ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS
The
following discussion should be read in conjunction with our consolidated financial statements and related notes included in this Form
10-K.
Abeona
is a clinical-stage biopharmaceutical company developing cell and gene therapies for life-threatening diseases. Our lead clinical program
is EB-101, an autologous, engineered cell therapy currently in development for recessive dystrophic epidermolysis bullosa (“RDEB”).
In November 2022, we announced positive topline data from the VIITALTM study evaluating the efficacy, safety and tolerability of
EB-101. The VIITALTM study met its two co-primary efficacy endpoints demonstrating statistically significant, clinically meaningful
improvements in wound healing and pain reduction in large chronic RDEB wounds. Based on the positive topline results, we intend to submit
a Biologics License Application (“BLA”) for EB-101 to the U.S. Food and Drug Administration (“FDA”) in late second
quarter of 2023 or early third quarter of 2023.
Our
development portfolio also features adeno-associated virus (“AAV”) based gene therapies designed to treat ophthalmic
diseases using the novel AIMTM capsid platform that we have exclusively licensed from the University of North Carolina at
Chapel Hill, and internal AAV vector research programs.
We
have continued to prepare our current Good Manufacturing Practices (“cGMP”) commercial facility in Cleveland, Ohio for manufacturing
EB-101 drug product to support our planned BLA filing to the FDA. EB-101 study drug product for all our VIITALTM study participants
has been manufactured at our Cleveland facility.
Preclinical
Pipeline
Our preclinical programs are investigating the use of novel AAV capsids
in AAV-based therapies for serious eye diseases, including ABO-504 for Stargardt disease, ABO-503 for X-linked retinoschisis (XLRS) and
ABO-505 for autosomal dominant optic atrophy (ADOA). In 2022, we evaluated the ability of our gene constructs and capsids to deliver and
express the recombinant protein in target eye tissues and rescue mutant phenotypes in mouse disease models. The Company has submitted
a pre-Investigational New Drug (IND) application meeting request for XLRS to the FDA to gain alignment on IND enabling toxicity studies
and clinical trial design. The Company expects to present new preclinical data from these programs at a future medical meeting in second
quarter of 2023.
RESULTS
OF OPERATIONS
Comparison
of Years Ended December 31, 2022 and December 31, 2021
For the year ended December 31, Change
Revenues:
Expenses:
Impairment of licensed technology 1,355 — 1,355 N/A
Impairment of right-of-use lease assets 2,511 — 2,511 N/A
Impairment of construction-in-progress 1,792 — 1,792 N/A
Gain on settlement with licensor — 6,743 (6,743 ) N/A
PPP loan payable forgiveness income — 1,758 (1,758 ) N/A
Change in fair value of warrant liabilities 11,383 — 11,383 N/A
N/A
- not applicable or not meaningful
License
and other revenues
License
and other revenues for the year ended December 31, 2022 was $1.4 million, as compared to $3.0 million for the same period of 2021. The
revenue in 2022 resulted from a clinical milestone achieved in the second quarter of 2022 under a sublicense agreement we entered into
with Taysha Gene Therapies (“Taysha”) in October 2020 relating to an investigational AAV-based gene therapy for Rett syndrome,
including certain intellectual property relating to MECP2 gene constructs and regulation of their expression. There was also revenue
consisting of the recognition of deferred revenue related to grants for the ABO-102 and ABO-101 development programs and revenue related
to the sublet of a portion of our existing leases.
The
revenue in 2021 resulted from a clinical milestone achieved in December 2021 under a sublicense agreement we entered into with Taysha
in August 2020 for ABO-202, an AAV gene therapy for CLN1 disease (also known as infantile Batten disease).
Royalties
Total
royalties expenses were $0.4 million for the year ended December 31, 2022, as compared to nil for the same period of 2021, an increase
of $0.4 million. The increase in expense was due to royalties owed to our licensors resulting from the $1.0 million milestone due from
Taysha.
Research
and development
Research
and development expenses include, but are not limited to, payroll and personnel expense, lab supplies, preclinical and development costs,
clinical trial costs, manufacturing and manufacturing facility costs, costs associated with regulatory approvals, depreciation on lab
supplies and manufacturing facilities, and consultant-related expenses.
Total
research and development spending for the year ended December 31, 2022 was $28.9 million, as compared to $38.7 million for the same period
of 2021, a decrease of $9.8 million. The decrease in expenses was primarily due to:
● decreased non-cash stock compensation expenses of $3.2 million; and
● decreased salary and related costs of $1.0 million; partially offset by
● increased other costs of $0.1 million.
We
expect our research and development activities to continue as we attempt to advance our product candidates towards potential regulatory
approval, reflecting costs associated with:
● employee and consultant-related expenses;
● preclinical and developmental costs;
● clinical trial costs;
● the cost of acquiring and manufacturing clinical trial materials; and
● costs associated with regulatory approvals.
General
and administrative
General
and administrative expenses primarily consist of payroll and personnel costs, office facility costs, public reporting company related
costs, professional fees (e.g., legal expenses) and other general operating expenses not otherwise included in research and development
expenses.
Total
general and administrative expenses were $17.2 million for the year ended December 31, 2022, as compared to $21.6 million for the same
period of 2021, a decrease of $4.4 million. The decrease in expenses was primarily due to:
● decreased professional fees of $3.9 million;
● increased other costs of $0.8 million; and
● increased salary and related costs of $1.4 million.
Impairment
of goodwill
Goodwill
impairment charge was nil for the year ended December 31, 2022, as compared to $32.5 million in the same period of 2021. As of year-end
2021, the carrying value of our net assets was determined to exceed the fair value of our net assets, and therefore, we recorded a goodwill
impairment charge of $32.5 million.
Impairment
of licensed technology
Impairment
of licensed technology was $1.4 million for the year ended December 31, 2022, as compared to nil in the same period of 2021. The licensed
technology was for the ABO-102 and ABO-101 development programs, which, as a result of our shift in priorities, we determined the licensed
technology had no future value and thus recorded impairment of $1.4 million for the year ended December 31, 2022.
Impairment
of right-of-use lease assets
Impairment
of right-of-use lease assets was $2.5 million for the year ended December 31, 2022, as compared to nil in the same period of 2021. A
portion of the impairment was related to a lease for a future manufacturing facility for the ABO-102 and ABO-101 development programs,
which, as a result of our shift in priorities, we determined the portion of this lease had no future value and thus recorded impairment
of $1.6 million for the for the year ended December 31, 2022. In addition, we sublet a portion of our leased properties which indicated
that a portion of the lease had a reduced future value and thus recorded impairment of $0.9 million for the year ended December 31, 2022.
Impairment
of construction-in-progress
Impairment
of construction-in-progress was $1.8 million for the year ended December 31, 2022, as compared to nil in the same period of 2021. The
construction-in-progress was for a facility for the ABO-102 and ABO-101 development programs. As a result of our shift in priorities,
we determined the construction-in-progress facility had no future value and thus recorded impairment of $1.8 million for the for the
year ended December 31, 2022, which was net of a cash refund from the builder of approximately $1.5 million.
Gain
on settlement with licensor
Gain
on settlement with licensor was nil for the year ended December 31, 2022, as compared to $6.7 million in the same period of 2021. On
November 12, 2021, we entered into a settlement agreement with REGENXBIO, Inc. (“REGENXBIO”) to resolve all current disputes
between us and REGENXBIO. The accounting for this settlement agreement resulted in a $6.7 million gain on settlement with REGENXBIO in
the year ended December 31, 2021.
PPP
loan payable forgiveness income
PPP
loan payable forgiveness income was nil for the year ended December 31, 2022, as compared to $1.8 million in the same period of 2021.
In July 2021, we received notice from the SBA that our PPP loan had been forgiven so the PPP loan payable was reversed in the year ended
December 31, 2021.
Interest
income
Interest
income was $0.4 million for the year ended December 31, 2022, as compared to $40,000 in the same period of 2021. The increase resulted
from higher earnings on short-term investments driven by higher interest rates and a higher average balance of short-term investments.
Interest
expense
Interest
expense was $0.7 million for the year ended December 31, 2022, as compared to $3.7 million in the same period of 2021. The decrease results
primarily from the resolution of a disputed liability owed to our prior licensor, REGENXBIO.
Change
in fair value of warrant liabilities
The
change in fair value of warrant liabilities was $11.4 million for the year ended December 31, 2022, as compared to nil in the same period
of 2021. We issued stock purchase warrants that are required to be classified as a liability and valued at fair market value at each
reporting period. The change in the fair value of warrant liabilities resulted in a gain of $11.4 million due primarily to the reduction
in our stock price year over the year and a shorter term.
Other
income
Other
income was $0.1 million for the year ended December 31, 2022, as compared to $15,000 in the same period of 2021. The increase was primarily
a result of a gain on lease termination of $0.3 million partially offset by $0.1 million of losses on the disposal of fixed assets.
LIQUIDITY
AND CAPITAL RESOURCES
Cash
Flows for the Years Ended December 31, 2022 and 2021
For the year ended December 31,
Total cash, cash equivalents and restricted cash (used in) provided by:
Operating
activities
Net
cash used in operating activities was $43.5 million for the year ended December 31, 2022, primarily comprised of our net loss of $39.7
million and decrease in operating assets and liabilities of $5.9 million and net non-cash charges of $2.1 million.
Net
cash used in operating activities was $65.7 million for the year ended December 31, 2021, primarily comprised of our net loss of $84.9
million and decrease in operating assets and liabilities of $18.3 million, partially offset by net non-cash charges of $37.5 million.
Investing
activities
Net
cash used in investing activities was $24.0 million for the year ended December 31, 2022, primarily comprised of purchases of short-term
investments of $78.2 million and capital expenditures of $0.1 million, partially offset by proceeds from maturities of short-term investments
of $52.6 million and proceeds from the disposal of property and equipment of $1.7 million.
Net
cash provided by investing activities was $66.1 million for the year ended December 31, 2021, primarily comprised of proceeds from maturities
of short-term investments of $90.4 million, partially offset by purchases of short-term investments of $20.2 million and capital expenditures
of $4.1 million.
Financing
activities
Net
cash provided by financing activities was $43.2 million for the year ended December 31, 2022, primarily comprised of proceeds of $12.8
million from open market sales of common stock pursuant to the ATM Agreement (as defined below) and proceeds of $34.1 million from a
private offering of common stock and warrants on November 3, 2022, partially offset by the proceeds and redemption of our convertible
redeemable preferred stock.
Net
cash provided by financing activities was $24.9 million for the year ended December 31, 2021, primarily comprised of proceeds of $17.4
million from the issuance of common stock and warrants in a public offering, proceeds of $8.0 million from open market sales of common
stock pursuant to the ATM Agreement and proceeds of $0.8 million from the exercise of stock options, partially offset by the payment
of offering costs in a public offering of $1.5 million.
We
have historically funded our operations primarily through sales of common stock.
Our
principal source of liquidity is cash, cash equivalents, restricted cash and short-term investments, collectively referred to as our
cash resources. As of December 31, 2022, our cash resources were $52.5 million. We believe that our current cash and cash equivalents,
restricted cash and short-term investments are sufficient resources to fund operations through at least the next 12 months from the date
of this report on Form 10-K. We may need to secure additional funding to carry out all of our planned research and development activities.
If we are unable to obtain additional financing or generate license or product revenue, the lack of liquidity and sufficient capital
resources could have a material adverse effect on our future prospects.
We
have an open market sale agreement with Jefferies LLC (as amended, the “ATM Agreement”) pursuant to which, we may sell
from time to time, through Jefferies LLC, shares of our common stock for an aggregate sales price of up to $150.0 million. Any sales
of shares pursuant to this agreement are made under our effective “shelf” registration statement on Form S-3 that is on
file with and has been declared effective by the SEC. We are currently subject to General Instruction I.B.6 of Form S-3, as a result
of which the amount of funds we can raise through primary public offerings of securities in any 12-month period using our
registration statement on Form S-3 is limited to one-third of the aggregate market value of the voting and non-voting common equity
held by non-affiliates. We remain subject to this one-third limitation until such time our public float exceeds $75 million. We sold
146,872 shares of our common stock under the ATM Agreement and received $8.1 million of net proceeds during the year ended December
31, 2021. We sold 3,479,016 shares of our common stock under the ATM Agreement and received $12.8 million of net proceeds during the
year ended December 31, 2022.
Since
our inception, we have incurred negative cash flows from operations and have expended, and expect to continue to expend substantial funds
to complete our planned product development efforts. We have not been profitable since inception and to date have received limited revenues
from the sale of products or licenses. We expect to incur losses for the next several years as we continue to invest in product research
and development, preclinical studies, clinical trials, and regulatory compliance and cannot provide assurance that we will ever be able
to generate sufficient product sales or royalty revenue to achieve profitability on a sustained basis, or at all.
If
we raise additional funds by selling additional equity securities, the relative equity ownership of our existing investors will be diluted,
and the new investors could obtain terms more favorable than previous investors. If we raise additional funds through collaborations,
strategic alliances, or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future
revenue streams, research programs, or product candidates or grant licenses on terms that may not be favorable to us. If we are unable
to raise additional funds through equity or debt financing when needed, we may be required to delay, limit, or terminate our product
development programs or any future commercialization efforts or grant rights to develop and market product candidates to third parties
that we would otherwise prefer to develop and market ourselves.
Our
future capital requirements and adequacy of available funds depend on many factors, including:
● continued scientific progress in our research and development programs;
● the magnitude, scope and results of preclinical testing and clinical trials;
● the costs involved in filing, prosecuting, and enforcing patent claims;
● the costs involved in conducting clinical trials;
● competing technological developments;
● the cost of manufacturing and scale-up;
● the successful outcome of our regulatory filings.
Due
to uncertainties and certain of the risks described above, our ability to successfully commercialize our product candidates, our ability
to obtain applicable regulatory approval to market our product candidates, our ability to obtain necessary additional capital to fund
operations in the future, our ability to successfully manufacture our products and our product candidates in clinical quantities or for
commercial purposes, government regulation to which we are subject, the uncertainty associated with preclinical and clinical testing,
intense competition that we face, the potential necessity of licensing technology from third parties and protection of our intellectual
property, it is not possible to reliably predict future spending or time to completion by project or product category or the period in
which material net cash inflows from significant projects are expected to commence. If we are unable to timely complete a particular
project, our research and development efforts could be delayed or reduced, our business could suffer depending on the significance of
the project and we might need to raise additional capital to fund operations, as discussed in the risks above.
We
plan to continue our policy of investing any available funds in suitable certificates of deposit, money market funds, government securities
and investment-grade, interest-bearing securities. We do not invest in derivative financial instruments.
Contractual
Obligations
We
enter into agreements in the normal course of business with clinical research organizations for clinical trials and clinical manufacturing
organizations for supply manufacturing and with vendors for preclinical research studies and other services and products for operating
purposes. These contractual obligations are cancelable at any time by us, generally upon prior written notice to the vendor, and are
thus not included in the contractual obligations table.
Operating
lease amounts represent future minimum lease payments under our non-cancelable operating lease agreements. The minimum lease payments
above do not include any related common area maintenance charges or real estate taxes.
On
November 12, 2021, we entered into a Settlement Agreement with REGENXBIO to resolve all current disputes between the parties including
the aforementioned AAA arbitration and New York State Supreme Court action. In accordance with the Settlement Agreement, we agreed to
pay REGENXBIO a total of $30 million, payable as follows: (1) $20 million payable that was paid in 2021 after execution of the Settlement
Agreement, (2) $5 million on the first anniversary of the effective date of the Settlement Agreement, and (3) $5 million upon the earlier
of: (i) the third anniversary of the effective date of the Settlement Agreement or (ii) the closing of a Strategic Transaction, as defined
in the Settlement Agreement. As of December 31, 2022, we have recorded the payable to licensor in the contractual obligations as the
one remaining payments due to REGENXBIO under the Settlement Agreement.
In
addition, we are also party to other license agreements, which include contingent payments. However, contingent payments related to these
license agreements are not disclosed as the satisfaction of these contingent payments is uncertain as of December 31, 2022 and, if satisfied,
the timing of payment for these amounts was not reasonably estimable as of December 31, 2022. Commitments related to the license agreements
include contingent payments that will become payable if and when certain development, regulatory and commercial milestones are achieved.
During the next 12 months, we do not expect to make milestone payments related to such license agreements.
Critical
Accounting Estimates
The
preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts and related disclosures in the financial statements. Management
considers an accounting estimate to be critical if:
While
we base our estimates and judgments on our experience and on various other factors that we believe to be reasonable under the circumstances,
actual results could differ from those estimates and the differences could be material.
Leases
We
account for leases pursuant to ASC 842, Leases (“ASC 842”). ASC 842 requires the recognition of lease assets and lease
liabilities by lessees for those leases classified as operating leases. We determine if an arrangement is a lease at inception
or when amended. Right-of-use lease assets represent our right to use an underlying asset for the lease term and lease liabilities represent
our obligation to make lease payments arising from the lease. The classification of our leases as operating or finance leases along with
the initial measurement and recognition of the associated right-of-use assets and lease liabilities is performed at the lease commencement
date or when amended. The measurement of lease liabilities is based on the present value of future lease payments over the lease term.
As our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the lease
commencement date in determining the present value of future lease payments. The right-of-use asset is based on the measurement of the
lease liability and includes any lease payments made prior to or on lease commencement or lease amendment and excludes lease incentives
and initial direct costs incurred, as applicable. Rent expense for our operating leases is recognized on a straight-line basis over the
lease term. We do not have any leases classified as finance leases.
Our
leases do not have significant rent escalation, holidays, concessions, material residual value guarantees, material restrictive covenants
or contingent rent provisions. Our leases include both lease (e.g., fixed payments including rent, taxes, and insurance costs) and non-lease
components (e.g., common-area or other maintenance costs), which are accounted for as a single lease component as we have elected the
practical expedient to group lease and non-lease components for all leases. We have elected the practical expedient to exclude short-term
leases from our right-of-use assets and lease liabilities.
Most
leases include one or more options to renew. The exercise of lease renewal options is typically at our sole discretion; therefore, the
majority of renewals to extend the lease terms are not included in our right-of-use assets and lease liabilities as they are not reasonably
certain of exercise. We regularly evaluate the renewal options and when they are reasonably certain of exercise, we include the renewal
period in our lease term.
On
March 31, 2022, we announced that we were pursuing a strategic partner to take over development activities of ABO-102 and we were discontinuing
development of ABO-101. As a result of this shift in priorities, we determined the portion of the lease that was dedicated to the future
facility for the ABO-101 and ABO-102 programs, had no future value and thus, we recorded an impairment charge of $1.6 million for the
year ended December 31, 2022. In addition, we sublet a portion of our leased properties which indicated that a portion of the lease had
a reduced future value and thus recorded impairment of $0.9 million for the year ended December 31, 2022
Licensed
Technology
We
maintain licensed technology on our consolidated balance sheet until either the licensed technology agreement underlying it is completed
or the asset becomes impaired. When we determine that an asset has become impaired or we abandon a project, we write down the carrying
value of the related intangible asset to its fair value and take an impairment charge in the period in which the impairment occurs.
Generally,
licensed technology is amortized over the life of the patent or the agreement. We test our intangible assets for impairment if indicators
are present or changes in circumstance suggest that impairment may exist. Events that could result in an impairment, or trigger an interim
impairment assessment, include the receipt of additional clinical or nonclinical data regarding our drug candidate or a potentially competitive
drug candidate, changes in the clinical development program for a drug candidate or new information regarding potential sales for the
drug. In connection with any impairment assessment, we compare the fair value of the asset as of the date of the assessment with the
carrying value of the asset on our consolidated balance sheets.
During
2022, in connection with the license of our ABO-102 asset for the treatment of Sanfilippo syndrome type A (MPS IIIA) to Ultragenyx and
the discontinuation of the ABO-101 program for the treatment of Sanfilippo syndrome type B (MPS IIIB), we recorded an impairment charge
of $1.4 million as we determined that there was no remaining value of the licensed technology.
In
2021, we did not impair any licensed technology.
Impairment
of Long-Lived Assets
Long-Lived
Assets consist of property and equipment, licensed technology, and right-of-use (“ROU”) assets. We test our long-lived assets
for impairment on an annual basis, or when events and circumstances indicate that the carrying value of an asset or group of assets may
not be fully recoverable. If indicators are present or changes in circumstance suggest that impairment may exist. We assess the recoverability
of the affected long-lived assets by determining whether the carrying value of such assets can be recovered through undiscounted future
operating cash flows. If the carrying amount is not recoverable, we measure the amount of any impairment by comparing the carrying value
of the asset to the present value of the expected future cash flows associated with the use of the asset.
Goodwill
In
accordance with ASC 350 — Intangibles — Goodwill and Other, we test goodwill for impairment on an annual basis and
in the interim if events and circumstances indicate that goodwill may be impaired. The events and circumstances that are considered include
business climate and market conditions, legal factors, operating performance indicators and competition. Impairment of goodwill is evaluated
on a qualitative basis before calculating the fair value of the entity. If the qualitative assessment suggests that impairment is more
likely than not, a quantitative impairment analysis is performed. The quantitative analysis involves comparison of the fair value of
the entity with its carrying value. The valuation of an entity requires judgment. In making these judgments, we evaluate the financial
health of our business. Decreases in the value of our common stock could cause the carrying value of the entity to exceed its fair value.
If the carrying amount of the entity exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited
to the total amount of goodwill. If an event occurs that would cause a revision to the estimates and assumptions used in analyzing the
value of the goodwill, the revision could result in a noncash impairment charge that could have a material impact on the financial results.
We
experienced a steep decline in our share price during the year ended December 31, 2021. We performed our annual goodwill impairment tested
as of year-end 2021 and determined that the carrying value of our net assets exceeded fair value using our market capitalization as a
proxy for fair value. In accordance with ASC 350, we recognized an impairment loss for that excess of carrying value over fair value
but limited to the total amount of goodwill recorded on our consolidated balance sheets. As a result, we recorded a goodwill impairment
charge of $32.5 million during the year ended December 31, 2021.
Revenue
Recognition
We
account for revenue under ASC 606, Revenue from Contracts with Customers, (“ASC 606”). We recognize revenue when our
customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange
for those goods or services. To determine revenue recognition for arrangements that we determine are within the scope of ASC 606, we
perform the following five steps: (i) identify the contract(s) with our customer; (ii) identify the performance obligations in the contract;
(iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize
revenue when (or as) we satisfy a performance obligation.
Sublicense
and Inventory Purchase Agreements Relating to CLN1 Disease: In August 2020, we entered into sublicense and inventory purchase agreements
with Taysha Gene Therapies (“Taysha”) relating to a potential gene therapy for CLN1 disease. Under the sublicense agreement,
Taysha received worldwide exclusive rights to intellectual property and know-how relating to the research, development, and manufacture
of the potential gene therapy, which we had referred to as ABO-202. Under the inventory purchase agreement, we sold to Taysha certain
inventory and other items related to ABO-202. We assessed these contracts at contract inception and determined that, under ASC 606, the
two contracts would be combined and accounted for as a single contract, with a single performance obligation. We assessed the nature
of the promised license to determine whether the license has significant stand-alone functionality and evaluated whether such functionality
can be retained without ongoing activities by us and determined that the license has significant stand-alone functionality. Furthermore,
we have no ongoing activities associated with the license to support or maintain the license’s utility. Based on this, we determined
that the pattern of transfer of control of the license to Taysha was at a point in time.
The
transaction price of the contract includes (i) $7.0 million of fixed consideration, (ii) up to $26.0 million of variable consideration
in the form of event-based milestone payments, (iii) up to $30.0 million of variable consideration in the form of sales-based milestone
payments, and (iv) other royalty-based payments based on net sales. The event-based milestone payments are based on certain development
and regulatory events occurring. At inception, we evaluated whether the milestone conditions had been achieved and if it was probable
that a significant revenue reversal would not occur before recognizing the associated revenue and determined that these milestone payments
were not within our control or the licensee’s control, such as regulatory approvals, and were not considered probable of being
achieved until those approvals were received. Accordingly, at inception, we fully constrained the $26.0 million of event-based milestone
payments until such time that it is probable that significant revenue reversal would not occur. The sales-based milestone payments and
other royalty-based payments are based on a level of sales for which the license is deemed to be the predominant item to which the royalties
relate. We will recognize revenue for these payments at the later of (i) when the related sales occur, or (ii) when the performance obligation
to which some or all of the royalty has been allocated has been satisfied or partially satisfied. To date, we have not recognized any
sales-based or royalty revenue resulting from this licensing arrangement.
During
the year ended December 31, 2021, Taysha achieved an event-based milestone payment and, accordingly, we recognized $3.0 million of revenue
as of December 31, 2021. There was no revenue recognized under this agreement during the year ended December 31, 2022. As of December
31, 2022 and 2021, we have a contract asset for nil and $3.0 million but did not have any contract liabilities as a result of this transaction.
We collected the $3.0 million of cash in January 2022 in full satisfaction of the contract asset.
Sublicense
Agreement Relating to Rett Syndrome: In October 2020, we entered into a sublicense agreement with Taysha for a gene therapy for Rett
syndrome and MECP2 gene constructs and regulation of their expression. The agreement grants Taysha worldwide exclusive rights to intellectual
property developed by scientists at the University of North Carolina at Chapel Hill, the University of Edinburgh and us, and our know-how
relating to the research, development, and manufacture of the gene therapy for Rett syndrome and MECP2 gene constructs and regulation
of their expression.
We
assessed the nature of the promised license to determine whether the license has significant stand-alone functionality and evaluated
whether such functionality can be retained without ongoing activities by us and determined that the license has significant stand-alone
functionality. Furthermore, we have no ongoing activities associated with the license to support or maintain the license’s utility.
Based on this, we determined that the pattern of transfer of control of the license to Taysha was at a point in time.
The
transaction price of the contract includes (i) $3.0 million of fixed consideration, (ii) up to $26.5 million of variable consideration
in the form of event-based milestone payments, (iii) up to $30.0 million of variable consideration in the form of sales-based milestone
payments, and (iv) other royalty-based payments based on net sales. The event-based milestone payments are based on certain development
and regulatory events occurring. We evaluated whether the milestone conditions have been achieved and if it is probable that a significant
revenue reversal would not occur before recognizing the associated revenue. We determined that these milestone payments are not within
our control or the licensee’s control, such as regulatory approvals, and are not considered probable of being achieved until those
approvals are received. Accordingly, we have fully constrained the $26.5 million of event-based milestone payments until such time that
it is probable that significant revenue reversal would not occur. The sales-based milestone payments and other royalty-based payments
are based on a level of sales for which the license is deemed to be the predominant item to which the royalties relate. We will recognize
revenue for these payments at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or
all of the royalty has been allocated has been satisfied or partially satisfied. To date, we have not recognized any sales-based or royalty
revenue resulting from this licensing arrangement.
Under
this arrangement, we recognized $1.0 million of revenue during the year ended December 31, 2022, which amount related solely to fixed
consideration. We did not recognize any related revenue during the year ended December 31, 2021. As of December 31, 2022 and 2021, we
do not have any contract assets or contract liabilities as a result of this transaction.
Accrued
Research and Development Expenses
As
part of the process of preparing our consolidated financial statements, we are required to estimate our accrued research and development
expenses. This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that
have been performed on our behalf and estimating the level of service performed and the associated costs incurred for the services when
we have not yet been invoiced or otherwise notified of the actual costs. The majority of our service providers invoice us in arrears
for services performed, on a pre-determined schedule or when contractual milestones are met; however, some require advanced payments.
We make estimates of our accrued expenses as of each balance sheet date in our consolidated financial statements based on facts and circumstances
known to us at that time. There may be instances in which payments made to our vendors will exceed the level of services provided and
result in a prepayment of the clinical expense. If the actual timing of the performance of services or the level of effort varies from
our estimate, we adjust the accrual or amount of prepaid expense accordingly. Although we do not expect our estimates to be materially
different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status
and timing of services performed may vary and may result in us reporting amounts that are too high or too low in any particular period.
To date, we have not made any material adjustments to our prior estimates of accrued research and development expenses.
Share-Based
Compensation Expense
We
account for share-based compensation expense in accordance with ASC 718, Stock Based Compensation. We have two share-based compensation
plans under which incentive and qualified stock options and restricted shares may be granted to employees, directors, and consultants.
We measure the cost of the employee/director/consultant services received in exchange for an award of equity instruments based on the
fair value for employees and directors and vesting date fair value of the award for consultants. We use the Black-Scholes option pricing
model to determine the fair value of options as of the grant date and the Hull White I lattice model as of any option repricing dates.
The models used to determine the fair value of options includes assumptions for expected volatility, risk-free interest rate, dividend
yield and estimated expected term. We use the closing price of our common stock as quoted on Nasdaq to determine the fair value of restricted
stock. We account for forfeitures as they occur, which may result in the reversal of compensation costs in subsequent periods as the
forfeitures arise.
Stock
option-based compensation expense recognized for the years ended December 31, 2022 and 2021 was approximately $2.0 million and $5.3 million,
respectively. Restricted stock-based compensation expense recognized for the years ended December 31, 2022 and 2021 was approximately
$1.1 million and $3.7 million, respectively.
Warrants
We
have issued warrants associated with capital raises from time to time. We determine the accounting and value of any issued warrants in
accordance with ASC 480, Distinguishing Liabilities from Equity and ASC 815, Derivatives and Hedging. The first step is
to determine if the warrants are to be classified as either a liability or equity depending on the warrant terms. The second step is
to then determine the value of the warrants. We measure the value of any liability classified warrants on their issuance date based on
their fair value using the Black-Scholes pricing model. The models used to determine the fair value of these warrants includes assumptions
for expected volatility, risk-free interest rate, dividend yield and estimated expected term. The liability classified warrants are revalued
on each subsequent balance sheet date until such instruments are exercised or expire, with any changes in the fair value between reporting
periods recorded in the consolidated statements of operations and comprehensive loss.
Change
in fair value of warrant liability recognized for the years ended December 31, 2022 and 2021 was approximately $11.4 million and nil,
respectively.
ITEM7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not
applicable.
ITEM8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial
statements required by this Item are incorporated in this Annual Report on Form 10-K starting on page F-1 hereto.
Reference is made to Item 15 of this Form 10-K.
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
Our
management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness
of our disclosure controls and procedures (as defined in Rules 13a- 15(e) and 15d- 15(e) under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”)), as of the end of the period covered by this Annual Report on Form 10-K. Based on such evaluation,
our principal executive officer and principal financial officer have concluded that as of such date, our disclosure controls and procedures
were effective.
Management’s
Annual Report on Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over
financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act as a process designed by, or under
the supervision of, our principal executive and principal financial officers and effected by our board of directors, management and other
personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
Because
we are a non-accelerated filer and smaller reporting company, Whitley Penn LLP, our independent registered public accounting firm, is
not required to attest to or issue a report on the effectiveness of our internal control over financial reporting.
Inherent
Limitations of Internal Controls
Our
management, including our principal executive officer and principal financial officer, does not expect that our disclosure controls and
procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated,
can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the 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 detected. These inherent limitations include the realities that judgments in decision-making can be faulty,
and that breakdowns can occur because of a simple error or mistake. Additionally, 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 also
is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed
in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in
conditions, or the degree of compliance with the policies or procedures may deteriorate. Projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements
due to error or fraud may occur and not be detected.
Changes
in Internal Control over Financial Reporting
There
have been no changes in our internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15(d)-15(f) promulgated
under the Exchange Act, during the fourth quarter of 2022 that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
ITEM 9B.OTHER INFORMATION
None.
ITEM 9C.DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not
applicable.
PART
III
ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors
and Executive Officers
Directors
and Reports of Beneficial Ownership. The information required by this Item is incorporated herein by reference from the information
to be contained in our 2023 Proxy Statement to be filed with the SEC within 120 days after December 31, 2022 in connection with the solicitation
of proxies for our 2023 Annual Meeting of Stockholders (the “2023 Proxy Statement”).
Code
of Ethics. We have adopted a Code of Business Conduct and Ethics (the “Code”) that applies to all of our employees (including
executive officers) and directors. The Code is available on our website at www.abeonatherapeutics.com under the heading “Investors
& Media—Corporate Governance—Governance—Governance Documents.” We intend to satisfy the disclosure requirement
regarding any waiver of a provision of the Code applicable to any executive officer or director, by posting such information on such
website. We shall provide to any person without charge, upon request, a copy of the Code. Any such request must be made in writing to
Abeona Therapeutics Inc., c/o Investor Relations, 1330 Avenue of the Americas, 33rd Floor, New York, NY 10019.
Our
corporate governance guidelines and the charters of the Audit Committee, Compensation Committee and Nominating and Corporate Governance
Committee of the Board of Directors are available on our website at www.abeonatherapeutics.com under the heading “Investors
& Media—Corporate Governance—Governance—Governance Documents.” We shall provide to any person without charge,
upon request, a copy of any of the foregoing materials. Any such request must be made in writing to Abeona Therapeutics Inc., c/o Investor
Relations, 1330 Avenue of the Americas, 33rd Floor, New York, NY 10019.
ITEM 11.EXECUTIVE COMPENSATION
The
information required by this Item is contained in the 2023 Proxy Statement and is incorporated herein by reference.
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The
information required by this Item is contained in the 2023 Proxy Statement and is incorporated herein by reference.
ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTORINDEPENDENCE
The
information required by this Item is contained in the 2023 Proxy Statement and is incorporated herein by reference.
ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICES
The
information required by this Item is contained in the 2023 Proxy Statement and is incorporated herein by reference.
PART
IV
ITEM 15.EXHIBITS, FINANCIAL STATEMENT SCHEDULES
a. Financial Statements. Page
The following financial statements are submitted as part of this report:
Report of Independent Registered Public Accounting Firm (PCAOB ID 726) F-1
Consolidated Balance Sheets at December 31, 2022 and 2021 F-2
Consolidated Statements of Stockholders’ Equity for 2022 and 2021 F-4
Consolidated Statements of Cash Flows for 2022 and 2021 F-5
Notes to Consolidated Financial Statements F-6
b. Exhibits
Exhibit
Index
Exhibits: Description of Document
3.3 Amended and Restated Bylaws of Abeona Therapeutics Inc.
21 Subsidiaries of the registrant
23.1 Consent of Whitley Penn LLP
101.INS Inline XBRL Instance Document
101.SCH Inline XBRL Taxonomy Extension Schema
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document
*
Management contract or compensatory plan required to be filed as an exhibit to this report pursuant to Item 15(a)(3) of Form 10-K.
+
Portions of this exhibit have been omitted pursuant to Item 601(b)(10)(iv) of Regulation S-K.
ITEM
16. FORM 10-K SUMMARY
None.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
ABEONA THERAPEUTICS INC.
Date: March 29, 2023 By: /s/ Vishwas Seshadri
Vishwas Seshadri
President and Chief Executive Officer
(Principal Executive Officer)
Pursuant
to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: March 29, 2023 /s/ Vishwas Seshadri
Vishwas Seshadri