KRYSTAL BIOTECH, INC. – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations.

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

This section of this Form 10-K generally discusses 2022, 2021 and 2020 items and
year-to-year comparisons between 2022 and 2021, and 2021 and 2020 of the
Company's results of operations and cash flows.

Overview

We are a biotechnology company focused on developing and commercializing genetic
medicines for patients with rare diseases. Using our patented platform that is
based on engineered 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 encoded effector to
treat or prevent disease. We formulate our vectors for non-invasive or minimally
invasive routes of administration at a healthcare professional's office or
potentially in the patient's home by a healthcare professional. Our goal is to
develop easy-to-use medicines to dramatically improve the lives of patients
living with rare diseases and chronic conditions. Our innovative technology
platform is supported by in-house, commercial scale CGMP manufacturing
capabilities. Refer to Part I, Item 1 - Business for more information about our
clinical development pipeline and research programs and the status of our
product candidates.

Pipeline Highlights and Recent Developments:

•B-VEC is a topical gel containing our novel vector designed to deliver two
copies of the COL7A1 transgene for the treatment of DEB, a serious rare skin
disease caused by missing or mutated COL7 protein. We submitted a BLA to the FDA
for B-VEC for the treatment of DEB in June 2022. The FDA accepted the BLA in
August 2022 granting B-VEC a Priority Review Designation with a PDUFA action
date of February 17, 2023. In January 2023, the FDA notified us, that based on
manufacturing information submitted to the Agency on December 20, 2022 in
response to an information request from the FDA, the PDUFA date has been revised
to May 19, 2023. In this notification, we were also informed that there will be
no Advisory Committee meeting for B-VEC and a REMS program is not needed for the
B-VEC application. Commercial readiness efforts have been underway for the past
two years as we prepare for the potential approval of B-VEC by the FDA and the
EMA. In the United States our Medical Science Liaisons have been interacting
with and educating HCPs on DEB and the importance of genetic testing in ensuring
an accurate diagnosis. We have completed the build of Krystal Connect, our US
in-house patient services call center staffed with Krystal employees, and are
ready, pending FDA approval of B-VEC, to assist patients, care givers and HCPs
interested in accessing B-VEC. Additionally, we have hired, trained and deployed
commercial field teams who are interacting with physicians, patients, commercial
payers across the U.S. to educate on DEB and to prepare for a U.S. launch of
B-VEC. We are interacting frequently with the leading physicians in the major
markets across Europe and in Japan.

•We submitted a request for MAA with the EMA in November 2022 for B-VEC for the
treatment of DEB in patients 6 months and older. The Company was informed by the
EMA in January 2023 to modify the PIP waiver request to include patients between
birth and 6 months. The Company is modifying the application so that the MAA
procedure can officially start in the second half of 2023 with an approval
expected in early 2024.

•KB105 is a topical gel containing our novel vector designed to deliver two
copies of the TGM1 transgene for the treatment of TGM1-ARCI, a serious rare skin
disorder caused by missing or mutated TGM1 protein. A randomized,
placebo-controlled Phase 1/2 study is ongoing. On July 1, 2021, we announced
complete data from the Phase 1 trial, showing repeat topical KB105 dosing
continued to be well tolerated with no adverse events or evidence of immune
response. Details of the Phase 1/2 study can be found at www.clinicaltrials.gov
under NCT identifier NCT04047732.
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Nothing included on this website shall be deemed incorporated by reference into
this Annual Report on Form 10-K. We plan to initiate a Phase 2 study in 1H 2023.

•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. The FDA has granted KB104 rare pediatric designation for the
treatment of Netherton Syndrome. We plan to file an IND and initiate a clinical
trial of KB104 to treat patients with Netherton Syndrome in 2023.

•KB407 is an inhaled (nebulized) formulation of our novel vector designed to
deliver two copies of the full-length CFTR transgene for the treatment of cystic
fibrosis, a serious rare lung disease caused by missing or mutated CFTR protein.
On September 29, 2021, we announced that the Bellberry Human Research Ethics
Committee in Australia granted approval to conduct a Phase 1 clinical study of
inhaled KB407 in patients with cystic fibrosis, and trial initiation is
anticipated in first half of 2023. In August 2022, we announced that the FDA had
accepted our IND application to evaluate KB407 in a clinical trial to treat
patients with cystic fibrosis. We are closely working with Therapeutics
Development Network ("TDN") of the Cystic Fibrosis Foundation ("CFF") to
validate our Phase 1 clinical protocol and plan on initiating a Phase 1 clinical
trial in the US in first half of 2023.

•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"). We presented preclinical pharmacology data for KB408 at the European
Society of Gene & Cell Therapy Virtual Congress that was held October 19-22,
2021. We are planning to file an IND for KB408 to treat AATD patients in 2023.

•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. We initiated a Phase 1
clinical trial, the PEARL-1 trial, for the treatment of aesthetic skin
conditions on August 25, 2020. The Phase 1 dose-ranging trial evaluated the
safety, tolerability, and initial efficacy of intradermal injections of KB301 in
adult subjects aged 18-75. Details of the Phase 1 study can be found at
www.clinicaltrials.gov under NCT identifier (NCT04540900). Nothing included on
this website shall be deemed incorporated by reference into this Annual Report
on Form 10-K. Complete results from Cohort 1 focused on safety were presented at
the 2021 SID Annual Meeting. In March 2022, we announced positive
proof-of-concept efficacy and safety data from Cohort 2 of the PEARL-1 study of
KB301 for the treatment of aesthetic skin indications. Cohort 2 is a randomized,
double-blind, placebo-controlled clinical trial that evaluated the safety and
efficacy of KB301 for the improvement of fine lines and skin texture in the
lower and upper cheek and for improvement in skin thickness in the knee. Cohort
2 enrolled 27 subjects across two trial sites. Bilateral treatment areas
included the neck behind the ear to assess initial safety and on the cheek below
and above the zygomatic arch (lower and upper cheek), and around the knee.
Subjects were randomized 2:1 to receive low dose KB301 or placebo in the upper
cheek and knee as multiple micro depot injections over the selected treatment
area with a 33 G needle. Subjects receiving KB301 in the lower check were
randomized 2:1 to receive either low dose KB301, high dose KB301 or placebo.
Four patients dropped out of the Cohort 2 study - one subject following the
initial safety assessment behind the ear, two subjects for unspecified reasons,
and one subject due to unevenness in face between active and placebo during the
study. A subset of subjects from the PEARL-1 Cohort 2 trial (Cohort 3) were
enrolled into a durability trial to look for duration of effect, reduction of
the unevenness in placebo treated sites, and for long term safety monitoring.
Ten subjects from the PEARL-1 Cohort 2 study were enrolled in durability trial,
an open-label study to assess duration of effect below the zygomatic arch (the
lower cheek area). The extension cohort enrolled subjects who had received the
high dose regimen of KB301 during the efficacy cohort in one or both of their
lower cheeks. Subject Satisfaction Scores and Investigator Assessments were
measured monthly for three consecutive visits that correspond to timepoints up
to nine-months following administration of the last dose of KB301. In addition,
subjects with placebo-treated lower cheeks were dosed with KB301 during the
open-label extension cohort to normalize their appearance. In November 2022, we
announced nine-month durability of effect in Cohort 3 of the PEARL-1 study of
KB301. We are planning to initiate a Phase 2 study in fine lines in 2023.

Jeune Aesthetics has several other aesthetic medicine product candidates in
various stages of preclinical development reflected in the chart above in Item
1- Business.

Business Highlights:

•In March 2022, we presented additional results from our Phase 3 study of the
clinical efficacy and safety of B-VEC for the treatment of DEB at the 2022
American Academy of Dermatology Annual Meeting.

•In March 2022, results from the complete Phase 1/2 study of topical B-VEC for
the treatment of DEB were published in Nature Medicine.

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•On April 5, 2022, the Company issued and sold 434,782 shares of common stock at
a weighted average price of $69.00 per share for net proceeds of $29.1 million
after deducting selling commissions of approximately $900 thousand.

•On April 28, 2022, the Company entered into a final settlement agreement with
PeriphaGen, Inc. ("PeriphaGen") to resolve all claims in the trade secret
litigation filed by PeriphaGen in May 2020. We paid PeriphaGen an upfront
payment of $25.0 million for: (i) the release of all claims in the trade secret
litigation with PeriphaGen; (ii) the acquisition of certain PeriphaGen assets,
and (iii) the grant of a license by PeriphaGen for dermatological applications.
Upon approval of the Company's first product by the FDA, the Company will pay
PeriphaGen an additional $12.5 million, followed by three additional $12.5
million contingent milestone payments upon reaching $100.0 million in total
cumulative sales, $200.0 million in total cumulative sales and $300.0 million in
total cumulative sales.

•In April 2022, following feedback from the FDA, we announced that we planned to
offer patients with DEB, who were enrolled in the GEM-3 OLE, the opportunity to
be dosed in their homes by a health care professional.

•In April 2022, Jeune Aesthetics announced the formation and members of its
Scientific Advisory Board, comprised of industry leaders to serve as strategic
advisors assisting with program strategy and clinical development.

•In May 2022, we presented new data entitled "GEM-3: phase 3 safety and
immunogenicity results of Beremagene Geperpavec ("B-VEC"), an investigational,
topical gene therapy for dystrophic epidermolysis bullosa (DEB)" at the SID 2022
Annual Meeting.

•In December 2022 full results from the GEM-3 trial of B-VEC for DEB were
published in the New England Journal of Medicine.

COVID-19 Update

To date the impact of the COVID-19 pandemic on our business and clinical trials
in the U.S. has been minimal. We will continue to assess the potential impact of
the pandemic on our business and operations, including our supply chain and
preclinical and clinical trial activities. Outside of the U.S., we have
experienced pandemic-related delays in clinical trial initiation in Australia,
and we will continue to closely monitor the impact that future pandemic
developments have on this and our other clinical trials, going forward. For
additional information regarding the impact of the coronavirus pandemic, please
see "Risk Factors - Business interruptions resulting from the COVID-19 outbreak
or similar public health crises could cause a disruption of the development
efforts of our product candidates and adversely impact our business."

Financial Overview

Revenue

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

Research and Development Expenses

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

•expenses incurred under agreements with contract manufacturing organizations
("CMOs"), 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
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provided to us by our vendors. We expect our research and development expenses
will increase as we continue the manufacturing of preclinical and clinical
materials and manage the clinical trials of, and seek regulatory approval for,
our product candidates and expand our product portfolio. In the near term, we
expect that our research and development expenses will increase as we continue
our open label extension study for B-VEC, resume dosing with KB105 Phase 1/2
clinical trial, initiate a Phase 2 trial for KB301, initiate Phase 1 trials for
KB407, initiate a Phase 1 trial for KB104, 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.

General and Administrative Expenses

General and administrative expenses consist principally of salaries and other
related costs, including stock-based compensation, for personnel in our
executive, commercial, business development and other administrative functions.
General and administrative expenses also include professional fees associated
with corporate and intellectual property related legal expenses, consulting and
accounting services, facility-related costs and expenses associated with
obtaining and maintaining patents. Other general and administrative costs
include travel expenses.

We anticipate that our general and administrative expenses will increase in the
future to support the continued research and development of our product
candidates. 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 as a result of our preparation for commercial operations.

ASTRA Capital Expenditures

In March 2021, we closed on the purchase of the building that was constructed to
house our second CGMP facility, ASTRA. We are currently in the process of
constructing the interior build-out of this facility and we have entered into a
contract with Whiting-Turner who manages the construction of ASTRA. Further, we
have entered into various non-cancellable purchase agreements for long-lead
materials to help avoid potential schedule disruptions or material shortages.
These contracts typically call for the payment of fees for services or materials
upon the achievement of certain milestones. We expect to continue to incur
significant capital expenditures related to ASTRA as we construct and validate
the facility, which is expected to be completed in 2023.

Interest Income

Interest income consists primarily of income earned from our cash, cash
equivalents and investments.

Interest Expense

Interest expense consists primarily of non-cash interest expense recognized to
accrete the build to suit financial obligation to a balance that equaled the
cash consideration that was paid upon the close of the purchase of ASTRA.

Critical Accounting Policies and Significant Judgments and Estimates

Our management's discussion and analysis of our financial position and results
of operations is based on our financial statements, which have been prepared in
accordance with 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. On an ongoing basis, we evaluate estimates
which include, but are not limited to, estimates related to clinical trial and
contract manufacturing prepayments and accruals, stock-based compensation
expense, accrued expenses, the fair value of financial instruments, the
incremental borrowing rate for lease liabilities, and the valuation allowance
included in the deferred income tax calculation during the period. We base our
estimates on historical experience and other market-specific or other relevant
assumptions that we believe to be reasonable under the circumstances. Actual
results may differ materially from those estimates or assumptions.

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

Accrued Research and Development Expenses

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

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

Stock-Based Compensation

We have applied the fair value recognition provisions of Financial Accounting
Standards Board Accounting Standards Codification, or ASC, Topic
718, Compensation-Stock Compensation ("ASC 718"), to account for stock-based
compensation. We recognize compensation costs related to stock options granted
based on the estimated fair value of the awards on the date of grant. Described
below is the methodology we have utilized in measuring stock-based compensation
expense.

ASC 718 requires all stock-based payments, including grants of stock options and
restricted stock, to be recognized in the statements of operations based on
their grant-date fair values. Compensation expense is recognized on a
straight-line basis based on the grant-date fair value over the associated
service period of the award, which is generally the vesting term.

Determining the amount of stock-based compensation to be recorded requires us to
develop estimates of the fair value of stock-based awards as of their
measurement date. We recognize stock-based compensation expense over the
requisite service period, which is the vesting period of the award. Calculating
the fair value of stock-based awards requires that we make assumptions. We use
the Black-Scholes option pricing model to value our stock option awards. Use of
this valuation methodology requires that we make assumptions as to the
volatility of our common stock, the risk-free interest rate for a period that
approximates the expected term of our stock options and our expected dividend
yield. Once our own sufficient historical volatility data was obtained, we
eliminated the use of a representative peer group and as of Q4 2021 we use only
our own historical volatility data in its estimate of expected volatility given
that there is now sufficient amount of historical information regarding the
volatility of our own stock price. We use the simplified method to calculate the
expected term as prescribed by the SEC Staff Accounting Bulletin
No. 107, Share-Based Payment as we do not have sufficient historical stock
option activity data to provide a reasonable basis upon which to estimate the
expected term of stock options granted to employees. We utilize a dividend yield
of zero based on the fact that we have never paid cash dividends and have no
current intention of paying cash dividends. The risk-free interest rate used for
each grant is based on the U.S. Treasury yield curve in effect at the time of
grant for instruments with a similar expected life.

Leases

We account for our lease agreements in accordance with Financial Accounting
Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 842,
Leases ("ASC 842"). As our lease agreements do not provide an implicit rate and
as we do not have external borrowings, we use an estimated incremental borrowing
rate based on the information available at lease commencement in determining the
present value of lease payments. The incremental borrowing rate is the rate of
interest that we would expect to borrow on a collateralized and fully amortizing
basis over a similar term an amount equal to the lease payments in a similar
economic environment.

For lease arrangements where it has been determined that we have control over an
asset that is under construction and is thus considered the accounting owner of
the asset during the construction period, we record a construction-in-progress
asset ("CIP") and corresponding financial obligation on the consolidated balance
sheet. Once the construction is complete, an assessment will be performed to
determine whether the lease meets certain "sale-leaseback" criteria. If the
sale-leaseback criteria are determined to be met, we will remove the asset and
related financial obligation from the balance sheet and treat the building lease
as either an operating or finance lease based on our assessment of the guidance.
If, upon completion of construction, the project does not meet the
"sale-leaseback" criteria, the lease will be treated as a financing obligation
and we will depreciate the asset over its estimated useful life for financial
reporting purposes.
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Results of Operations

Years Ended December 31, 2022, 2021 and 2020

                                                              Years Ended December 31,                                 Change
                                                                                                             2022 vs.           2021 vs.
(in thousands)                                       2022                2021               2020               2021               2020
Expenses
Research and development                         $   42,461          $  27,884          $  17,936          $  14,577          $   9,948
General and administrative                           77,735             40,391             15,063             37,344             25,328
Litigation settlement                                25,000                  -                  -             25,000                  -
Total operating expenses                            145,196             68,275             32,999             76,921             35,276
Loss from operations                               (145,196)           (68,275)           (32,999)           (76,921)           (35,276)
Other Expense
Interest and other income, net                        5,221                197                832              5,024               (635)
Interest expense                                          -             (1,492)                 -              1,492             (1,492)
Total interest and other income, net                  5,221             (1,295)               832              6,516             (2,127)
Net loss                                         $ (139,975)         $ (69,570)         $ (32,167)         $ (70,405)         $ (37,403)

Research and Development Expenses

Research and development expenses increased $14.6 million for the year ended
December 31, 2022 compared to the year ended December 31, 2021. Higher research
and development expenses were due to increases in payroll related expenses of
$8.9 million which is primarily driven by an increase in personnel to support
overall growth and includes a $4.5 million increase in stock-based compensation,
an increase in outsourced research and development activities of $2.3 million,
an increase in preclinical, clinical and pre-commercial manufacturing activities
of $1.0 million, and an increase in other research and development expenses of
$2.4 million, primarily due to increases in depreciation and licensing fees.

Research and development expenses increased $9.9 million for the year ended
December 31, 2021 compared to the year ended December 31, 2020. Higher research
and development expenses were due to increases in preclinical, clinical and
pre-commercial manufacturing activities of $3.3 million, payroll related
expenses of approximately $3.1 million which is primarily driven by an increase
in personnel to support overall growth and includes a $2.4 million increase in
stock-based compensation, an increase in outsourced research and development
activities of $2.0 million, travel related expenses associated with our clinical
trial sites of $187 thousand, and other research and development expenses of
$1.3 million, primarily due to depreciation and rent.

General and Administrative Expenses

General and administrative expenses increased $37.3 million for the year ended
December 31, 2022 compared to the year ended December 31, 2021. Higher general
and administrative spending was due largely to increased payroll related
expenses of approximately $28.8 million which is primarily driven by an increase
in personnel to support overall growth and includes an approximate $13.4 million
increase in stock-based compensation, increased commercial preparedness expenses
of approximately $5.7 million, increased medical affairs costs of $581 thousand,
increased travel costs of $536 thousand, and an increase in other administrative
expenses of $2.9 million, primarily due to increases in utilities, information
technology costs, and conference fees. These increases were partially offset by
a decrease in net legal costs of $1.2 million, which consists of a decrease in
legal and professional fees of $2.8 million offset by a decrease in litigation
proceeds of approximately $1.6 million, due primarily to the settlement of the
PeriphaGen litigation.

General and administrative expenses increased $25.3 million for the year ended
December 31, 2021 compared to the year ended December 31, 2020. Higher general
and administrative spending was due largely to increased payroll related
expenses of approximately $14.7 million which is primarily driven by an increase
in personnel to support overall growth and includes an approximate $9.6 million
increase in stock-based compensation, commercial preparedness expenses of
approximately $3.8 million, legal and professional fees of approximately
$3.7 million which is net of $2.1 million of insurance proceeds, software
related costs of $1.0 million, medical affairs costs of $508 thousand, insurance
costs of $427 thousand and other administrative expenses of $1.2 million.

Litigation settlement

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We incurred litigation settlement expenses for the year ended December 31, 2022
of $25.0 million, which consisted of the settlement of litigation with
PeriphaGen. See "Legal Proceedings" in Note 6 of the notes to consolidated
financial statements included in this Form 10-K for more information.

Other Income (Expense)

Interest and other income for the year ended December 31, 2022, 2021, and 2020
was $5.2 million, $197 thousand and $832 thousand, respectively, and consisted
of realized gains from maturities of our investments, interest, and dividend
income earned from our cash, cash equivalents and investments.

Interest expense for the year ended December 31, 2022, 2021 and 2020 was zero,
$1.5 million, and zero, respectively. The 2021 interest expense related to
accretion of the financial obligation for the build to suit lease liability
during the year ended December 31, 2021 to a balance that equaled the purchase
consideration for ASTRA.

Liquidity and Capital Resources

Overview

On December 31, 2022, our cash, cash equivalents and short-term investments
balance was approximately $379.2 million. Since operations began, we have
incurred operating losses. Our net losses were $140.0 million, $69.6 million,
and $32.2 million for the years ended December 31, 2022, 2021, and 2020
respectively. At December 31, 2022, we had an accumulated deficit of $280.8
million. With the net proceeds raised from our previous public offerings, we
believe that our cash, cash equivalents and short-term investments will be
sufficient to allow us to fund our operations for at least 12 months from the
filing date of this Form 10-K.

As we continue to incur losses, a transition to profitability is dependent upon
the successful development, approval and commercialization of our product
candidates and the achievement of a level of revenues adequate to support our
cost structure. Furthermore, we expect to incur increasing costs associated with
satisfying regulatory and quality standards, maintaining product and clinical
trials, and furthering our efforts around our current and future product
candidates. We may never achieve profitability, and until we do, the Company
will continue to need to raise additional capital or obtain financing from 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 our continued clinical
studies of B-VEC, KB105, KB301 or our planned clinical and preclinical studies
for our other product candidates, or our operations. Further, we do not expect
to generate any product revenues in the first quarter of 2023, assuming we
receive marketing approval for B-VEC on the schedule we currently contemplate.
While we are in the process of building out our internal vector manufacturing
capacity, some of our manufacturing activities will be contracted out to third
parties. Additionally, we currently utilize third-party Contract Research
Organizations ("CROs") to carry out some of our clinical development activities.
As we seek to obtain regulatory approval for any of 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 $12.5 million upon the
approval of our first product by the FDA, followed by three additional $12.5
million contingent milestone payments upon reaching $100.0 million in total
cumulative sales, $200.0 million in total cumulative sales and $300.0 million in
total cumulative sales. Our funds may not be sufficient to enable us to conduct
pivotal clinical trials for, seek marketing approval for or commercially launch
B-VEC, KB105, KB301 or any other product candidate. Accordingly, to obtain
marketing approval for and to commercialize these or any other product
candidates, we may be required to obtain further funding through public or
private equity offerings, debt financings, collaboration and licensing
arrangements or other sources. Adequate additional financing may not be
available to us on acceptable terms, if at all. Our failure to raise capital
when needed could have a negative effect on our financial condition and our
ability to pursue our business strategy.

Operating Capital Requirements

Our primary uses of capital are, and we expect will continue to be for the near
future, compensation and related expenses, manufacturing costs for preclinical
and clinical materials, third-party clinical trial research and development
services, laboratory and related supplies, clinical costs, legal and other
regulatory expenses, 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
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with research, development and commercialization of pharmaceutical products, we
are unable to estimate the exact amount of our operating capital requirements.
Our future funding requirements will depend on many factors, including, but not
limited to:

•the timeline and cost of our OLE study for B-VEC;

•the progress, timing and costs of our ongoing Phase 1/2 clinical trials for
KB105;

•the progress, results and costs of our Phase 2 clinical trials for KB301;

•the progress, results and costs of our Phase 1 clinical trials for KB407;

•the progress, timing, and costs of manufacturing of B-VEC;

•the continued development and the filing of an IND application for future
product candidates;

•the initiation, scope, progress, timing, costs and results of drug discovery,
laboratory testing, manufacturing, preclinical studies and clinical trials for
any other product candidates that we may pursue in the future, if any;

•the costs of maintaining our own commercial-scale CGMP manufacturing
facilities;

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

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

•the extent to which the costs of our product candidates, if approved, will be
paid by health maintenance, managed care, pharmacy benefit and similar
healthcare management organizations, or will be reimbursed by government
authorities, private health coverage insurers and other third-party payors;

•the costs of commercialization activities for our current and future product
candidates if we receive marketing approval for such product candidates we may
develop, including the costs and timing of establishing product sales, medical
affairs, marketing, distribution and manufacturing capabilities;

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

Contractual Obligations

Operating Leases

Operating lease payments represent our commitments for future minimum rent made
under non-cancelable leases for our corporate headquarters in Pittsburgh,
Pennsylvania, office location in Boston, Massachusetts, office locations in
Switzerland and Netherlands, and for the ground lease associated with our second
CGMP manufacturing facility, ASTRA. The
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total future payments for our operating lease obligations at December 31, 2022
are $17.8 million, of which $1.6 million is due in the next twelve months and
the remaining payments are due over the terms of the respective leases. For
additional details regarding our leases, see Note 7 to our consolidated
financial statements included in this Annual Report on Form 10-K.

Clinical Supply and Product Manufacturing Agreements

We enter into various agreements in the normal course of business with CROs,
CMOs and other third parties for preclinical research studies, clinical trials
and testing and manufacturing services. We are obligated to make milestone
payments under certain of these agreements. The estimated remaining commitment
as of December 31, 2022 under these agreements is approximately $2.1 million,
all of which is expected to be due in the next twelve months.

Commercial Preparedness Agreements

We have contracted with various third parties to facilitate, coordinate and
perform agreed upon commercial preparedness and market research activities
relating to our lead product candidate, B-VEC. These contracts typically call
for the payment of fees for services upon the achievement of certain milestones.
The estimated remaining commitment as of December 31, 2022 is $8.4 million, all
of which is expected to be due in the next twelve months.

ASTRA Contractual Obligations

We have contracted with various third parties to construct our second CGMP
facility, ASTRA. Additionally, we have entered into various non-cancellable
purchase agreements for long-lead materials to help avoid potential schedule
disruptions or material shortages. These contracts typically call for the
payment of fees for services or materials upon the achievement of certain
milestones. The estimated remaining commitment as of December 31, 2022 is
$16.3 million, all of which is expected to be due in the next twelve months.

Cash Flows

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

Years Ended December 31,

                                                               2022                2021               2020
Net cash used in operating activities                      $ (100,569)         $ (47,938)         $  (26,083)
Net cash used in investing activities                        (114,083)          (226,770)            (11,181)
Net cash provided by financing activities                      35,347            347,685             118,019
Effect of exchange rate changes on cash and cash
equivalents                                                       (41)                 -                   -
Net change in cash                                         $ (179,346)         $  72,977          $   80,755


Operating Activities

Net cash used in operating activities for the year December 31, 2022 was $100.6
million and consisted primarily of a net loss of $140.0 million adjusted for
non-cash items of $36.6 million primarily made up of stock-based compensation
expense of $33.2 million and depreciation and amortization of $4.1 million, and
cash provided by decreases in net working capital of approximately $2.8 million.

Net cash used in operating activities for the year December 31, 2021 was $47.9
million and consisted primarily of a net loss of $69.6 million adjusted for
non-cash items of $19.1 million primarily made up of stock-based compensation
expense of $15.3 million, depreciation and amortization of $2.8 million and
build to suit interest expense of $1.5 million, and cash provided by decreases
in net working capital of approximately $2.5 million.

Net cash used in operating activities for the year ended December 31, 2020 was
$26.1 million and consisted primarily of a net loss of $32.2 million adjusted
for non-cash items of $5.2 million primarily made up of depreciation and
amortization of $1.9 million and stock-based compensation expense of $3.3
million, and cash provided by decreases in net working capital of approximately
$918 thousand.

Investing Activities

Net cash used in investing activities for the year ended December 31, 2022 was
approximately $114.1 million and consisted primarily of purchases of $318.8
million of available-for-sale investment securities, and expenditures of $53.0
million on the build-out of our ASTRA facility, leasehold improvement of new
office space, and purchases of computer and laboratory equipment, partially
offset by proceeds of $257.7 million from maturities of investments.
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Net cash used in investing activities for the year ended December 31, 2021 was
approximately $226.8 million and consisted primarily of purchases of $190.5
million of available-for-sale investment securities, and expenditures of $68.3
million on the build-out of our ASTRA facility, leasehold improvement of new
office space, and purchases of computer and laboratory equipment, partially
offset by proceeds of $32.0 million from maturities of investments.

Net cash used in investing activities for the year ended December 31, 2020 was
$11.2 million and consisted primarily of purchases of $3.2 million of short-term
available-for-sale investment securities, and expenditures of $14.8 million on
the build-out of our ASTRA facility, leasehold improvement of new office space,
and purchases of computer and laboratory equipment, partially offset by proceeds
of $6.9 million from maturities of short-term investments.

Financing Activities

Net cash provided by financing activities for the year ended December 31, 2022
was $35.3 million and was primarily from proceeds from public offerings of
434,782 shares of our common stock at a weighted average price of $69.00 per
share through our at-the-market equity offering program ("ATM") Program. Our net
proceeds from the offerings were $29.1 million after deducting underwriting
discounts and commissions of approximately $900 thousand. Additionally, we
received $7.0 million of proceeds related to the exercise and settlement of
employee stock options and restricted stock awards, offset by $649 thousand of
taxes paid for the settlement of restricted stock awards.

Net cash provided by financing activities for the year ended December 31, 2021
was $347.7 million and was primarily from proceeds from follow-on public
offerings of 2,211,538 shares of its common stock, including 288,461 shares
purchased by the underwriters, at $65.00 per share and 2,866,667 shares of its
common stock, including 200,000 shares purchased by the underwriters, at $75.00
per share. Our net proceeds from the offerings were $336.8 million after
deducting underwriting discounts and commissions of approximately $21.5 million,
and other offering expenses payable of $425 thousand.

Net cash provided by financing activities for the year ended December 31, 2020
was $118.0 million and was primarily from proceeds from our public offering in
May 2020 of 2,275,000 shares of our common stock to the public at $55 per share.
Our net proceeds from the offering were $117.2 million after deducting
underwriting and commissions of approximately $7.5 million and other offering
expenses of approximately $463 thousand.

Recent Accounting Pronouncements

See note 2 to our consolidated financial statements.

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