Krystal Biotech, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2017; results also compare the nine months ended September 30, 2017 with the same 2016 periods. Financial statements are unaudited. Krystal is a clinical-stage gene therapy company developing dermatology treatments; its lead candidate, KB103 for dystrophic epidermolysis bullosa (DEB), remained in preclinical development.
Financial results and liquidity
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $0 | $0 |
| Research and development expense | $1.355 million | $241,000 | $2.120 million | $339,000 |
| General and administrative expense | $738,000 | $81,000 | $1.154 million | $184,000 |
| Operating loss | $2.093 million | $322,000 | $3.274 million | $523,000 |
| Interest expense, net | $3.180 million | $0 | $3.253 million | $0 |
| Net loss | $5.273 million | $322,000 | $6.527 million | $523,000 |
- There was no product or other revenue, so gross margin and profitability margins are not meaningful. Basic and diluted loss per share was $1.26 for Q3 and $1.75 for the nine-month period in 2017.
- At September 30, 2017, cash was $52.570 million, total assets $52.673 million, current liabilities $2.475 million, and total liabilities $2.475 million. Convertible notes and accrued interest were zero after conversion; the company reported no outstanding debt at quarter-end.
- Cash used in operating activities was $1.763 million for the first nine months of 2017, versus $450,000 in 2016. Investing activities used $51,000; financing activities provided $52.461 million. Cash increased by $50.647 million to $52.570 million.
- Management said quarter-end cash was expected to fund operations for at least 12 months from the filing date, but not to fund marketing approval or commercialization. Accumulated deficit was $7.677 million.
Material changes and notable items
- Operating expenses rose substantially year over year, reflecting outsourced manufacturing and in-vivo studies, increased payroll and supplies, and higher legal, professional, public-company and other administrative costs.
- The $3.2 million Q3 net interest expense was primarily a noncash charge associated with the beneficial conversion feature of convertible notes converted into preferred shares. Notes and accrued interest totaling $4.254 million converted in August; the preferred shares converted to common stock at the September IPO.
- The September IPO raised approximately $40.8 million in net proceeds after underwriting discounts and offering expenses. The company also received $7.0 million from an August preferred-stock financing and approximately $1.0 million from a director-affiliated common-stock purchase.
- At September 30, 10,237,247 common shares were outstanding. The company reported no material litigation, no off-balance-sheet arrangements, and effective disclosure controls and procedures.
Outlook, risks, and subsequent events
- Management expected R&D spending to increase as KB103 advances and clinical materials are manufactured; G&A costs were also expected to rise as the company operates as a public company. The filing stated a plan, subject to regulatory clearances, to begin a Phase 1/2 KB103 trial in the first quarter of 2018.
- The company had not demonstrated clinical safety or efficacy for KB103 and warned that clinical, regulatory, manufacturing, recruitment, intellectual-property and financing risks could delay or prevent development. Further capital would likely be needed to reach regulatory approval and commercialization; future financing could dilute shareholders or impose restrictive terms.
- The company estimated approximately $1.7 million of remaining commitment under its KB103 clinical supply agreement. Net future lease payments were disclosed as $108,000 after expected sublease receipts.
- After quarter-end, the company reported that the FDA granted KB103 orphan drug designation on November 2, 2017, and that NIH RAC protocol registration was completed on November 3. These are subsequent developments, not quarter-end results. A November 2 stock sale to nonprofit purchasers generated $770,000 gross proceeds.
- Other risks include the company’s early stage and limited operating history, reliance on third-party manufacturing, no issued patents at the time described in the filing, potential adverse events, and concentration of voting power among founders and executives.
Investor verification points
- Confirm the planned Phase 1/2 trial start, regulatory clearances, and subsequent clinical progress for KB103.
- Track cash burn and the assumptions behind management’s stated 12-month runway, including the timing and cost of clinical manufacturing and trials.
- Review the composition of the $3.2 million noncash conversion-related interest charge and the note-conversion terms.
- Assess whether manufacturing capacity, supply commitments, and patent applications progress as planned; the filing noted no patents had yet been granted to the company.
- Verify subsequent financing, share-count changes, and the conditions and potential benefits associated with the orphan drug designation.