KRYSTAL BIOTECH, INC. The following discussion and analysis of our financial condition and results of operations should be read together with the unaudited condensed consolidated financial statements and related notes included elsewhere in Item 1 of Part I of this Quarterly Report on Form 10-Q and with the audited financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 , as filed with theSEC , onMarch 10, 2020 . SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements include all statements that are not historical facts and can be identified by terms such as "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "may," "plan," "potential," "predict," "project," "seek," "should," "target," "will," "would," or similar expressions and the negatives of those terms. These statements relate to future events or to our future operating or financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. Forward-looking statements appearing in a number of places throughout this Quarterly Report on Form 10-Q include, but are not limited to, statements about the following, among other things: •the initiation, timing, progress and results of preclinical and clinical trials for B-VEC (previously "KB103"), KB105, KB301 and any other product candidates, including statements regarding the timing of initiation and completion of studies or trials and related preparatory work, the period during which the results of the trials will become available and our research and development programs; •the impact that the COVID-19 pandemic and measures to prevent its spread may have on our business operations, access to capital, research and development activities, and preclinical and clinical trials for B-VEC, KB105, KB301 and any other product candidates; •the timing, scope or results of regulatory filings and approvals, including timing of finalUS Food and Drug Administration ("FDA"), marketing and other regulatory approval of our product candidates; •our ability to achieve certain accelerated or orphan drug designations from the FDA; •our estimates regarding the potential market opportunity for B-VEC, KB105, KB301 and any other product candidates; •our research and development programs for our product candidates; •our plans and ability to successfully develop and commercialize our product candidates, including B-VEC, KB105, KB301 and our other product candidates; •our ability to identify and develop new product candidates; •our ability to identify, recruit and retain key personnel; •our commercialization, marketing and manufacturing capabilities and strategy; •the implementation of our business model, strategic plans for our business, product candidates and technology; •the scalability and commercial viability of our proprietary manufacturing methods and processes; •the rate and degree of market acceptance and clinical utility of our product candidates and gene therapy, in general; •our competitive position; •our intellectual property position and our ability to protect and enforce our intellectual property; •our financial performance; •developments and projections relating to our competitors and our industry; •our ability to establish and maintain collaborations or obtain additional funding; •our estimates regarding expenses, future revenue, capital requirements and needs for or ability to obtain additional financing; •our ability to successfully resolve any intellectual property or other claims that may be brought against us; 18
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•any statements regarding compliance with the listing standards of The NASDAQ Capital Market; •the impact of laws and regulations; and •any statements regarding economic conditions, including statements related to the economic fallout from the COVID-19 pandemic and the impact on our business, or performance and any statement of assumptions underlying any of the foregoing. Forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in "Risk Factors" elsewhere in this Form 10-Q and in other filings we make with theSEC from time to time. Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this prospectus may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management's beliefs and assumptions only as of the date of this Quarterly Report. You should read this Quarterly Report completely and with the understanding that our actual future results may be materially different from what we expect. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. Throughout this Form 10-Q, unless the context requires otherwise, all references to "Krystal," "the Company," we," "our," "us" or similar terms refer toKrystal Biotech, Inc. , together with its consolidated subsidiaries. Overview We are a clinical stage gene therapy company developing a new class of transformative medicines to treat diseases caused by gene or protein dysfunction or absence. Using our patented platform that is based on engineered HSV-1, we create vectors that encode functional proteins. Our vector is designed to be specifically and efficiently delivered to the target cell in an outpatient setting, via topical or intradermal routes of administration, where the cell's own machinery transcribes and translates the encoded protein, restoring or augmenting protein function to treat or prevent disease. Presently, we have two product candidates in the clinic to treat rare skin diseases. We announced initiation of a Phase 3 pivotal trial on our most advanced product candidate, B-VEC, to treat dystrophic epidermolysis bullosa ("DEB") onJuly 28, 2020 . Details of the pivotal study can be found at www.clinicaltrials.gov under NCT identifier NCT04491604. We expect to complete enrollment in this study in early 2021 and anticipate having top-line data from this trial, as well as filing of a Biologics License Application ("BLA") with theU.S. Food and Drug Administration ("FDA"), in 2021. We initiated the Phase 2 portion of our Phase 1/2 study on our second product candidate, KB105, to treat autosomal recessive congenital ichthyosis ("ARCI") onAugust 4, 2020 following a successful recent completion of a Phase 1 trial in adults. Details of the Phase 2 study can be found at www.clinicaltrials.gov under NCT identifier NCT04047732. Nothing included on these websites shall be deemed incorporated by reference into this Quarterly Report on Form 10-Q. We are also applying our HSV-1 platform towards the development of therapies to treat aesthetic skin conditions. We announced initiation of the Phase 1 clinical study on our third product candidate, KB301, to treat wrinkles and acne scars in onAugust 25, 2020 . Details of the Phase 1 study can be found at www.clinicaltrials.gov under NCT identifier NCT04540900. During the third quarter of 2020, the United States Patent Office ("USPTO") has grantedU.S. Patent No. 10,786,438 which covers pharmaceutical compositions comprising HSV vectors encoding one or more cosmetic proteins, as well as methods of their use for improving skin condition, quality, and/or appearance. Recognizing the breadth and potential transformative power of our HSV-1 vector platform, we have expanded the scope of our product development beyond skin and have begun preclinical efforts in pulmonary diseases. The large payload capacity, robust tropism to epithelial cells (including human airway epithelia), immune-evasive properties, and manufacturing scalability of our HSV-based vector platform gives us an advantage over other viral vector therapies for pulmonary indications. Our preclinical efforts to date have led to the development of a novel candidate, KB407, for the treatment of Cystic Fibrosis ("CF"), which has been shown to successfully transduce human CF patient-derived epithelial cells and deliver functional cystic fibrosis transmembrane conductance regulator ("CFTR") in vitro in 2D and 3D organotypic systems, and is amendable to non-invasive inhaled administration in vivo, as indicated by successful delivery to the lungs through the use of a clinically relevant nebulizer in small animal models. Successful delivery and distribution throughout the lung was also observed in a non-human primate study. Based on feedback from regulatory agencies, Investigational New Drug ("IND") enabling safety and efficacy studies, 19
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including an additional safety study in non-human primates, are underway, and IND filing for KB407 is anticipated in 1H 2021. During the third quarter of 2020, we received a Notice of Allowance for our patent application covering methods of using KB407 for the treatment of Cystic fibrosis and other diseases causing progressive lung destruction, which is expected to issue as US Pat. No. 10,829,529 onNovember 10, 2020 . Additional pulmonary diseases are also being evaluated. We believe that gene therapy companies should control their manufacturing destiny and that having in-house current good manufacturing practices ("cGMP") facilities allow a gene therapy company to maintain better quality control, shorter lead times, lower costs and better command over intellectual property. Last year, we completed the construction of our own commercial scale 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 and our other product candidates receive marketing approval. The clinical material for the pivotal trial has been produced at ANCORIS and we expect to produce initial commercial launch material of B-VEC will be produced at the same facility. Earlier this year, we announced the ground-breaking of our second commercial gene therapy facility in thePittsburgh, Pennsylvania area. The ASTRA facility is being designed as a state-of-the-art cGMP manufacturing facility that, beyond providing for expansion of Krystal's current production platform, will allow the in-house incorporation of raw material preparation, excipient manufacturing, testing, packaging, labeling and distribution, fully-integrating all components of the supply chain from starting materials to patient experience. We anticipate that the ASTRA facility will initially be used as a commercial back-up facility for B-VEC in theU.S. and supply ex-U.S. markets. Eventually, the ASTRA facility will be expanded to produce investigational and commercial material for our pipeline products. We have recently expanded our facility design to include additional production, quality control labs for testing and release of product, and administrative and training spaces. We expect the 150,000 square foot facility to be completed and validated in 2022. We have a rapidly expanding portfolio of issued patents in boththe United States and foreign jurisdictions and believe that the granting of these patents, which are entirely owned by the Company, protects our core platform and products based thereupon, affording us the freedom to use our patented platform for the development of novel therapeutics for multiple indications. We continue to advance our IP portfolio actively through the filing of new patent applications, divisionals, and continuations relating to our technologies as we deem appropriate. In addition to our patents, we rely on trade secrets and know-how to develop and maintain our competitive position. However, trade secrets can be difficult to protect. We seek to protect our proprietary technology and processes, and obtain and maintain ownership of certain technologies, in part, through confidentiality agreements and intellectual property assignment agreements with our employees, consultants and commercial partners. We also seek to preserve the integrity and confidentiality of our data, trade secrets, and know-how, including by implementing measures intended to maintain the physical and electronic security of our research and manufacturing facilities, as well as our information technology systems. Our desire is to bring transformative medicines, using our platform, to patients suffering from debilitating diseases and conditions. A brief overview of our pipeline follows below. Pipeline Beremagene Geperpavec ("B-VEC") for the treatment of Dystrophic Epidermolysis Bullosa Our lead product candidate, B-VEC, is a topical gene therapy to treat DEB, a rare and severe monogenic skin disease for which there is currently no approved treatment. DEB affects the skin and mucosal tissues and is caused by one or more mutations in a gene called COL7A1, which is responsible for the formation of the protein type VII collagen, or COL7, that forms anchoring fibrils that bind the dermis, or inner layer of the skin, to the epidermis, or outer layer of the skin. In DEB patients, the genetic defect in COL7A1 results in loss or malfunctioning of these anchoring fibrils, leading to extremely fragile skin that blisters and tears from minor friction or trauma. Thosewho are born with DEB are sometimes called "butterfly children," because their skin is likened to be as fragile as the wings of a butterfly. DEB patients may suffer from open wounds, skin infections, fusion of fingers and toes and gastrointestinal tract problems throughout their lifetime, and may eventually develop squamous cell carcinoma, a potentially fatal condition. OnJuly 28, 2020 , we announced initiation of our Phase 3 pivotal study known as GEM-3. The trial is a randomized, double-blind, intra patient placebo-controlled multicenter study designed to evaluate the efficacy and safety of B-VEC for patients suffering from both recessive and dominant forms of DEB. The trial aims to enroll approximately thirty (30) participants with DEB, aged 6 months or older at time of consent. Investigator identified wound pairs, up to three in each patient, are deemed the "primary" wounds. These primary wounds will be treated once weekly for six months with either B-VEC or placebo, until wound closure. If a wound were to re-open at any point during the study, weekly dosage will resume until closure. The dose administered to each wound is dependent on the size of the wound and ranges from 4x108 to 1.2x109 PFU per wound. A maximum vector dose per patient per week has been defined on the basis of preclinical and clinical safety data. In the event that the maximum dose per patient has not been reached based on dosing of the primary wounds, the study 20
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investigators and patients will have the opportunity to select additional "secondary" wounds across which the remaining weekly dose may be applied. The Primary Outcome Measure is complete wound healing determined by the Investigator, as compared to baseline in B-VEC treated wounds versus placebo treated wounds at Weeks 20, 22 and 24. Secondary endpoints to be evaluated in the study include complete wound healing at Weeks 8, 10 and 12; the mean change in pain severity (using either a VAS or FLACC-R Scale) per primary wound site associated with wound dressing; the proportion of primary wound sites with ?75% healing assessed via Canfield photography. Additional exploratory measures include relative time to wound closure from baseline, duration of wound closure, mean reduction in wound surface area in B-VEC treated versus placebo treated wounds, mean change in Quality of Life in addition toSkindex score as compared to baseline at Week 24. Throughout the study, participants will complete questionnaires, have images captured of their study wounds, undergo physical exams, have vital signs and safety labs monitored. Additional details on the study protocol are available at www.clinicaltrials.gov under NCT identifier NCT04491604. Nothing included on this website shall be deemed incorporated by reference into this Quarterly Report on Form 10-Q. We expect to complete enrollment in this study in early 2021 and anticipate having top-line data from this trial as well as filing of a BLA with the FDA in 2021. We are aligned with theEuropean Medicines Agency ("EMA") on a pivotal trial design and we believe that data from GEM-3 will form the basis of a Marketing Authorisation Application ("MAA") filing, shortly after the BLA. In May of 2020, complete Phase 1/2 data from the GEM-1 and GEM-2 studies was presented at theSociety of Investigational Dermatology ("SID") meeting. The Phase 1 portion of the trial commenced inMay 2018 atStanford University , and we announced positive interim results from this clinical study on two patients inOctober 2018 . The Phase 2 portion of the trial commenced inDecember 2018 atStanford University , and we announced positive interim results from this clinical study onJune 24, 2019 . The FDA and the EMA have each granted B-VEC orphan drug designation for the treatment of DEB, and the FDA has granted B-VEC fast track designation and rare pediatric designation for the treatment of DEB. In addition, in 2019, the FDA granted Regenerative Medicine Advanced Therapy ("RMAT") to B-VEC for the treatment of DEB and the EMA granted PRIority MEdicines, or PRIME, eligibility for B-VEC to treat DEB. The PRIME designation is awarded by the EMA to promising medicines that target an unmet medical need. KB105 for the treatment of Autosomal Recessive Congenital Ichthyosis Our second pipeline candidate, KB105, delivers functional human transglutaminase 1 ("TGM1"), genes using our gene therapy platform to patients with TGM1-deficient ARCI. ARCI is a life-long, severe monogenic skin disease. While a number of genetic mutations have been associated with the development of ARCI, the most common cause of ARCI is an inactivating mutation in the TGM1 gene encoding the enzyme transglutaminase-1, a protein that is essential for the proper formation of the skin barrier. Mutations in the TGM1 gene, and the subsequent disruption to the epidermal barrier, leads to pronounced dehydration and trans-epidermal exposure to unwanted toxins and surface microorganisms, greatly increasing the risk of infection and sepsis. Transglutaminase-1 deficiency is associated with increased mortality in the neonatal period and has a dramatic impact on quality of life. There are currently no treatments targeting molecular correction of this disease. InAugust 2020 , we initiated the second phase of our Phase 1/2 clinical trial of KB105 to treat ARCI. We have enrolled one patient in whom four rectangular 100cm2 (4-inch x 4-inch) areas of skin were selected as Target Areas. Two sites will receive an initial and a repeat dose of 4.0 x 10^9 PFU/Treated Area (TA) while the other two sites will receive 1.0 x 10^10 PFU/ TA. The primary objective of the study is to assess the improvement in localized severity of disease through an Investigator's Global Assessment ("IGA") of disease severity in the treatment area and TGM1 expression and activity and to evaluate safety through the incidence of adverse events associated with KB105 post administration. Additional details on the study protocol are available at www.clinicaltrials.gov under NCT identifier NCT04047732. Nothing on this website shall be deemed incorporated into this Quarterly Report on Form 10-Q. InMay 2020 , clinical data from the first phase of the Phase 1/2 study which enrolled adult patients were presented at the SID meeting. Additional details on the interim results are available at http://ir.krystalbio.com/index.php/news-releases/news-release-details/krystal-biotech-announces-positive-interim-results-phase-12. We announced that the study was initiated onSeptember 4, 2019 . Nothing on this website shall be deemed incorporated into this Quarterly Report on Form 10-Q. KB301 for the treatment of aesthetic skin conditions The skin is largely composed of collagen-rich connective tissue, with dermal collagen, composed primarily of types 1 and 3 collagen fibrils, representing >90% (dry weight) of human skin. The characteristics of skin aging are largely due to aberrant collagen homeostasis, including reduced collagen biosynthesis, increased collagen fibril fragmentation, and progressive loss of dermal collagen culminating in a net collagen deficiency, resulting from both intrinsic (e.g., passage of time, 21
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genetics) and extrinsic (e.g., chronic light exposure, pollution) pressures. The goal of skin biorejuvenation is, in part, to enhance the synthesis of human dermal collagens (i.e., neocollagenesis), thereby correcting the molecular defect underlying the aged phenotype. We believe that our approach of directed expression of full-length human type 3 collagen via intradermal application of KB301 provides a unique and straightforward approach to restoring collagen homeostasis, and by extension, reconstructing an optimal physiologic environment in the skin to treat wrinkles and other superficial skin defects. We initiated the Phase 1 safety clinical trial for the treatment of wrinkles and acne scars onAugust 25, 2020 . OnOctober 8, 2020 , we announced presentation of preclincial data supporting the ongoing development of KB301 at theAmerican Society for Dermatologic Surgery ("ASDS") 2020 Virtual Meeting. KB104 for the treatment of Netherton Syndrome KB104 is designed to deliver functional Serine Protease Inhibitor Kazal-type 5 ("SPINK5"), genes using our gene therapy platform to patients suffering from Netherton Syndrome, which is a debilitating monogenic autosomal recessive skin disorder that causes defective keratinization, severe skin barrier defects, and recurrent infections. Severe Netherton Syndrome symptoms in infants are associated with failure to thrive, hypernatremic dehydration secondary to excess fluid loss, delayed growth, short stature, and recurrent infections. Clinically, Netherton Syndrome is characterized by congenital ichthyosiform erythroderma, hair shaft defects, recurrent infections, and a defective skin barrier. A predisposition to allergies, asthma, and eczema is also characteristic of Netherton Syndrome. Ultimately, those afflicted by Netherton Syndrome often experience chronic skin inflammation, severe dehydration, and stunted growth. KB407 for the treatment of Cystic Fibrosis We are developing KB407 as a non-invasive inhaled gene therapy product for the treatment of CF and are currently in the preclinical phase with plans for a clinical study for KB407 in 1H 2021. The FDA granted Orphan Drug Designation to KB407 onAugust 17, 2020 , and Rare Pediatric Designation onSeptember 28, 2020 . CF, the most common inherited genetic disorder inthe United States , is caused by mutations in the gene encoding CFTR. Lack of functional CFTR in secretory airway epithelia results in defective Cl-, bicarbonate, and thiocyanate secretion, coupled with enhanced Na+ absorption and mucus production, leading to dehydration and acidification of the airway surface liquid. CF is characterized by recurrent chest infections, increased airway secretions, and eventually, respiratory failure. While CF comprises a multiorgan pathology affecting the upper and lower airways, gastrointestinal and reproductive tracts, and the endocrine system, the primary cause of morbidity and mortality in CF is due to progressive lung destruction. According to theUS Cystic Fibrosis Foundation ("CFF"), the median age at death for patients with CF inthe United States was 30.8 years in 2018. Currently approved CFTR modulating therapies are limited to patients with specific genetic mutations and there is a significant unmet medical need for patients with CFwho have genetic mutations non-amenable to currently approved CFTR small molecule "modulators". According to the CFF, approximately 30,000 patients inthe United States and more than 70,000 patients worldwide are living with CF, and approximately 850 new cases of CF were diagnosed in 2018. Other InDecember 2019 , COVID-19 was first reported inWuhan, China and inMarch 2020 , a global pandemic was declared by theWorld Health Organization . In an effort to slow the spread of the virus, certain governments, including theCommonwealth of Pennsylvania where the Company's primary offices, laboratory and manufacturing spaces are located, enacted stay-at-home orders, and sweeping restrictions to travel were initiated by corporations and governments. Although these restrictions have been lifted in some areas, it is not known at this time whether they will be reestablished or the extent to which the Company will be impacted. The degree of COVID-19's effect on the Company's clinical, operational and financial performance will depend on future developments, including additional protective measures that may be implemented by governmental authorities or the Company to protect its employees, or by investigators, caregivers or patients to minimize exposure, all of which are uncertain and difficult to predict. While to date the impact of COVID-19 on our business and clinical trials has been minimal, we will continue to assess the potential impact of the COVID-19 pandemic on our business and operations, including our supply chain and preclinical and clinical trial activities. AtSeptember 30, 2020 , our cash, cash equivalents and short-term investments balance was approximately$286.4 million . Since operations began, we have incurred operating losses. Our net losses were$9.6 million and$21.8 million for the three and nine months endedSeptember 30, 2020 and$4.3 million and$13.7 million for the three and nine months endedSeptember 30, 2019 , respectively. AtSeptember 30, 2020 , we had an accumulated deficit of$60.8 million . We will need to generate significant revenue to achieve profitability, and we may never generate revenue or enough revenue to achieve profitability. We expect to incur significant expenses and increasing operating losses for the foreseeable future. Our net losses 22
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may fluctuate significantly from quarter to quarter and year to year. We expect
our costs will continue to increase significantly as a result of our current and
planned business activities, such as:
•conducting our Phase 3 clinical trial for B-VEC, Phase 1/2 clinical trial for
KB105, and Phase 1 clinical trial for KB301;
•continued research and development-related activities for the advancement of
our pipeline product candidates into clinical development, such as KB104 and
KB407;
•construction of our cGMP manufacturing facility, ASTRA, and related completion
and validation costs;
•manufacturing of our clinical trial materials;
•pursuing regulatory approval for our product candidates;
•adding personnel to support our administrative, product development and
commercialization efforts; and
•activities leading up to the commercial launch of B-VEC in multiple markets.
Costs related to clinical trials can be unpredictable and therefore there can be
no guarantee that we will have sufficient capital to fund our planned
preclinical studies for our pipeline product candidates, or our operations. Our
funds may not be sufficient to enable us to seek marketing approval for or to
commercially launch B-VEC, KB105, KB301 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 planned business strategy.
Financial Overview
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 and clinical 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;
•facility costs, depreciation and other expenses, which include direct expenses
for rent and maintenance of facilities and other supplies; and
•payroll related expenses, including stock-based compensation expense.
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
manufacturing 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 pivotal Phase 3 clinical
trial for B-VEC, conduct our ongoing Phase 1/2 clinical trial for KB105, and
incur preclinical 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 our clinical trials, and, as a
result, the actual costs to complete our clinical trials may exceed the expected
costs.
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General and Administrative Expenses General and administrative expenses consist principally of professional fees associated with corporate and intellectual property-related legal expenses, consulting and accounting services, facility-related costs and expenses associated with obtaining and maintaining patents. 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 Income Interest income consists primarily of income earned from our cash, cash equivalents and investments. Critical Accounting Policies, Significant Judgments and Estimates There have been no significant changes during the three and nine months endedSeptember 30, 2020 to our critical accounting policies, significant judgments and estimates as disclosed in our management's discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . Results of Operations Three Months EndedSeptember 30, 2020 and 2019 Three Months Ended September 30, 2020 2019 Change (In thousands) (unaudited) Expenses Research and development $ 5,100$ 3,885 $ 1,215 General and administrative 4,580 1,457 3,123 Total operating expenses 9,680 5,342 4,338 Loss from operations (9,680) (5,342) (4,338) Other Income Interest and other income, net 70 1,070 (1,000) Net loss $ (9,610)$ (4,272) $ (5,338) Research and Development Expenses Research and development expenses increased$1.2 million in the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 . Higher research and development expenses were due to an increase in outsourcing research and development activities of$352 thousand , lab supplies of$187 thousand , payroll related expenses of$526 thousand which is primarily driven by an increase in headcount to support overall growth and includes a$190 thousand increase in stock-based compensation, and other research and development expenses of$150 thousand . General and Administrative Expenses General and administrative expenses increased$3.1 million in the three months endedSeptember 30, 2020 as compared to the three months endedSeptember 30, 2019 . Higher general and administrative spending was due largely to increases in payroll related expenses of approximately$1.6 million which is primarily driven by an increase in headcount to support overall growth and includes an$888 thousand increase in stock-based compensation, market research related expenses of$611 thousand , legal and professional fees of$631 thousand and other administrative expenses of$298 thousand . 24
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Interest and Other Income Interest and other income for the three months endedSeptember 30, 2020 and 2019 was$70 thousand and$1.1 million , respectively and consisted of interest and dividend income earned from our cash, cash equivalents and investments. This decrease was driven by a decline in market interest rates. Nine Months EndedSeptember 30, 2020 and 2019 Nine Months Ended September 30, 2020 2019 Change (In thousands) (unaudited) Expenses Research and development$ 12,264 $ 11,267 $ 997 General and administrative 10,315 4,660 5,655 Total operating expenses 22,579 15,927 6,652 Loss from operations (22,579) (15,927) (6,652) Other Income Interest and other income, net 795 2,196 (1,401) Net loss$ (21,784) $ (13,731) $ (8,053) Research and Development Expenses Research and development expenses increased$997 thousand in the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 . Higher research and development expenses were due largely to an increase in payroll related expenses of approximately$1.4 million which is primarily driven by an increase in headcount to support overall growth and includes a$318 thousand increase in stock-based compensation and a net increase in other research and development expense of$311 thousand offset by an decrease in outsourcing research and development activities of$681 thousand . General and Administrative Expenses General and administrative expenses increased$5.7 million in the nine months endedSeptember 30, 2020 as compared to the nine months endedSeptember 30, 2019 . Higher general and administrative spending was due largely to increases in payroll related expenses of approximately$3.1 million which is primarily driven by an increase in headcount to support overall growth and includes an approximately$1.5 million increase in stock-based compensation, market research related expenses of approximately$1.1 million , legal and professional fees of$748 thousand , insurance expense of$552 thousand and other administrative expenses of$177 thousand . Interest and Other Income Interest and other income for the nine months endedSeptember 30, 2020 and 2019 was$795 thousand and$2.2 million , respectively and consisted of interest and dividend income earned from our cash, cash equivalents and investments. This decrease was driven by a decline in market interest rates. 25
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Liquidity and Capital Resources Overview As ofSeptember 30, 2020 , the Company had an accumulated deficit of$60.8 million . With the net proceeds raised from its public and private securities offerings, including the public offering completed onMay 21, 2020 , the Company believes that its cash, cash equivalents and short-term investments of approximately$286.4 million as ofSeptember 30, 2020 will be sufficient to allow the Company to fund its operations for at least 12 months from the filing date of this Form 10-Q. 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. In addition, the COVID-19 pandemic may negatively impact our operations, including possible effects on its financial condition, ability to access the capital markets on attractive terms or at all, liquidity, operations, suppliers, industry, and workforce. The Company will continue to evaluate the impact that these events could have on the operations, financial position, and the results of operations and cash flows during fiscal year 2020 and beyond. Operating Capital Requirements We expect our primary use of capital to continue to be for 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 believe that our available funds will be sufficient to enable us to complete our pivotal Phase 3 clinical trials for B-VEC, to continue our Phase 1/2 clinical trials for KB105, to complete our Phase 1 clinical trials for KB301, as well as to continue construction and validation related activities associated with our cGMP manufacturing facility, ASTRA. 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 timeline and cost of our pivotal Phase 3 clinical trials for B-VEC; •the progress, timing, results and costs of our ongoing Phase 1/2 clinical trials for KB105; •the progress, results and costs of our Phase 1 clinical trials for KB301; •the progress, timing and costs of manufacturing of B-VEC for our pivotal Phase 3 clinical trials; •the continued development and the filing on an 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, KB301 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, KB301 and other product candidates if we receive marketing approval for B-VEC, KB105, KB301 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, KB301 or our other product candidates; 26
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•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 may 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, KB301 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, KB105, KB301 or
our other product candidates that we otherwise would seek to develop or
commercialize ourselves.
Sources and Uses of Cash
The following table summarizes our sources and uses of cash (in thousands):
Nine months Ended
September 30,
2020 2019
(unaudited)
Net cash used in operating activities
Net cash used in investing activities (4,964) (4,400)
Net cash provided by financing activities 117,878 107,226
Net increase in cash $ 94,855 $ 91,136
Operating Activities Net cash used in operating activities for the nine months endedSeptember 30, 2020 was$18.1 million and consisted primarily of a net loss of$21.8 million adjusted for non-cash items primarily of depreciation and amortization and stock-based compensation expense of$4.1 million , and cash used by increases in net operating assets of approximately$371 thousand . Net cash used in operating activities for the nine months endedSeptember 30, 2019 was$11.7 million and consisted primarily of a net loss of$13.7 million adjusted for non-cash items of depreciation and amortization and stock-based compensation expense of approximately$1.7 million , and cash provided by decreases in net operating liabilities of$318 thousand . Investing Activities Net cash used in investing activities for the nine months endedSeptember 30, 2020 was$5.0 million and consisted primarily of purchases of$3.2 million of short-term available-for-sale investment securities, and expenditures of$7.6 million on the build-out of our ASTRA facility, leasehold improvement of new office space, and purchases of computer and laboratory equipment, partially offset by proceeds of$5.9 million received from the maturities of short-term investments. Net cash used in investing activities for the nine months endedSeptember 30, 2019 was$4.4 million and consisted primarily of purchases of$6.9 million of short-term available-for-sale investment securities, and expenditures of$4.1 million on the build-out of our new cGMP facilities and purchases of computer and laboratory equipment, partially offset by proceeds of$6.6 million received from the maturities of short-term investments. 27
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Financing Activities Net cash provided by financing activities for the nine months endedSeptember 30, 2020 was$117.9 million and was primarily from proceeds from our public offering onMay 21, 2020 of 2,275,000 shares of our common stock to the public at$55.00 per share. Net proceeds to the Company from the offering were$117.2 million after deducting underwriting discounts and commissions of approximately$7.5 million and other offering expenses of approximately$463 thousand . Net cash provided by financing activities for the nine months endedSeptember 30, 2019 was$107.2 million and was primarily from proceeds from our public offering inJune 2019 of 2,500,000 shares of our common stock at a price to the public of$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 of approximately$190 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 . Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements as defined in the rules and regulations of theSEC . Contractual Obligations There have been no material changes to our contractual obligations as previously disclosed in our Annual Report on Form 10-K for the year endedDecember 31, 2019 other than as described in Note 6 "Commitments and Contingencies" of our condensed consolidated financial statements on this Form 10-Q. JOBS Act Accounting Election We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 ("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.
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