighted- Average Remaining Contractual Life (in years) Aggregate Intrinsic Value (1) (in thousands) Balance as of January 1, 2024 2,606,592 $ 66.39 7.9 $ 150,405 Granted 348,642 $ 168.67 Exercised ( 525,857 ) $ 61.62 Cancelled or forfeited ( 380,314 ) $ 78.98 Balance as of December 31, 2024 2,049,063 $ 82.69 7.3 $ 156,404 Granted 395,903 $ 168.08 Exercised ( 310,323 ) $ 73.02 Cancelled or forfeited ( 104,226 ) $ 109.35 Balance as of December 31, 2025 2,030,417 $ 99.45 6.8 $ 298,662 Exercisable as of December 31, 2025 1,140,898 $ 73.28 5.8 $ 197,676 (1) Aggregate intrinsic value represents the difference between the closing stock price of our common stock on December 31, 2025, 2024 and 2023, respectively, and the exercise price of outstanding in-the-money options on the respective date. 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, 2025, 2024 and 2023 was $ 35.4 million, $ 54.8 million and $ 43.8 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, 2025, 2024 and 2023 was $ 110.50 , $ 114.31 and $ 63.38 , respectively. There was $ 58.6 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 2.7 years as of December 31, 2025. 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, 2025, 2024 and 2023: Years Ended December 31, 2025 2024 2023 Expected stock price volatility 69 % 73 % 73 % Expected term of the award (years) 6.2 6.1 6.0 Risk-free interest rate 4.06 % 4.21 % 3.96 % Weighted-average exercise price $ 168.08 $ 168.67 $ 92.14 Dividend Yield — % — % — % F-20 Krystal Biotech, Inc. Notes to Consolidated Financial Statements—Continued Restricted Stock Awards The following table summarizes the Company’s RSA activity for the years ended December 31, 2025 and 2024: Number of Shares Weighted- Average Grant Date Fair Value Non-vested RSAs as of January 1, 2024 44,400 $ 78.89 Vested ( 14,523 ) $ 78.89 Surrendered for taxes ( 7,677 ) $ 78.89 Non-vested RSAs as of December 31, 2024 22,200 $ 78.89 Vested ( 11,925 ) $ 78.89 Surrendered for taxes ( 10,275 ) $ 78.89 Non-vested RSAs as of December 31, 2025 — $ — Restricted Stock Units RSUs granted to employees vest ratably over a four-year period. The following table summarizes the Company’s RSU activity for the years ended December 31, 2025 and 2024: Number of Shares Weighted- Average Grant Date Fair Value Non-vested RSUs as of January 1, 2024 160,900 $ 81.91 Granted 230,403 $ 160.15 Vested ( 40,084 ) $ 81.93 Forfeited ( 43,123 ) $ 119.02 Non-vested RSUs as of December 31, 2024 308,096 $ 135.22 Granted 139,256 $ 178.51 Vested ( 84,524 ) $ 129.82 Forfeited ( 31,254 ) $ 154.42 Non-vested RSUs as of December 31, 2025 331,574 $ 152.97 There was $ 37.7 million of unrecognized stock-based compensation expense related to employees’ RSU awards that is expected to be recognized over a weighted-average period of 2.6 years as of December 31, 2025. 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. The following table summarizes the Company’s PSU activity for the years ended December 31, 2025 and 2024: F-21 Krystal Biotech, Inc. Notes to Consolidated Financial Statements—Continued Number of Shares Weighted- Average Grant Date Fair Value Non-vested PSUs as of January 1, 2024 50,000 $ 81.91 Granted 112,500 $ 159.47 Forfeited — $ — Vested ( 25,000 ) $ 81.91 Non-vested PSUs as of December 31, 2024 137,500 $ 145.37 Granted — $ — Forfeited — $ — Vested ( 81,250 ) $ 135.61 Non-vested PSUs as of December 31, 2025 56,250 $ 159.47 There was $ 1.4 million of unrecognized stock-based compensation expense related to employees’ PSU awards that is expected to be recognized over a weighted-average period of two months as of December 31, 2025. Stock-Based Compensation Expense, Net The Company recorded stock-based compensation expense, net related to stock options, RSAs, RSUs and PSUs in the consolidated statements of operations and comprehensive income for the years ended December 31, 2025, 2024 and 2023 as follows: Years Ended December 31, (in thousands) 2025 2024 2023 Research and development $ 10,375 $ 9,237 $ 10,054 Selling, general and administrative 44,139 39,890 29,879 Total stock-based compensation $ 54,514 $ 49,127 $ 39,933 After the FDA approval of VYJUVEK in May 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, 2025, 2024, and 2023 the Company capitalized $ 3.8 million, $ 3.3 million, and $ 1.1 million, 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. For the years ended December 31, 2025, 2024 and 2023, the Company capitalized zero , zero and $ 0.2 million, respectively, into property, plant and equipment . 11. Income Taxes Income before income tax benefit (expense) by jurisdiction consisted of the following: Years Ended December 31, (in thousands) 2025 2024 2023 U.S. $ 187,938 $ 93,808 $ 7,795 Foreign 1,533 1,548 5,102 Income before income taxes $ 189,471 $ 95,356 $ 12,897 F-22 Krystal Biotech, Inc. Notes to Consolidated Financial Statements—Continued The benefit (expense) for income taxes consists of the following: Years Ended December 31, (in thousands) 2025 2024 2023 Current: Federal $ ( 2,987 ) $ ( 1,445 ) $ ( 125 ) State ( 8,257 ) ( 4,599 ) ( 1,702 ) Foreign ( 671 ) ( 153 ) ( 138 ) Total current tax (expense) $ ( 11,915 ) $ ( 6,197 ) $ ( 1,965 ) Deferred: Federal $ 19,637 $ — $ — State 7,188 — — Foreign 450 — — Total deferred tax benefit $ 27,275 $ — $ — Total: Federal $ 16,650 $ ( 1,445 ) $ ( 125 ) State ( 1,069 ) ( 4,599 ) ( 1,702 ) Foreign ( 221 ) ( 153 ) ( 138 ) Total benefit (expense) for income taxes $ 15,360 $ ( 6,197 ) $ ( 1,965 ) Income taxes paid, net of refunds, consisted of the following: Years Ended December 31, (in thousands) 2025 2024 2023 Federal $ 12,210 $ 1,740 $ — State: Kentucky 3,055 1,158 — Pennsylvania ( 880 ) 880 — California — 276 — Other States 149 1,611 — Total State 2,324 3,925 — Foreign 259 — — Total Taxes Paid (Net of Refunds) $ 14,793 $ 5,665 $ — F-23 Krystal Biotech, Inc. Notes to Consolidated Financial Statements—Continued A reconciliation of income tax (benefit) expense 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, 2025, 2024 and 2023 are as follows: Years Ended December 31, (in thousands, except percentages) 2025 2024 2023 Amount Percent Amount Percent Amount Percent Federal Income Tax Expense at Statutory Rate $ 39,791 21.0 % $ 20,025 21.0 % $ 2,708 21.0 % State and Local Income Taxes, Net of Federal Income Tax Effect (a) ( 5,227 ) ( 2.8 ) ( 547 ) ( 0.6 ) 1,340 10.4 Change in Valuation Allowance ( 51,231 ) ( 27.1 ) ( 8,833 ) ( 9.3 ) 1,258 9.8 Nontaxable or Nondeductible Items Stock compensation ( 2,721 ) ( 1.4 ) ( 4,793 ) ( 5.0 ) ( 1,715 ) ( 13.3 ) Executive compensation 4,570 2.4 2,645 2.8 2,675 20.7 Other nontaxable or nondeductible items 81 — 71 0.1 95 0.7 Effect of Cross Border Tax Laws Global Intangible Low-taxed Income (GILTI) 1 — ( 220 ) ( 0.2 ) 623 4.8 Foreign Derived Intangible Income (FDII) ( 1,178 ) ( 0.6 ) ( 635 ) ( 0.7 ) — — Tax Credits R&D tax credits ( 3,596 ) ( 1.9 ) ( 3,150 ) ( 3.3 ) ( 2,782 ) ( 21.6 ) Orphan drug credits ( 931 ) ( 0.5 ) ( 1,416 ) ( 1.5 ) ( 1,570 ) ( 12.2 ) Other credits — — 16 — ( 106 ) ( 0.8 ) Change in Unrecognized Tax Benefits 5,227 2.8 3,316 3.5 — — Other Adjustments Other comprehensive income — — ( 114 ) ( 0.1 ) 389 3.0 Other adjustments ( 45 ) — 5 — ( 16 ) ( 0.1 ) Foreign Tax Effects Australia Other nondeductible expenses — — ( 137 ) ( 0.1 ) 137 1.1 Valuation allowance — — ( 52 ) ( 0.1 ) ( 140 ) ( 1.1 ) Other Australia — — 57 0.1 11 0.1 Switzerland Foreign rate differential ( 69 ) — ( 62 ) ( 0.1 ) ( 470 ) ( 3.6 ) Valuation allowance — — — — ( 475 ) ( 3.7 ) Other Switzerland 31 — ( 2 ) — — — Other Foreign Jurisdictions ( 63 ) — 23 — 3 — Total Tax (Benefit) Expense $ ( 15,360 ) ( 8.1 ) % $ 6,197 6.5 % $ 1,965 15.2 % (a) In 2025 and 2024, state and local income taxes in Kentucky comprised the majority of the state and local income taxes, net of federal effect category. In 2023, state and local income taxes in Kentucky and Pennsylvania comprised the majority of the state and local income taxes, net of federal category. F-24 Krystal Biotech, Inc. Notes to Consolidated Financial Statements—Continued The significant components of the Company’s deferred tax assets and liabilities as of December 31, 2025 and 2024 are as follows: December 31, (in thousands) 2025 2024 Deferred tax assets: Net operating loss carryforwards $ 13,245 14,539 Stock compensation 11,432 9,090 Lease liability 2,205 1,784 Accrued expenses 2,419 1,929 Section 174 R&D capitalization 4,382 27,230 Intangible assets 15,946 17,632 Credits 1,855 10,376 Inventory 1,018 558 Other 16 — Deferred tax assets 52,518 83,138 Valuation allowance ( 14,214 ) ( 68,094 ) Deferred tax assets 38,304 15,044 Deferred tax liabilities: Depreciation ( 11,761 ) ( 11,771 ) Right-of-use assets ( 1,750 ) ( 1,543 ) Prepaid expenses ( 1,388 ) ( 1,647 ) Unrealized gain on marketable securities ( 581 ) ( 83 ) Total deferred tax liabilities ( 15,480 ) ( 15,044 ) Net deferred tax assets $ 22,824 $ — The Company has evaluated the positive and negative evidence bearing upon the realizability of its net U.S. deferred tax assets. Under the applicable accounting standards, management has considered the Company’s history of operating losses and the uncertainty around any sustained future profitability. The Company has concluded that it is more likely than not that the Company will realize the benefits of its net deferred tax assets. Accordingly, the Company has decreased the valuation allowance for deferred tax assets from $ 68.0 million as of December 31, 2024 to $ 14.2 million as of December 31, 2025. As of December 31, 2025 and 2024, the Company had federal research and development credit carryforwards of $ 0.5 million and $ 6.6 million, respectively. The federal tax credit carryforwards will begin to expire in 2042 if not utilized. As of December 31, 2025 and 2024, the Company also had orphan drug tax credit carryforwards of $ 0.1 million and $ 3.8 million, respectively. The orphan drug tax credit carryforwards will begin to expire in 2042 if not utilized. As of December 31, 2025 and 2024, the Company had state research and development credit carryforwards of $ 1 million and $ 0.7 million respectively. The state research and development credit carryforwards will begin to expire in 2038 if not utilized. As of December 31, 2025, the Company had cumulative U.S. state net operating loss carryforwards of $ 166.2 million. The state net operating losses 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 net operating loss carryforwards and tax credits utilized during the year are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities. Net operating loss 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. At December 31, 2025, deferred tax assets have been recognized on our consolidated balance sheets related to federal research and development credits and orphan drug credits. The Company fully utilized its federal net operating losses in 2025. If we have previously had, or have in the future, one or more Section 382 or 383 “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 federal tax credits. F-25 Krystal Biotech, Inc. Notes to Consolidated Financial Statements—Continued The "One Big Beautiful Bill Act" (OBBBA) enacted on July 4, 2025, introduced notable changes to the U.S. Internal Revenue Code, including immediate expensing of domestic Section 174 costs. Section 174 costs are expenditures which represent research and development costs that are incident to the development or improvement of a product, process, formula, invention, computer software, or technique. As previously required under the Tax Cuts and Jobs Act, we capitalized research and development expenditures in the years ended December 31, 2022 through December 31, 2024. With the enactment of OBBBA, we began deducting 2025 and cumulative domestic Section 174 costs. As of December 31, 2025, we have a deferred tax asset of $ 4.4 million related to capitalized Section 174 expenditures. 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 years ended December 31, 2022 through December 31, 2025. 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 Federal 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. The Company is subject to income taxes in U.S. federal, various state, and foreign jurisdictions. Significant judgment is required in evaluating the Company’s tax positions and determining the provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. The Company establishes reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. These reserves are established when the Company believes that certain positions might be challenged despite the belief that the tax return positions are fully supportable. The Company adjusts these reserves in light of changing facts and circumstances. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate. We do not anticipate significant increases or decreases to the amount of unrecognized tax benefits within the next twelve months. As of December 31, 2025, 2024, and 2023 the Company had unrecognized tax benefits of $ 10.0 million, $ 4.2 million and zero , respectively, of which $ 8.0 million, $ 3.3 million, and zero , respectively, if fully recognized would decrease the Company’s effective tax rate. A reconciliation of unrecognized tax benefits for the years ended December 31, 2025, 2024, and 2023 are as follows: Years Ended December 31, (in thousands) 2025 2024 2023 Unrecognized tax benefits - January 1 $ 4,152 $ — $ — Gross increases to tax positions in prior periods 34 Gross increases to current period tax positions 5,863 4,152 — Settlements with tax authorities — — — Lapse in statute of limitations $ — $ — $ — Unrecognized tax benefits - December 31 $ 10,049 $ 4,152 $ — As of December 31, 2025, 2024, and 2023 the Company had accrued interest and penalties related to unrecognized tax benefits of $ 0.8 million, $ 0.2 million, and zero , respectively. The Company recognizes interest expense and any related penalties from unrecognized tax benefits in income tax expense. The Company is also subject to taxation in various states and other foreign jurisdictions including Switzerland, Netherlands, France, Germany, Japan, United Kingdom, Italy and Spain. 12. Gain on Sale of Priority Review Voucher In August 2023, the Company entered into an agreement to sell the rare pediatric disease priority review 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 and comprehensive income as it did not have a carrying value at the time of the sale. 13. Segment Information The Company operates as one operating segment, which is focused on the discovery, development, manufacturing and commercialization of genetic medicines to treat diseases with high unmet medical needs. The Company’s chief operating decision maker (“CODM”), its chief executive officer, utilizes financial information presented on a consolidated basis to F-26 Krystal Biotech, Inc. Notes to Consolidated Financial Statements—Continued manage and allocate resources. The CODM uses consolidated gross margin, operating margin, net income and total research and development expenses by product candidate or program to assess performance, forecast future financial results and allocate resources. The following table presents selected financial information with respect to the Company’s single operating segment for the years ended December 31, 2025, 2024, and 2023: Years Ended December 31, (in thousands) 2025 2024 2023 Product revenues, net $ 389,130 $ 290,515 $ 50,699 Less: Cost of goods sold 23,049 20,061 3,094 Gross margin 366,081 270,454 47,605 Gross margin percentage 94 % 93 % 94 % B-VEC 6,690 8,760 9,039 KB111 1,837 — — KB301 184 635 485 KB304 960 1,342 66 KB407 1,805 1,877 1,668 KB408 882 1,630 1,043 KB707 10,856 8,677 3,828 KB801 2,175 1,314 — KB803 2,564 604 — Other dermatology programs 12 935 284 Other ophthalmology programs 44 554 71 Other programs 2,493 2,098 1,506 Other research and development costs (1) 27,543 25,154 28,443 Research and development 58,045 53,580 46,433 Selling, general and administrative 146,741 113,626 98,289 Litigation settlement — 37,500 12,500 Operating income (expense) $ 161,295 $ 65,748 $ ( 109,617 ) Other income Gain from sale of priority review voucher — — 100,000 Interest and other income, net 28,176 29,608 22,514 Income before income taxes 189,471 95,356 12,897 Income tax benefit (expense) 15,360 ( 6,197 ) ( 1,965 ) Net income 204,831 89,159 10,932 (1) Includes stock-based compensation, other manufacturing expenses related to our product candidates and other unallocated expenses which largely relates to depreciation and other facilities and equipment related costs 14. 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-27 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.