KRYSTAL BIOTECH, INC. – 10-Q – 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, 2022, as filed with the SEC on February 27, 2023.

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 initiation, timing, cost, progress and results, of our research and
development activities, preclinical studies and clinical trials for B-VEC
(previously "KB103" and now known as VyjuvekTM) and our other product
candidates;

•the timing, scope or results of regulatory filings and approvals, including
timing of final U.S. Food and Drug Administration ("FDA") and other regulatory
approval of our product candidates;

•our ability to achieve certain accelerated or orphan drug designations from the
FDA;

•changes in our estimates regarding the potential market opportunity for B-VEC
and our other product candidates;

•our ability to raise capital to fund our operations;

•increases in costs associated with our research and development programs for
our product candidates;

•our general and administrative expenses;

•risks related to our ability to successfully develop and commercialize our
product candidates;

•our ability to identify and develop 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 cost of building a medical affairs and commercial organization, including a
sales force in anticipation of commercialization of any of our product
candidates;

•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 financial performance;

•our ability to establish and maintain collaborations;

•our estimates regarding expenses, future revenue, capital requirements and
needs for additional financing;

•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 recent bank failures; and

•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 "Risk Factors" in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2022 and in other filings we

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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. Also,
forward-looking statements represent our management's beliefs and assumptions
only as of the date of this Quarterly Report. You should read this Quarterly
Report completely and with the understanding that our actual future results may
be materially different from what we expect.

Except as required by law, we assume no obligation to update these
forward-looking statements publicly, or to update the reasons actual results
could differ materially from those anticipated in these forward-looking
statements, even if new information becomes available in the future.

Throughout this Form 10-Q, unless the context requires otherwise, all references
to "Krystal," "the Company," we," "our," "us" or similar terms refer 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 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.


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Our Product Candidates

The following table summarizes information regarding our product candidates in
various stages of clinical and preclinical development:

                  [[Image Removed: Pipeline Chart Q1 23.jpg]]

There can be no assurance that the upcoming milestones will be met on the
expected timeline or at all.

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Pipeline Highlights and Recent Developments

                                  Dermatology

Beremagene geperpavec ("B-VEC") is a topical gel containing our novel vector
designed to deliver two copies of the COL7A1 transgene for the treatment of
dystrophic epidermolysis bullosa ("DEB"), a serious rare skin disease caused by
missing or mutated COL7 protein. We submitted a Biologics License Application
("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.
The action date for B-VEC is May 19, 2023. We submitted a request for a
Marketing Authorization Application ("MAA") with the European Medicines Agency
("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
Pediatric Investigation Plan ("PIP") waiver request to include patients between
birth and 6 months. The Company has modified and submitted the PIP waiver 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-deficient autosomal
recessive congenital ichthyosis ("TGM1-ARCI"), a serious rare skin disorder
caused by missing or mutated TGM1 protein. A randomized, placebo-controlled
Phase 1/2 study is ongoing. In July 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. We plan to initiate a Phase 2 study in the first half of 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 Investigational New Drug
("IND") application and initiate a clinical trial of KB104 to treat patients
with Netherton Syndrome in 2023.

                                  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, a serious
rare lung disease caused by missing or mutated CFTR protein. In September 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 the first
half of 2023. Details of the Phase 1 study can be found at
www.clinicaltrials.gove under NCT identifier NCT05095246. 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. Details of the Phase 1
study can be found at www.clinicaltrials.gov under NCT identifier NCT05504837.
We are closely working with the Therapeutics Development Network of the Cystic
Fibrosis Foundation to validate our Phase 1 clinical protocol. We plan to
initiate a Phase 1 clinical trial in the U.S. in the 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 the
second half of 2023.

                                   Aesthetics

We are also 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 March 2021, Jeune announced that data
from the safety cohort of a Phase 1 clinical trial, the PEARL-1 trial, for the
treatment of aesthetic skin conditions, showed the safety and tolerability of
repeat KB301 injections. Complete results from the safety cohort of the PEARL-1
trial were presented at the 2021 Society for Investigative Dermatology Annual
Meeting. In 2022, we completed efficacy and durability cohorts of the PEARL-1
trial. In March 2022, Jeune announced positive proof-of-concept, safety and
efficacy data with respect to improvement of fine lines and wrinkles from the
efficacy cohort of the PEARL-1 trial. In November 2022, Jeune announced data
from the PEARL-1 extension cohort showing up to nine-month durability of effect
following administration of high dose KB301. Details of the Phase 1 study can be
found at www.clinicaltrials.gov under NCT identifier (NCT04540900).

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Jeune has several other aesthetic medicine product candidates in various stages
of preclinical development as reflected in the chart above.

Business Highlights and Recent Developments

•In April 2023, the Company presented new data on the compassionate use of
topical B-VEC to treat a patient with DEB with recurrent cicatrizing
conjunctivitis at the Association for Research in Vision and Ophthalmology
(ARVO) 2023 Annual Meeting. The patient underwent surgical symblepharon lysis
with pannus removal in the right eye. B-VEC was administered to the patient's
right eye at regular intervals following surgery in addition to routine
post-surgical management. B-VEC was well tolerated and associated with full
corneal healing by 3 months as well as significant visual acuity improvement
from hand motion to 20/40 at 7 months, the latest time point of the on-going
treatment effect evaluation.

•In April 2023, the Company was informed by the Ministry of Health, Labour and
Welfare (MHLW) of Japan that B-VEC was confirmed as safe for importation under
the Cartagena Act. With the approval for importation of B-VEC under the
Cartagena Act, we intend to start a small open label extension ("OLE") study of
B-VEC in Japan with an approval in Japan expected in early 2025.

•In April 2023, Jeune treated the first subject in the Phase 1, Cohort 3 study
of KB301 for the improvement of lateral canthal lines at rest. The Phase 1,
Cohort 3 study is being conducted at a single center as an open label study to
evaluate two different doses of KB301 in up to 20 subjects. Improvement of
lateral canthal lines at rest ("LCL") was selected as a target indication for
KB301 based upon the Phase 1 safety, efficacy and durability studies, which
evaluated KB301 in the lower and upper cheek, including the lateral canthal
region. Subjects will be followed for three months after KB301 treatment, and
the study is expected to be completed in the second half of 2023. Following
completion of this study, Jeune plans to initiate a Phase 2 study of KB301 in
LCL.

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. Outside of the U.S., we experienced
pandemic-related delays in clinical trial initiation in Australia. We will
closely monitor any potential impact that future public health crises may have
on our clinical trials. For additional information, please see "The effect of
the COVID-19 pandemic or similar public health crises on our operations and the
operations of our third-party partners could cause a disruption of the
development efforts for our product candidates and adversely impact our
business" in our Annual Report on Form 10-K for the fiscal year ended December
31, 2022.

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,
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.

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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, continue the Phase
1, Cohort 3 study and 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 and our commercial and operational goals. 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. The Company
placed a portion of ASTRA into service during the three months ended March 31,
2023 as it was determined that certain assets were ready for their intended use.
On March 27, 2023, the Company received the permanent occupancy permit for ASTRA
which allowed the Company to begin utilizing certain portions of the building.
As certain building improvements and certain qualification activities are still
underway, the Company will continue to hold the remaining assets within
construction in progress until validation has been completed and the assets are
ready for their intended use. Validation of the facility is expected to be
completed in 2023.

Interest and Other Income

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

Critical Accounting Policies, and Significant Judgments and Estimates

There have been no significant changes during the three months ended March 31,
2023 to our critical accounting policies, significant judgments and estimates as
disclosed in our management's discussion and analysis of financial condition and
results of operations included in our Annual Report on Form 10-K for the year
ended December 31, 2022.

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Results of Operations

Three Months Ended March 31, 2023 and 2022

                                            Three Months Ended March 31,
                                                2023                   2022          Change
    (In thousands)                                  (unaudited)
    Expenses
    Research and development         $        12,288                $  

9,314 $ 2,974

    General and administrative                24,035                   15,908         8,127
    Litigation settlement                     12,500                   25,000       (12,500)
    Total operating expenses                  48,823                   50,222        (1,399)
    Loss from operations                     (48,823)                 (50,222)        1,399
    Other Income
    Interest and other income, net             3,526                      257         3,269

    Net loss                         $       (45,297)               $ (49,965)     $  4,668

Research and Development Expenses

Research and development expenses increased $3.0 million in the three months
ended March 31, 2023 compared to the three months ended March 31, 2022. The
increase was primarily due to increased payroll related expenses of $2.4
million, which were primarily driven by an increase in headcount to support
overall growth, and includes a $1.1 million increase in stock-based
compensation, an increase in outsourced research and development activities of
$432 thousand, and increased other research and development expenses of $1.2
million, primarily due to depreciation, facilities expenses, license and
regulatory fees, and software related costs. The increase was partially offset
by decreases in preclinical, clinical and pre-commercial manufacturing expenses
of $1.0 million, due to fewer receipts of raw materials and lab supplies period
over period that were purchased for planned manufacturing runs of the Company's
products.

Research and development expenses consist primarily of costs relating to the
preclinical and clinical development of our product candidates and preclinical
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 pre-clinical 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.

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The following table summarizes our research and development expense by product
candidate or program, and for unallocated expenses, by type, for the quarters
ended March 31, 2023 and 2022:

                                                              Three Months Ended March 31,
(in thousands)                                               2023                    2022                    Change
B-VEC                                                   $         2,387       $            1,543       $               844
KB105                                                            231                     22            $               209
KB407                                                            377                    391            $              (14)
KB301                                                            250                    207            $                43
Other dermatology programs                                         8                      6            $                 2
Other respiratory programs                                       112                     22            $                90
Other aesthetics programs                                         13                     14            $               (1)
Other research programs                                          596                    211            $               385
Other development programs                                       335                    146            $               189
Stock-based compensation                                       2,496                  1,368            $             1,128
Other unallocated manufacturing expenses(1)                    3,919                  4,502            $             (583)
Other unallocated expenses(2)                                  1,564                    882            $               682
Research and development expense                        $        12,288       $            9,314       $             2,974

(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.

As noted above, research and development expense increased $3.0 million in the
three months ended March 31, 2023 compared to the three months ended March 31,
2022. Expenses for B-VEC increased $844 thousand, due to increased payroll
related expenses to support pre-approval activities, clinical trial costs,
license and regulatory costs and increased allocated research and development
expenses. KB105 and other development programs spending increased primarily due
to payroll related costs. Spending on other research programs increased by $385
thousand due primarily to increased internal resources and other payroll related
costs and an increase from allocated research and development expenses.
Stock-based compensation increased $1.1 million due to an increase in internal
resources to support overall research and development growth. Additionally,
other unallocated expenses increased $682 thousand primarily related to
increases in depreciation expense. These increases were offset by a decrease in
other unallocated manufacturing expenses of $583 thousand due to fewer receipts
of raw materials period over period that were purchased for planned
manufacturing runs of the Company's products.

General and Administrative Expenses

General and administrative expenses increased $8.1 million in the three months
ended March 31, 2023 as compared to the three months ended March 31, 2022.
Higher general and administrative spending was due largely to increases in
payroll related expenses of approximately $7.0 million, which was primarily
driven by an increase in headcount in our commercial and other administrative
functions to support overall growth and preparation for commercialization, and
includes a $2.9 million increase in stock-based compensation, increased
marketing costs of $919 thousand, increased software-related costs of $253
thousand, increased travel related costs of $232 thousand, and an increase in
other general and administrative expenses of $456 thousand, which consisted
primarily of increased information technology costs and utilities costs. These
increases were partially offset by a net decrease of legal costs of $434
thousand, which consists of decreased legal and professional fees of $943
thousand offset by a decrease in litigation related insurance proceeds of
approximately $509 thousand, due primarily to the settlement of the PeriphaGen
litigation, and a decrease in medical affairs costs of $277 thousand.

Litigation Settlement

Litigation settlement for the three months ended March 31, 2023 and 2022 was
$12.5 million and $25.0 million, respectively, and consisted of amounts related
to the settlement of litigation with PeriphaGen. For the three months ended
March 31, 2023, in accordance with ASC Topic 450, Contingencies, we determined
that FDA approval of B-VEC was probable, and recorded expense relating to the
first milestone payment, which becomes payable upon the approval of our first
product by

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the FDA. See "Legal Proceedings" in Note 6 of the notes to condensed
consolidated financial statements included in this Form 10-Q for more
information.

Interest and Other Income

Interest and other income for the three months ended March 31, 2023 and 2022 was
$3.5 million and $257 thousand, 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.

Liquidity and Capital Resources

Overview

At March 31, 2023, our cash, cash equivalents and short-term investments balance
was approximately $350.4 million. Since operations began, we have incurred
operating losses. Our net losses were $45.3 million and $50.0 million for the
three months ended March 31, 2023 and 2022, respectively. At March 31, 2023, we
had an accumulated deficit of $326.1 million. We believe that our cash, cash
equivalents and short-term investments as of March 31, 2023 will be sufficient
to allow us to fund operations for at least 12 months from the filing date of
this Quarterly Report on Form 10-Q.

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 unless and until we do, we
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, KB407, 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 until 3Q 2023, at the earliest, assuming
we receive marketing approval for B-VEC on the schedule we currently
contemplate. While we are in the process of building out our internal vector
manufacturing capacity, 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 $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, KB407, 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, pre-commercialization 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 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;

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•the progress, timing and costs of our Phase 1, Cohort 3 study and Phase 2
clinical trials for KB301;

•the progress, timing and costs of our KB407 clinical trials;

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

•the continued development and the filing of an IND application 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 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 the 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.

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Sources and Uses of Cash

The following table summarizes our sources and uses of cash for the three months
ended March 31, 2023 and 2022 (in thousands):

Three Months Ended March 31,

                                                                           2023                  2022
                                                                            

(unaudited)

Net cash used in operating activities                                       (26,156)            (15,493)
Net cash provided by (used in) investing activities                           3,563             (55,908)
Net cash provided by (used in) financing activities                           1,474                (542)
Effect of exchange rate changes on cash and cash equivalents                    (36)                  -
Net decrease in cash                                                $       (21,155)         $  (71,943)


Operating Activities

Net cash used in operating activities for the three months ended March 31, 2023
was $26.2 million and consisted primarily of a net loss of $45.3 million
adjusted for non-cash items primarily comprised of stock-based compensation
expense of $10.4 million and depreciation and amortization of $705 thousand, and
cash provided by decreases in net working capital of approximately $8.6 million
which includes an increase in accrued legal settlement of $12.5 million.

Net cash used in operating activities for the three months ended March 31, 2022
was $15.5 million and consisted primarily of a net loss of $50.0 million
adjusted for non-cash items primarily of depreciation and amortization and
stock-based compensation expense of $7.3 million, and cash provided by decreases
in net working capital of approximately $27.2 million which includes an increase
in accrued legal settlement of $25.0 million.

Investing Activities

Net cash provided by investing activities for the three months ended March 31,
2023 was $3.6 million and consisted primarily of proceeds of $154.5 million
received from the maturities of short-term investments, partially offset by
expenditures of $5.4 million on the build-out of our ASTRA facility, leasehold
improvement of new office space, and purchases of computer and laboratory
equipment, and $145.6 million on the purchase of short-term and long-term
investments.

Net cash used in investing activities for the three months ended March 31, 2022
was $55.9 million and consisted primarily of expenditures of $17.2 million on
the build-out of our ASTRA facility, leasehold improvement of new office space,
and purchases of computer and laboratory equipment, $62.8 million on the
purchase of short-term and long-term investments, partially offset by proceeds
of $24.0 million received from the maturities of short-term investments.

Financing Activities

Net cash provided by financing activities for the three months ended March 31,
2023 was $1.5 million and consisted primarily of proceeds of $2.2 million
received from exercises of stock options and partially offset by $749 thousand
used for the employee tax withholding payment for settlement of vested
restricted stock awards.

Net cash used by financing activities for the three months ended March 31, 2022
was $542 thousand and consisted primarily of proceeds of $107 thousand received
from exercises of stock options and offset by $649 thousand used for the
employee tax withholding payment for settlement of vested restricted stock
awards.




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