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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________________
FORM 10-Q
_____________________________________________________
(Mark One)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2024
or
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from               to                    
Commission file number: 001-38210
_____________________________________________________
Krystal Biotech, Inc.
(Exact name of registrant as specified in its charter)
_____________________________________________________

Delaware82-1080209
(State or other jurisdiction of
incorporation or organization)		(I.R.S. Employer
Identification Number)
2100 Wharton Street, Suite 701
Pittsburgh, Pennsylvania 15203
(Address of principal executive offices and zip code)
(412) 586-5830
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
_____________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading
Symbol(s)		Name of each exchange on which registered
Common StockKRYS
NASDAQ Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer☒Accelerated filer☐
Non-accelerated filer☐Smaller reporting company☐
Emerging growth company     ☐
If emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of July 29, 2024, there were 28,729,950 shares of the registrant’s common stock issued and outstanding.


Krystal Biotech, Inc.
TABLE OF CONTENTS
  Page No.
  
  
  
 
Condensed Consolidated Balance Sheets as of June 30, 2024 (unaudited) and December 31, 2023
 
  
  
 
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2024 and 2023 (unaudited)
 
  
 
 
 
  
 
   
 
Item 1A.
 
 
 
 
 
 
   
 

2

PART I. FINANCIAL INFORMATION
ITEM 1.    FINANCIAL STATEMENTS
Krystal Biotech, Inc.
Condensed Consolidated Balance Sheets
(unaudited)
(in thousands, except par value)
June 30,
2024		December 31,
2023
Assets
Current assets
Cash and cash equivalents$345,786 $358,328 
Short-term investments213,826 173,850 
Accounts receivable, net
103,236 42,040 
Inventory
12,179 6,985 
Prepaid expenses and other current assets7,745 6,706 
Total current assets682,772 587,909 
Property and equipment, net158,808 161,202 
Long-term investments69,292 61,954 
Right-of-use assets6,660 7,027 
Other non-current assets126 263 
Total assets$917,658 $818,355 
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable$5,425 $4,132 
Current portion of lease liability1,361 1,474 
Accrued rebates
21,733 5,977 
Accrued expenses and other current liabilities43,332 21,511 
Total current liabilities71,851 33,094 
Lease liability6,326 6,620 
Other long-term liabilities
588 — 
Total liabilities78,765 39,714 
Commitments and contingencies (see note 7)
Stockholders' equity
Common stock; $0.00001 par value; 80,000 shares authorized as of June 30, 2024 and December 31, 2023; 28,709 and 28,237 shares issued and outstanding as of June 30, 2024 and December 31, 2023, respectively.
— — 
Additional paid-in capital1,092,854 1,047,830 
Accumulated other comprehensive (loss) gain(634)638 
Accumulated deficit(253,327)(269,827)
Total stockholders’ equity
838,893 778,641 
Total liabilities and stockholders’ equity
$917,658 $818,355 
The accompanying notes are an integral part of these condensed consolidated financial statements.
3

Krystal Biotech, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
(unaudited)
 Three Months Ended June 30,Six Months Ended June 30,
(in thousands, except per share data)
2024202320242023
Product revenue, net
$70,284 $— $115,535 $— 
Expenses
Cost of goods sold6,009 — 8,428 — 
Research and development15,583 12,144 26,539 24,432 
Selling, general and administrative
27,626 25,904 53,685 49,939 
Litigation settlement12,500 — 25,000 12,500 
Total operating expenses61,718 38,048 113,652 86,871 
Income (loss) from operations
8,566 (38,048)1,883 (86,871)
Other income
Interest and other income, net7,479 4,838 15,095 8,364 
Income (loss) before income taxes
16,045 (33,210)16,978 (78,507)
Income tax expense
(477)— (477)— 
Net income (loss)
15,568 (33,210)16,501 (78,507)
Unrealized (loss) gain on available-for-sale securities and other
(335)(82)(1,272)492 
Comprehensive income (loss)
$15,233 $(33,292)$15,229 $(78,015)
Net income (loss) per common share:
Basic$0.54 $(1.25)$0.58 $(3.00)
Diluted$0.53 $(1.25)$0.56 $(3.00)
Weighted-average common shares outstanding:
Basic28,598 26,657 28,446 26,187 
Diluted29,637 26,657 29,504 26,187 
The accompanying notes are an integral part of these condensed consolidated financial statements.
4

Krystal Biotech, Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(unaudited)
 Common StockAdditional Paid-in CapitalAccumulated Other Comprehensive Income (Loss)Accumulated DeficitTotal
Stockholders’ Equity
(in thousands)
SharesAmount
Balances as of January 1, 2024
28,237 $— $1,047,830 $638 $(269,827)$778,641 
Issuance of common stock upon exercise of stock options
260 — 15,969 — — 15,969 
Vesting of restricted stock units, net of shares withheld for taxes39 — (4,181)— — (4,181)
Shares of restricted stock awards surrendered for taxes(8)— (1,205)— — (1,205)
Stock-based compensation— — 10,023 — — 10,023 
Unrealized (loss) on investments and other(1)
— — — (937)— (937)
Net income— — — — 932 932 
Balances at March 31, 2024
28,528 $— $1,068,436 $(299)$(268,895)$799,242 
Issuance of common stock upon exercise of stock options
181 — 10,637 — — 10,637 
Stock-based compensation— — 13,781 — — 13,781 
Unrealized (loss) on investments and other(2)
— — — (335)— (335)
Net income
— — — — 15,568 15,568 
Balances at June 30, 2024
28,709 $— $1,092,854 $(634)$(253,327)$838,893 
 Common StockAdditional Paid-in CapitalAccumulated Other Comprehensive Income (Loss)Accumulated DeficitTotal
Stockholders’ Equity
(in thousands)
SharesAmount
Balances as of January 1, 2023
25,764 $— $803,718 $(728)$(280,759)$522,231 
Issuance of common stock upon exercise of stock options
42 — 2,208 — — 2,208 
Shares of restricted stock awards surrendered for taxes(10)— (749)— — (749)
Stock-based compensation— — 10,599 — — 10,599 
Unrealized gain on investments and other(1)
— — — 574 — 574 
Net loss— — — — (45,297)(45,297)
Balances at March 31, 2023
25,796 $— $815,776 $(154)$(326,056)$489,566 
Issuance of common stock in private placement offering, net of offering costs
1,730 — 159,951 — — 159,951 
Issuance of common stock upon exercise of stock options
449 — 25,446 — — 25,446 
Stock-based compensation— — 11,443 — — 11,443 
Unrealized (loss) on investments and other(2)
— — — (82)— (82)
Net loss— — — — (33,210)(33,210)
Balances at June 30, 2023
27,975 $— $1,012,616 $(236)$(359,266)$653,114 
(1)Includes foreign currency translation loss of $62 thousand and $35 thousand for the three months ended March 31, 2024 and 2023, respectively.
(2)Includes foreign currency translation loss of $83 thousand and gain of $57 thousand for the three months ended June 30, 2024 and 2023, respectively.
The accompanying notes are an integral part of these condensed consolidated financial statements.
5

Krystal Biotech, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)
 Six Months Ended June 30,
(in thousands)
20242023
Operating Activities
Net income (loss)$16,501 $(78,507)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities
Depreciation
3,262 2,348 
Accretion on marketable securities(1,104)(1,046)
Amortization of operating lease right-of-use assets368 441 
Stock-based compensation expense, net22,455 21,768 
Realized gain on investments(2,859)(2,390)
Other, net89 50 
Changes in operating assets and liabilities
Accounts receivable, net
(61,196)— 
Inventory
(1,708)(906)
Prepaid expenses and other current assets(2,532)(649)
Other non-current assets29 110 
Lease liability(406)(380)
Other long-term liabilities
588 — 
Accounts payable1,511 481 
Accrued expenses and other current liabilities(4,034)(1,666)
Accrued rebates
15,756 — 
Accrued litigation settlement25,000 — 
Net cash provided by (used in) operating activities
11,720 (60,346)
Investing Activities
Purchases of property and equipment(2,391)(8,171)
Purchases of investments(201,736)(319,969)
Maturities of investments
158,794 315,746 
Net cash (used in) investing activities
(45,333)(12,394)
Financing Activities
Proceeds from issuance of common stock, net of offering costs
— 159,838 
Proceeds from exercise of stock options
26,607 27,654 
Taxes paid for employee tax withholding related to restricted stock units
(4,181)— 
Taxes paid related to settlement of restricted stock awards
(1,205)(749)
Net cash provided by financing activities21,221 186,743 
Effect of exchange rate changes on cash and cash equivalents(150)(28)
Net (decrease) increase in cash and cash equivalents
(12,542)113,975 
Cash and cash equivalents at beginning of period358,328 161,900 
Cash and cash equivalents at end of period$345,786 $275,875 
Supplemental Disclosures of Non-Cash Investing Activities
Unpaid purchases of property and equipment included in accounts payable and accrued expenses$8,568 $10,998 
Supplemental Cash Flow Information
Income taxes paid
$2,002 $— 
The accompanying notes are an integral part of these condensed consolidated financial statements.
6

Krystal Biotech, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
1.    Organization
Krystal Biotech, Inc. (the “Company,” or “we” or other similar pronouns) commenced operations in April 2016. In March 2017, we converted from a California limited liability company to a Delaware C-corporation, and changed our name from Krystal Biotech LLC to Krystal Biotech, Inc. In June 2018, the Company incorporated a wholly-owned subsidiary in Australia for the purpose of undertaking preclinical and clinical studies in Australia. In April 2019, we incorporated Jeune Aesthetics, Inc. (“Jeune Aesthetics”), in Delaware, a wholly-owned subsidiary, for the purpose of undertaking preclinical and clinical studies for aesthetic skin conditions. In January 2022, August 2022, December 2022, August 2023 and March 2024, we incorporated wholly-owned subsidiaries in Switzerland, Netherlands, France, Germany and Japan, respectively, for the purpose of establishing initial operations in Europe and Japan for the commercialization of our product pipeline.
We are a fully integrated, commercial-stage biotechnology company focused on the discovery, development, manufacturing and commercialization of genetic medicines to treat diseases with high unmet medical needs. Using our patented gene therapy technology platform that is based on engineered herpes simplex virus-1 (“HSV-1”), we create vectors that efficiently deliver therapeutic transgenes to cells of interest in multiple organ systems. The cell’s own machinery then transcribes and translates the transgene to treat the disease. Our vectors are amenable to formulation for non-invasive or minimally invasive routes of administration at a healthcare professional’s office or in the patient’s home by a healthcare professional. Our innovative technology platform is supported by two in-house, commercial scale Current Good Manufacturing Practice (“CGMP”) manufacturing facilities.
Liquidity
As of June 30, 2024, the Company had an accumulated deficit of $253.3 million. Our operating profitability is dependent upon the continued successful commercialization of VYJUVEK, as well as successful development, approval, and commercialization of our other product candidates. Management intends to fund future operations through its on hand cash, cash equivalents and investments and revenue generated from the sale of VYJUVEK, and may also seek additional capital through the sale of equity, arrangements with strategic partners, debt financings or other sources. There can be no assurance that additional funding will be available on terms acceptable to the Company, if at all.
The Company is subject to risks common to companies in the biotechnology industry, including but not limited to the failure of product candidates in clinical and preclinical studies, the development of competing product candidates or other technological innovations by competitors, dependence on key personnel, protection of proprietary technology, compliance with government regulations and the ability to commercialize product candidates. The Company expects to incur significant costs to further its pipeline and to expand its commercialization capabilities in advance of the potential global regulatory approvals of VYJUVEK®, the Company’s U.S. Food and Drug Administration (the “FDA”) approved redosable gene therapy, for treating patients, six months of age or older, suffering from dystrophic epidermolysis bullosa, a rare and severe monogenic disease that affects the skin and mucosal tissues. The Company believes that its cash, cash equivalents and short-term investments of approximately $559.6 million as of June 30, 2024 will be sufficient to allow the Company to fund its planned operations for at least the next 12 months from the date of this Quarterly Report on Form 10-Q.
2.    Summary of Significant Accounting Policies
Basis of Presentation
The accompanying interim condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”). In the opinion of management, all adjustments, which consist of all normal recurring adjustments necessary for a fair presentation of the Company’s financial position and results of operations for the interim periods presented, are reflected in the interim condensed consolidated financial statements. All intercompany balances and transactions have been eliminated in consolidation.
Certain prior period amounts have been reclassified to conform to the current period presentation. The reclassified amounts have no impact on the Company’s previously reported financial position or results of operations.
The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year. These unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023 (“2023 10-K”), as filed with the U.S. Securities and Exchange Commission (“SEC”) on February 26, 2024.
7

Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the condensed consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates. Management considers many factors in developing the estimates and assumptions that are used in the preparation of these financial statements. Management must apply significant judgment in this process. In addition, other factors may affect estimates, including expected business and operational changes, sensitivity and volatility associated with the assumptions used in developing estimates, and whether historical trends are expected to be representative of future trends. The estimation process often may yield a range of potentially reasonable estimates of the ultimate future outcomes and management must select an amount that falls within that range of reasonable estimates. If actual results in the future vary from the Company’s estimates, the Company will adjust these estimates in the period these variances become known. Estimates are used in the following areas, among others: variable consideration associated with revenue recognition, stock-based compensation expense, accrued expenses, the fair value of financial instruments and the valuation allowance included in the deferred income tax calculation.
Concentration of Credit Risk and Off-Balance Sheet Risk
Financial instruments that subject the Company to credit risk primarily consist of cash and cash equivalents, short-term investments, long-term investments, and accounts receivable, net. The Company maintains its cash and cash equivalent balances with high-quality financial institutions and, consequently, the Company believes that such funds are subject to minimal credit risk. The Company is exposed to credit risk in the event of default by the financial institutions to the extent amounts recorded on the condensed consolidated balance sheets are in excess of insured limits. The Company has not experienced any credit losses in such accounts and does not believe it is exposed to any significant credit risk on these funds.
The Company’s accounts receivable as of June 30, 2024 are primarily from one counterparty that distributes VYJUVEK in the U.S. on behalf of the Company. As of June 30, 2024, the credit profile for this counterparty was deemed to be in good standing and, as such, an allowance for credit losses was not recorded. For accounts receivable arising from named patient sales, the Company evaluates the creditworthiness of each counterparty on a regular basis. As of June 30, 2024, no allowance for credit losses was deemed necessary as a result of these counterparties.
For the six months ended June 30, 2024, the Company’s counterparty distributed VYJUVEK within the U.S. to primarily one customer on behalf of the Company. No product revenue was recorded for the six months ended June 30, 2023.
The Company has no financial instruments with off-balance sheet risk of loss.
Summary of Significant Accounting Policies
See Note 2 to our consolidated financial statements included in our 2023 10-K. There were no material changes to the Company's significant accounting policies during the six months ended June 30, 2024.
Recent Accounting Pronouncements
There were no accounting pronouncements issued or adopted during the six months ended June 30, 2024 that are expected to have a material impact on the Company’s condensed consolidated financial statements.
In December 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-09 “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” The purpose of this guidance is to enhance the transparency and usefulness of income tax disclosures and provide comprehensive income tax information, particularly in relation to rate reconciliation and income taxes paid in the U.S. and foreign jurisdictions. This new standard will be effective for fiscal years starting after December 15, 2024, with the option to apply it retrospectively. Early adoption is also allowed. Currently, the Company is assessing the potential impact of this guidance on its consolidated financial statement disclosures.
3.    Revenue Recognition
Following FDA approval on May 19, 2023, the Company began commercial marketing and sales of VYJUVEK throughout the United States and began recognizing revenue in the third quarter of 2023.
The following table summarizes changes in allowances and discounts for the six months ended June 30, 2024:
(in thousands)
Rebates
Prompt Pay
Other Accruals
Total
Balance as of December 31, 2023
$5,977 $858 $279 $7,114 
Provisions
18,132 4,008 521 22,661 
Payments/Credits
(1,788)(1,656)(165)(3,609)
Balance as of June 30, 2024
$22,321 $3,210 $635 $26,166 
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Rebates are included in accrued rebates and other long-term liabilities on the condensed consolidated balance sheets. Other long-term liabilities includes $588 thousand of long-term accrued rebates. Other accruals are included in accrued expenses and other current liabilities on the condensed consolidated balance sheets. Prompt pay is recorded as an allowance against accounts receivable, net on the condensed consolidated balance sheets. Provisions for rebates, prompt pay and other accruals are recorded as a reduction to product revenue, net on the condensed consolidated statements of operations and comprehensive income (loss).
4.    Net Income (Loss) Per Share Attributable to Common Stockholders
Basic net income (loss) per share attributable to common stockholders is calculated by dividing net income (loss) attributable to common stockholders by the weighted-average shares outstanding during the period, without consideration for common stock equivalents. Diluted net income (loss) per share attributable to common stockholders is computed by dividing the net income (loss) by the weighted-average number of shares of common stock and common stock equivalents outstanding for the period. Common stock equivalents consist of common stock issuable upon (1) exercise of stock options and (2) vesting of restricted stock awards, restricted stock units and performance-based restricted stock units (collectively, “restricted stock”).
For the three months ended June 30, 2024 and 2023, respectively, there were (1) 215 thousand and 3.2 million common stock equivalents outstanding in the form of stock options and (2) 2 thousand and 44 thousand in unvested restricted stock, that have each been excluded from the calculation of diluted net income (loss) per common share as their effect would be anti-dilutive.
For the six months ended June 30, 2024 and 2023, respectively, there were (1) 169 thousand and 3.2 million common stock equivalents outstanding in the form of stock options and (2) 1 thousand and 44 thousand in unvested restricted stock, that have each been excluded from the calculation of diluted net income (loss) per common share as their effect would be anti-dilutive.
Three Months Ended June 30,Six Months Ended June 30,
(in thousands, except per share data)
2024202320242023
Numerator: 
Net income (loss)$15,568 $(33,210)$16,501 $(78,507)
Denominator:
Weighted-average basic common shares
28,598 26,657 28,446 26,187 
Dilutive effect of stock options and unvested restricted stock1,039 — 1,058 — 
Weighted-average diluted common shares29,637 26,657 29,504 26,187 
Net income (loss) per common share—basic
$0.54 $(1.25)$0.58 $(3.00)
Net income (loss) per common share—diluted
$0.53 $(1.25)$0.56 $(3.00)
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5.    Fair Value Instruments
The following tables show the Company’s cash, cash equivalents and available-for-sale securities by significant investment category as of June 30, 2024 and December 31, 2023:
 June 30, 2024
(in thousands)
Amortized CostGross
Unrealized
Gains
Gross
Unrealized
(Losses)
Aggregate Fair
Value		Cash and Cash
Equivalents
Short-term
Marketable
Securities(1)
Long-term
Marketable
Securities(2)
Level 1:       
Cash and cash equivalents$345,786 $— $— $345,786 $345,786 $— $— 
Subtotal345,786 — — 345,786 345,786 — — 
Level 2:
Commercial paper37,193 3 (13)37,183 — 37,183 — 
Corporate bonds96,553 38 (131)96,460 — 62,778 33,682 
U.S. government agency securities149,722 28 (275)149,475 — 113,865 35,610 
Subtotal283,468 69 (419)283,118 — 213,826 69,292 
Total$629,254 $69 $(419)$628,904 $345,786 $213,826 $69,292 
(1)The Company’s short-term marketable securities mature in one year or less.
(2)The Company’s long-term marketable securities mature between one and two years.
 December 31, 2023
(in thousands)
Amortized CostGross
Unrealized
Gains
Gross
Unrealized
(Losses)
Aggregate Fair
Value		Cash and Cash
Equivalents
Short-term
Marketable
Securities(1)
Long-term
Marketable
Securities(2)
Level 1:       
Cash and cash equivalents$358,328 $— $— $358,328 $358,328 $— $— 
Subtotal358,328 — — 358,328 358,328 — — 
Level 2:
Commercial paper17,124 5 (1)17,128 — 17,128 — 
Corporate bonds111,824 407 (27)112,204 — 70,996 41,208 
U.S. government agency securities106,079 423 (30)106,472 — 85,726 20,746 
Subtotal235,027 835 (58)235,804 — 173,850 61,954 
Total$593,355 $835 $(58)$594,132 $358,328 $173,850 $61,954 
(1)The Company’s short-term marketable securities mature in one year or less.
(2)The Company’s long-term marketable securities mature between one and two years.
6.    Balance Sheet Components
Inventory
Inventory consisted of the following:
(in thousands)
June 30,
2024		December 31,
2023
Raw materials$5,507 $3,154 
Work-in-process5,035 3,204 
Finished goods1,637 627 
Inventory$12,179 $6,985 
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Property and Equipment, Net
Property and equipment, net consisted of the following:
(in thousands)
June 30,
2024		December 31,
2023
Building and building improvements$111,407 $111,180 
Leasehold improvements25,637 25,068 
Manufacturing equipment26,530 24,905 
Construction in progress
6,020 7,291 
Laboratory equipment3,066 2,339 
Computer equipment and software1,932 1,614 
Furniture and fixtures1,645 1,632 
Total property and equipment176,237 174,029 
Accumulated depreciation(17,429)(12,827)
Property and equipment, net$158,808 $161,202 
Depreciation expense was $1.8 million and $1.2 million for the three months ended June 30, 2024 and 2023, respectively, and $3.3 million and $2.3 million for the six months ended June 30, 2024 and 2023, respectively. Depreciation expense capitalized into inventory was $559 thousand and $72 thousand for the three months ended June 30, 2024 and 2023, respectively, and $1.4 million and $72 thousand for the six months ended June 30, 2024 and 2023, respectively.
In March 2023, the Company received the permanent occupancy permit for its second commercial scale CGMP facility, ASTRA, which allowed the Company to begin utilizing certain portions of the building. As a result, and as qualification of assets occurred through 2023 and the first half of 2024, the majority of assets relating to ASTRA were reclassified from construction in progress to leasehold improvements, manufacturing equipment, buildings and building improvements, furniture and fixtures, or computer equipment and software as it was determined that assets were ready for their intended use. As certain pieces of equipment are not yet qualified, the Company will continue to hold the remaining assets within construction in progress until qualification has been completed and the assets are ready for their intended use. Estimated remaining payments related to ASTRA were $8.0 million as of June 30, 2024 and are recorded in accounts payable and accrued expenses and other current liabilities on the condensed consolidated balance sheets.
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following as of June 30, 2024 and December 31, 2023:
(in thousands)
June 30,
2024		December 31,
2023
Accrued litigation settlement$25,000 $— 
Accrued payroll and benefits5,321 8,778 
Accrued construction-in-progress
5,148 5,182 
Other current liabilities2,500 1,876 
Accrued professional fees2,096 1,810 
Accrued preclinical and clinical expenses1,512 1,248 
Accrued inventory
1,046 334 
Accrued taxes
709 2,283 
Total$43,332 $21,511 
7.    Commitments and Contingencies
Agreements with Contract Manufacturing Organizations and Contract Research Organizations
The Company enters into various agreements in the normal course of business with Contract Research Organizations (“CROs”), Contract Manufacturing Organizations (“CMOs”) and other third parties for preclinical research studies, clinical trials and testing and manufacturing services. The agreements with CMOs primarily relate to the manufacturing of our sterile gel that is mixed with in-house produced vectors as part of the final drug product for VYJUVEK. Agreements with third parties may also include research and development consulting activities, clinical-trial agreements, testing of our clinical-stage, pre-commercial and commercial stage products and/or storage, packaging and labeling. The Company is obligated to make milestone payments under certain of these contracts. The Company may also be responsible for the payment of a monthly
11

service fee for project management services for the duration of any agreements. The estimated remaining commitments as of June 30, 2024 under these agreements was approximately $1.0 million. The Company has incurred research and development expenses under these agreements of $1.0 million and $2.5 million for the three and six months ended June 30, 2024 and $1.1 million and $3.1 million for the three and six months ended June 30, 2023.
Legal Proceedings
In May 2020, a complaint was filed against the Company in the United States District Court for the Western District of Pennsylvania by PeriphaGen, Inc. (“PeriphaGen”) alleging breach of contract and misappropriation of trade secrets. On April 27, 2022, the Company and PeriphaGen entered into a final settlement agreement, and the Company paid PeriphaGen an upfront payment of $25.0 million on April 28, 2022 for: (i) the release of all claims in the litigation with PeriphaGen; (ii) the acquisition of certain PeriphaGen assets and (iii) the grant of a license by PeriphaGen for dermatological applications. In accordance with the settlement agreement, on June 15, 2023, the Company paid PeriphaGen an additional $12.5 million following the FDA’s approval of VYJUVEK. The settlement agreement requires the Company to pay three additional $12.5 million contingent milestone payments upon reaching $100.0 million in cumulative sales, $200.0 million in cumulative sales and $300.0 million in cumulative sales.
On May 29, 2024, the parties entered into an amendment to the final settlement agreement (“Amendment”) to clarify the definition of cumulative sales and modify the timing of the $12.5 million contingent milestone payment triggered by reaching $100.0 million in cumulative sales. As defined in the settlement agreement and clarified in the Amendment, cumulative sales means the total cumulative revenue from sales of the Company’s products by the Company and its affiliates and licensees. The amendment modified the timing of the $12.5 million contingent milestone payment triggered by reaching $100.0 million in cumulative sales, such that $6.25 million is payable following the Company’s filing of a Quarterly Report on Form 10-Q that reports $100.0 million in cumulative sales, and the remaining $6.25 million is payable within 120 days following the end of the fiscal year in which the initial $6.25 million is paid. There were no other revisions to the settlement agreement, and the contingent payments triggered upon reaching $200.0 million in cumulative sales and $300.0 million in cumulative sales continue to remain payable following the filing(s) by the Company of an Annual Report(s) on Form 10-K reporting $200.0 million in cumulative sales and $300.0 million in cumulative sales. If all milestones are achieved, the total consideration for settling the dispute, acquiring certain assets, and granting of a license from PeriphaGen will be $75.0 million, of which $37.5 million has been paid.
The Company recorded litigation settlement expense of $12.5 million and $25.0 million for the three and six months ended June 30, 2024, respectively, and zero and $12.5 million for the three and six months ended June 30, 2023, respectively, on the condensed consolidated statements of operations and comprehensive income (loss) in accordance with the settlement agreement and the Amendment. During the three months ended June 30, 2024, the Company reached cumulative sales of $100.0 million. Accordingly, following the filing of this Quarterly Report on Form 10-Q, the Company will make a $6.25 million milestone payment, which was fully accrued for in the first quarter of 2024. Also during the three months ended June 30, 2024, in accordance with ASC 450, “Contingencies”, the Company determined that reaching $200.0 million in cumulative sales was probable, and recorded litigation settlement expense of $12.5 million relating to the milestone payment, which becomes payable following the filing of the Annual Report on Form 10-K that reports $200.0 million in cumulative sales. The Company previously recorded litigation settlement expense of $12.5 million for the six months ended June 30, 2023 following FDA approval of B-VEC. As of June 30, 2024, the Company has not recorded an accrual for the remaining contingent milestone payment of $12.5 million related to $300.0 million in cumulative sales.
12

8.    Leases
As of June 30, 2024, future minimum commitments under the Company’s operating leases with lease terms in excess of 12 months were as follows:
(in thousands)
Operating
Leases
2024 (remaining six months)$772 
20251,277 
20261,277 
20271,300 
20281,325 
Thereafter9,437 
Future minimum operating lease payments15,388 
Less: Interest(7,701)
Present value of lease liability$7,687 
As of June 30, 2024 and December 31, 2023, the Company's weighted-average remaining lease term for operating leases was 12.2 years and 12.3 years, respectively, and the Company’s weighted-average discount rate for operating leases was 9.5% as of June 30, 2024 and December 31, 2023.
The components of the Company’s lease expense are as follows:

Three Months Ended June 30,Six Months Ended June 30,
(in thousands)
2024202320242023
Lease cost:
Operating lease expense$346 $440 $645 $902 
Variable lease expense51 29 91 88 
Total lease expense$397 $469 $736 $990 
9.    Capitalization
ATM Program
On May 8, 2023, the Company entered into a sales agreement with Cowen and Company, LLC (“Cowen”) with respect to an at-the-market equity offering program (“ATM Program”), under which the Company may issue and sell from time to time through Cowen, acting as agent and/or principal, shares of its common stock, par value $0.00001 per share (“Common Stock”), having an aggregate offering price up to $150.0 million (“Placement Shares”).
The Placement Shares will be offered and sold pursuant to the Company’s effective shelf registration statement on Form S-3 filed with the SEC on April 6, 2023, and a prospectus supplement relating to the Placement Shares that was filed with the SEC on May 8, 2023. During the six months ended June 30, 2024 and 2023, no shares of Common Stock were issued pursuant to the ATM Program, resulting in $150.0 million being available for issuance under the ATM Program.
2023 Private Placement Offering
On May 22, 2023 and May 23, 2023, the Company sold 1,720,100 and 9,629 shares of Common Stock, respectively, in a private placement to certain institutional investors at a price of $92.50 per share for aggregate net proceeds of $160.0 million. In addition, the Company entered into a Registration Rights Agreement with the investors (“Registration Rights Agreement”) that required the Company to file a registration statement with the SEC within 60 days of the date of the Registration Rights Agreement registering the resale of the shares of Common Stock issued in the private placement. On July 18, 2023, the Company filed the resale registration statement on Form S-3ASR with the SEC, which became effective upon filing.
10.    Stock-Based Compensation
In 2017, the Company adopted the 2017 IPO Stock Plan (“Plan”), which governs the issuance of equity awards to employees, certain non-employee consultants, and directors. Initially, the Company reserved 900 thousand shares for issuance under the Plan with an initial sublimit for incentive stock options of 900 thousand shares. On an annual basis, the amount of shares available for issuance under the Plan increases by an amount equal to four percent of the total outstanding shares as of the last day of the preceding calendar year. The sublimit of incentive stock options is not subject to the increase. The Company has historically granted stock options and restricted stock awards (“RSAs”) to its employees. In February 2023, the Company
13

began issuing restricted stock units (“RSUs”) and performance-based restricted stock units (“PSUs” and with RSUs commonly referred to collectively as “restricted stock units”) to certain employees.
Shares remaining available for grant under the Plan were 2.4 million as of June 30, 2024.
Stock Options
The following table summarizes the Company’s stock option activity for the six months ended June 30, 2024:
Stock Options Outstanding
Weighted-Average Exercise Price
Weighted-Average Remaining Contractual Life (in years)
Aggregate Intrinsic Value(1)
(in thousands)
Outstanding as of December 31, 2023
2,606,592 $66.39 7.9$150,405 
Granted227,182 $160.67 
Exercised(441,027)$60.33 
Cancelled or forfeited(321,134)$68.85 
Outstanding as of June 30, 2024
2,071,613 $77.65 7.7$219,580 
Exercisable as of June 30, 2024
818,577 $62.85 6.9$98,872 
(1)Aggregate intrinsic value represents the difference between the closing stock price of our Common Stock on December 31, 2023 and June 30, 2024, respectively, and the exercise price of outstanding in-the-money options.
The following table summarizes the Company’s stock option activity for the six months ended June 30, 2023:
Stock Options Outstanding
Weighted-Average Exercise Price
Weighted-Average Remaining Contractual Life (in years)
Aggregate Intrinsic Value(1)
(in thousands)
Outstanding as of December 31, 2022
3,582,181 $61.15 8.7$64,880 
Granted389,280 $88.74 
Exercised(490,995)$56.41 
Cancelled or forfeited(250,800)$63.14 
Outstanding as of June 30, 2023
3,229,666 $65.04 8.4$169,121 
Exercisable as of June 30, 2023
778,737 $55.83 7.5$47,952 
(1)Aggregate intrinsic value represents the difference between the closing stock price of our Common Stock on December 31, 2022 and June 30, 2023, respectively, and the exercise price of outstanding in-the-money options.
The total intrinsic value (the amount by which the fair market value exceeds the exercise price) of stock options exercised was $19.8 million and $26.7 million during the three months ended June 30, 2024 and 2023, respectively, and $44.3 million and $27.9 million during the six months ended June 30, 2024 and 2023, respectively.
The weighted-average grant-date fair value per share of options granted to employees, non-employees, and directors was $112.05 and $72.95 during the three months ended June 30, 2024 and 2023, respectively, and $109.18 and $61.06 during the six months ended June 30, 2024 and 2023, respectively.
There was $63.6 million of unrecognized stock-based compensation expense related to employees’, non-employees’, and directors’ options that is expected to be recognized over a weighted-average period of 2.5 years as of June 30, 2024.
14

Restricted Stock Awards
The following table summarizes the Company’s RSA activity:
Six Months Ended June 30,
20242023
Number of Shares
Weighted-Average Grant Date Fair Value
Number of Shares
Weighted-Average Grant Date Fair Value
Non-vested RSAs, beginning of period
44,400 $78.89 66,600 $78.89 
Granted— — 
Vested(14,523)$78.89 (12,649)$78.89 
Surrendered for taxes(7,677)$78.89 (9,551)$78.89 
Non-vested RSAs, end of period
22,200 $78.89 44,400 $78.89 
There was $1.2 million of unrecognized stock-based compensation expense related to employees’ RSAs that is expected to be recognized over a weighted-average period of 8 months as of June 30, 2024.
Restricted Stock Units
The following table summarizes the Company’s RSU activity:
Six Months Ended June 30,
20242023
Number of Shares
Weighted-Average Grant Date Fair Value
Number of Shares
Weighted-Average Grant Date Fair Value
Non-vested RSUs, beginning of period
160,900 $81.91 — 
Granted224,890 $159.59 186,900 $81.91 
Vested(40,075)$81.91 — 
Forfeited
(29,314)$103.31 (14,200)$81.91 
Non-vested RSUs, end of period
316,401 $135.14 172,700 $81.91 
There was $39.0 million of unrecognized stock-based compensation expense related to employees’ RSU awards that is expected to be recognized over a weighted-average period of 3.5 years as of June 30, 2024.
Performance-Based Restricted Stock Units
The following table summarizes the Company’s PSU activity:
Six Months Ended June 30,
20242023
Number of Shares
Weighted-Average Grant Date Fair Value
Number of Shares
Weighted-Average Grant Date Fair Value
Non-vested PSUs, beginning of period
50,000 $81.91 — 
Granted112,500 $159.47 60,000 $81.91 
Vested(25,000)$81.91 — 
Non-vested PSUs, end of period
137,500 $145.37 60,000 $81.91 
PSUs vest ratably over two years based upon continued service through the vesting date and the achievement of specific regulatory and commercial performance criteria as determined by the Compensation Committee of the Company’s Board of Directors. The performance criteria are to be completed by the end of the year in which the PSU awards were granted. As of the June 30, 2024, the Company estimated that 100% of the newly granted PSUs will be eligible to vest.
There was $16.3 million of unrecognized stock-based compensation expense related to employees’ PSU awards that is expected to be recognized over a weighted-average period of 1.6 years as of June 30, 2024.
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Stock-Based Compensation Expense, Net
The Company recorded stock-based compensation expense, net related to its stock options, RSAs, RSUs and PSUs in the condensed consolidated statements of operations and comprehensive income (loss) for the three and six months ended June 30, 2024 and 2023 as follows:
Three Months Ended June 30,Six Months Ended June 30,
(in thousands)
2024202320242023
Research and development
$2,772 $2,863 $4,640 $5,359 
Selling, general and administrative
10,384 8,469 17,815 16,409 
Total stock-based compensation$13,156 $11,332 $22,455 $21,768 
After the FDA approval of VYJUVEK on May 19, 2023, the Company began capitalizing stock-based compensation associated with the allocation of labor costs related to work performed to manufacture VYJUVEK. The Company capitalized stock-based compensation of $625 thousand and $113 thousand for the three months ended June 30, 2024 and 2023, respectively and $1.3 million and $112 thousand for the six months ended June 30, 2024 and 2023, respectively, into inventory.
Historically, the Company also capitalized the portion of stock-based compensation related to work performed on the construction of our manufacturing facilities. The Company capitalized stock-based compensation of zero for each the three months ended June 30, 2024 and 2023, respectively, and zero and $162 thousand for the six months ended June 30, 2024 and 2023, respectively, into property and equipment, net.
11.    Income Taxes
The Company recorded an income tax provision of $477 thousand for the three and six months ended June 30, 2024. The tax provision for interim periods is calculated using an estimate of the annual effective tax rate, adjusted for discrete items. If there are any changes to the estimated annual tax rate, the Company will make a cumulative adjustment to the income tax provision in the period the change becomes known. The Company did not record an income tax provision for the three and six months ended June 30, 2023 as it generated sufficient tax losses, after consideration of discrete items, during each of the periods. The Company expects to maintain a full valuation allowance against its net deferred tax assets for the year.
12.    Subsequent Events
The Company evaluates events or transactions that occur after the balance sheet date, but prior to the issuance of the financial statements, to identify matters that require recognition or disclosure. The Company concluded that no subsequent events have occurred, that would require recognition or disclosure in the condensed consolidated financial statements.
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ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 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 ended December 31, 2023 (“2023 10-K”), as filed with the SEC on February 26, 2024.
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. Some of such factors include, but are not limited to:
•the commercial success of VYJUVEK® (beremagene geperpavec-svdt), our U.S. Food and Drug Administration (“FDA”) approved product for treating patients, six months of age or older, suffering from dystrophic epidermolysis bullosa (“DEB”);
•the initiation, timing, cost, progress and results of our research and development activities, preclinical studies and clinical trials for our product candidates;
•the timing, scope or results of regulatory filings and approvals, including timing of final FDA and other regulatory approval of our product candidates;
•our ability to achieve certain accelerated or orphan drug designations from the FDA or other regulators;
•changes in our estimates regarding the potential market opportunity for VYJUVEK and our product candidates;
•increases in costs associated with our research and development programs for our product candidates;
•increases in our selling, general and administrative expenses;
•risks related to our ability to successfully develop and commercialize our product candidates;
•our ability to identify new product candidates;
•our ability to identify, recruit and retain key personnel;
•risks related to our marketing and manufacturing capabilities and strategy;
•our business model and strategic plans for our business, product candidates and technology;
•the rate and degree of market acceptance and clinical utility of our product candidates and gene therapy, in general;
•our competitive position and the success of competing therapies;
•our intellectual property position and our ability to protect and enforce our intellectual property;
•our ability to establish and maintain collaborations;
•our financial performance and our estimates regarding expenses, future revenue, capital requirements and needs for additional financing, as well as our ability to raise capital;
•our ability to successfully avoid or resolve any litigation, intellectual property or other claims, that may be brought against us;
•global economic conditions, including the recent rise in inflation and interest rates; and
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•the impact of changes in laws and regulations.
Forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in Item 1A of Part II of this Quarterly Report on Form 10-Q and other filings we make with the SEC 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 Quarterly Report on Form 10-Q 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. You should read this Quarterly Report completely and with the understanding that our actual future results may be materially different from what we expect.
Forward-looking statements represent our management’s beliefs and assumptions only as of the date of this Quarterly Report. Except as required by law, we assume no obligation to update these forward-looking statements publicly as a result of subsequent events, developments or otherwise, 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 to Krystal Biotech, Inc., together with its consolidated subsidiaries. Web links throughout this document are provided for convenience only and are not intended to be active hyperlinks to the referenced websites. No content on the referenced websites shall be deemed incorporated by reference into this Quarterly Report on Form 10-Q.
Overview
We are a fully integrated, commercial-stage biotechnology company focused on the discovery, development, manufacturing and commercialization of genetic medicines to treat diseases with high unmet medical needs. Using our patented gene therapy technology platform that is based on engineered herpes simplex virus-1 (“HSV-1”), we create vectors that efficiently deliver therapeutic transgenes to cells of interest in multiple organ systems. The cell’s own machinery then transcribes and translates the transgene to treat the disease. Our vectors are amenable to formulation for non-invasive or minimally invasive routes of administration at a healthcare professional’s office or in the patient’s home by a healthcare professional. Our innovative technology platform is supported by two in-house, commercial scale Current Good Manufacturing Practice (“CGMP”) manufacturing facilities.
Our FDA Approved Commercial Product
VYJUVEK (beremagene geperpavec-svdt, or B-VEC; referred to as B-VEC outside the U.S.)
On May 19, 2023, the FDA approved VYJUVEK, the first ever redosable gene therapy, for treating patients, six months of age or older, suffering from DEB, a rare and severe monogenic disease that affects the skin and mucosal tissues and is caused by one or more mutations in a gene called COL7A1. VYJUVEK is a redosable topical gel containing our novel vector designed to deliver two copies of the COL7A1 transgene to a patient’s skin cells to produce the COL7 protein. VYJUVEK is the first and only corrective medicine approved by the FDA for the treatment of DEB, both recessive and dominant, that can be administered by a healthcare professional (“HCP”) in either a clinical setting or in the home. We possess exclusive rights to develop, manufacture, and commercialize VYJUVEK and all our pipeline candidates throughout the world.
We launched VYJUVEK in the United States in the second quarter of 2023. Net VYJUVEK product revenue was $70.3 million for the three months ended June 30, 2024, and $166.2 million in cumulative net product revenue since launch in August 2023.
Gross margin for the three months ended June 30, 2024 was 91%. We define gross margin as product revenue, net less cost of goods sold expressed as a percentage of product revenue, net.
We have made steady progress securing access and reimbursement for VYJUVEK since launch and as of July 2024, positive access determinations have been achieved for 97% of lives covered under commercial and Medicaid plans.
As of July 2024, we have secured over 400 reimbursement approvals for VYJUVEK in the U.S.
We seek to make the experience of starting and continuing on VYJUVEK treatment seamless for the patient. Since launch, infrastructure has been in place for patients to be treated in their homes by an HCP, reducing the need for regular visits to a clinic or hospital. Krystal ConnectTM, our U.S. in-house patient services call center, has been active since FDA approval and assists patients, care givers and HCPs interested in accessing VYJUVEK. We also continue to offer no-cost genetic testing through our DecodeDEB program. Since launch and through the second quarter of 2024, patient compliance with once weekly treatment while on VYJUVEK remains high at 90%.
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Preparations and infrastructure buildout are underway in Europe and Japan to support our planned direct commercial launch in these regions. In June 2024, the President and General Manager of Krystal Biotech Japan G.K. joined the Company in preparation for a Japanese launch.
In October 2023, we submitted a Marketing Authorization Application (“MAA”) to the European Medicines Agency (“EMA”) for B-VEC for the treatment of DEB. In November 2023, we were notified that the MAA had been validated and was now under Committee for Medicinal Products for Human Use review. In February 2024, the EMA completed inspection of our manufacturing facility as part of the MAA review process and, in May 2024, good manufacturing practices certification was granted by the EMA. We expect an EMA decision on our MAA in the second half of 2024.
In July 2023, the Pharmaceuticals and Medical Devices Agency (“PMDA”) in Japan officially accepted the open label extension (“OLE”) study of B-VEC. The efficacy portion of the Japan OLE study was completed in April 2024 and results closely mirrored those of our Phase 3 study in the U.S. A total of 5 patients were enrolled, with one patient discontinuing after 8 weeks due to scheduling challenges. B-VEC was well tolerated in the Japanese study population, with a safety profile consistent with previous studies, and all four patients that completed the study achieved the primary endpoint of complete wound closure at 6 months. We anticipate filing our Japan New Drug Application with Japan’s PMDA in the second half of 2024, enabling a potential authorization by PMDA in 2025.
Pipeline Highlights and Recent Developments
Respiratory
KB407 is an inhaled (nebulized) formulation of our novel vector designed to deliver two copies of the full-length cystic fibrosis transmembrane conductance regulator (“CFTR”) transgene for the treatment of cystic fibrosis (“CF”), a serious rare lung disease caused by missing or mutated CFTR protein. In July 2023, we announced that we had dosed the first patient in CORAL-1, a Phase 1 multi-center, dose-escalation study evaluating KB407, delivered via a nebulizer, in patients with CF, regardless of their underlying genotype. In May 2024, we cleared the safety evaluation window for the second cohort of CORAL-1, and we expect to initiate the third and final cohort in the second half of 2024. Details of the Phase 1 study can be found at www.clinicaltrials.gov under NCT identifier NCT05504837.
We presented preclinical data at the American Thoracic Society 2024 International Conference held in May 2024 demonstrating KB407 transduction of fully differentiated, patient airway epithelial cell-derived apical out airway organoids leading to production of full-length and fully glycosylated CFTR.
KB408 is an inhaled (nebulized) formulation of our novel vector designed to deliver two copies of the SERPINA1 transgene, that encodes for normal human alpha-1 antitrypsin protein, for the treatment of alpha-1 antitrypsin deficiency (“AATD”), a serious rare lung disease. In February 2024, we dosed the first patient in SERPENTINE-1, a Phase 1, open-label, single dose escalation study evaluating KB408, delivered via a nebulizer, in adult patients with AATD with a Pi*ZZ or a Pi*ZNull genotype. In May 2024, we cleared the safety evaluation window for the first cohort of SERPENTINE-1 and enrollment in the second cohort is ongoing. We are working closely with the Alpha-1 Foundation and their Therapeutic Development Network on the SERPENTINE-1 study and intend to announce interim data from the study in the fourth quarter of 2024. Details of the Phase 1 study can be found at www.clinicaltrials.gov under NCT identifier: NCT06049082. An overview of KB408 IND-enabling studies conducted to support the initiation of SERPENTINE-1 was presented at the American Thoracic Society 2024 International Conference held in May 2024.
Ophthalmology
In April 2023, we announced clinical data on the compassionate use of B-VEC, administered as an eyedrop, to treat a patient suffering from ocular complications of DEB. Data was first presented at the Association for Research in Vision and Ophthalmology (“ARVO”) 2023 Annual Meeting and subsequently published in the New England Journal of Medicine in February 2024. Regular application of B-VEC to the eye was well tolerated and associated with full corneal healing at 3 months and visual acuity improvement from hand motion to 20/25 by 8 months.
Based on this early clinical evidence of safety and potential benefit under compassionate use, we started discussions with the FDA in the first quarter of 2024 on a potential clinical development path for ophthalmic B-VEC, and in February 2024, we aligned with the FDA on our proposed single arm, open label study in approximately 10 to 15 patients to enable approval of B-VEC eyedrops to treat ocular complications which are thought to affect over 25% of DEB patients. We plan to initiate the registrational study in the fourth quarter of 2024.
In August 2024, we initiated a natural history study to prospectively collect data on the frequency and severity of corneal abrasions in patients with DEB and serve as a run-in period for patients who may be eligible to participate in the registrational study.
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We are actively evaluating multiple, preclinical-stage genetic medicine candidates for the treatment of front and back of the eye diseases and presented preclinical data highlighting the potential of Krystal’s HSV-1-based gene delivery platform for back of the eye gene delivery at the ARVO 2024 Annual Meeting that was held in May 2024.
Oncology
KB707 is a redosable, immunotherapy designed to deliver genes encoding both human interleukin-2 (“IL-2”) and interleukin-12 (“IL-12”) to the tumor microenvironment and promote systemic immune-mediated tumor clearance. Two formulations of KB707 are in development, a solution formulation for transcutaneous injection and an inhaled (nebulized) formulation for lung delivery. Both formulations of KB707 have been granted Fast Track Designation by the FDA and in May 2024, intratumoral KB707 was also granted Rare Pediatric Disease Designation by the FDA for the treatment of osteosarcoma.
In October 2023, we dosed the first patient in OPAL-1, an open-label, multi-center, monotherapy, dose escalation and expansion Phase 1 study, evaluating intratumoral KB707 in patients with locally advanced or metastatic solid tumors, who relapsed or are refractory to standard of care, with at least one measurable and injectable tumor accessible by transcutaneous route of administration. In May 2024, we cleared the safety evaluation window for our third and final dose escalation cohort of the OPAL-1 study. Enrollment in the dose expansion cohort is ongoing. Details of the Phase 1 study can be found at www.clinicaltrials.gov under NCT identifier NCT05970497. Based on the current pace of enrollment, we expect to report interim data in the fourth quarter of 2024.
In April 2024, we dosed the first patient in KYANITE-1, an open-label, monotherapy, dose escalation and expansion Phase 1 study, evaluating inhaled KB707 in patients with locally advanced or metastatic solid tumors of the lung. The safety evaluation window for the first dose escalation cohort of the KYANITE-1 study was cleared in June 2024 and enrollment of the second cohort is ongoing. Details of the Phase 1 study can be found at www.clinicaltrials.gov under NCT identifier NCT06228326.
We presented preclinical efficacy data generated in syngeneic mouse models using murine equivalents to KB707 at the American Association for Cancer Research Annual Meeting that was held in April 2024. Study results demonstrated that IL-12 and IL-2, delivered intratumorally using Krystal’s HSV-1-based gene delivery platform, enhanced local and systemic T-cell effector responses consistent with previously reported anti-tumor activity.
Dermatology
KB105 is a topical gel containing our novel vector designed to deliver two copies of the TGM1 transgene encoding the human enzyme transglutaminase-1 (“TGM1”) for the treatment of lamellar icthyosis, a serious rare skin disorder most often caused by missing or mutated TGM1 protein. KB104 is a topical gel formulation of our novel vector designed to deliver two copies of the SPINK5 transgene for the treatment of Netherton Syndrome, a debilitating autosomal recessive skin disorder caused by missing or mutated SPINK5 protein. We expect to resume enrollment in the Phase 2 portion of JADE-1, a randomized, placebo-controlled Phase 1/2 study evaluating KB105 for the treatment of lamellar icthyosis in the first half of 2025, and plan to file an investigational new drug (“IND”) application and initiate a clinical trial of KB104 to treat patients with Netherton Syndrome following initiation of the KB105 Phase 2 study. Details of the JADE-1 Phase 1/2 study can be found at www.clinicaltrials.gov under NCT identifier NCT04047732.
Aesthetics
In addition to focusing on genetic medicines to treat patients with diseases with high unmet medical needs, we are leveraging the ability of our platform to deliver proteins of interest to cells in the skin in the context of aesthetic medicine via our wholly-owned subsidiary, Jeune Aesthetics, Inc. (“Jeune”). KB301 is a solution formulation of our novel vector for intradermal injection designed to deliver two copies of the COL3A1 transgene to address signs of aging or damaged skin caused by declining levels of, or damaged proteins within the extracellular matrix, including type III collagen. In April 2023, Jeune initiated and treated the first subject in the Phase 1 PEARL-1 Cohort 3 clinical study. The PEARL-1 Cohort 3 study is an open label study to evaluate different doses of KB301 for the improvement of lateral canthal lines at rest in up to 20 subjects. In January 2024, Jeune initiated the PEARL-1 Cohort 4 clinical study, an open label study to evaluate KB301 for the improvement of dynamic wrinkles of the décolleté in up to 20 subjects. Cohorts 3 and 4 were fully enrolled in April 2024 and Jeune plans to announce results for both cohorts in the third quarter of 2024. Following completion of both cohorts, Jeune plans to initiate a Phase 2 study of KB301. Details of the Phase 1 study can be found at www.clinicaltrials.gov under NCT identifier NCT04540900. Jeune has several other aesthetic medicine product candidates in various stages of preclinical development.
Financial Overview
Product Revenue, Net
After FDA approval of VYJUVEK in May 2023, we began commercial marketing and sales throughout the United States and began recognizing revenue during the third quarter of 2023. Our future revenue will fluctuate from quarter to quarter for many reasons, including the uncertain timing and amount of any such sales.
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We have contracted to sell VYJUVEK to a limited number of specialty pharmacy providers (“SPs”) that mix the medication and administer it to patients in the patient’s home by a healthcare professional and through a specialty distributor (“SD”) to hospitals and outpatient clinics where patients are administered the medication at a healthcare professional’s office. The transaction price that we recognize as revenue for VYJUVEK sales includes an estimate of variable consideration, which includes discounts, returns, copay assistance and rebates that are offered within contracts. Refer to Note 3 of the notes to condensed consolidated financial statements included in this Form 10-Q and Note 2 of our consolidated financial statements in our 2023 10-K for additional information.
Cost of Goods Sold
Cost of goods sold includes direct and indirect costs related to the manufacturing of VYJUVEK. These costs consist of manufacturing costs, personnel costs including stock-based compensation, facility costs, and other indirect overhead costs. Cost of goods sold may also include period costs related to certain manufacturing services and inventory adjustment charges.
Prior to receiving FDA approval in May 2023, costs associated with the manufacturing of VYJUVEK were expensed as research and development expenses.
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, contract research 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 as we expand our product portfolio. In the near term, we expect that our research and development expenses will increase as we continue our Phase 1 trials for KB407, KB408, intratumoral KB707, and inhaled KB707, resume dosing with KB105 in our Phase 1/2 clinical trial, complete the Phase 1, Cohorts 3 and 4 study and initiate a Phase 2 trial for KB301, begin our open label study evaluating ophthalmic B-VEC, 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 clinical trials, and, as a result, the actual costs to complete clinical trials may exceed the expected costs. 
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist principally of salaries and other related costs, including stock-based compensation for personnel in our executive, finance, legal, commercial, business development, information technology and other general and administrative functions. Selling, general and administrative expenses also include professional fees associated with corporate and intellectual property-related legal expenses, consulting and accounting services, insurance, facility-related costs and expenses associated with obtaining and maintaining patents. Other selling, general and administrative costs include travel expenses, patient access program costs, management service fees, marketing expenses, and selling expenses which include transportation, shipping and handling fees.
We anticipate that our selling, general and administrative expenses will increase in the future relating to our commercialization efforts and to support the development of our product candidates. 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, we anticipate that we will continue to increase our salary and personnel costs and other expenses to support B-VEC commercialization globally.
ASTRA Capital Expenditures
In March 2021, we closed on the purchase of the building that was constructed to house our second commercial scale CGMP facility, ASTRA. In March 2023, we received the permanent occupancy permit for ASTRA which allowed the Company to begin utilizing certain parts of the building for research and development operations once qualification was
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completed and a portion of the assets were placed into service throughout 2023. We incurred significant capital expenditures related to the construction of ASTRA in 2023 and expect to continue to incur capital expenditures related to ASTRA throughout the operational life of the facility.
Interest and Other Income, Net
Interest and other income, net 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 six months ended June 30, 2024 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 2023 10-K.
Results of Operations
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 U.S. 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.
Three Months Ended June 30, 2024 and 2023
 Three Months Ended June 30, 
 20242023Change
(in thousands)
(unaudited) 
Product revenue, net
$70,284 $— $70,284 
Expenses
  
Cost of goods sold6,009 — 6,009 
Research and development15,583 12,144 3,439 
Selling, general and administrative
27,626 25,904 1,722 
Litigation settlement12,500 — 12,500 
Total operating expenses61,718 38,048 23,670 
Income (loss) from operations
8,566 (38,048)46,614 
Other income 
Interest and other income, net7,479 4,838 2,641 
Income (loss) before income taxes
16,045 (33,210)49,255 
Income tax expense
(477)— (477)
Net income (loss)
$15,568 $(33,210)$48,778 
Product Revenue, Net
Product revenue, net was $70.3 million for the three months ended June 30, 2024, as compared to zero for the three months ended June 30, 2023 due to sales of VYJUVEK after FDA approval was obtained on May 19, 2023. As VYJUVEK initial product sales revenue did not begin until the third quarter of 2023, there was no comparative period revenue.
Cost of Goods Sold
Cost of goods sold was $6.0 million for the three months ended June 30, 2024, as compared to zero for the three months ended June 30, 2023 due to sales of VYJUVEK after FDA approval was obtained on May 19, 2023. Prior to receiving FDA approval for VYJUVEK in May 2023, costs associated with the manufacturing of VYJUVEK were expensed as research and development expense.
Research and Development Expenses 
Research and development expenses increased $3.4 million in the three months ended June 30, 2024 compared to the three months ended June 30, 2023. The increase was primarily driven by the following:
•an increase in manufacturing expenses of $2.0 million related to our product candidates, including on-going manufacturing efficiency and process optimization costs for which such processes have not yet been approved by the FDA,
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•an increase of $820 thousand in clinical development costs,
•an increase in depreciation of $621 thousand due to the Company's second CGMP facility being placed into service in 2023 partially offset by the capitalization of depreciation associated with commercial batches of VYJUVEK after FDA approval in May 2023 and
•an increase in other research and development expenses of $678 thousand primarily relating to licensing and regulatory costs.
The increases were partially offset by:
•a decrease of $407 thousand due to the capitalization of allocated overhead costs for commercial batches of VYJUVEK after FDA approval in May 2023 and
•a net decrease in direct manufacturing expenses of $269 thousand primarily due to the capitalization of costs to manufacture VYJUVEK into inventory following FDA approval.
Research and development expenses consist primarily of costs relating to our preclinical development, the development of our product candidates and our clinical trial programs. Direct research and development expenses associated with our product candidates or development programs consist of compensation related expenses for our internal resources conducting research and development activities, fees paid to external consultants, contract research organizations, or for costs to support our clinical trials. Indirect research and development expenses that are allocated to our product candidates or programs consist of lab supplies and software fees. A significant portion of our research and development expenses are not allocated to individual product candidates and preclinical programs, as certain expenses benefit multiple product candidates and preclinical programs. For example, we do not allocate costs associated with stock-based compensation, manufacturing of preclinical or clinical development products or costs relating to facilities and equipment to individual product candidates and preclinical programs.
The following table summarizes our research and development expenses by product candidate or program, and for unallocated expenses, by type, for the three months ended June 30, 2024 and 2023.
Three Months Ended June 30,
20242023Change
(in thousands)
(unaudited)
B-VEC
$3,594 $2,130$1,464
KB407713 442 271
KB408
249 309 (60)
KB301223 77 146
KB7071,770 943 827
Ophthalmology programs
612 — 612
Other dermatology programs21 16 5
Other aesthetics programs823 1 822
Other research programs393 131 262
Other development programs193 194 (1)
Stock-based compensation2,772 2,863 (91)
Other unallocated manufacturing expenses(1)
2,288 3,536 (1,248)
Other unallocated expenses(2)
1,932 1,502 430
Research and development expense$15,583$12,144$3,439
(1)Unallocated manufacturing expenses consist of shared pre-commercial manufacturing costs, primarily relating to raw materials, contract manufacturing, contract testing, process development, quality control and quality assurance activities and other manufacturing costs which support the development of multiple product candidates in our preclinical and clinical development programs.
(2)Other unallocated expenses include rental, storage, depreciation, and other facility related costs that we do not allocate to our individual product candidates.
The primary changes in our research and development expenses by product candidate or program in the three months ended June 30, 2024 compared to the three months ended June 30, 2023 are as follows:
•a net increase in B-VEC costs of $1.5 million largely due to the following:
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◦on-going manufacturing efficiency and process optimization costs for which such processes have not yet been approved by the FDA,
◦an increase in overseas preclinical and clinical trial costs and
◦overseas licensing and regulatory costs;
◦partially offset by costs being to research and development expense prior to receiving FDA approval in May 2023 that are now included as part of the cost of inventory,
•an increase in KB707 costs of $827 thousand following the expansion of our research and development pipeline to oncology consisting of an increase in payroll related costs to support our research and an increase in contract research expenses in preparation for the Phase 1 clinical trial of inhaled KB707 that has now commenced,
•an increase in other aesthetics programs of $822 thousand,
•an increase in ophthalmology programs of $612 thousand, inclusive of $214 thousand for ophthalmic B-VEC and
•an increase in other unallocated expenses of $430 thousand, which largely relates to depreciation due to the Company's second CGMP facility being placed into service in 2023 partially offset by the capitalization of depreciation associated with commercial batches of VYJUVEK after its approval in May 2023.
The increases were partially offset by:
•a decrease in other unallocated manufacturing expenses of $1.2 million primarily due to costs related to the manufacturing of VYJUVEK being recorded as inventory and cost of goods sold following FDA approval.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $1.7 million in the three months ended June 30, 2024 as compared to the three months ended June 30, 2023. The increase was primarily driven by the following:
•an increase in stock-based compensation of $1.9 million,
•an increase related to professional services incurred to support our commercial growth of $938 thousand and
•an increase in selling expenses related to the launch of VYJUVEK of $909 thousand, which includes $184 thousand related to our patient access program.
The increases were partially offset by:
•a decrease in marketing costs of $1.5 million due to the timing of marketing activities ahead of the VYJUVEK launch and
•a decrease in information technology infrastructure costs of $355 thousand.
Litigation Settlement
Litigation settlement for the three months ended June 30, 2024 and 2023 was $12.5 million and zero, respectively, and consisted of amounts related to the settlement of litigation with PeriphaGen. See “Legal Proceedings” in Note 7 of the notes to condensed consolidated financial statements included in this Form 10-Q for more information.
Interest and Other Income, Net
Interest and other income, net for the three months ended June 30, 2024 and 2023 was $7.5 million and $4.8 million, respectively, and consisted of interest and dividend income earned from our cash, cash equivalents and investments. The increase in interest and dividend income is the result of increased investment activity and more favorable interest rates as compared to the prior period and an increase in our balance of cash, cash equivalents and investments.
Income Tax Expense
Income tax expense for the three months ended June 30, 2024 and 2023 was $477 thousand and zero, respectively.
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Six Months Ended June 30, 2024 and 2023
 Six Months Ended June 30,
 20242023Change
(in thousands)
(unaudited) 
Product revenue, net
$115,535 $— $115,535 
Expenses
Cost of goods sold
8,428 — 8,428 
Research and development26,539 24,432 2,107 
Selling, general and administrative
53,685 49,939 3,746 
Litigation settlement25,000 12,500 12,500 
Total operating expenses113,652 86,871 26,781 
Income (loss) from operations
1,883 (86,871)88,754 
Other income
 
Interest and other income, net15,095 8,364 6,731 
Income (loss) before income taxes
16,978 (78,507)95,485 
Income tax expense
(477)— (477)
Net income (loss)$16,501 $(78,507)$95,008 
Products Revenue, net
Product revenue, net was $115.5 million for the six months ended June 30, 2024 as compared to zero for the six months ended June 30, 2023 due to initial sales of VYJUVEK after FDA approval was obtained on May 19, 2023. As VYJUVEK was approved by the FDA in May 2023, there were no comparative period revenue.
Cost of Goods Sold
Cost of goods sold was $8.4 million for the six months ended June 30, 2024 as compared to zero for the six months ended June 30, 2023 due to initial sales of VYJUVEK after FDA approval was obtained on May 19, 2023. Prior to receiving FDA approval for VYJUVEK in May 2023, costs associated with the manufacturing of VYJUVEK were expensed as research and development expense.
Research and Development Expenses 
Research and development expenses increased $2.1 million in the six months ended June 30, 2024 compared to the six months ended June 30, 2023. The increase was primarily driven by the following:
•an increase in manufacturing expenses of $1.8 million related to our product candidates,
•an increase in clinical development costs of $983 thousand,
•an increase in depreciation of $893 thousand due to the Company's second CGMP facility being placed into service in 2023 partially offset by the capitalization of depreciation associated with commercial batches of VYJUVEK after FDA approval in May 2023 and
•an increase in other research and development expenses of $1.0 million primarily relating to licensing and regulatory costs.
The increases were partially offset by:
•a decrease of $1.3 million due to the capitalization of allocated overhead costs for commercial batches of VYJUVEK after FDA approval in May 2023 partially offset by increased payroll related expenses, including stock-based compensation, primarily driven by an increase in headcount to support overall growth and
•a net decrease in direct manufacturing expenses of $1.2 million due to the capitalization of costs to manufacture VYJUVEK into inventory following FDA approval.
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The following table summarizes our research and development expenses by product candidate or program, and for unallocated expenses, by type, for the six months ended June 30, 2024 and 2023:
Six Months Ended June 30,
20242023Change
(in thousands)
(unaudited)
B-VEC
$5,815 $4,520 $1,295
KB4071,451 819 632
KB408
495 419 76
KB301383 329 54
KB7073,156 1,408 1,748
Ophthalmology programs
712 — 712
Other dermatology programs35 257 (222)
Other aesthetics programs958 14 944
Other research programs643 258 385
Other development programs425 529 (104)
Stock-based compensation4,640 5,359 (719)
Other unallocated manufacturing expenses(1)
4,419 7,456 (3,037)
Other unallocated expenses(2)
3,407 3,064 343
Research and development expense$26,539$24,432$2,107
(1)Unallocated manufacturing expenses consist of shared pre-commercial manufacturing costs, primarily relating to raw materials, contract manufacturing, contract testing, process development, quality control and quality assurance activities and other manufacturing costs which support the development of multiple product candidates in our preclinical and clinical development programs.
(2)Other unallocated expenses include rental, storage, depreciation, and other facility related costs that we do not allocate to our individual product candidates.
The primary changes in our research and development expenses by product candidate or program in the six months ended June 30, 2024 compared to the six months ended June 30, 2023 are as follows:
•an increase in KB707 costs of $1.7 million following the expansion of our research and development pipeline to oncology consisting of increase in payroll related costs to support our research and an increase in contract research expenses in preparation for the Phase 1 clinical trial of inhaled KB707that has now commenced,
•a net increase in B-VEC costs of $1.3 million largely due to:
◦on-going manufacturing efficiency and process optimization costs for which such processes have not yet been approved by the FDA,
◦an increase in overseas preclinical and clinical trial costs and
◦overseas licensing and regulatory costs partially offset by costs being expensed to research and development expense prior to receiving FDA approval in May 2023 that are now included as part of the cost of inventory,
•an increase in other aesthetics programs of $944 thousand,
•an increase in ophthalmology programs of $712 thousand, inclusive of $214 thousand for ophthalmic B-VEC,
•an increase in KB407 costs of $632 thousand and
•an increase in other unallocated expenses of $343 thousand, which largely relates to depreciation due to the Company's second CGMP facility being placed into service in 2023 partially offset by the capitalization of depreciation associated with commercial batches of VYJUVEK after its approval in May 2023.
The increases were partially offset by:
•a decrease in other unallocated manufacturing expenses of $3.0 million primarily due to the costs related to the manufacturing of VYJUVEK following FDA approval being recorded as inventory and cost of goods sold and
•a decrease in stock-based compensation of $719 thousand due to the allocation of labor costs related to work performed to manufacture VYJUVEK to inventory following FDA approval.
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Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $3.7 million in the six months ended June 30, 2024 as compared to the six months ended June 30, 2023. The increase was primarily driven by the following:
•an increase in selling expenses related to the launch of VYJUVEK of $3.0 million, which includes $1.7 million related to our patient access program,
•an increase related to professional services incurred to support our commercial growth of $1.7 million,
•an increase in stock-based compensation of $1.4 million and
•an increase in payroll related expenses of $1.0 million, which was primarily driven by an increase in headcount to support overall growth.
The increases were partially offset by:
•a decrease in marketing costs of $2.5 million due to the timing of marketing activities ahead of the VYJUVEK launch and
•a decrease in information technology infrastructure costs of $436 thousand.
Litigation Settlement
Litigation settlement for the six months ended June 30, 2024 and 2023 was $25.0 million and $12.5 million, respectively, and consisted of amounts related to the settlement of litigation with PeriphaGen. See “Legal Proceedings” in Note 7 of the notes to condensed consolidated financial statements included in this Form 10-Q for more information.
Interest and Other Income, Net
Interest and other income, net for the six months ended June 30, 2024 and 2023 was $15.1 million and $8.4 million, respectively, and consisted of interest and dividend income earned from our cash, cash equivalents and investments. The increase in interest and dividend income is the result of increased investment activity and more favorable interest rates as compared to the prior period and an increase in our balance of cash, cash equivalents and investments.
Income Tax Expense
Income tax expense for the six months ended June 30, 2024 and 2023 was $477 thousand and zero, respectively.
Liquidity and Capital Resources
Overview
As of June 30, 2024, our cash, cash equivalents and short-term investments balance was approximately $559.6 million. As of June 30, 2024, we had an accumulated deficit of $253.3 million. We believe that our cash, cash equivalents and short-term investments as of June 30, 2024 will be sufficient to allow us to fund our operations for at least 12 months from the filing date of this Quarterly Report on Form 10-Q.
Our ability to continue to achieve operating profitability is dependent upon the continued successful commercialization of VYJUVEK and the successful development, approval, manufacturing, and commercialization of product candidates. Furthermore, we expect to incur increasing costs associated with satisfying regulatory and quality standards, maintaining and initiating product clinical trials, and furthering our efforts to discover, develop, manufacture, and commercialize current and future product candidates. We intend to fund future operations through on hand cash and cash equivalents, revenue generated from the sale of VYJUVEK, the sale of equity, debt financings, and we may also seek additional capital through arrangements with strategic partners or other sources.
Costs related to clinical trials can be unpredictable and, therefore, there can be no guarantee that we will have sufficient capital to fund the continued or planned pre-clinical and clinical studies for our product candidates, or our operations. Further, we expect future revenue to fluctuate from quarter to quarter for many reasons, including the uncertain timing and amount of any product sales. While we are in the process of building out our internal vector manufacturing capacity, some of our manufacturing activities will be contracted out to third parties. Additionally, we currently utilize third-party contract research organizations to carry out some of our clinical development activities. As we seek to obtain regulatory approval for our product candidates, we expect to continue to incur significant manufacturing and commercialization expenses as we prepare for product sales, marketing, commercial manufacturing, packaging, labeling and distribution. Furthermore, pursuant to our settlement agreement with PeriphaGen, we will be required to pay three $12.5 million contingent milestone payments upon reporting $100.0 million in cumulative sales, $200.0 million in cumulative sales and $300.0 million in cumulative sales. Our funds may not be sufficient to enable us to conduct pivotal clinical trials for, seek marketing approval for or commercially launch our product candidates. Accordingly, to obtain marketing approval for and to commercialize these or any other product
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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.
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, regulatory expenses, third-party clinical trial research and development services, laboratory and related supplies, selling expenses, costs to manufacture our commercial product, legal expenses, payments of settlement amounts to PeriphaGen and general overhead costs. 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 may require substantial additional funding.
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, manufacturing and commercialization of genetic medicines, 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 costs needed to commercialize and market our lead product, VYJUVEK;
•the progress, timing and costs of clinical trials of our current product candidates;
•the progress, timing and costs of manufacturing VYJUVEK and revenue received from commercial sale of VYJUVEK;
•the continued development and the filing of IND applications for current and future product candidates;
•the initiation, scope, progress, timing, costs and results of drug discovery, laboratory testing, manufacturing, preclinical studies and clinical trials for any product candidates that we may pursue in the future, if any;
•the costs of maintaining our own commercial-scale CGMP manufacturing facilities;
•the outcome, timing and costs of seeking regulatory approvals;
•the costs associated with the manufacturing process development and evaluation of third-party manufacturers;
•the extent to which the costs of VYJUVEK and 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 our current and future product candidates if we receive marketing approval for such product candidates, 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 our current and future 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 may need to obtain substantial additional funding in order to receive regulatory approval and to commercialize our product candidates. 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
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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 our 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 our 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 for the six months ended June 30, 2024 and 2023:
 Six Months Ended June 30,
20242023
(in thousands)
(unaudited)
Net cash provided by (used in) operating activities
$11,720 $(60,346)
Net cash (used in) investing activities
(45,333)(12,394)
Net cash provided by financing activities21,221