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MarketScreener Homepage  >  Equities  >  Nasdaq  >  Krystal Biotech, Inc.    KRYS

KRYSTAL BIOTECH, INC.

(KRYS)
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KRYSTAL BIOTECH : Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-K)

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03/10/2020 | 07:03am EDT
The following information should be read in conjunction with the consolidated
financial statements and related notes thereto included in this Annual Report on
Form 10-K. In addition to historical information, this report contains
forward-looking statements that involve risks and uncertainties which may cause
our actual results to differ materially from plans and results discussed in
forward-looking statements. We encourage you to review the risks and
uncertainties discussed in the sections entitled Item 1A. "Risk Factors" and
"Forward-Looking Statements" included at the beginning of this Annual Report on
Form 10-K. The risks and uncertainties can cause actual results to differ
significantly from those forecast in forward-looking statements or implied in
historical results and trends. We caution readers not to place undue reliance on
any forward-looking statements made by us, which speak only as of the date they
are made. We disclaim any obligation, except as specifically required by law and
the rules of the SEC, to publicly update or revise any such statements to
reflect any change in our expectations or in events, conditions or circumstances
on which any such statements may be based, or that may affect the likelihood
that actual results will differ from those set forth in the forward-looking
statements.



This section of this Form 10-K generally discusses 2019 and 2018 items and
year-to-year comparisons between 2019 and 2018 of the Company. Discussions of
2017 items and year-to-year comparisons between 2018 and 2017 that are not
included in this Form 10-K can be found in "Management's Discussion and Analysis
of Financial Condition and Results of Operations" in Part II, Item 7 of the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2018.

Overview


We are a clinical stage gene therapy company dedicated to developing and
commercializing novel treatments for patients suffering from skin diseases. We
have developed a proprietary gene therapy platform, which we refer to as the
Skin TARgeted Delivery platform, or STAR-D platform, that consists of a patented
engineered viral vector based on herpes simplex virus 1, or HSV-1, and
skin-optimized gene transfer technology, to develop off-the-shelf treatments for
dermatological diseases for which we believe there are no known effective
treatments. We are initially using the STAR-D platform to develop treatments for
rare or orphan dermatological indications caused by the absence of or a mutation
in a single gene, and plan to leverage our platform in the future to expand our
pipeline to include other indications and skin conditions.

Our lead clinical product candidate, B-VEC (beremagene geperpavec, previously
"KB103") is our proprietary gene therapy candidate therapy for the treatment of
dystrophic epidermolysis bullosa, or DEB, a rare and severe genetic disease, for
which there is currently no approved treatment.

In October 2019, we announced positive results from our Phase 1/2 clinical trial
of B-VEC at Stanford University. Safety data from all patients showed that B-VEC
was well tolerated with no serious adverse events (SAEs) reported. For more
information on the B-VEC Phase 1/2 clinical trial, visit:

http://ir.krystalbio.com/news-releases/news-release-details/krystal-biotech-announces-final-update-phase-12-clinical-trial.

We anticipate commencing pivotal Phase 3 FDA trials in the first half of 2020.


The FDA and the European Medicines Agency, or EMA, have each granted B-VEC
orphan drug designation for the treatment of DEB. In addition, the FDA granted
Regenerative Medicine Advanced Therapy, or RMAT to B-VEC. The designation
includes all the benefits of the FDA's Fast Track and Breakthrough Therapy
designations and enables the ability to work more closely and frequently with
the FDA to discuss surrogate or intermediate endpoints to support the potential
acceleration of approval and satisfy post-approval requirements. The EMA granted
PRIority MEdicines, or PRIME, eligibility for B-VEC to treat DEB. Through PRIME,
the EMA offers enhanced support to medicine developers including early
interaction and dialogue, and a pathway for accelerated evaluation by the
agency. B-VEC is also eligible during the FDA marketing process to apply for a
Rare Pediatric Disease Priority Review Voucher that can be redeemed to receive a
priority review of a subsequent marketing application for a different product.

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Our second pipeline candidate, KB105, is currently in a Phase 1/2 clinical trial
for treatment of patients with deficient autosomal recessive congenital
ichthyosis, or ARCI, which is associated with transglutaminase 1, or TGM-1.
There are currently no treatments for this disease that affects approximately
20,000 patients worldwide. The FDA has granted KB105 orphan drug designation and
rare pediatric designation for the treatment of ARCI. KB105 is also eligible
during the FDA marketing process to apply for a Rare Pediatric Priority Review
Voucher. We anticipate announcing interim clinical results from the on-going
trial in 1H 2020.

We have several other product candidates in various stages of preclinical development.


We 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. On June 19, 2018, we
incorporated Krystal Australia Pty Ltd, an Australian proprietary limited
company, for the purposes of undertaking preclinical and clinical studies in
Australia. On April 24, 2019, the Company incorporated Jeune, Inc. in Delaware,
a wholly-owned subsidiary, for the purposes of undertaking preclinical studies
for aesthetic skin conditions.

On September 22, 2017, the Company completed its initial public offering, or
IPO, of 4,554,000 shares of its common stock at a price to the public of $10.00
per share. Proceeds to the Company were $40.7 million, net of underwriting
discounts, commissions and offering expenses.



On November 1, 2017, the Company entered into a stock purchase agreement with
Epidermolysis Bullosa Medical Research Foundation, a California not-for-profit
corporation ("EBMRF"), and EB Research Partnership, Inc., a New
York not-for-profit corporation ("EBRP" and together with EBMRF, the
"Purchasers"), pursuant to which the Company agreed to issue and sell, and the
Purchasers agreed to purchase, an aggregate of 70,000 shares of the Company's
common stock, par value $0.00001 per share, for a purchase price of $11.00 per
share, resulting in aggregate gross proceeds to the Company of $770 thousand.



On January 16, 2018, the United States Patent and Trademark Office or USPTO
granted US patent No. 9,877,990 to the Company which covers compositions
comprising herpes simplex viral or HSV vectors and methods of using the same for
providing prophylactic, palliative or therapeutic relief of a wound, disorder or
disease of the skin in a subject.



On August 16, 2018, the Company entered into a stock purchase agreement with
Frazier Life Sciences for the private placement of 625,000 shares of the
Company's common stock at $16.00 per share. The private placement yielded gross
proceeds of $10 million and closed on August 17, 2018.



On October 23, 2018, the Company completed a public offering of 3,450,000 shares
of its common stock at a price to the public of $20.00 per share, which includes
the sale of 450,000 shares of the Company's common stock pursuant to the
underwriters' full exercise of their option to purchase additional shares. Net
proceeds were approximately $64.3 million from the public offering after
underwriter discounts, commissions and other offering expenses payable by the
Company.

In January 2019, we completed the construction of our own commercial scale
current good manufacturing practice or cGMP-compliant manufacturing facility,
ANCORIS, to enhance supply chain control, increase supply capacity for clinical
trials and ensure commercial demand is met in the event that B-VEC receives
marketing approval. We intend to use our cGMP manufacturing process for all
clinical and commercial production of B-VEC.

On June 27, 2019, the Company completed a public offering of 2,500,000 shares of
its common stock to the public at $40.00 per share. Net proceeds to the Company
from the offering were $93.8 million after deducting underwriting discounts and
commissions of approximately $6.0 million, and other offering expenses payable
by the Company of approximately $220 thousand. On July 3, 2019, the underwriters
exercised their option to purchase an additional 353,946 shares of common
stock at $40.00 per share for additional net proceeds of $13.3 million after
deducting underwriting discounts and commissions of approximately $849 thousand.

On September 27, 2019, the Company announced the granting of a new patent for
its lead product candidate, B-VEC, after receiving a Notice of Acceptance from
IP Australia for patent application number 2016401692. This represents the
company's first foreign patent and a Notice of Acceptance appeared in
the Australian Official Journal of Patents on October 3, 2019. This patent
covers pharmaceutical compositions comprising B-VEC, as well as to medical uses
thereof, e.g., in the treatment of wounds, disorders, or diseases of the skin,
particularly those found in epidermolysis bullosa patients.  In addition, the
United States Patent and Trademark Office (USPTO) announced a new US patent for
B-VEC that covers the STAR-D, for skin-targeted therapeutics, as well as methods
of its use for delivering any effector of interest to the skin.

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On January 21, 2020, the Company announced the appointment of Jennifer Chien to
the newly created position of chief commercial officer, effective January 20,
2020. Ms. Chien has more than 20 years of commercial leadership experience in
the biopharmaceutical industry, most recently having served as vice president,
head of genetic diseases at Sanofi Genzyme.



On January 24, 2020, we announced the ground breaking of the second commercial
gene therapy facility in Findlay Township, Pennsylvania. The Findlay-based GMP
facility, named ASTRA, will have the capacity to produce commercial gene therapy
medicines to treat patients suffering from debilitating rare diseases.
The ASTRA facility will initially be used as a commercial back up facility for
B-VEC, which is being developed for the treatment of dystrophic epidermolysis
bullosa, a rare and devastating skin disorder, and expand to produce
investigational and commercial material for our pipeline products. The 100,000
square foot facility will be built-out and validated with an expected completion
date by early 2021.



At December 31, 2019, our cash, cash equivalents and short-term investments
balance was approximately $193.7 million. Since operations began, we have
incurred operating losses. Our net losses were $19.1 million and $10.9 million
for the years ended December 31, 2019 and 2018, respectively. At December 31,
2019, we had an accumulated deficit of $39.0 million. We expect to incur
significant expenses and increasing operating losses for the foreseeable future.
Our net losses may fluctuate significantly from quarter to quarter and year to
year. We will need to generate significant revenue to achieve profitability, and
we may never generate revenue or enough revenue to achieve profitability.



Costs related to clinical trials can be unpredictable and therefore there can be
no guarantee that we will have sufficient capital to fund our continued clinical
studies of B-VEC, KB105 and planned preclinical studies for our other product
candidates, or our operations. Our funds may not be sufficient to enable us to
conduct pivotal clinical trials for, seek marketing approval for or commercially
launch B-VEC, KB105 or any other product candidate. Accordingly, to obtain
marketing approval for and to commercialize this or any other product
candidates, we may be required to obtain further funding through public or
private equity offerings, debt financings, collaboration and licensing
arrangements or other sources. Adequate additional financing may not be
available to us on acceptable terms, if at all. Our failure to raise capital
when needed could have a negative effect on our financial condition and our
ability to pursue our business strategy.



Substantially all our net losses resulted from costs incurred in connection with
our research and development programs and from general and administrative costs
associated with our operations. We expect to continue to incur significant
expenses and increasing operating losses for at least the next several years. We
expect our expenses will increase substantially in connection with our ongoing
and planned activities, as we:



  • conduct clinical studies for our B-VEC and KB105 product candidates;

• increase research and development-related activities for the discovery and

      development of our pipeline product candidates;


  • continue our research and development efforts internally;

• manufacture clinical study materials and establish the infrastructure

necessary to support and develop large-scale manufacturing capabilities;


  • seek regulatory approval for our product candidates;

• add personnel to support our product development and commercialization

efforts; and

• increase activities leading up to the potential commercial launch of our

      B-VEC, KB105 and other product candidates.




We do not expect to generate any product revenues until 2022, at the earliest,
assuming we receive marketing approval for B-VEC on the schedule we currently
contemplate. While we are in the process of building out our internal vector
manufacturing capacity, currently all of our manufacturing activities are
contracted out to third parties. Additionally, we currently utilize third-party
contract research organizations, or CROs, to carry out our clinical development
activities. As we seek to obtain regulatory approval for any of our product
candidates, we expect to incur significant commercialization expenses as we
prepare for product sales, marketing, manufacturing, and distribution.
Accordingly, we will seek to fund our operations through public or private
equity or debt financings, strategic collaborations, or other sources. However,
we may be unable to raise additional funds or enter into such other arrangements
when needed on favorable terms or at all. Our failure to raise capital or enter
into such other arrangements as and when needed would have a negative impact on
our financial condition and our ability to develop our products.



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Because of the numerous risks and uncertainties associated with product
development, we are unable to predict the timing or amount of increased expenses
or when or if we will be able to achieve or maintain profitability. Even if we
are able to generate revenues from the sale of our products, we may not become
profitable. If we fail to become profitable or are unable to sustain
profitability on a continuing basis, then we may be unable to continue our
operations at planned levels and be forced to reduce our operations.

Revenue


We currently have no approved products for commercial marketing or sale and have
not generated any revenue from the sale of products or other sources to date. In
the future, we may generate revenue from product sales, royalties on product
sales, or license fees, milestones, or other upfront payments if we enter into
any collaborations or license agreements. We expect that our future revenue will
fluctuate from quarter to quarter for many reasons, including the uncertain
timing and amount of any such payments and sales.

Research and Development Expenses

Research and development expenses consist primarily of costs incurred to advance our preclinical candidates, which include:

• expenses incurred under agreements with contract manufacturing

organizations, consultants and other vendors that conduct our preclinical

activities;

• costs of acquiring, developing and manufacturing clinical trial materials

and lab supplies; and

• facility costs, depreciation and other expenses, which include direct

expenses for rent and maintenance of facilities and other supplies.



We expense internal research and development costs to operations as incurred. We
expense third party costs for research and development activities, such as the
manufacturing of preclinical and clinical materials, based on an evaluation of
the progress to completion of specific tasks such as manufacturing of drug
substance, fill/finish and stability testing, which is provided to us by our
vendors.

We expect our research and development expenses will increase as we continue the
manufacture of preclinical and clinical materials and manage the clinical trials
of, and seek regulatory approval for, our product candidates and expand our
product portfolio. In the near term, we expect that our research and development
expenses will increase as we begin our planned pivotal Phase 3 clinical trial
for B-VEC, conduct our ongoing Phase 1/2 clinical trial for KB105, and incur
pre-clinical expenses for our other product candidates. Due to the numerous
risks and uncertainties associated with product development, we cannot determine
with certainty the duration, costs and timing of this clinical trial, and, as a
result, the actual costs to complete this planned clinical trial may exceed the
expected costs.

General and Administrative Expenses


General and administrative expenses consist principally of professional fees
associated with corporate and intellectual property legal expenses, consulting
and accounting services and facility-related costs. Other general and
administrative costs include stock-based compensation and travel expenses.

We anticipate that our general and administrative expenses will increase in the
future to support the continued research and development of our product
candidates and to operate as a public company. These increases will likely
include increased costs for insurance, costs related to the hiring of additional
personnel and payments to outside consultants, lawyers and accountants, among
other expenses. Additionally, if and when we believe a regulatory approval of
our first product candidate appears likely, we anticipate that we will increase
our salary and personnel costs and other expenses as a result of our preparation
for commercial operations.

Interest and Other Income (Expense), Net

Interest and other income (expense), net for year ended December 31, 2019 consisted primarily of interest earned on our cash, cash equivalents and short-term investments.


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Critical Accounting Policies and Significant Judgments and Estimates


Our management's discussion and analysis of our financial position and results
of operations is based on our financial statements, which have been prepared in
accordance with US generally accepted accounting principles, or GAAP. The
preparation of financial statements in conformity with GAAP requires us to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. On an ongoing basis, we evaluate estimates
which include, but are not limited to, estimates related to clinical trial and
contract manufacturing prepayments and accruals, stock-based compensation
expense, and reported amounts of related expenses during the period. We base our
estimates on historical experience and other market-specific or other relevant
assumptions that we believe to be reasonable under the circumstances. Actual
results may differ materially from those estimates or assumptions.

While our significant accounting policies are described in more detail in the
notes to our financial statements appearing elsewhere in this Annual Report on
Form 10-K, we believe the following accounting policies to be most critical to
the judgments and estimates used in the preparation of our financial statements.

Accrued Research and Development Expenses


As part of the process of preparing our financial statements, we are required to
estimate our accrued research and development expenses, current assets and other
current liabilities. This process involves reviewing open contracts and
commitments, communicating with our personnel to identify services that have
been performed for us and estimating the level of service performed and the
associated cost incurred for the service when we have not yet been invoiced or
otherwise notified of the actual cost. The majority of our service providers
invoice us monthly in arrears for services performed or when contractual
milestones are met. We make estimates of our accrued research and development
expenses, current assets and other current liabilities as of each balance sheet
date in our financial statements based on facts and circumstances known to us at
that time. Examples of estimated accrued research and development expenses,
prepaid assets and other current liabilities include fees paid to contract
manufacturers made in connection with the manufacturing of pre-clinical and
clinical trials materials.

We base our expenses related to clinical manufacturing on our estimates of the
services performed pursuant to contracts with the entities producing clinical
materials on our behalf. The financial terms of these agreements are subject to
negotiation, vary from contract to contract and may result in uneven payment
flows. Payments under these types of contracts depend heavily upon the
successful completion of many separate tasks involved in the manufacturing of
drug product. In accruing service fees, we estimate the time period over which
services will be performed, and the actual services performed in each period. If
our estimates of the status and timing of services performed differs from the
actual status and timing of services performed we may report amounts that are
too high or too low in any particular period. To date, there have been no
material differences from our estimates to the amount actually incurred.

Stock-Based Compensation


We have applied the fair value recognition provisions of Financial Accounting
Standards Board Accounting Standards Codification, or ASC, Topic
718, Compensation-Stock Compensation, or ASC 718, to account for stock-based
compensation for employees and ASC 718 and ASC 505, Equity, or ASC 505, for
non-employees for 2018. We recognize compensation costs related to stock options
granted to employees based on the estimated fair value of the awards on the date
of grant. Stock compensation related to non-employee awards is re-measured in
2018 at each reporting period until the awards are vested. Described below is
the methodology we have utilized in measuring stock-based compensation expense.

Determining the amount of stock-based compensation to be recorded requires us to
develop estimates of the fair value of stock-based awards as of their
measurement date. We recognize stock-based compensation expense over the
requisite service period, which is the vesting period of the award. Calculating
the fair value of stock-based awards requires that we make highly subjective
assumptions. We use the Black-Scholes option pricing model to value our stock
option awards. Use of this valuation methodology requires that we make
assumptions as to the volatility of our common stock, the risk-free interest
rate for a period that approximates the expected term of our stock options and
our expected dividend yield. Because we are a company with a limited operating
history, we utilize data from a representative group of publicly traded
companies to estimate expected stock price volatility. We selected
representative companies from the biopharmaceutical industry with
characteristics similar to us. We use the simplified method as prescribed by the
SEC Staff Accounting Bulletin No. 107, Share-Based Payment as we do not have
sufficient historical stock option activity data to provide a reasonable basis
upon which to estimate the expected term of stock options granted to employees.
For non-employee grants, we use an expected term equal to the remaining
contractual term of the award in 2018. We utilize a dividend yield of zero based
on the fact that we have never paid cash dividends and have no current intention
of paying cash dividends. The risk-free interest rate used for each grant is
based on the US Treasury yield curve in effect at the time of grant for
instruments with a similar expected life.

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Under ASC 718, we elected to estimate the level of forfeitures expected to occur
and record stock-based compensation expense only for those awards that we
ultimately expect will vest. During the years ended December 31, 2019 and 2018,
our estimated annual forfeiture rate was 10% and 0%, respectively.



JOBS Act Accounting Election


We are an emerging growth company, as defined in the JOBS Act. Under the JOBS
Act, emerging growth companies can delay adopting new or revised accounting
standards issued subsequent to the enactment of the JOBS Act until such time as
those standards apply to private companies. We have irrevocably elected not to
avail ourselves of this exemption from new or revised accounting standards and,
therefore, will be subject to the same new or revised accounting standards as
other public companies that are not emerging growth companies.

Results of Operations

Years Ended December 31, 2019, 2018 and 2017




                                             Years Ended December 31,                   Change
                                                                                2019 vs.      2018 vs.
(in thousands)                           2019          2018          2017         2018          2017
Expenses
Research and development               $  15,616$   7,761$  3,208$   7,855$   4,553
General and administrative                 6,465         4,155        1,564         2,310         2,591
Total operating expenses                  22,081        11,916        4,772        10,165         7,144
Loss from operations                     (22,081 )     (11,916 )     (4,772 )     (10,165 )      (7,144 )
Other Expense
Interest and other income, net             2,993         1,027       (3,148 )       1,966         4,175
Total interest and other income, net       2,993         1,027       (3,148 )       1,966         4,175
Net loss                               $ (19,088 )$ (10,889 )$ (7,920 )$  (8,199 )$  (2,969 )

Research and Development Expenses


Research and development expenses increased $7.9 million for the year ended
December 31, 2019 compared to the year ended December 31, 2018. Higher research
and development expenses were due to increases in professional services related
to outsourced manufacturing, in-vivo and clinical studies of $2.3 million,
payroll, employee benefits and stock-based compensation of $1.9 million due to
an increase in headcount as we scaled up our research and development efforts
for our 2 leading product candidates, B-VEC and KB105, lab supplies of $2.2
million, and other research and development expenses of $1.5 million.

Research and development expenses increased $4.6 million for the year ended
December 31, 2018 compared to the year ended December 31, 2017. Higher research
and development expenses were due largely to increases in professional services
related to outsourced manufacturing, in-vivo and clinical studies of $1.9
million, payroll, employee benefits and stock-based compensation of $1.5 million
due to an increase in headcount as we scaled up our research and development
efforts for our 2 leading product candidates, KB103 and KB105, lab supplies of
$860 thousand, and other research and development expenses of $216 thousand.

General and Administrative Expenses


General and administrative expenses increased $2.3 million for the year ended
December 31, 2019 compared to the year ended December 31, 2018. Higher general
and administrative spending was due largely to increases in legal and
professional services of $184 thousand, payroll, employee benefits and
stock-based compensation costs of $1.5 million, insurance expenses of $242
thousand, and other administrative costs of $434 thousand.

General and administrative expenses increased $2.6 million for the year ended
December 31, 2018 compared to the year ended December 31, 2017. Higher general
and administrative spending was due largely to increases in legal and
professional services of $420 thousand, payroll, employee benefits and
stock-based compensation costs of $1.6 million, insurance expenses of $270
thousand as a result of being a public company for the full year, tax and
license expenses of $142 thousand as a result of increased authorized common
shares for the full year, and other administrative costs of $196 thousand.

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Interest and Other Income (Expense), Net


Interest and other income for the year ended December 31, 2019 was $3.0 million
and consisted of interest income earned from our cash, cash equivalents,
short-term and long-term investments. Interest and other income, net, for the
year ended December 31, 2018 was $1.0 million and consisted of interest income
earned from our cash, cash equivalents and short-term investments. This increase
was due to our increased cash position in 2019 as compared to 2018.

Interest and other income for the year ended December 31, 2018 was $1.0 million
and consisted of interest income earned from our cash, cash equivalents and
short-term investments. Interest and other expense, net, for the year ended
December 31, 2017 was $3.1 million and consisted primarily of interest expense
incurred due to the beneficial conversion feature upon conversion of promissory
notes to shares of preferred stock, and to a lesser degree due to interest
expense on our convertible promissory notes before their conversion to shares of
preferred stock, partially offset by interest earned on our cash and cash
equivalents.

Liquidity and Capital Resources

Overview

At December 31, 2019 and 2018, we had accumulated deficits of $39.0 million and $20.0 million, respectively.


We believe that our cash, cash equivalents and short-term investments of
approximately 193.7 million as of December 31, 2019 will be sufficient to allow
the Company to fund its operations for at least 12 months from the filing date
of this Form 10-K. As the Company continues to incur losses, a transition to
profitability is dependent upon the successful development, approval and
commercialization of its product candidates and the achievement of a level of
revenues adequate to support the Company's cost structure. The Company may never
achieve profitability, and unless and until it does, the Company will continue
to need to raise additional capital. Management intends to fund future
operations through the sale of equity and debt financings and may also seek
additional capital through arrangements with strategic partners. There can be no
assurances that additional funding will be available on terms acceptable to the
Company, if at all.

We have funded our operations principally from the sale of common stock in public and private placement offerings as outlined below:

• In June 2019, we received net proceeds of approximately $107.1 million from

our public offering after deducting underwriting discounts and commissions

and other offering expense payable by the Company.

• In October 2018, we received net proceeds of approximately $64.3 million

from our public offering after underwriter discounts, commissions and other

offering expenses payable by the Company.

• In August 2018, we closed the sale of common stock in a private placement to

Frazier Life Sciences for gross proceeds of $10 million.

• In November 2017, we closed the sale of common stock in a private placement

for gross proceeds of $770 thousand.

• On September 22, 2017, we received net proceeds of approximately $40.7

million from our initial public offering

• In August 2017, we closed the sale of preferred stock to a single investor

for aggregate proceeds of $7.0 million, and the sale of 130,590 shares of

our common stock with a party related to a member of our board of directors

for aggregate proceeds of $1.0 million.

• Prior to August 2017, we had received $1.4 million in gross proceeds from

      the issuance of equity securities and $4.1 million in gross proceeds from
      debt financings.

Operating Capital Requirements


Our primary uses of capital are, and we expect will continue to be for the near
future, compensation and related expenses, manufacturing costs for preclinical
and clinical materials, third party clinical trial research and development
services, laboratory and related supplies, clinical costs, legal and other
regulatory expenses and general overhead costs.

We expect that our existing cash, cash equivalents and short-term investments as
of December 31, 2019 will be sufficient to fund our planned operations and to
enable us to complete our planned pivotal Phase 3 clinical trial for B-VEC and
our ongoing Phase 1/2 clinical trial for KB105. In order to complete the process
of obtaining regulatory approval for any of our product candidates and to build
the sales, manufacturing, marketing and distribution infrastructure that we
believe will be necessary to commercialize our product candidates, if approved,
we will require substantial additional funding.

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We have based our projections of operating capital requirements on assumptions
that may prove to be incorrect and we may use all of our available capital
resources sooner than we expect. Because of the numerous risks and uncertainties
associated with research, development and commercialization of pharmaceutical
products, we are unable to estimate the exact amount of our operating capital
requirements. Our future funding requirements will depend on many factors,
including, but not limited to:

• the progress, timing, results and costs of our ongoing Phase 1/2 clinical

trial for KB105;

• the progress, timing and costs of manufacturing of B-VEC for our planned

pivotal Phase 3 clinical trials;

• the continued development and the filing on an Investigational New Drug, or

      IND, application for future product candidates;


   •  the initiation, scope, progress, timing, costs and results of drug
      discovery, laboratory testing, manufacturing, preclinical studies and

clinical trials for any other product candidates that we may pursue in the

future, if any;

• the costs of maintaining our own commercial-scale cGMP manufacturing

      facility;


  • the outcome, timing and costs of seeking regulatory approvals;


   •  the costs associated with the manufacturing process development and
      evaluation of third-party manufacturers;

• the costs of future activities, including product sales, medical affairs,

marketing, manufacturing and distribution, in the event we receive marketing

approval for B-VEC, KB105 or any other product candidates we may develop;

• the extent to which the costs of our product candidates, if approved, will

be paid by health maintenance, managed care, pharmacy benefit and similar

healthcare management organizations, or will be reimbursed by government

authorities, private health coverage insurers and other third-party payors;

• the costs of commercialization activities for B-VEC, KB105 and other product

candidates if we receive marketing approval for B-VEC, KB105 or any other

      product candidates we may develop, including the costs and timing of
      establishing product sales, medical affairs, marketing, distribution and
      manufacturing capabilities;

• subject to receipt of marketing approval, if any, revenue received from

commercial sale of B-VEC, KB105 or our other product candidates;

• the terms and timing of any future collaborations, licensing, consulting or

other arrangements that we may establish;

• the amount and timing of any payments we may be required to make, or that we

may receive, in connection with the licensing, filing, prosecution,

maintenance, defense and enforcement of any patents or other intellectual

      property rights, including milestone and royalty payments and patent
      prosecution fees that we are obligated to pay pursuant to our license
      agreements;

• our current license agreements remaining in effect and our achievement of

milestones under those agreements;

• our ability to establish and maintain collaborations and licenses on

favorable terms, if at all; and

• the extent to which we acquire or in-license other product candidates and

technologies.



We expect that we will need to obtain substantial additional funding in order to
receive regulatory approval and to commercialize B-VEC or any other product
candidates, including KB105. To the extent that we raise additional capital
through the sale of common stock, convertible securities or other equity
securities, the ownership interests of our existing stockholders may be
materially diluted and the terms of these securities could include liquidation
or other preferences that could adversely affect the rights of our existing
stockholders. In addition, debt financing, if available, would result in
increased fixed payment obligations and may involve agreements that include
restrictive covenants that limit our ability to take specific actions, such as
incurring additional debt, making capital expenditures or declaring dividends,
that could adversely affect our ability to conduct our business. If we are
unable to raise capital when needed or on attractive terms, we could be forced
to significantly delay, scale back or discontinue the development or
commercialization of B-VEC, KB105 or our other product candidates, seek
collaborators at an earlier stage than otherwise would be desirable or on terms
that are less favorable than might otherwise be available, and relinquish or
license, potentially on unfavorable terms, our rights to B-VEC or KB105 or our
other product candidates that we otherwise would seek to develop or
commercialize ourselves.

                                       58

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Cash Flows

The following table summarizes our sources and uses of cash (in thousands):



                                                    Years Ended December 31,
                                                      2019              2018

Net cash used in operating activities $ (18,713 )$ (9,445 )

      Net cash used in investing activities              (4,968 )       

(10,323 )

      Net cash provided by financing activities         107,525          73,847
      Net increase in cash                        $      83,844$  54,079




Operating Activities

Net cash used in operating activities for the year December 31, 2019 was $18.7 million and consisted primarily of a net loss of $19.1 million adjusted for non-cash items of depreciation of $748 thousand, stock-based compensation expense of $1.2 million, loss on disposals of fixed assets of $67 thousand, amortization of right-of-use asset of $226 thousand, and cash used by net decreases in operating assets and liabilities of $1.9 million.


Net cash used in operating activities for the year ended December 31, 2018 was
$9.4 million and consisted primarily of a net loss of $10.9 million adjusted
for non-cash items of depreciation and stock-based compensation expense of
$933 thousand and a net decrease in operating assets and liabilities of
approximately $511 thousand.

Investing Activities


Net cash used in investing activities for the year ended December 31, 2019 was
$5.0 million and consisted primarily of purchases of $8.6 million of short-term
available-for-sale investment securities, proceeds of $10.5 million from
maturities of short-term investments, purchases of $497 thousand of long-term
investments, expenditures of $6.4 million for the build-out of our GMP facility
and purchases of computer and laboratory equipment.

Net cash used in investing activities for the year ended December 31, 2018 was
$10.3 million and consisted primarily of purchases of $8.1 million of short-term
available-for-sale investment securities, expenditures of $2.2 million for the
build-out of our new GMP facility and purchases of computer and laboratory
equipment.

Financing Activities


Net cash provided by financing activities for the year ended December 31, 2019
was $107.5 million and was primarily from net proceeds of $107.1 million after
underwriter discounts and other offering expenses payable by the Company from a
follow-on public offering of 2,853,946 shares of common stock at a price of
$40.00 per share, which includes the sale of 353,946 shares of the Company's
common stock pursuant to the underwriters' exercise of their option to purchase
additional shares.

Net cash provided by financing activities for the year ended December 31, 2018
was $73.8 million and was primarily form net proceeds of $64.3 million after
underwriter discounts, commissions and other offering expenses payable by the
Company from a follow-on public offering of 3,450,000 shares of common stock at
a price of $20.00 per share, which includes the sale of 450,000 shares of the
Company's common stock pursuant to the underwriters' full exercise of their
option to purchase additional shares, and an August 2018 private placement of
625,000 shares of the Company's common stock at $16.00 per share resulting in
gross proceeds of $10.0 million, partially offset by transactions costs of $450
thousand.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated by the SEC.


                                       59

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Contractual Obligations

The following table summarizes our outstanding contractual obligations as of payment due date by period at December 31, 2019 (in thousands):



                                            Less than        Years          Years         More Than
                              Total          1 year           1-3            4-5           5 Years
Future minimum operating
lease payments (1)(2)       $   19,943$     3,029$    2,743$    2,854$    11,317
Obligation to contract
manufacturing
organization                $    3,264$     3,264     $        -     $        -     $         -



(1) We lease approximately 25,000 square feet of office and laboratory space at

2100 Wharton St., Suite 701, Pittsburgh, Pennsylvania. The lease expires

February 2027.

(2) On December 26, 2019, we entered into a lease agreement for our second

commercial gene therapy facility in the Pittsburgh, Pennsylvania area. The

100,000 square foot facility is under construction and is expected to be

completed by early 2021. The lease will commence when the space is

available for access, which is anticipated to be in the second half of

2020, and has an initial term that lasts until October 31, 2035. A cash

contribution in the amount of $2.4 million was paid to escrow on January

21, 2020. The contribution was intended to reduce the amount of the

building construction costs and had the effect of reducing the base rental

rate of the lease.

Recent Accounting Pronouncements


In August 2018, the SEC issued a final rule to simplify certain disclosure
requirements. In addition, the amendments expanded the disclosure requirements
on the analysis of stockholders' equity for interim financial statements. In
August and September 2018, further amendments were issued to provide
implementation guidance on adoption of the SEC rule and transition guidance for
the new interim stockholders' equity disclosure. The amended guidance is
effective for us commencing in the first quarter of 2019. The adoption of this
amended guidance resulted in us disclosing the Condensed Consolidated Statements
of Stockholders' Equity in the quarterly financial statements for the year ended
December 31, 2019 and 2018.

In August 2018, the FASB issued ASU 2018-13 - Fair Value Measurement (Topic 820)
("ASU 2018-13") which removes, modifies and adds disclosure requirements on fair
value measurements. ASU 2018-13 removes disclosure requirements for transfers
between Level 1 and Level 2 measurements and valuation processes for Level 3
measurements but adds new disclosure requirements including changes in
unrealized gains/losses in other comprehensive income related to recurring Level
3 measurements. The amended guidance is effective for us beginning in the first
quarter of 2020. Certain aspects may be applied prospectively while other
aspects may be applied retrospectively upon the effective date. The Company does
not anticipate a material impact to the consolidated financial statements as a
result of the adoption of this guidance.

In June 2018, the FASB issued ASU 2018-07 - Compensation - Stock Compensation
(Topic 718): Improvements to Nonemployee Share-Based Payment Accounting which
simplifies the accounting for share-based payments to nonemployees by aligning
it with the accounting for share-based payments to employees, with certain
exceptions. The new guidance expands the scope of ASC 718 to include share-based
payments granted to nonemployees in exchange for goods or services used or
consumed in an entity's own operations. The amended guidance is effective for us
beginning in the first quarter of 2019. Early adoption is permitted. The
adoption of this amended guidance did not have a material effect on our
consolidated financial statements.

In February 2016, the FASB issued ASC 842 - Leases ("ASC 842"), which replaces
the existing lease accounting standards. The new standard requires a dual
approach for lessee accounting under which a lessee would account for leases as
finance (also referred to as capital) leases or operating leases. Both finance
leases and operating leases with terms longer than 12 months will result in the
lessee recognizing a right-of-use asset and a corresponding lease liability. For
finance leases the lessee would recognize interest expense and amortization of
the right-of-use asset and for operating leases the lessee would recognize
straight-line total lease expense. In July 2018, further amendments were issued
to clarify how to apply certain aspects of the amended lease guidance and to
address certain implementation issues. ASC 842 was effective for the Company
beginning in the first quarter of 2019. The Company generally does not finance
purchases of equipment but does lease office and lab facilities. The adoption of
this amended guidance resulted in $1.1 million of right-of-use asset and $1.4
million of lease liability being recognized on the consolidated balance sheet as
of January 1, 2019.

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