KRYSTAL BIOTECH, INC. 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 theSEC , 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 endedDecember 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. InOctober 2019 , we announced positive results from our Phase 1/2 clinical trial of B-VEC atStanford 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 theEuropean 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 theFDA'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. 51
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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 inApril 2016 . InMarch 2017 , we converted from aCalifornia limited liability company to a Delaware C-corporation, and changed our name fromKrystal Biotech, LLC toKrystal Biotech, Inc. OnJune 19, 2018 , we incorporatedKrystal Australia Pty Ltd , an Australian proprietary limited company, for the purposes of undertaking preclinical and clinical studies inAustralia . OnApril 24, 2019 , the Company incorporatedJeune, Inc. inDelaware , a wholly-owned subsidiary, for the purposes of undertaking preclinical studies for aesthetic skin conditions. OnSeptember 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. OnNovember 1, 2017 , the Company entered into a stock purchase agreement withEpidermolysis Bullosa Medical Research Foundation , aCalifornia not-for-profit corporation ("EBMRF"), andEB Research Partnership, Inc. , aNew 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 . OnJanuary 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. OnAugust 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 onAugust 17, 2018 . OnOctober 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. InJanuary 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. OnJune 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 . OnJuly 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 . OnSeptember 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 theAustralian Official Journal of Patents onOctober 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. 52
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OnJanuary 21, 2020 , the Company announced the appointment ofJennifer Chien to the newly created position of chief commercial officer, effectiveJanuary 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. OnJanuary 24, 2020 , we announced the ground breaking of the second commercial gene therapy facility inFindlay 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. AtDecember 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 endedDecember 31, 2019 and 2018, respectively. AtDecember 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
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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.
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 theSEC 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 theUS Treasury yield curve in effect at the time of grant for instruments with a similar expected life. 55
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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 endedDecember 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
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 endedDecember 31, 2019 compared to the year endedDecember 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 endedDecember 31, 2018 compared to the year endedDecember 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 endedDecember 31, 2019 compared to the year endedDecember 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 endedDecember 31, 2018 compared to the year endedDecember 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 . 56
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Interest and Other Income (Expense), Net
Interest and other income for the year endedDecember 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 endedDecember 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 endedDecember 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 endedDecember 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
We believe that our cash, cash equivalents and short-term investments of approximately 193.7 million as ofDecember 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
our public offering after deducting underwriting discounts and commissions
and other offering expense payable by the Company.
• In
from our public offering after underwriter discounts, commissions and other
offering expenses payable by the Company.
• In
Frazier Life Sciences for gross proceeds of
• In
for gross proceeds of
• On
million from our initial public offering
• In
for aggregate proceeds of
our common stock with a party related to a member of our board of directors
for aggregate proceeds of
• Prior to
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 ofDecember 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. 57
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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 andclinical 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.
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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
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
Net cash used in operating activities for the year endedDecember 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 endedDecember 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 endedDecember 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 endedDecember 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 endedDecember 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 anAugust 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
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Contractual Obligations
The following table summarizes our outstanding contractual obligations as of
payment due date by period at
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
(2) On
commercial gene therapy facility in 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
contribution in the amount of
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
InAugust 2018 , theSEC 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 andSeptember 2018 , further amendments were issued to provide implementation guidance on adoption of theSEC 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 endedDecember 31, 2019 and 2018. InAugust 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. InJune 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. InFebruary 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. InJuly 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 ofJanuary 1, 2019 . 60
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