KRYS US Equity☆

Item 7. 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 U.S. Securities and Exchange Commission, or 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 2023, 2022 and 2021 items and year-to-year comparisons between 2023 and 2022, and 2022 and 2021 of the Company’s results of operations and cash flows.

Overview

We are a fully integrated, commercial-stage biotechnology company focused on the discovery, development, 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 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 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 and serious diseases. Our innovative technology platform is supported by an in-house, FDA-inspected, commercial scale Current Good Manufacturing Practice (“CGMP”) manufacturing facility and a second, completed and qualified, commercial scale CGMP facility to support future expansion. Refer to Part I, Item 1 - Business for more information about our United States Food and Drug Administration (“FDA”) approved product, VYJUVEK®, clinical development pipeline and research programs, and the status of our product candidates.

Highlights and Recent Developments

VYJUVEK (beremagene geperpavec-svdt or B-VEC; referred to as B-VEC outside the U.S.)

In May 2023, the FDA approved B-VEC for the treatment of patients, six months of age or older, suffering from dystrophic epidermolysis bullosa (“DEB”). FDA approval was based, in part, on our pivotal Phase 3 clinical trial, a randomized, double-blind, intra-patient placebo-controlled multi-center study, that demonstrated that B-VEC was both well-tolerated and significantly improved wound closure in DEB patients. Clinical data from our registrational Phase 3 B-VEC trial were published in the New England Journal of Medicine in December 2022. B-VEC is marketed as VYJUVEK in the United States and is the first and only corrective medicine approved by the FDA for the treatment of DEB, both recessive and dominant. VYJUVEK can be administered by a healthcare professional in either a healthcare professional or home setting.

We launched VYJUVEK in the United States in the second quarter of 2023. Net product revenue for VYJUVEK for the year ended December 31, 2023 was $50.7 million.

We have made steady progress securing access and reimbursement for VYJUVEK since launch and have secured positive policies or coverage decisions from plans covering over 93% of commercial and Medicaid lives in the United States. In January 2024, we announced that the United States Centers for Medicare & Medicaid Services, or CMS, had assigned a permanent and product-specific J-code (J3401) for VYJUVEK, effective on January 1, 2024.

We seek to make the patient experience of starting and continuing on VYJUVEK treatment as seamless as possible. Since launch, the infrastructure has been in place for patients to be treated in their home by a healthcare provider, or 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. Through the end of 2023, patient compliance with once weekly VYJUVEK treatment has been 96%.

We continue to pursue development and commercialization activities to maximize access to B-VEC in the United States and globally. Recent highlights subsequent to FDA approval are summarized below:

70

•In December 2023, B-VEC was granted orphan drug designation, or ODD, status for the treatment of DEB by the Japan Ministry of Health, Labour and Welfare, a designation which confers specific benefits for orphan drug development including priority review of applications, extended registration validity, and reduced development costs. We anticipate filing our Japan New Drug Application with Japan’s Pharmaceuticals and Medical Devices Agency (“PMDA”) in the second half of 2024 enabling a potential authorization in 2025

•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 patients from birth. In November 2023, we were notified that the MAA had been validated and was now under Committee for Medicinal Products for Human Use review. We expect an EMA decision on our MAA in the second half of 2024.

•In July 2023, the PMDA in Japan officially accepted the open label extension (“OLE”) study of B-VEC. Following that acceptance, we initiated the Japan OLE study and completed study enrollment. A total of 5 Japanese DEB patients have been enrolled. Details of the study can be found at jrct.niph.go.jp under JRCT ID jRCT2053230075. Nothing included on this website shall be deemed incorporated by reference into this Annual Report on Form 10-K.

•In April 2023, we announced clinical data on the compassionate use of B-VEC, administered as an eye drop, to treat a patient suffering from ocular complications of DEB. Data were first presented at the Association for Research in Vision and Ophthalmology 2023 Annual Meeting in April 2023, 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 to align on a potential clinical development path for ophthalmic B-VEC.

•In January 2024, the United States Patent and Trademark Office, or USPTO, issued U.S. Patent No. 11,865,148, covering methods of delivering human transgenes to the eye using replication-incompetent HSV-1. This patent covers the administration of B-VEC to the eye, as well as novel applications of our HSV-1 based platform to deliver genetic material to the eye via multiple routes of administration for the potential treatment of genetic eye diseases. The patent expires in 2037. Refer to Part I, Item 1 - Business for more information about our intellectual property and issued patents.

•In February 2024, the FDA agreed with our proposed single arm, open label study in approximately 10 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 this study in the second half of 2024.

Pipeline

•KB407 is an inhaled (nebulized) formulation of our novel vector designed to deliver two copies of the full-length cystic fibrosis transmembrane conductance regulator, or CFTR, transgene for the treatment of cystic fibrosis (“CF”), a serious rare lung disease caused by missing or mutated CFTR protein. In August 2022, we announced that the FDA had accepted our investigational new drug (“IND”) application to evaluate KB407 in a clinical trial to treat patients with cystic fibrosis. In July 2023, we dosed the first patient in our Phase 1 CORAL-1 study evaluating KB407, delivered via a nebulizer, for the treatment of patients with CF. The CORAL-1 study is a multi-center, dose-escalation trial of KB407 in patients with CF, regardless of their underlying genotype. In the fourth quarter of 2023, we completed the first cohort of the CORAL-1 study with no severe or serious adverse events and, in January 2024, we initiated dosing in the second of three cohorts. Details of the Phase 1 study can be found at www.clinicaltrials.gov under NCT identifier NCT05504837. Nothing included on this website shall be deemed incorporated by reference into this Annual Report on Form 10-K. In January 2023, the European Commission granted Orphan Designation for KB407 for the treatment of CF.

•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, or AATD. In September 2023, the FDA accepted our IND application to evaluate KB408, delivered via a nebulizer, in a clinical trial to treat patients with AATD. In February 2024, the Company dosed the first patient in the KB408 Phase 1 SERPENTINE-1 study for the treatment of Alpha-1 Antitrypsin Deficiency. SERPENTINE-1 is a Phase 1 open-label, single dose escalation study in adult patients with AATD with a PI*ZZ genotype. Three planned dose levels of KB408 will be evaluated in up to 12 patients to evaluate the safety, tolerability, and proof-of-mechanism of KB408. Cohorts 1 and 2 will focus predominantly on safety with dose escalation and pharmacodynamic activity in the lung will be assessed at the highest dose by bronchoscopy in Cohort 3. We are working closely with the Alpha-1 Foundation and their Therapeutic Development Network on SERPENTINE-1 study and intend to announce interim data from the study in the second half of 2024. The FDA granted ODD to KB408 for the treatment of AATD in September 2023. We presented preclinical pharmacology data for KB408 at the European Society of Gene & Cell Therapy Congress that was held in October 2023.

71

•KB707 is a redosable, immunotherapy designed to deliver genes encoding both human IL-2 and 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. In July 2023, the FDA granted intratumoral KB707 Fast Track Designation for the treatment of anti-PD-1 relapsed/refractory locally advanced or metastatic melanoma and accepted our IND application to evaluate intratumoral KB707 in a clinical trial to treat patients with locally advanced or metastatic solid tumors. The study, OPAL-1, is an open-label, multi-center, monotherapy, dose escalation and expansion Phase 1 study, enrolling 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. We dosed the first patient in the OPAL-1 study in October 2023 and enrollment is ongoing. Details of the Phase 1 study can be found at www.clinicaltrials.gov under NCT identifier NCT05970497. Nothing included on this website shall be deemed incorporated by reference into this Annual Report on Form 10-K. We presented preclinical efficacy data generated in syngeneic mouse models using murine equivalents to KB707 at the Society for Immunotherapy in Cancer Annual Meeting that was held in November 2023.

•In January 2024, the FDA accepted an amendment to our IND application to evaluate inhaled KB707 in a clinical trial to treat patients with locally advanced or metastatic solid tumors of the lung. We plan on initiating this open-label, multi-center, monotherapy, dose escalation and expansion Phase 1 study, KYANITE-1, in the first half of 2024. Details of the Phase 1 study can be found at www.clinicaltrials.gov under NCT identifier NCT06228326. Nothing included on this website shall be deemed incorporated by reference into this Annual Report on Form 10-K. Inhaled KB707 also received Fast Track Designation from the FDA in February 2024, for the treatment of patients with solid tumors with pulmonary metastases that are relapsed or refractory to standard of care therapy.

•In October 2023, the USPTO issued U.S. Patent No. 11,779,660, covering compositions of matter containing engineered HSV constructs encoding IL-2 and IL-12, including KB707. The patent expires in 2042. Refer to Part I, Item 1 - Business for more information about our intellectual property and issued patents.

•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 TGM1-deficientautosomal recessive congenital ichthyosis, 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. Nothing included on this website shall be deemed incorporated by reference into this Annual Report on Form 10-K. We plan to resume enrollment in the Phase 2 portion of this trial later in 2024. In August 2023, the USPTO issued U.S. Patent No. 11,717,547, the second composition of matter and method of use patent related to KB105. The patent expires in 2039. Refer to Part I, Item 1 - Business for more information about our intellectual property and issued patents.

•KB104 is a topical gel formulation of our novel vector designed to deliver two copies of the SPINK5 transgene encoding serine protease inhibitor Kazal-type 5 (“SPINK5”) 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 application and initiate a clinical trial of KB104 to treat patients with Netherton Syndrome following initiation of the KB105 Phase 2 study. In May 2023, the USPTO issued U.S. Patent No. 11,642,384, covering compositions of matter containing replication-defective HSV constructs encoding SPINK5, including KB104. The patent expires in 2039. Refer to Part I, Item 1 – Business for more information about our intellectual property and issued patents.

•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 Aesthetics, Inc. (“Jeune Aesthetics”), our wholly-owned subsidiary, initiated and treated the first subject in the 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, or LCL, at rest in up to 20 subjects. In January 2024, Jeune Aesthetics 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. These studies are running simultaneously, and Jeune Aesthetics expects to announce results for both cohorts in the first half of 2024. Following completion of this study, Jeune Aesthetics 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. Nothing included on this website shall be deemed incorporated by reference into this Annual Report on Form 10-K. Jeune Aesthetics has several other aesthetic medicine product candidates in various stages of preclinical development.

2023 Business Highlights

72

•In August 2023, we sold our Rare Pediatric Disease Priority Review Voucher, or PRV, for $100.0 million. The PRV was awarded in connection with the FDA’s accelerated approval of VYJUVEK for the treatment of DEB for patients 6 months of age and older.

•In August 2023, we began research and development operations in our second commercial scale CGMP biologics manufacturing facility, ASTRA, a 155,000 sq. ft. state-of-the-art CGMP facility with comprehensive end-to-end capabilities.

•In May 2023, shortly after we received FDA approval of VYJUVEK, we issued and sold 1,729,729 shares of common stock at a price of $92.50 per share in a private placement (the “PIPE”) to certain accredited investors. Net proceeds from the PIPE were approximately $160.0 million. We filed a registration statement with the SEC in July 2023 registering the resale of the shares of common stock issued in the PIPE.

•On March 6, 2023, we announced the appointment of Catherine Mazzacco to our Board of Directors.

Financial Overview

Product Revenue

After FDA approval of VYJUVEK in May 2023, we began commercial marketing and sales of the product throughout the United States and began recognizing revenue in 3Q 2023. Our future revenue will fluctuate from quarter to quarter for many reasons, including the uncertain timing and amount of any such sales.

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 our contracts. Refer to Note 2 of our consolidated financial statements for additional information.

Cost of Goods Sold

We recognize cost of goods sold for 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 expense. As such, a portion of the cost of inventory sold during 2023 was expensed prior to FDA approval.

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 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 Japan OLE study for B-VEC, continue our Phase 1 trials for KB407, KB408, and intratumoral KB707, initiate our Phase 1 trials for inhaled KB707, resume dosing with KB105 Phase 1/2 clinical trial, complete Phase 1 Cohorts 3 and 4 and initiate a Phase 2 trial for KB301, begin our open label study with ophthalmic B-VEC, and incur preclinical expenses for our other product candidates. Due to the numerous risks and uncertainties associated with product

73

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, commercial, business development and other administrative functions. Selling, 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 selling, general, and administrative costs include travel expenses, patient access program fees, management service fees, and other selling expenses which include transportation, shipping and handling fees.

We anticipate that our selling, 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 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 CGMP facility, ASTRA. We received the permanent occupancy permit for ASTRA in March 2023, which permitted utilization of certain parts of the building, and subsequently placed a portion of ASTRA into service. Qualification of the facility was completed later in 2023, and we began research and development operations. 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.

Gains from Sale of Priority Review Voucher

Gain from sale of priority review voucher relates to proceeds from sale of the rare pediatric PRV we received in connection with the FDA’s approval of VYJUVEK.

Interest and Other Income

Interest and other 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, 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 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.

Revenue Recognition

After FDA approval of VYJUVEK in May 2023, we began commercial marketing and made our first product sales in 3Q 2023. ASC 606Revenue from Contracts with Customers requires us to make estimates of variable consideration, included in our contracts, to be included in the transaction price.

Product revenue, net is recorded at the net sales price, or transaction price, upon delivery and transfer of control to the customer, and includes an estimate of variable consideration, which results from discounts, rebates, copay assistance, and returns that are offered within contracts between the Company and its customers.

74

–Prompt Pay Discounts: As an incentive for prompt payment, we offer a cash discount to our counterparty. We estimate accrued prompt pay discounts using the most likely amount method. We expect that all eligible counterparties will comply with the contractual terms to earn the discount. We record the discount as an allowance against accounts receivable, net and a reduction of revenue.

–Government Rebates: We participate in certain government rebate programs including Medicaid, Medicare and Tricare. We estimate accrued government rebates using the expected value method. We accrue estimated rebates based on estimated percentages of VYJUVEK that will be prescribed to qualified patients, estimated rebate percentages and estimated levels of inventory in the distribution channel that will be prescribed to qualified patients and record the rebates as a reduction of revenue. Accrued government rebates are included in other accrued liabilities on the consolidated balance sheets. For Medicare, the Company also estimates the accrued liability based on the number of patients in the prescription drug coverage gap under the Medicare Part D program.

–Commercial Rebates: We participate in certain commercial rebate programs. Under these rebate programs, we pay a rebate to the commercial entity or third-party administrator of the program. Accrued commercial rebates are estimated using the expected value method. We accrue estimated rebates based on contract prices, estimated percentages of VYJUVEK that will be prescribed to qualified patients and estimated levels of inventory in the distribution channel and record the rebate as a reduction of revenue. Accrued commercial rebates are included in other accrued liabilities on the consolidated balance sheets.

–Copay Assistance: The Company provides copay assistance to qualified patients with commercial insurance in states that allow copay assistance, helping them meet copay obligations to their insurance provider. The Company reimburses pharmacies for this discount through third-party vendors. The Company estimates copay assistance costs using the expected value method. The estimate is based on contract prices, estimated percentages of VYJUVEK that will be prescribed to qualified patients, average assistance paid based on reporting from third-party vendors and estimated levels of inventory in the distribution channel. Copay assistance costs are recorded as reductions to revenue and are accrued in other accrued liabilities on the consolidated balance sheets.

–Product Returns: We offer SPs and SDs limited return rights relating only to product damage or defects identified upon receipt, and therefore we expect minimal returns. Returns are estimated taking into consideration several factors including these limited product return rights, historical return activity, and other relevant factors.. There were no returns for the year ended December 31, 2023.

Variable consideration is estimated and reduces the transaction price to reflect our best estimate of the amount of consideration to which we are entitled based on the terms of the contracts and are recorded in the same period the related product revenue is recognized. The amount of variable consideration that is included in the transaction price may be constrained and is included in the net sales price only to the extent that it is considered probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. Actual amounts of consideration ultimately received may differ from our estimates. If actual results in the future vary from our estimates, we will adjust these estimates in the period these variances become known.

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 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 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 record our expenses related to clinical manufacturing based 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 actual results in the future vary from our estimates, we will adjust these estimates in the period these variances become known.

75

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 Payments 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.

Results of Operations

Years Ended December 31, 2023, 2022 and 2021

Years Ended December 31, Change

Expenses

Other income (expense)

Gain from sale of priority review voucher 100,000 — — 100,000 —

Product Revenue, net

Product revenue, net was $50.7 million for the year ended December 31, 2023 as compared to zero for the years ended December 31, 2022 and 2021 due to initial sales of VYJUVEK after FDA approval was obtained on May 19, 2023. To date, all of our product revenue has been generated in the United States.

Cost of Goods Sold

Cost of goods sold was $3.1 million for the year ended December 31, 2023 as compared to zero for the years ended December 31, 2022 and 2021 due to initial sales of VYJUVEK after FDA approval was obtained on May 19, 2023. Prior to

76

receiving FDA approval for VYJUVEK in May 2023, costs associated with the manufacturing of VYJUVEK were expensed as research and development expense. As such, a portion of the cost of inventory sold during 2023 was expensed prior to FDA approval.

Research and Development Expenses

Research and development expenses increased approximately $4.0 million for the year ended December 31, 2023 compared to the year ended December 31, 2022. Higher research and development expenses were due to increases in payroll related expenses of $5.8 million which was primarily driven by an increase in personnel to support overall growth and includes a $2.2 million increase in stock-based compensation, an increase in depreciation of $2.2 million, and an increase in other research and development expenses of approximately $428 thousand, primarily due to increases in facilities expenses. These increases were partially offset by decreases of $2.0 million in preclinical, clinical and pre-commercial manufacturing due to the costs related to the manufacturing of VYJUVEK following FDA approval being recorded as inventory and due to fewer receipts of raw materials and lab supplies period over period that were purchased for planned manufacturing runs of our products, a decrease from overhead allocations to inventory of $1.3 million, and a decrease from outsourced research and development costs of $1.2 million.

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 was 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.

The following table summarizes our research and development expenses by product candidate or program, and for unallocated expenses, by type, for the years ended December 31, 2023, 2022 and 2021:

Years Ended December 31, Change

(1)For the year ended December 31, 2023,KB103 expenses consist of pre-approval activity costs, post marketing study costs and overseas preclinical and clinical trial costs, licensing and regulatory costs.

(2)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.

(3)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 expenses increased approximately $4.0 million in the year ended December 31, 2023 compared to the year ended December 31, 2022. Expenses for KB103 increased $943 thousand due to increased payroll related expenses to support VYJUVEK’s pre-approval activities, clinical trial costs, license and regulatory costs, costs associated with overseas clinical trials and regulatory agency filings, and increased allocated research and

77

development expenses. KB707 spending increased $3.4 million due to increased payroll related costs and increased contract research costs in preparation for the Phase 1 clinical trial. Stock-based compensation increased $2.2 million due to an increase in internal resources to support overall research and development growth. Additionally, other unallocated expenses increased by $1.4 million primarily due to increases in depreciation expense offset by a decrease from rent expense allocated to inventory. These increases were partially offset by a decrease in other unallocated manufacturing expenses of $2.5 million due to the costs related to the manufacturing of VYJUVEK following FDA approval being recorded as inventory and due to fewer receipts of raw materials period over period that were purchased for planned manufacturing runs of our products and product candidates, a decrease in KB301 expenses of $852 thousand due to the timing of clinical research costs, and a decrease in spending on other dermatology programs of $498 thousand due to a reduction in contract manufacturing expenses.

Research and development expenses increased $14.6 million in the year ended December 31, 2022 compared to the year ended December 31, 2021. Expenses for KB103 increased $1.9 million primarily due to increased payroll expenses and clinical trial costs related to OLE studies. Expenses for KB407 increased $908 thousand due to increased payroll expenses and pre-clinical costs. Other respiratory expenses increased $692 thousand due to increased contract research costs. Expenses for KB707 increased $400 thousand primarily related to payroll supporting initial research activities. Stock-based compensation increased due to an increase of $4.5 million in internal resources to support overall research and development growth. Unallocated manufacturing expenses increased by $5.8 million primarily due to receipts of raw materials purchased for planned manufacturing runs our products.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $20.7 million for the year ended December 31, 2023 compared to the year ended December 31, 2022. Higher selling, general and administrative spending was due largely to increased payroll related expenses of approximately $15.1 million which is primarily driven by an increase in personnel to support overall growth and includes an approximate $4.5 million increase in stock-based compensation, increased selling expenses related to the launch of VYJUVEK of $1.7 million, increased information technology infrastructure costs of $2.1 million, increased software-related costs of $1.3 million, increased travel costs of $1.1 million, an increase in sponsorships of $425 thousand, an increase in net legal costs of $381 thousand, which consists of a decrease in litigation proceeds of $570 thousand, offset by a decrease in legal and professional fees of $189 thousand and an increase of other selling, general and administrative expense of $676 thousand, primarily due to increases in depreciation and rent expense. These increases were partially offset by a decrease of $1.2 million of commercial preparedness expenses, a decrease in medical affairs costs of $466 thousand, and a decrease in business development costs of $428 thousand.

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.

Litigation Settlement

Litigation settlement for the years ended December 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. See "Legal Proceedings" in Note 7 of the notes to consolidated financial statements included in this Form 10-K for more information.

Gain from sale of Priority Review Voucher

Gain from sale of priority review voucher for the year ended December 31, 2023 was $100.0 million related to the sale of our rare pediatric PRV, which was awarded to the Company in connection with the FDA’s approval of VYJUVEK.

Other Income (Expense)

Interest and other income for the years ended December 31, 2023, 2022, and 2021 was $22.6 million, $5.2 million and $197 thousand, respectively, and consisted of realized gains from maturities of our investments, interest income earned from our cash, cash equivalents and investments.

Interest expense for the years ended December 31, 2023, 2022 and 2021 was zero, zero, and $1.5 million, 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.

78

Income Tax Expense

Income tax expense for the years ended December 31, 2023, 2022, and 2021 was $2.0 million, zero, and zero, respectively. In 2023, income tax expense related to U.S. state and federal taxes related to the PRV sale and our initial commercial activities in those jurisdictions. See Note 11 of the notes to consolidated financial statements included in this Form 10-K for more information.

Liquidity and Capital Resources

Overview

On December 31, 2023, our cash, cash equivalents and short-term investments balance was approximately $532.2 million. Since operations began, we have incurred operating losses. Net income was $10.9 million for the year ended December 31, 2023, and our net losses were $140.0 million and $69.6 million for the years ended December 31, 2022, and 2021, respectively. At December 31, 2023, we had an accumulated deficit of $269.8 million. With the net proceeds raised from our previous public and private offerings and sale of the PRV, 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.

Our transition to operating profitability is dependent upon the continued successful commercialization of VYJUVEK and the successful development, approval and commercialization of our product candidates and the achievement of a level of revenue 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 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 our continued clinical studies of KB105, KB407, KB301, KB707 or our planned clinical and preclinical studies for our other product candidates, or our operations. Further, we expect future revenue to fluctuate between periods 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 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 commercial launch of KB104, KB105, KB407, KB408, KB301, KB707 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, 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 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 costs needed to commercialize and market our lead product, VYJUVEK;

•the progress, timing and costs of clinical trials of our current product candidates;

79

•the progress, timing and costs of manufacturing of VYJUVEK and revenue received from commercial sale of VYJUVEK;

•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 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 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 total future payments for our operating lease obligations at December 31, 2023 are $16.2 million, of which $1.5 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 8 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, 2023 under these agreements is approximately $1.7 million, all of which is expected to be due in the next twelve months.

80

ASTRA Contractual Obligations

We have contracted with various third parties to complete and qualify our second CGMP facility, ASTRA. 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, 2023 is $8.2 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,

Effect of exchange rate changes on cash and cash equivalents (156) (41) —

Operating Activities

Net cash used in operating activities for the year December 31, 2023 was $88.8 million and consisted primarily of net income of $10.9 million adjusted for non-cash items of $61.9 million primarily comprised of a gain on sale of the rare pediatric PRV of $100.0 million, stock-based compensation expense of $39.9 million, realized gain on investments of $5.1 million, depreciation and amortization of $3.7 million, other non-cash items of $451 thousand, and cash used by increases in net working capital of approximately $37.9 million.

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.

Investing Activities

Net cash provided by investing activities for the year ended December 31, 2023 was approximately $82.6 million and consisted primarily of proceeds of $100.0 million from the sale of the rare pediatric PRV, proceeds from maturities of investments of $503.2 million, offset by purchases of available-for-sale investment securities of $508.8 million, and expenditures of $11.8 million on the build-out of our ASTRA facility, leasehold improvement of new office space, and purchases of computer and laboratory equipment.

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.

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.

Financing Activities

Net cash provided by financing activities for the year ended December 31, 2023 was $202.8 million and consisted primarily of proceeds of $160.0 million received from a private placement equity offering and proceeds of $43.5 million primarily from exercises of stock options, partially offset by $749 thousand used for the employee tax withholding payment for settlement of vested restricted stock awards.

81

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 our common stock, including 288,461 shares purchased by the underwriters, at $65.00 per share and 2,866,667 shares of our 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.

Recent Accounting Pronouncements

See note 2 to our consolidated financial statements.

82

Item 7A. Qualitative and Quantitative Disclosures About Market Risk

We had cash, cash equivalents and short-term investments of approximately $532.2 million as of December 31, 2023, which consist primarily of money market funds, commercial paper, corporate bonds, and government agency securities. The investments in these financial instruments are made in accordance with an investment policy which specifies the categories, allocations and ratings of securities we may consider for investment. The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive without significantly increasing risk. Some of the financial instruments in which we invest could be subject to market risk. This means that a change in prevailing interest rates may cause the value of the instruments to fluctuate. For example, if we purchase a security that was issued with a fixed interest rate and the prevailing interest rate later rises, the value of that security will probably decline. To minimize this risk, we intend to maintain a portfolio which may include cash, cash equivalents and short-term investment securities available-for-sale in a variety of securities which may include money market funds, government and non-government debt securities and commercial paper, all with various maturity dates. Based on our current investment portfolio, we do not believe that our results of operations or our financial position would be materially affected by an immediate change of 10% in interest rates.

As of December 31, 2023, we have established operations in Europe and Australia and hold cash in Swiss Francs, Euros, and Australian Dollars. We are subject to foreign exchange rate risk arising from transactions conducted in the aforementioned foreign currencies, however our foreign operations are not currently material to our business. We do not believe that our results of operations or our financial position would be materially affected by an immediate change of 10% in foreign currency exchange rates.

We do not hold or issue derivatives, derivative commodity instruments or other financial instruments for speculative trading purposes. Further, we do not believe our cash, cash equivalents and short-term investments have significant risk of default or illiquidity. While we believe our cash, cash equivalents and short-term investments do not contain excessive risk, we cannot provide absolute assurance that any investments we make in the future will not be subject to adverse changes in market value. Our cash, cash equivalents and short-term investments are recorded at fair value.

83

Item 8. Financial Statements and Supplementary Data.

INDEX TO FINANCIAL STATEMENTS

Consolidated Balance Sheets as of December 31, 2023 and December 31, 2022 F-4

Notes to Consolidated Financial Statements F-8

F-1

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors

Krystal Biotech, Inc.:

Opinion on theConsolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Krystal Biotech, Inc. and subsidiaries (the Company) as of December 31, 2023 and 2022, the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2023, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 26, 2024 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

Critical audit matters are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters.

/s/ KPMG LLP

We have served as the Company’s auditor since 2022.

Pittsburgh, Pennsylvania

February 26, 2024

F-2

Report of Independent Registered Public Accounting Firm

To the Board of Directors and

Stockholders of Krystal Biotech, Inc.:

Opinion on the Financial Statements

We have audited the accompanying consolidated statements of operations and comprehensive loss, stockholders’ equity and cash flows of Krystal Biotech, Inc. (the “Company”) for the year ended December 31, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the results of the Company’s operations and their cash flows for the year ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

We have served as the Company's auditor since 2017, which ended in 2022.

/s/ Mayer Hoffman McCann P.C.

San Diego, California

February 28, 2022

F-3

Krystal Biotech, Inc.

Consolidated Balance Sheets

Assets

Current assets

Accounts receivable, net 42,040 —

Prepaid expenses and other current assets 6,706 4,608

Other non-current assets 263 324

Liabilities and Stockholders' Equity

Current liabilities

Current portion of lease liability 1,474 1,561

Accrued expenses and other current liabilities 27,488 23,305

Commitments and contingencies (Note 7)

Stockholders' equity

Accumulated other comprehensive gain (loss) 638 (728)

Total liabilities and stockholders' equity $ 818,355 $ 558,450

The accompanying notes are an integral part of these consolidated financial statements.

F-4

Krystal Biotech, Inc.

Consolidated Statements of Operations and Comprehensive Income (Loss)

Year EndedDecember 31,

(In thousands, except share and per share data) 2023 2022 2021

Product revenue, net $ 50,699 $ — $ —

Expenses

Cost of goods sold 3,094 — —

Other income (expense)

Gain from sale of priority review voucher 100,000 — —

Interest expense — — (1,492)

Income tax expense (1,965) — —

Net income (loss) per common share:

Weighted-average common shares outstanding:

The accompanying notes are an integral part of these consolidated financial statements.

F-5

Krystal Biotech, Inc.

Consolidated Statements of Stockholders' Equity

Shares Amount

Stock-based compensation expense — — 15,603 — — 15,603

Unrealized loss on investments and other (1) — — — (169) — (169)

Shares surrendered for taxes and forfeitures (17,879) — (649) — — (649)

Stock-based compensation expense — — 33,781 — — 33,781

Unrealized loss on investments and other (1) — — — (565) — (565)

Shares surrendered for taxes (9,551) — (749) — — (749)

Stock-based compensation expense — — 41,179 — — 41,179

Unrealized gain on investments and other (1) — — — 1,366 — 1,366

(1)Includes foreign currency translation losses of $66 thousand and $78 thousand, and a gain of $7 thousand for the years ended December 31, 2023, 2022, and 2021, respectively.

The accompanying notes are an integral part of these consolidated financial statements.

F-6

Krystal Biotech, Inc.

Consolidated Statements of Cash Flows

Years Ended December 31,

Operating Activities

Gain from sale of priority review voucher (100,000) — —

Loss on disposal of fixed assets 27 72 —

Non-cash interest expense — — 1,492

Realized gain on investments (5,092) (570) —

Changes in operating assets and liabilities

Accounts receivable (42,040) — —

Inventory (4,475) — —

Prepaid expenses and other current assets (908) (311) (691)

Other non-current assets (64) (150) 65

Accrued rebates 5,977 — —

Accrued expenses and other current liabilities 4,558 5,173 2,705

Investing Activities

Proceeds from sale of priority review voucher 100,000 — —

Financing Activities

Taxes paid related to settlement of restricted stock awards (749) (649) —

Repayment of ASTRA build-to-suit liability — — (7,960)

Effect of exchange rate changes on cash and cash equivalents (156) (41) —

Supplemental Disclosures of Non-Cash Investing and Financing Activities

Initial recognition of right-of-use assets $ — $ 1,556 $ 4,396

The accompanying notes are an integral part of these consolidated financial statements.

F-7

Krystal Biotech, Inc.

Notes to Consolidated Financial Statements

1. Organization

Krystal Biotech, Inc. (the “Company,” or “we” or other similar pronouns) commenced operations in April 2016. In March 2017, the Company converted from a California limited liability company to a Delaware C-corporation, and changed its 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, the Company 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, and August 2023, the Company incorporated wholly-owned subsidiaries in Switzerland, Netherlands, France, and Germany respectively, for the purpose of establishing initial operations in Europe for the commercialization of the Company’s product pipeline.

We are a fully integrated, commercial-stage biotechnology company focused on the discovery, development, and commercialization of genetic medicines to treat diseases with high unmet medical needs. Our first commercial product, VYJUVEK®, was approved by the FDA on May 19, 2023 for the treatment of DEB, and we subsequently initiated our U.S. commercial launch. VYJUVEK is the first medicine approved by the FDA for the treatment of DEB.

Using our patented gene therapy technology 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 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 and serious diseases. Our innovative technology platform is supported by an in-house, FDA-inspected commercial scale Current Good Manufacturing Practice (“CGMP”) manufacturing facility and a second, completed and qualified, commercial scale CGMP facility to support future expansion.

Liquidity

As of December 31, 2023, the Company had an accumulated deficit of $269.8 million. Our transition to operating profitability is dependent upon the continued successful commercialization of VYJUVEK as well as successful development, approval, and commercialization of our other product candidates and the achievement of a level of revenue adequate to support the Company’s cost structure. Management intends to fund future operations through its on hand cash and cash equivalents, revenue generated from the sale of VYJUVEK, the sale of equity, debt financings, and may also seek additional capital through arrangements with strategic partners 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 believes that its cash, cash equivalents and short-term investments of approximately $532.2 million as of December 31, 2023 will be sufficient to allow the Company to fund its planned operations for at least the next 12 months from the date of this Annual Report on Form 10-K.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”). 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.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates. Management considers many factors in developing the estimates and

F-8

Krystal Biotech, Inc.

Notes to Consolidated Financial Statements — Continued

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.

Segment and Geographical Information

Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company and the Company’s chief operating decision maker view the Company’s operations and manage its business in one operating segment, which is the business of developing and commercializing pharmaceutical products.

Cash, Cash Equivalents and Investments

Cash and cash equivalents consist of money market funds and bank deposits. Cash equivalents are defined as short-term, highly liquid investments with original maturities of 90 days or less at the date of purchase.

Investments with maturities of less than one year are classified as short-term investments on the consolidated balance sheets and consist of commercial paper, corporate bonds, and U.S. government agency securities. Investments with maturities of greater than one year are classified as long-term investments on the consolidated balance sheets and consist of corporate bonds and U.S. government agency securities. Accrued interest on investments is also classified as short-term investments.

As our entire investment portfolio is considered available for use in current operations, we classify all investments as available-for-sale securities. Available-for-sale securities are carried at fair value, with unrealized gains and losses reported in accumulated other comprehensive gain (loss), which is a separate component of stockholders’ equity in the consolidated balance sheets. Any premium arising at purchase is amortized to the earliest call date and any discount arising at purchase is accreted to maturity. Amortization and accretion of premiums and discounts are recorded in interest and other income, net in the consolidated statements of operations and comprehensive income (loss).

Fair Value of Financial Instruments

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. There is a three-level hierarchy that prioritizes the inputs used in determining fair value by their reliability and preferred use, as follows:

•Level 1—Valuations based on quoted prices in active markets for identical assets or liabilities.

•Level 2—Valuations based on quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in inactive markets, or other inputs that are observable, or can be corroborated by observable market data.

•Level 3—Valuations based on inputs that are both significant to the fair value measurement and unobservable.

To the extent that a valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized within Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

There have been no significant changes to the valuation methods utilized by the Company during the periods presented. There have been no transfers between Level 1, Level 2, and Level 3 in any periods presented.

The carrying amounts of financial instruments consisting of cash and cash equivalents, investments, accounts receivable, net, prepaid expenses and other current assets, accounts payable, accrued expenses and other current liabilities included in the Company’s consolidated financial statements, are reasonable estimates of fair value, primarily due to their short maturities.

Our available-for-sale, short-term and long-term investments, which consist of commercial paper, corporate bonds, and U.S. government agency securities are considered to be Level 2 financial instruments. The fair value of Level 2 financial assets

F-9

Krystal Biotech, Inc.

Notes to Consolidated Financial Statements — Continued

is determined using inputs that are observable in the market or can be derived principally from or corroborated by observable market data such as pricing for similar securities, recently executed transactions, cash flow models with yield curves, and benchmark securities. In addition, Level 2 financial instruments are valued using comparisons to like-kind financial instruments and models that use readily observable market data as their basis.

Revenue Recognition

The Company has 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 single specialty distributor (“SD”) to hospitals and outpatient clinics where patients are administered the medication at a healthcare professional’s office. The Company entered into a third-party logistics distribution agreement to engage a logistics agent (the “3PL Agent”) to distribute the Company’s products to its customers. The 3PL Agent provides services to the Company that include storage, shipping and distribution, processing product returns, as well as customer service, order to cash, and logistics support. The Company and an affiliate of the 3PL Agent (the Title Company) entered into a Title Model Amendment (the Title Amendment) to the 3PL Agreement so that the Title Company may purchase and take title to the product and sell the product to the SPs who have contracted to purchase the product from the Company or SD who has contracted to deliver the product to our customers. Although, under the Title Amendment the Title Company takes title to the product, the economic substance of the transaction provides that the Title Company does not possess the risk of loss or participate in the significant risks and rewards of ownership of the product. The Title Company also lacks the ability to control, direct the use of, and obtain substantially all of the remaining benefits from the product. Accordingly, the Company does not recognize revenue on the transfer of the goods until the goods are sold from the Title Company to the SPs or delivered by the SD. Revenue is recognized upon transfer of control of the product to the customer.

The Company recognizes product revenue under ASC Topic 606, Revenue from Contracts with Customers (“Topic 606”). Under Topic 606, the Company is required to complete the following five steps:

(i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price, including variable consideration, if any; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation.

The Company recognizes revenue when the customer obtains control of the product, which occurs at a point in time, upon delivery to the customer. Sales and other taxes collected concurrent with revenue-producing activities are excluded from revenue. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring VYJUVEK and is generally based upon a list or fixed price less allowances for returns, copay assistance, rebates and discounts. The Company’s payment terms are generally 80 days from the invoice date.

Variable Consideration

Product revenue, net is recorded at the net sales price, or transaction price, upon delivery and transfer of control to the customer, and includes an estimate of variable consideration, which results from discounts, rebates, and returns that are offered within our contracts.

–Prompt Pay Discounts: As an incentive for prompt payment, the Company offers cash discounts to its counterparties. The Company estimates accrued prompt pay discounts using the most likely amount method. The Company expects that all eligible counterparties will comply with the contractual terms to earn the discount. The Company records the discount as an allowance against accounts receivable, net and a reduction of revenue.

–Government Rebates: The Company participates in certain government rebate programs including Medicaid, Medicare and Tricare. The Company estimates accrued government rebates using the expected value method. The Company accrues estimated rebates based on estimated percentages of VYJUVEK that will be prescribed to qualified patients, estimated rebate percentages and estimated levels of inventory in the distribution channel that will be prescribed to qualified patients and records the rebates as a reduction of revenue. Accrued government rebates are recorded as a reduction of revenue and are included in other accrued liabilities on the consolidated balance sheets. For Medicare, the Company also estimates the accrued liability based on the number of patients in the prescription drug coverage gap under the Medicare Part D program.

–Commercial Rebates: The Company participates in certain commercial rebate programs. Under these rebate programs, the Company pays a rebate to the commercial entity or third-party administrator of the program. Accrued commercial rebates are estimated using the expected value method. The Company accrues estimated rebates based on contract prices, estimated percentages of VYJUVEK that will be prescribed to qualified patients and estimated levels of inventory in the distribution channel. Accrued commercial rebates are recorded as a reduction of revenue and are included in other accrued liabilities on the consolidated balance sheets.

F-10

Krystal Biotech, Inc.

Notes to Consolidated Financial Statements — Continued

–Copay Assistance: The Company provides copay assistance to qualified patients with commercial insurance in states that allow copay assistance, helping them meet copay obligations to their insurance provider. The Company reimburses pharmacies for this discount through third-party vendors. The Company estimates copay assistance costs using the expected value method. The estimate is based on contract prices, estimated percentages of VYJUVEK that will be prescribed to qualified patients, average assistance paid based on reporting from third-party vendors and estimated levels of inventory in the distribution channel. Copay assistance costs are recorded as reductions to revenue and are accrued in other accrued liabilities on the consolidated balance sheets.

–Product Returns: The Company offers SPs and SDs limited return rights relating only to product damage or defects identified upon receipt, and therefore the Company expects minimal returns. Returns are estimated taking into consideration several factors including these limited product return rights, historical return activity, and other relevant factors.. There were no returns for the year ended December 31, 2023.

Variable consideration is estimated and reduces the transaction price to reflect the Company’s best estimate of the amount of consideration to which the Company is entitled based on the terms of the contracts and are recorded in the same period the related product revenue is recognized. The amount of variable consideration that is included in the transaction price may be constrained and is included in the net sales price only to the extent that it is considered probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. Actual amounts of consideration ultimately received may differ from the Company’s 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.

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.

Accounts Receivable

Accounts receivable is recorded net of allowances for prompt payment discounts, returns, and credit losses. The Company estimates an allowance for credit losses by considering factors such as credit quality, the age of the accounts receivable balances, and current economic conditions that may affect a customer’s ability to pay. As of December 31, 2023, the credit profile for the Company’s counterparty was deemed to be in good standing, and as such an allowance for credit losses was not recorded.

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 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, net and marketable securities, which primarily consist of U.S. government agency securities and treasuries, corporate bonds and commercial paper, potentially subject the Company to concentrations of credit risk. The Company had one customer for the year ended December 31, 2023 and no product revenue for the years ended December 31, 2022 and 2021. The Company has no financial instruments with off-balance sheet risk of loss.

Inventories

The Company capitalizes inventory costs associated with products when future economic benefit is expected to be realized. These costs consist of raw materials, manufacturing-related costs, personnel costs including stock-based compensation, facility costs, and other indirect overhead costs. Prior to receiving FDA approval for VYJUVEK in May 2023, the Company expensed costs related to inventory for clinical and pre-commercial purposes directly to research and development expense. Following the FDA’s approval of VYJUVEK, the Company began capitalizing inventory related to commercialized products held for sale, in-process of production for sale, and raw materials to be used in the manufacturing of inventory.

The Company values its inventories at the lower-of-cost and net realizable value, on a first-in, first-out (“FIFO”) basis. The Company adjusts the net realizable value of any excess, obsolete or unsalable inventories in the period in which they are identified. For the years ended December 31, 2023, 2022, and 2021, there were no inventory write-downs. See Note 6.

F-11

Krystal Biotech, Inc.

Notes to Consolidated Financial Statements — Continued

Property and Equipment, net

Property and equipment, net, is stated at cost, less accumulated depreciation. Maintenance and repairs that do not improve or extend the lives of the respective assets are expensed to operations as incurred, while costs of major additions and betterments are capitalized. Upon disposal, the related cost and accumulated depreciation is removed from the accounts and any resulting gain or loss is included in the results of operations. Depreciation is recorded using the straight-line method over the estimated useful lives of the respective assets, which are as follows:

Buildings and building improvements 7 - 47 years

Computer equipment and software 3 - 7 years

Manufacturing equipment 3 - 20 years

Laboratory equipment 3 - 15 years

Furniture and fixtures 3 - 7 years

The Company reviews the estimated useful lives of its property and equipment on a continuing basis. In evaluating the useful lives, the Company considers how long assets will remain functionally effective, whether the technology continues to be relevant and considers other competitive and economic factors. If the assessment indicates that the assets will be used for a shorter or longer period than previously anticipated, the useful life of the assets is adjusted, resulting in a change in estimate. Changes in estimates are accounted for on a prospective basis by depreciating the current carrying values of the assets over their revised remaining useful lives.

Construction-in-progress (“CIP”) is not depreciated until the asset is placed in service.

Impairment of Long-Lived Assets

The Company evaluates long-lived assets for potential impairment when events or changes in circumstances indicate the carrying value of the assets may not be recoverable. We review the recoverability of the net book value of long-lived assets whenever events and circumstances indicate ("triggering events") that the net book value of an asset may not be recoverable from the estimated undiscounted future cash flows expected to result from its use and eventual disposition. In cases where a triggering event occurs and undiscounted expected future cash flows are less than the net book value, we recognize an impairment loss equal to an amount by which the net book value exceeds the fair value of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell. The Company has not experienced any triggering events or recognized any impairment losses for the years ended December 31, 2023, 2022, and 2021.

Leases

The Company accounts for its lease agreements in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 842, Leases. Right-of-use lease assets represent the right to use an underlying asset during the lease term and the lease liabilities represent the commitment to make lease payments arising from the lease. Right-of-use lease assets and obligations are recognized based on the present value of remaining lease payments over the lease term. As the Company’s existing lease agreements do not provide an implicit rate and as the Company does not have any external borrowings, the Company has used an estimated incremental borrowing rate based on the information available at lease commencement in determining the present value of lease payments. Operating lease expense is recognized on a straight-line basis over the lease term. Variable lease expense is recognized in the period in which the obligation for the payment is incurred. In addition, the Company also has made an accounting policy election to exclude leases with an initial term of twelve months or less from its consolidated balance sheets and to account for lease and non-lease components of its operating leases as a single component.

Research and Development Expenses

Research and development costs are charged to expense as incurred in performing research and development activities. These costs include employee compensation costs, facilities and overhead, preclinical and clinical activities, clinical manufacturing costs, contract management services, regulatory and other related costs.

The Company estimates contract research and manufacturing expenses based on the services performed pursuant to contracts with research organizations and manufacturing organizations that manufacture materials used in the Company’s ongoing preclinical and clinical studies. Non-refundable advanced payments for goods or services to be received in the future for use in research and development activities are deferred and capitalized. The capitalized amounts are expensed as the related goods are delivered or the services are performed.

F-12

Krystal Biotech, Inc.

Notes to Consolidated Financial Statements — Continued

In accruing service fees, the Company estimates the time period over which services will be performed and the level of effort to be expended in each period. These estimates are based on communications with third-party service providers and the Company’s estimates of accrued expenses using information available at each balance sheet date. If the actual timing of the performance of services or the level of effort varies from the estimate, the Company will adjust the accrual accordingly.

Stock-Based Compensation Expense

The Company applies the fair value recognition provisions of FASB ASC Topic 718, Compensation—Stock Compensation (“ASC 718”), to account for stock-based compensation. Compensation costs related to stock options granted are based on the estimated fair value of the awards on the date of grant.

ASC 718 requires all stock-based payments, including grants of stock options and restricted stock, to be recognized in the consolidated statements of operations and comprehensive income (loss) based on their grant-date fair values. Compensation expense for stock options, restricted stock awards, and restricted stock units 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. Compensation expense for performance-based restricted stock units is recognized for the awards that are probable of vesting over the service period of the award. On a quarterly basis, management estimates the probable number of performance-based restricted stock units that would vest until such time that the ultimate achievement of the performance criteria are known.

The Company estimates the fair value of its stock options using the Black-Scholes option pricing model, which requires the input of subjective assumptions, including: (i) the expected stock price volatility; (ii) the expected term of the award; (iii) the risk-free interest rate; and (iv) expected dividends. Once the Company's own sufficient historical volatility data was available in 2021, the Company eliminated the use of a representative peer group and began using only its own historical volatility data in its estimate of expected volatility.

The Company estimates the expected term of its stock options using the “simplified” method, whereby the expected term equals the arithmetic mean of the vesting term and the original contractual term of the option. The risk-free interest rates are based on US Treasury securities with a maturity date commensurate with the expected term of the associated award. The Company has never paid and does not expect to pay dividends in the foreseeable future. The Company accounts for forfeitures as they occur. Stock-based compensation expense recognized in the financial statements is based on awards for which service conditions are expected to be satisfied.

Income Taxes

For the years ended December 31, 2023, 2022, and 2021, income taxes were recorded in accordance with FASB ASC Topic 740, Income Taxes (“ASC 740”), which provides for deferred taxes using an asset and liability approach. Under this method, we record deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities using enacted tax rates expected to be in effect when the differences are expected to reverse. Valuation allowances are provided when necessary to reduce net deferred tax assets to the amount that is more likely than not to be realized. Based on the available evidence, we are unable, at this time, to support the determination that it is more likely than not that our deferred tax assets will be utilized in the future. Accordingly, we recorded a full valuation allowance as of December 31, 2023 and 2022. We intend to maintain a valuation allowance until sufficient evidence exists to support its reversal.

The Company accounts for uncertain tax positions in accordance with the provisions of ASC 740. When uncertain tax positions exist, the Company recognizes the tax benefit of tax positions to the extent that the benefit will more likely than not be realized. The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position as well as consideration of the available facts and circumstances. As of December 31, 2023 and 2022, the Company did not have any significant uncertain tax positions.

The Company may recognize interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2023 and 2022, the Company had no accrued interest or penalties related to uncertain tax positions and no amounts have been recognized in the Company’s consolidated statements of operations and comprehensive income (loss).

Comprehensive Income (Loss)

Comprehensive income (loss) is defined as the change in equity during a period from transactions from non-owner sources. Unrealized gains or losses on available-for-sale securities is a component of other comprehensive gains or losses and is presented net of taxes. We record reclassifications from other comprehensive gains or losses to interest and other income, net on the consolidated statements of operations and comprehensive income (loss) related to realized gains on sales of available-for-sale securities.

F-13

Krystal Biotech, Inc.

Notes to Consolidated Financial Statements — Continued

The Company reviews its securities quarterly to determine whether an other-than-temporary impairment has occurred. The Company determined that there were no other-than-temporary impairments during the years ended December 31, 2023, 2022, and 2021.

Recent Accounting Pronouncements

In December 2023, the FASB issued 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.

In November 2023, the FASB issued Accounting Standard Update (“ASU”) No. 2023-07: Improvements to Reportable Segment Disclosures. This new standard requires public entities to disclose significant segment expenses and additional segment items annually and in interim periods, and to provide all reported segment profit or loss information and assets currently required each year. The standard also requires disclosure of the Chief Operating Decision Maker's title and position. The standard does not change the manner in which public entities identify their operating segments, aggregate them, or apply the quantitative thresholds for determining their reportable segments. The new standard applies for fiscal years starting after December 15, 2023 and interim periods starting after December 15, 2024, with early adoption permitted. The Company has determined it operates as a single segment, therefore, we anticipate that this ASU will minimally impact our disclosed information and will not impact our consolidated balance sheets, consolidated statements of operations and comprehensive income (loss), consolidated statements of stockholders’ equity, or consolidated statements of cash flows.

There were no recently adopted accounting pronouncements that had a material impact on the Company's consolidated financial statements, and no additional recently issued accounting pronouncements that are expected to have a material impact on the Company's consolidated financial statements.

3. Revenue Recognition

The Company began commercial marketing and sales of VYJUVEK throughout the United States and began recognizing revenue in 2023. For the years ended December 31, 2023, 2022, 2021, the Company recognized net product revenue of 50.7 million, zero, and zero, respectively. Accounts receivable, net balances were 42.0 million and zero as of December 31, 2023 and 2022, respectively.

The following table summarizes changes in allowances and discounts for the year ended December 31, 2023 (in thousands):

Rebates Prompt Pay Other Accruals Total

Balance as of December 31, 2022 $ — $ — $ — $ —

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 exercise of stock options and vesting of restricted stock awards, restricted stock units, and performance-based restricted stock units.

There were 896,745, 3,582,181, and 2,043,179 common stock equivalents outstanding in the form of stock options and zero, 66,600, and 98,800 unvested restricted stock awards as of December 31, 2023, 2022 and 2021, respectively, that have been excluded from the calculation of diluted net income (loss) per common share as their effect would be anti-dilutive.

F-14

Years Ended December 31,

(In thousands, except share and per share data) 2023 2022 2021

Numerator:

Denominator:

Dilutive effect of stock options and unvested restricted stock 597,619 — —

Net income (loss) per common share — Basic $ 0.40 $ (5.49) $ (3.13)

Net income (loss) per common share — Diluted $ 0.39 $ (5.49) $ (3.13)

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 December 31, 2023 and 2022, respectively (in thousands):

Level 1:

Level 2:

Level 1:

Level 2:

(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 year and two years.

See Note 2 to these consolidated financial statements for additional discussion regarding the Company’s fair value measurements.

F-15

Krystal Biotech, Inc.

Notes to Consolidated Financial Statements — Continued

6. Balance Sheet Components

Inventory

Inventory consisted of the following as of December 31, 2023 and 2022, respectively (in thousands):

Raw materials $ 3,154 $ —

Work-in-process 3,204 —

Finished goods 627 —

Inventory $ 6,985 $ —

Property and Equipment, Net

Property and equipment, net consisted of the following as of December 31, 2023 and 2022, respectively (in thousands):

Building and building improvements $ 111,180 $ —

Computer equipment and software 1,614 100

Depreciation expense was $5.0 million, $2.6 million and $1.8 million for the years ended December 31, 2023, 2022, and 2021, respectively.

On March 27, 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 throughout 2023, 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.

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following as of December 31, 2023 and 2022, respectively (in thousands):

Accrued payroll and benefits $ 8,778 $ 6,781

Accrued rebates 5,977 —

Accrued preclinical and clinical expenses 1,248 1,365

F-16

Krystal Biotech, Inc.

Notes to Consolidated Financial Statements — Continued

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 cell and virus banks and for 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, storage, packaging, labeling, and/or testing of our pre-commercial and clinical-stage products. 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 service fee for project management services for the duration of any agreements. The estimated remaining commitment as of December 31, 2023 under these agreements is approximately $1.7 million. The Company has incurred research and development expenses under these agreements of $5.2 million, $6.0 million and $5.0 million for the years ended December 31, 2023, 2022, and 2021, respectively.

ASTRA Contractual Obligations

The Company has contracted with various third parties to complete and qualify our second CGMP facility, ASTRA. The estimated remaining commitment as of December 31, 2023 is $8.2 million and primarily relates to building improvements and certain qualification activities of the facility that have been completed and placed into service as of December 31, 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 trade secret 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 total cumulative sales, $200.0 million in total cumulative sales and $300.0 million in total cumulative sales. As defined in the settlement agreement, cumulative sales shall include all revenue from sales of the Company products by the Company and its affiliates and licensees, as reported by the Company in its annual Form 10-K filings. 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 the settlement payments of $12.5 million, $25.0 million, and zero for the year ended December 31, 2023, 2022, and 2021, respectively, under litigation settlement expense on the consolidated statements of operations and comprehensive income (loss). The additional contingent milestone payments were not deemed probable due to uncertainty in the achievement of these milestones as of December 31, 2023, and therefore no additional accrual has been recorded.

The Company has received zero, $1.1 million, $1.6 million, of insurance proceeds during fiscal years ending December 31, 2023, 2022, and 2021 respectively. The reimbursements have been recorded as an offset to our legal fees included in selling, general and administrative expenses on the consolidated statements of operations and comprehensive income (loss) and within operating activities on the consolidated statements of cash flows.

8. Leases

Lease Agreements

In May 2016, the Company signed an operating lease for laboratory and office space in Pittsburgh, Pennsylvania that commenced in June 2016 and was scheduled to expire in October 2017 (the “2016 Lease”). The 2016 Lease has been amended several times to increase the area leased, which currently consists of approximately 54,000 square feet and includes the commercial scale CGMP-compliant manufacturing facility (“ANCORIS”). As a result of the lease amendments, the 2016 Lease expiration date was extended to October 2031. In September 2022, the Company amended the 2016 Lease (“Short-Term Amendment”) to add a 12 month lease for additional office space that commenced in October 2022 and subsequently amended the lease again in September 2023, which commenced in October 2023 and extended the lease until September 2024. The Short-Term Amendment increased the area leased by approximately 7,000 square feet through September 2024. Due to the short-term nature of these amendments and the Company's lease accounting policy, the Company did not record a right-of-use asset or corresponding lease liability.

F-17

Krystal Biotech, Inc.

Notes to Consolidated Financial Statements — Continued

In December 2019, the Company entered into a lease agreement for a second commercial gene therapy facility, (“ASTRA”), in the Pittsburgh, Pennsylvania area (“ASTRA lease”) with Northfield I, LLC (the “Landlord”, “Northfield”, or “Lessor”) with an initial lease term that expired on October 2035. The ASTRA lease contained an option (“Purchase Option”) to purchase the building, related improvements and take corresponding assignment of the Landlord's rights under its existing Ground Lease (the “Ground Lease”).

In October 2020, the Company was provided with notice that the initial delivery conditions of the building had been met, including completion of the building shell, interior slab, and exterior doors, and the Company gave the Landlord notice of its intent to purchase ASTRA for approximately $9.4 million, subject to the parties entering into a commercially reasonable purchase and sale agreement. As a result of the Company's ability to exercise its option to purchase ASTRA, the Company obtained control over the construction in progress of ASTRA. The Company recorded a $10.0 million CIP asset and a corresponding build-to-suit lease liability related to the costs incurred by the Landlord, offset by the previous cash contributions of $2.4 million.

In January 2021, the Company entered into a Purchase and Sale Agreement (“PSA”) for ASTRA with Northfield related to the purchase option exercised by the Company in October 2020, for a purchase price of $9.4 million. The Company held approximately $1.5 million on deposit with Northfield under the existing lease agreement and applied this deposit as a credit against the purchase price at closing. In February 2021, Northfield delivered the space as substantially complete and made the space available for access by the Company, thus triggering lease commencement. As a result, the Company concluded that this transaction did not qualify for sale-leaseback accounting because it did not meet the definition of a sale. As control did not transfer to the Lessor at lease commencement, the transaction continued to be accounted for as construction in progress and a financing obligation. In March 2021, the purchase closed and the Company determined that reclassification of the construction in progress to buildings and leasehold improvements was not appropriate as the interior of the building was not yet ready for its intended use. From construction completion to the closing of the purchase, the Company recognized interest expense to accrete the financial obligation to a balance that equaled the cash consideration that was paid upon the close of purchase. The building was placed into service as of December 31, 2023. For more information about the expected construction costs associated with ASTRA, see “ASTRA Contractual Obligations” above.

As part of the transaction, the Company also became the accounting owner of the Ground Lease, due to obtaining control over ASTRA. When the PSA was finalized, the Company took assignment of the Lessor's Ground Lease, in accordance with the Purchase Option, of which lease payments are based on annual payments of $82 thousand, and are subject to a cumulative 10% escalation clause every 5 years through 2071.

In December 2021, the Company entered into a 3 year lease agreement for the Boston, Massachusetts office that commenced in January 2022 and expires in January 2025.

In May 2022, the Company entered into a 16 month lease agreement for the Zug, Switzerland office that commenced in September 2022 and ended in December 2023. In September 2023, the Company entered into a 12 month lease that commenced January 2024 and expires in December 2024. Due to the short-term nature of the agreement and the Company’s lease accounting policy, the Company did not record a right-of-use asset or corresponding lease liability.

As of December 31, 2023, future minimum commitments under the Company’s operating leases were as follows (in thousands):

Operating Leases

Future minimum operating lease payments $ 16,156

Less: Interest (8,062)

Present value of lease liability $ 8,094

F-18

Krystal Biotech, Inc.

Notes to Consolidated Financial Statements — Continued

Supplemental balance sheet information related to leases is as follows:

Operating leases:

Current portion of lease liability 1,474 1,561

Weighted average remaining lease term, in years 12.3 12.5

Weighted average discount rate 9.5 % 9.4 %

The components of the Company's lease expense are as follows:

Years Ended December 31,

Lease cost:

9. Capitalization

Public Sale of Common Stock

In December 2021, the Company completed an underwritten public offering of 2,866,667 shares of its common stock, including 200,000 shares purchased by the underwriters pursuant to their option to purchase additional shares, at $75.00 per share. Net proceeds to the Company from the offering were $201.9 million after deducting underwriting discounts and commissions of approximately $12.9 million, and other offering expenses payable by the Company of $227 thousand.

In February 2021, the Company completed an underwritten public offering of 2,211,538 shares of its common stock, including 288,461 shares purchased by the underwriters pursuant to their option to purchase additional shares, at $65.00 per share. Net proceeds to the Company from the offering were $134.9 million after deducting underwriting discounts and commissions of approximately $8.6 million, and other offering expenses payable by the Company of $198 thousand.

ATM Program

On December 31, 2020, the Company entered into a sales agreement with Cowen and Company, LLC ("Cowen") with respect to an at-the-market equity offering program ("2020 ATM Program"), under which the Company issued and sold from time to time through Cowen, acting as agent and/or principal, shares of its common stock, par value $0.0001 per share, having an aggregate offering price up to $150.0 million ("Placement Shares"). The issuance and sale of the Placement Shares were made pursuant to the Company's effective "shelf" registration statement on Form S-3 that was filed with the Securities and Exchange Commission (the “SEC”) on May 4, 2020 (the “2020 Shelf Registration Statement”). During the year ended December 31, 2022, the Company issued and sold 434,782 Placement Shares 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.

During the year ended December 31, 2021, 262,500 shares of common stock were issued pursuant to the ATM Program at a weighted average price of $66.50 per share for net proceeds of $16.9 million after deducting underwriting discounts and commissions of approximately $524 thousand,

The Company’s 2020 Shelf Registration Statement expired on May 4, 2023, and the Company put in place a new at-the-market equity offering program under substantially the same terms as the 2020 ATM Program (the “New ATM Program”). Accordingly, on May 8, 2023, the Company entered into a new sales agreement with Cowen to issue and sell shares of the Company’s common stock having an aggregate offering price of up to $150.0 million (the “New Placement Shares”) from time to time, under which Cowen will act as the Company’s agent and/or principal. The New 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

F-19

Krystal Biotech, Inc.

Notes to Consolidated Financial Statements — Continued

prospectus supplement relating to the New Placement Shares that was filed with the SEC on May 8, 2023. During the year ended December 31, 2023, no shares of common stock were issued pursuant to the New ATM Program, resulting in $150.0 million available for issuance under the New 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 (the “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 to its employees. In February 2023, the Company began issuing restricted stock units and performance-based restricted stock units to certain employees.

Stock Options

Options granted to employees and non-employees vest ratably over a four-year period and stock options granted to directors of the company vest ratably over one-year to three-year periods. Stock options have a life of ten years.

The Company granted 435,280 and 2,130,500 stock options to employees, non-employees, and directors during the years ended December 31, 2023 and 2022, respectively.

The following table summarizes the Company’s stock option activity:

Expired — —

(1)Aggregate intrinsic value represents the difference between the closing stock price of our common stock on December 31, 2023 and the exercise price of outstanding in-the-money options.

The total intrinsic value (the amount by which the fair market value exceeded the exercise price) of stock options exercised during the years ended December 31, 2023 and 2022 was $43.8 million and $2.9 million, respectively.

The weighted-average grant-date fair value per share of options granted to employees, non-employees, and directors during the years ended December 31, 2023 and 2022 was $63.38 and $44.50, respectively.

There was $68.5 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 2.4 years as of December 31, 2023.

F-20

Krystal Biotech, Inc.

Notes to Consolidated Financial Statements — Continued

The Company has recorded aggregate stock-based compensation expense related to the issuance of stock option awards in the consolidated statements of operations and comprehensive income (loss) for the years ended December 31, 2023, 2022, and 2021 as follows (in thousands):

Years Ended December 31,

The fair value of options granted was estimated at the date of grant using the Black-Scholes valuation model with the following weighted-average assumptions for the years ended December 31, 2023, 2022, and 2021:

Years Ended December 31,

Expected stock price volatility 73 % 78 % 72 %

Expected term of the award (years) 6.0 6.2 6.2

Forfeiture Rate — % — % — %

Dividend Yield — % — % — %

Restricted Stock Awards

Restricted stock awards (“RSAs”) granted to employees vest ratably over a four-year period. The Company granted no RSAs to employees of the Company for each of the years ended December 31, 2023 and 2022 respectively.

The following table summarizes the Company’s RSA activity:

Number of Shares Weighted AverageGrant DateFair Value

Granted — $ —

Granted — $ —

There was $2.0 million of unrecognized stock-based compensation expense related to employees’ awards that is expected to be recognized over a weighted-average period of 1.2 years as of December 31, 2023.

The Company recorded the following stock-based compensation expense related to RSAs in the consolidated statements of operations and comprehensive income (loss) for the years ended December 31, 2023, 2022, and 2021 as follows (in thousands):

F-21

Krystal Biotech, Inc.

Notes to Consolidated Financial Statements — Continued

Years Ended December 31,

Restricted Stock Units

Restricted stock units (“RSUs”) granted to employees vest ratably over a four-year period. The Company granted 186,900 and zero RSUs to employees of the Company during the years ended December 31, 2023 and 2022, respectively.

Number of Shares Weighted AverageGrant DateFair Value

Non-vested RSUs as of December 31, 2022 —

Vested —

There was $10.4 million of unrecognized stock-based compensation expense related to employees’ RSU awards that is expected to be recognized over a weighted-average period of 3.2 years as of December 31, 2023.

The Company recorded stock-based compensation expense related to RSUs in the consolidated statements of operations and comprehensive income (loss) for the years ended December 31, 2023, 2022, and 2021 as follows (in thousands):

Years Ended December 31,

Research and development $ 1,112 $ — $ —

Selling, general and administrative 1,427 — —

Total stock-based compensation $ 2,539 $ — $ —

Performance-Based Restricted Stock Units

Performance-based restricted stock units (“PSUs”) granted to employees 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. Each PSU represents the right to receive one share of the Company's common stock upon vesting. The Company recognizes stock-based compensation expense for the fair value of the PSU awards relating to the portion of the awards that are probable of vesting over the service period. On a quarterly basis, management estimates the probable number of PSU’s that would vest until such time that the ultimate achievement of the performance criteria are known. As of December 31, 2023, the Company determined that 100% of the PSUs granted will be eligible to vest.

The Company granted 60,000 and zero PSUs to employees of the Company during the years ended December 31, 2023 and 2022.

Number of Shares Weighted AverageGrant DateFair Value

Non-vested PSUs as of December 31, 2022 —

Vested —

F-22

Krystal Biotech, Inc.

Notes to Consolidated Financial Statements — Continued

There was $2.4 million of unrecognized stock-based compensation expense related to employees’ PSU awards that is expected to be recognized over a weighted-average period of 1.2 years as of December 31, 2023.

The Company recorded stock-based compensation expense related to PSUs in the consolidated statements of operations and comprehensive income (loss) for the years ended December 31, 2023, 2022, and 2021 as follows (in thousands):

Years Ended December 31,

Selling, general and administrative $ 1,717 $ — $ —

Total stock-based compensation $ 1,717 $ — $ —

Shares remaining available for grant under the Plan were 1,509,438, with a sublimit for incentive stock options of 22,786, at December 31, 2023.

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. For the years ended December 31, 2023, 2022 and 2021, the Company capitalized $1.1 million, zero, and zero, respectively, in inventory.

Historically, the Company also capitalized the portion of stock-based compensation related to work performed on the construction of our manufacturing facilities. For the years ended December 31, 2023, 2022 and 2021, the Company capitalized $162 thousand, $551 thousand, and $284 thousand, respectively, of stock-based compensation in property and equipment.

11. Income Taxes

Our income (loss) before income taxes by jurisdiction consisted of the following:

Years Ended December 31,

The provision (benefit) for income taxes consists of the following:

Years Ended December 31,

Federal $ 125 $ — $ —

Foreign 138 $ — $ —

Total Tax Provision $ 1,965 $ — $ —

F-23

Krystal Biotech, Inc.

Notes to Consolidated Financial Statements — Continued

A reconciliation of income tax expense (benefit) computed at the statutory federal and state income tax rate for the year to income tax expense as reflected in our financial statements for years ended December 31, 2023, 2022 and 2021 are as follows (in thousands):

Years Ended December 31,

State income tax expense (benefit) net of federal benefit 7,546 (10,438) (5,436)

Other non-deductible expenses 136 30 (49)

Total tax expense $ 1,965 $ — $ —

The significant components of the Company’s deferred tax assets and liabilities as of December 31, 2023 and 2022 are as follows (in thousands):

December 31, December 31,

Deferred tax assets:

Unrealized loss on marketable securities — 192

Deferred tax liabilities:

Unrealized gain on marketable securities (197) —

Total deferred tax liabilities $ (14,602) $ (3,303)

Net deferred tax assets $ — $ —

The Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets. Based on the Company’s history of operating losses, the Company has concluded that it is not more likely than not that the benefit of its deferred tax assets will be realized. Accordingly, the Company has provided a full valuation allowance for deferred tax assets as of December 31, 2023 and 2022.

As of December 31, 2023 and 2022, the Company had federal research and development credit carryforwards of approximately $4.8 million and $2.0 million, respectively. The federal tax credit carryforwards will begin to expire in 2039 if not utilized. As of December 31, 2023 and 2022, the Company also had orphan drug tax credit carryforwards of approximately $5.5 million and $4.4 million, respectively. The orphan drug tax credit carryforwards will begin to expire in 2039 if not utilized.

F-24

Krystal Biotech, Inc.

Notes to Consolidated Financial Statements — Continued

As of December 31, 2023, the Company fully utilized its state research and development credit carryforwards and as of December 31, 2022, the Company had $457 thousand of state research and development credit carryforwards.

As of December 31, 2023, the Company had cumulative U.S. federal NOL carryforwards of approximately $138.2 million. The federal NOL carryforwards are available indefinitely to offset future income tax liabilities with no expiration period.

As of December 31, 2023, the Company had cumulative U.S. state NOL carryforwards of approximately $186.0 million. The state NOLs are available to offset future state income tax liabilities and will begin to expire in 2037.

Under the provisions of the Internal Revenue Code, the NOL carryforwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities. NOL carryforwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant shareholders over a three-year period in excess of 50%, as defined under Internal Revenue Code Sections 382 and 383 of the Internal Revenue Code, respectively, as well as similar state provisions. This could limit the amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities.

No deferred tax assets have been recognized on our consolidated balance sheets related to these NOLs, as they are fully offset by a valuation allowance. If we have previously had, or have in the future, one or more Section 382 “ownership changes,” including in connection with our initial public offering or another offering, or if we do not generate sufficient taxable income, we may not be able to utilize a material portion of our NOLs, even if we achieve profitability.

The Company files income tax returns in the United States at the federal and state level and in foreign jurisdictions in which the Company conducts business activities. The federal and state income tax returns are subject to tax examinations for the tax year ended December 31, 2022, 2021, 2020. To the extent the Company has tax attribute carryforwards, the tax years in which the attribute was generated may still be adjusted upon examination by the Internal Revenue Service or state tax authorities to the extent utilized in a future period. Additionally, the Company is subject to tax examinations by taxing authorities in foreign jurisdictions where it has business operations. At this time, the Company is not undergoing examination by the Internal Revenue Service or any state or foreign taxing authorities.

12. Gain on Sale of Priority Review Voucher

In August 2023, the Company entered into an agreement to sell the rare pediatric disease voucher (“PRV”), which was awarded to the Company in connection with the FDA’s approval of VYJUVEK. The transaction closed in August 2023 and was not subject to any commissions or closing costs. The proceeds of $100.0 million from the sale of the PRV were recorded as a gain from sale of priority review voucher on the Company’s consolidated statement of operations as it did not have a carrying value at the time of the sale, and as proceeds from sale of priority review voucher on the Company’s consolidated statement of cash flows.

13. 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 disclosure. The Company concluded that no subsequent events have occurred that would require recognition or disclosure in the consolidated financial statements.

F-25

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Under the supervision of our Chief Executive Officer and Chief Accounting Officer, we evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of December 31, 2023. Based on that evaluation, our Chief Executive Officer and Chief Accounting Officer have concluded that our disclosure controls and procedures were effective as of December 31, 2023 to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Accounting Officer, as appropriate to allow timely discussion regarding required disclosures. In designing and evaluating our disclosure controls and procedures, management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2023 based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Based on the results of its evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2023. The effectiveness of our internal control over financial reporting as of December 31, 2023 has been audited by KPMG, an independent registered public accounting firm, as stated in their report which is included herein.

Inherent Limitations on Controls and Procedures

Our management, including the Chief Executive Officer and Chief Accounting Officer, do not expect that our disclosure controls and procedures and our internal controls will prevent all error and all fraud. A control system, no matter how well designed and operated, can only provide reasonable assurances that the objectives of the control system are met. The design of a control system reflects resource constraints; the benefits of controls must be considered relative to their costs. Because there are inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been or will be detected. As these inherent limitations are known features of the financial reporting process, it is possible to design into the process safeguards to reduce, though not eliminate, these risks. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns occur because of simple error or mistake. Controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events. While our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, there can be no assurance that any design will succeed in achieving its stated goals under all future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with the policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.