ABEONA THERAPEUTICS INC. 10-Q

ITEM 1. FINANCIAL STATEMENTS Abeona Therapeutics Inc. and Subsidiaries Condensed Consolidated Balance Sheets September 30, 2020 December 31, 2019 (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 8,424,000 $ 129,258,000 Receivables 7,000,000 - Short-term investments 88,447,000 - Prepaid expenses and other current assets 689,000 3,132,000 Total current assets 104,560,000 132,390,000 Property and equipment, net 12,095,000 13,157,000 Right-of-use lease assets 7,295,000 8,047,000 Licensed technology, net 1,881,000 36,178,000 Goodwill 32,466,000 32,466,000 Other assets and restricted cash 1,068,000 1,144,000 Total assets $ 159,365,000 $ 223,382,000 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 1,262,000 $ 3,763,000 Accrued expenses 3,585,000 5,543,000 Loan payable 1,758,000 - Current portion of lease liability 1,709,000 1,699,000 Payable to licensor 30,127,000 27,400,000 Deferred revenue 296,000 296,000 Total current liabilities 38,737,000 38,701,000 Long-term lease liabilities 5,517,000 6,251,000 Total liabilities 44,254,000 44,952,000 Commitments and contingencies - - Stockholders’ equity: Common stock - $ 0.01 par value; authorized 200,000,000 shares; issued and outstanding 84,516,161 at September 30, 2020 and 83,622,135 at December 31, 2019 845,000 836,000 Additional paid-in capital 669,125,000 664,064,000 Accumulated deficit ( 554,876,000 ) ( 486,470,000 ) Accumulated other comprehensive income 17,000 - Total stockholders’ equity 115,111,000 178,430,000 Total liabilities and stockholders’ equity $ 159,365,000 $ 223,382,000 The accompanying notes are an integral part of these condensed consolidated statements. 3 Abeona Therapeutics Inc. and Subsidiaries Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited) 2020 2019 2020 2019 For the three months ended September 30, For the nine months ended September 30, 2020 2019 2020 2019 Revenues License and other revenues $ 7,000,000 $ - $ 7,000,000 $ - Expenses: Research and development 7,969,000 10,917,000 20,896,000 38,961,000 General and administrative 4,432,000 4,700,000 16,382,000 15,971,000 Depreciation and amortization 847,000 2,032,000 3,746,000 5,747,000 Licensed technology impairment charge - - 32,916,000 - Total expenses 13,248,000 17,649,000 73,940,000 60,679,000 Loss from operations ( 6,248,000 ) ( 17,649,000 ) ( 66,940,000 ) ( 60,679,000 ) Interest and miscellaneous income 338,000 277,000 1,261,000 828,000 Interest and other expense ( 1,327,000 ) - ( 2,727,000 ) - Net loss $ ( 7,237,000 ) $ ( 17,372,000 ) $ ( 68,406,000 ) $ ( 59,851,000 ) Basic and diluted loss per common share $ ( 0.08 ) $ ( 0.35 ) $ ( 0.73 ) $ ( 1.22 ) Weighted average number of common shares outstanding – basic and diluted 93,772,712 49,721,753 93,199,679 48,883,883 Other comprehensive income/(loss): Change in unrealized (losses) gains related to available-for-sale debt securities ( 116,000 ) - 17,000 - Comprehensive loss $ ( 7,353,000 ) $ ( 17,372,000 ) $ ( 68,389,000 ) $ ( 59,851,000 ) The accompanying notes are an integral part of these condensed consolidated statements. 4 Abeona Therapeutics Inc. and Subsidiaries Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) Common Stock Shares Common Stock Amount Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Income Total Accumulated Additional Other Total Common Stock Paid-in Accumulated Comprehensive Stockholders’ Shares Amount Capital Deficit Income Equity For the three months ended September 30, 2020 Balance, June 30, 2020 84,781,241 $ 848,000 $ 667,712,000 $ ( 547,639,000 ) $ 133,000 $ 121,054,000 Stock option-based compensation expense - - 1,249,000 - - 1,249,000 Restricted stock-based compensation expense - - 161,000 - - 161,000 Cancellation of restricted share awards ( 265,080 ) ( 3,000 ) 3,000 - - - Issuance of common stock in connection with restricted share awards - Common stock issued for cash under open market sale agreement Common stock issued for cash under open market sale agreement, shares Common stock issued for cash exercise of options Common stock issued for cash exercise of options, shares Issuance of common stock in connection with restricted share awards, net of cancellations Issuance of common stock in connection with restricted share awards, net of cancellations, shares Shares returned in connection with arbitration ruling on licensing agreement Shares returned in connection with arbitration ruling on licensing agreement, shares Net loss - - - ( 7,237,000 ) - ( 7,237,000 ) Other comprehensive loss - - - - ( 116,000 ) ( 116,000 ) Balance, September 30, 2020 84,516,161 $ 845,000 $ 669,125,000 $ ( 554,876,000 ) $ 17,000 $ 115,111,000 For the three months ended September 30, 2019 Balance, June 30, 2019 49,249,497 $ 492,000 $ 559,335,000 $ ( 452,667,000 ) $ - $ 107,160,000 Stock option-based compensation expense - - 1,826,000 - - 1,826,000 Restricted stock-based compensation expense - - 98,000 - - 98,000 Issuance of common stock in connection with restricted share awards 376,625 4,000 ( 4,000 ) - - - Common stock issued for cash under open market sale agreement 1,428,273 15,000 4,325,000 - - 4,340,000 Net loss - - - ( 17,372,000 ) - ( 17,372,000 ) Balance, September 30, 2019 51,054,395 $ 511,000 $ 565,580,000 $ ( 470,039,000 ) $ - $ 96,052,000 For the nine months ended September 30, 2020 Balance, December 31, 2019 83,622,135 $ 836,000 $ 664,064,000 $ ( 486,470,000 ) $ - $ 178,430,000 Stock option-based compensation expense - - 4,083,000 - - 4,083,000 Restricted stock-based compensation expense - - 812,000 - - 812,000 Common stock issued for cash exercise of options 75,793 1,000 174,000 - - 175,000 Issuance of common stock in connection with restricted share awards, net of cancellations 818,233 8,000 ( 8,000 ) - - - Net loss - - - ( 68,406,000 ) - ( 68,406,000 ) Other comprehensive income - - - - 17,000 17,000 Balance, September 30, 2020 84,516,161 $ 845,000 $ 669,125,000 $ ( 554,876,000 ) $ 17,000 $ 115,111,000 For the nine months ended September 30, 2019 Balance, December 31, 2018 47,944,486 $ 479,000 $ 543,754,000 $ ( 410,188,000 ) $ - $ 134,045,000 Stock option-based compensation expense - - 5,607,000 - - 5,607,000 Restricted stock-based compensation expense - - 348,000 - - 348,000 Common stock issued for cash exercise of options 96,334 1,000 412,000 - - 413,000 Common stock issued for cash under open market sale agreement 3,086,950 32,000 16,930,000 - - 16,962,000 Issuance of common stock in connection with restricted share awards 376,625 4,000 ( 4,000 ) - - - Shares returned in connection with arbitration ruling on licensing agreement ( 450,000 ) ( 5,000 ) ( 1,467,000 ) - - ( 1,472,000 ) Net loss - - - ( 59,851,000 ) - ( 59,851,000 ) Balance, September 30, 2019 51,054,395 $ 511,000 $ 565,580,000 $ ( 470,039,000 ) $ - $ 96,052,000 The accompanying notes are an integral part of these condensed consolidated statements. 5 Abeona Therapeutics Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited) 2020 2019 For the nine months ended September 30, 2020 2019 Cash flows from operating activities: Net loss $ ( 68,406,000 ) $ ( 59,851,000 ) Adjustments to reconcile net loss to cash used in operating activities: Non-cash licensed technology impairment charge 32,916,000 - Depreciation and amortization 3,746,000 5,747,000 Stock option-based compensation expense 4,083,000 5,607,000 Restricted stock-based compensation expense 812,000 348,000 Non-cash interest expense 600,000 - Accretion and interest on short-term investments ( 237,000 ) ( 1,090,000 ) Accretion of right-of-use lease assets 752,000 619,000 Non-cash loss on arbitration ruling on licensing agreement - 367,000 Change in operating assets and liabilities: Receivables ( 7,000,000 ) 66,000 Prepaid expenses and other current assets 2,443,000 2,148,000 Other assets ( 62,000 ) 4,000 Accounts payable, accrued expenses and lease liabilities ( 5,183,000 ) ( 2,539,000 ) Change in payable to licensor 2,127,000 - Net cash used in operating activities ( 33,409,000 ) ( 48,574,000 ) Cash flows from investing activities: Capital expenditures ( 1,303,000 ) ( 6,187,000 ) Acquisition of licensed technology - ( 199,000 ) Purchases of short-term investments ( 139,230,000 ) - Proceeds from maturities of short-term investments 51,037,000 67,308,000 Net cash (used in)/provided by investing activities ( 89,496,000 ) 60,922,000 Cash flows from financing activities: Proceeds from loan payable 1,758,000 - Proceeds from open market sales of common stock - 16,962,000 Proceeds from exercise of stock options 175,000 413,000 Net cash provided by financing activities 1,933,000 17,375,000 Net (decrease)/increase in cash, cash equivalents and restricted cash ( 120,972,000 ) 29,723,000 Cash, cash equivalents and restricted cash at beginning of period 130,368,000 19,310,000 Cash, cash equivalents and restricted cash at end of period $ 9,396,000 $ 49,033,000 Supplemental cash flow information: Cash and cash equivalents $ 8,424,000 $ 47,923,000 Restricted cash 972,000 1,110,000 Total cash, cash equivalents and restricted cash $ 9,396,000 $ 49,033,000 Shares returned in connection with arbitration ruling on licensing agreement $ - $ 1,472,000 Cash paid for interest $ - $ - Cash paid for taxes $ - $ - The accompanying notes are an integral part of these condensed consolidated statements. 6 ABEONA THERAPEUTICS INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE 1 – NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES Background Abeona Therapeutics Inc., a Delaware corporation (together with our subsidiaries, “we,” “our,” “Abeona” or the “Company”), is a clinical-stage biopharmaceutical company developing gene and cell therapies for life-threatening rare genetic diseases. Our lead clinical programs consist of: (i) EB-101, an autologous, gene-corrected cell therapy for recessive dystrophic epidermolysis bullosa (“RDEB”), (ii) ABO-102, an adeno-associated virus (“AAV”)-based gene therapy for Sanfilippo syndrome type A (“MPS IIIA”), and (iii) ABO-101, an AAV-based gene therapy for Sanfilippo syndrome type B (“MPS IIIB”). We have additional AAV-based gene therapies in various developmental stages designed to treat the CLN3 form of Batten Disease, cystic fibrosis and retinal diseases. In addition, we are developing next-generation AAV-based gene therapies using the novel AIM™ capsid platform that we have exclusively licensed from the University of North Carolina at Chapel Hill, and internal AAV vector research programs. Our efforts have been principally devoted to research and development, resulting in significant losses. Basis of Presentation The condensed consolidated balance sheet as of September 30, 2020 and the condensed consolidated statements of operations and comprehensive loss, stockholders’ equity and cash flows for the three and nine months ended September 30, 2020 and 2019 were prepared by management without audit. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, except as otherwise disclosed, necessary for the fair presentation of the financial position, results of operations, and changes in financial position for such periods, have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted. These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Form 10-K for the year ended December 31, 2019. The results of operations for the period ended September 30, 2020 are not necessarily indicative of the operating results that may be expected for a full year. The condensed consolidated balance sheet as of December 31, 2019 contains financial information taken from the audited Abeona consolidated financial statements as of that date. Uses and Sources of Liquidity The financial statements have been prepared on the going concern basis, which assumes the Company will have sufficient cash to pay its operating expenses, as and when they become payable, for a period of at least 12 months from the date the financial report was issued. As of September 30, 2020, we had cash, cash equivalents, receivables and short-term investments of $ 103.9 million and net assets of $ 115.1 million. For the nine months ended September 30, 2020, we had cash outflows from operations of $ 33.4 million. We have not generated any significant product revenues and have not achieved profitable operations. There is no assurance that profitable operations will ever be achieved, and, if achieved, could be sustained on a continuing basis. In addition, development activities, clinical and nonclinical testing, and commercialization of our products will require significant additional financing. We are subject to a number of risks similar to other life science companies, including, but not limited to, risks related to the successful discovery and development of product candidates, obtaining the necessary regulatory approval to market our product candidates, raising additional capital to continue to fund our operations, development of competing drugs and therapies, protection of proprietary technology and market acceptance of our products. As a result of these and other risks and the related uncertainties, there can be no assurance of our future success. 7 Based upon our current operating plans, we believe that we have sufficient resources to fund operations through the next 12 months with our existing cash, cash equivalents and short-term investments. We will need to secure additional funding in the future, to carry out all 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. In October 2020, the Company announced that it had retained Jefferies LLC as its financial advisor to assist with the review of strategic options focused on advancing the Company’s mission and maximizing stockholder value. In an effort to unlock potential additional value, the Company initiated this formal process to explore a broad range of strategic alternatives, including but not limited to the partnering of its various clinical and pre-clinical programs, or a sale or merger of the Company. Use of Estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reported period. Actual results could differ from these estimates and assumptions. Cash and Cash Equivalents We consider all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. We maintain deposits primarily in financial institutions, which may at times exceed amounts covered by insurance provided by the U.S. Federal Deposit Insurance Corporation (“FDIC”). We have not experienced any losses related to amounts in excess of FDIC limits. Receivables Receivables are reported at net realizable value. We continually evaluate the creditworthiness of our customers and their financial condition and generally do not require collateral. The need for an allowance for doubtful accounts is based upon reviews of specific customer balances, historic losses, and general economic conditions. As of September 30, 2020, no allowance was recorded as the receivables are considered collectible. There were no receivables outstanding as of December 31, 2019. Short-term Investments Short-term investments consist of investments in U.S. government, U.S. agency and U.S. treasury securities. We determine the appropriate classification of the securities at the time they are acquired and evaluate the appropriateness of such classifications at each balance sheet date. We classify our short-term investments as available-for-sale pursuant to Accounting Standards Codification (“ASC”) 320, Investments – Debt and Equity Securities . Investments classified as current have maturities of less than one year. We review our short-term investments for other-than-temporary impairment whenever the fair value of a marketable security is less than the amortized cost and evidence indicates that a short-term investment’s carrying amount is not recoverable within a reasonable period of time. Leases We account for leases in accordance with ASC 842, Leases . 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 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 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. 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. Additional information and disclosures required under ASC 842 is included in Note 8. 8 Restricted Cash In November 2016, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash , requiring restricted cash and restricted cash equivalents to be included with cash and cash equivalents on the statement of cash flows when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. We adopted this standard during the first quarter of 2018. Restricted cash is now included as a component of cash, cash equivalents and restricted cash on our consolidated statements of cash flows. Restricted cash is recorded within other assets and restricted cash in the accompanying consolidated balance sheets. Revenue Recognition We account for contracts with customers in accordance with ASC 606, Revenue from Contracts with Customers . ASC 606 applies to all contracts with customers, except for contracts that are within the scope of other standards. Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the entity performs 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; (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. Additional information and disclosures required under ASC 606 are included in Note 6. Loss Per Common Share We have presented basic and diluted loss per common share on the statement of operations. Basic and diluted net loss per share is computed by dividing net loss by the weighted-average number of shares of common stock and shares underlying “pre-funded” warrants outstanding during the period. At September 30, 2020, 84,516,161 shares of common stock were outstanding. The “pre-funded” warrants are included in the computation of basic net loss per share as the exercise price is negligible and they are fully vested and exercisable. There were 9,017,055 “pre-funded” warrants included in the computation of basic net loss per share for the three and nine months ended September 30, 2020. There were no “pre-funded” warrants included in the computation of basic net loss per share for the three and nine months ended September 30, 2019. In October 2020, all of the pre-funded warrants were exercised and converted into shares of common stock. We do not include the potential impact of dilutive securities in diluted net loss per share, as the impact of these items is anti-dilutive. Potential dilutive securities result from outstanding stock options and “non-pre-funded” warrants. We did not include the following potentially dilutive securities in the computation of diluted net loss per common share during the periods presented: SCHEDULE OF ANTIDILUTIVE SECURITIES EXCLUDED FROM COMPUTATION OF EARNINGS PER SHARE For the three months ended September 30, For the nine months ended September 30, 2020 2019 2020 2019 “Non-pre-funded” warrants - 1,820,686 - 1,820,686 Stock options 6,431,183 6,697,980 6,431,183 6,697,980 Total 6,431,183 8,518,666 6,431,183 8,518,666 "Non-pre-funded" Warrants [Member] NOTE 2 – SHORT-TERM INVESTMENTS The following table summarizes the carrying value of the available-for-sale debt securities held: SCHEDULE OF AVAILABLE-FOR-SALE DEBT SECURITIES HELD Description September 30, 2020 December 31, 2019 U.S. government and agency securities and treasuries $ 88,447,000 $ - The amortized cost of the available-for-sale debt securities, which is adjusted for amortization of premiums and accretion of discounts to maturity, was $ 88,430,000 as of September 30, 2020. There were no significant realized gains or losses recognized on the sale or maturity of available-for-sale debt securities during the nine months ended September 30, 2020 or 2019. 9 NOTE 3 – LICENSED TECHNOLOGY On November 4, 2018, we entered into a license agreement with REGENXBIO Inc. (“REGENXBIO”) to obtain rights to an exclusive worldwide license (subject to certain non-exclusive rights previously granted for MPS IIIA), with rights to sublicense, to REGENXBIO’s NAV AAV9 vector for gene therapies for treating MPS IIIA, MPS IIIB, CLN1 Disease and CLN3 Disease. Consideration for the rights granted under the original agreement included fees totaling $ 180 million and a running royalty on net sales, including: (i) an initial fee of $ 20 million, $ 10 million of which was due to REGENXBIO shortly after the effective date of the agreement, and $ 10 million of which was to be due on the first anniversary of the effective date of the agreement in November 2019, (ii) annual fees totaling up to $ 100 million, payable in $ 20 million annual installments beginning on the second anniversary of the effective date (the first of which was to remain payable if the agreement were terminated before the second anniversary in November 2020), (iii) sales milestone payments totaling $ 60 million, and (iv) royalties payable in the low double digits to low teens on net sales of products covered under the agreement. The license was being amortized over the life of the patent of eight years . On November 1, 2019, we entered into an amendment of the original license agreement. The amended agreement replaced the $ 10 million payment due on November 4, 2019 with a $ 3 million payment due on November 4, 2019 and an additional $ 8 million payment (which included $ 1 million of interest) that would have been due no later than April 1, 2020. That $ 8 million payment had been scheduled to be paid by April 1, 2020 and the $ 20 million that had been due to be paid on November 4, 2020 , and both were recorded as payable to licensor on the consolidated balance sheet. As discussed below, the Company has disputed that it is responsible for the $ 8 million and $ 20 million payments, and those payments are the subject of a current arbitration between the Company and REGENXBIO, as further discussed below. Prior to the April 1, 2020 deadline, we engaged REGENXBIO in discussions in an attempt to renegotiate the financial terms of the agreement, but we were unable to reach a mutual understanding that we believed would have been favorable for the Company or our programs, and we did not make the $ 8 million payment due by April 1, 2020. On April 17, 2020, REGENXBIO sent us a written demand for the $ 8 million fee, payable within a 15-day cure period after receipt of the demand letter. The license terminated on May 2, 2020 , when the 15-day period expired. There were no penalties for early termination of the license. On May 25, 2020, we filed an arbitration claim with the American Arbitration Association alleging that REGENXBIO materially breached the license agreement prior to termination and seeking, among other things, a declaration that as a result of REGENXBIO’s material breach, we are not responsible for payments totaling $ 28 million (which would otherwise have been due in 2020) plus accrued interest ($ 2.1 million as of September 30, 2020). REGENXBIO disputes our arbitration claim and has filed a counterclaim seeking payment of the $ 28 million plus interest, which REGENXBIO argues remains due. Additional information is included in Note 8. As of March 31, 2020, we considered the status of our discussions with REGENXBIO as a potential indicator of impairment in accordance with ASC 360-10-35-21. Since our impairment testing indicated that the carrying value of the license agreement exceeded its fair value, we recorded a $ 32.9 million non-cash impairment charge in the three months ended March 31, 2020. On May 15, 2015, we acquired Abeona Therapeutics LLC, which had an exclusive license through Nationwide Children’s Hospital to the AB-101 and AB-102 patent portfolios for developing treatments for patients with Sanfilippo Syndrome Type A and Type B. The license is amortized over the life of the license of 20 years. Licensed technology consists of the following: SCHEDULE OF LICENSED TECHNOLOGY September 30, 2020 December 31, 2019 Licensed technology $ 2,606,000 $ 42,606,000 Less accumulated amortization 725,000 6,428,000 Licensed technology, net $ 1,881,000 $ 36,178,000 10 The aggregate estimated amortization expense for intangible assets remaining as of September 30, 2020 is as follows: SCHEDULE OF AMORTIZATION EXPENSE FOR INTANGIBLE ASSETS Sep 30, 20 2020, remainder $ 43,000 2021 174,000 2022 174,000 2023 174,000 2024 174,000 Thereafter 1,142,000 Total $ 1,881,000 Amortization of licensed technology was $ 43,000 and $ 1,381,000 for the three and nine months ended September 30, 2020, respectively, and $ 1,293,000 and $ 3,931,000 for the three and nine months ended September 30, 2019, respectively. NOTE 4 – FAIR VALUE MEASUREMENTS We calculate the fair value of our assets and liabilities that qualify as financial instruments and include additional information in the notes to the consolidated financial statements when the fair value is different than the carrying value of these financial instruments. The estimated fair value of receivables, prepaid expenses, other assets, accounts payable, accrued expenses, payable to licensor and deferred revenue approximate their carrying amounts due to the relatively short maturity of these instruments. U.S. GAAP defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. This guidance establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows: ● Level 1 – Quoted prices in active markets for identical assets or liabilities. ● Level 2 – Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. ● Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar valuation techniques that use significant unobservable inputs. The guidance requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. We have segregated all financial assets and liabilities that are measured at fair value on a recurring basis (at least annually) into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date in the table below. 11 Financial assets and liabilities measured at fair value on a recurring and non-recurring basis as of September 30, 2020 and December 31, 2019 are summarized below: SCHEDULE OF FAIR VALUE, ASSETS AND LIABILITIES MEASURED ON RECURRING AND NON-RECURRING BASIS Description September 30, 2020 Level 1 Level 2 Level 3 Recurring Assets: Short-term investments $ 88,447,000 $ - $ 88,447,000 $ - Non-recurring Assets: Licensed technology, net $ 1,881,000 $ - $ - $ 1,881,000 Goodwill 32,466,000 - - 32,466,000 Description December 31, 2019 Level 1 Level 2 Level 3 Non-recurring Assets: Licensed technology, net $ 36,178,000 $ - $ - $ 36,178,000 Goodwill 32,466,000 - - 32,466,000 NOTE 5 – LOAN PAYABLE On May 2, 2020, we received loan proceeds in the amount of approximately $ 1.8 million (the “PPP Loan”) under the Paycheck Protection Program (“PPP”). The PPP was established under the Coronavirus Aid, Relief and Economic Security Act, as amended (“CARES Act”) and is administered by the U.S. Small Business Administration (“SBA”). Under the terms of the CARES Act, PPP loan recipients can apply for loan forgiveness. The potential loan forgiveness for all or a portion of PPP loans is determined, subject to limitations, based on the use of loan proceeds over the 24 weeks after the loan proceeds are disbursed for payment of payroll costs and any payments of mortgage interest, rent, and utilities. The amount of loan forgiveness will be reduced if PPP loan recipients terminate employees or reduce salaries during the covered period. The unforgiven portion of our PPP Loan, if any, is payable over two years at an interest rate of 1 %, with a deferral of payments for the first six months, beginning on May 2, 2020. We believe that we have used the proceeds from our PPP Loan for purposes consistent with the PPP. While we currently believe that our use of the loan proceeds will meet the conditions for forgiveness of our PPP Loan, there can be no assurance that forgiveness for any portion of the PPP Loan will be obtained. NOTE 6 – REVENUE FROM CONTRACTS WITH CUSTOMERS On August 14, 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 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 of the entity 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 the customer was at a point in time. 12 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. 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 $26.0 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. Under this arrangement, we recognized $ 7.0 million of revenue during the three months ended September 30, 2020, which amount related solely to fixed consideration. In addition, we have $ 7.0 million of related accounts receivable at September 30, 2020; this receivable was paid by Taysha in October 2020. We do not have any contract assets or contract liabilities as a result of this transaction. NOTE 7 – STOCK-BASED COMPENSATION Stock Options: The following table summarizes stock option-based compensation for the three and nine months ended September 30, 2020 and 2019: SCHEDULE OF STOCK BASED COMPENSATION For the three months ended September 30, For the nine months ended September 30, 2020 2019 2020 2019 Research and development $ 765,000 $ 972,000 $ 2,380,000 $ 3,013,000 General and administrative 484,000 854,000 1,703,000 2,594,000 Stock option-based compensation expense included in operating expense 1,249,000 1,826,000 4,083,000 5,607,000 Total stock option-based compensation expense 1,249,000 1,826,000 4,083,000 5,607,000 Tax benefit - - - - Stock option-based compensation expense, net of tax $ 1,249,000 $ 1,826,000 $ 4,083,000 $ 5,607,000 Stock Option [Member] We estimate the fair value of each option award on the date of grant using the Black-Scholes option valuation model. We then recognize the grant date fair value of each option as compensation expense ratably using the straight-line attribution method over the service period (generally the vesting period). The Black-Scholes model incorporates the following assumptions: ● Expected volatility – we estimate the volatility of our share price at the date of grant using a “look-back” period which coincides with the expected term, defined below. We believe using a “look-back” period which coincides with the expected term is the most appropriate measure for determining expected volatility. ● Expected term – we estimate the expected term using the “simplified” method, as outlined in Staff Accounting Bulletin No. 107, “Share-Based Payment.” ● Risk-free interest rate – we estimate the risk-free interest rate using the U.S. Treasury yield curve for periods equal to the expected term of the options in effect at the time of grant. ● Dividends – we use an expected dividend yield of zero because we have not declared or paid a cash dividend, nor do we have any plans to declare a dividend. We used the following weighted-average assumptions to estimate the fair value of the options granted for the periods indicated: SCHEDULE OF WEIGHTED-AVERAGE ASSUMPTIONS TO ESTIMATE THE FAIR VALUE OF THE OPTIONS GRANTED For the three months ended September 30, For the nine months ended September 30, 2020 2019 2020 2019 Expected volatility 110 % 103 % 111 % 108 % Expected term 6.25 years 6.25 years 6.25 years 5.09 years Risk-free interest rate 0.16 % 1.83 % 0.29 % 2.21 % Expected dividend yield 0 % 0 % 0 % 0 % 13 The following table summarizes the options granted for the periods indicated: SCHEDULE OF OPTIONS ACTIVITY For the three months ended September 30, For the nine months ended September 30, 2020 2019 2020 2019 Options granted 342,100 105,600 3,415,146 1,490,490 Weighted-average: Exercise price $ 3.08 $ 2.58 $ 2.38 $ 6.53 Grant date fair value $ 2.56 $ 2.09 $ 1.99 $ 5.14 Restricted Common Stock : The following table summarizes restricted common stock compensation expense for the three and nine months ended September 30, 2020 and 2019: SCHEDULE OF STOCK BASED COMPENSATION For the three months ended September 30, For the nine months ended September 30, 2020 2019 2020 2019 Research and development $ 89,000 $ 66,000 $ 561,000 $ 66,000 General and administrative 72,000 32,000 251,000 282,000 Restricted stock-based compensation expense included in operating expense 161,000 98,000 812,000 348,000 Total restricted stock-based compensation expense 161,000 98,000 812,000 348,000 Tax benefit - - - - Restricted stock-based compensation expense, net of tax $ 161,000 $ 98,000 $ 812,000 $ 348,000 We granted 818,233 shares of restricted common stock, net of cancellations, during the nine months ended September 30, 2020. There were 265,080 shares of restricted common stock canceled during the three months ended September 30, 2020. We granted 376,625 shares of restricted common stock during the three and nine months ended September 30, 2019. NOTE 8 – COMMITMENTS AND CONTINGENCIES Arbitration Proceeding We are currently engaged in an arbitration proceeding with REGENXBIO regarding the former license agreement between the parties relating to use of the AAV9 capsid in our MPS IIIA, MPS IIIB, CLN1 (which has now been sold to Taysha Gene Therapies, as discussed in Note 6 above), and CLN3 programs. The license terminated on May 2, 2020, and on May 25, 2020, we filed an arbitration claim with the American Arbitration Association alleging that REGENXBIO materially breached the license agreement prior to termination and seeking, among other things, a declaration that as a result of REGENXBIO’s material breach, we are not responsible for payments totaling $ 28 million (which would otherwise have been due in 2020) plus accrued interest ($ 2.1 million as of September 30, 2020). REGENXBIO disputes our arbitration claim and has filed a counterclaim seeking payment of these amounts. Under the current schedule, the arbitration is expected to be completed in the first half of 2021. Commitment with Contract Manufacturer We engaged a contract manufacturer to assist us with developing and defining the processes necessary to manufacture our RDEB product candidate and had a remaining commitment of $ 6.3 million at March 31, 2020. During the second quarter of 2020, we cancelled the remaining stages of work with the contract manufacturer. We have no remaining commitment at September 30, 2020. Operating Leases We lease space under operating leases for manufacturing and laboratory facilities and administrative offices in Cleveland, Ohio, as well as administrative offices in New York, New York. We also lease office space in Madrid, Spain as well as certain office equipment under operating leases, which have a non-cancelable lease term of less than one year and, therefore, we have elected the practical expedient to exclude these short-term leases from our right-of-use assets and lease liabilities. Components of lease cost are as follows: SCHEDULE OF COMPONENTS OF LEASE COST For the three months ended September 30, For the nine months ended September 30, 2020 2019 2020 2019 Operating lease cost $ 434,000 $ 434,000 $ 1,302,000 $ 1,157,000 Variable lease cost $ 81,000 $ 82,000 $ 256,000 $ 241,000 Short-term lease cost $ 19,000 $ 32,000 $ 43,000 $ 113,000 14 The following table presents information about the amount and timing of cash flows arising from operating leases as of September 30, 2020: SCHEDULE OF SUPPLEMENTAL CASH FLOW INFORMATION RELATED TO LEASES Maturity of lease liabilities: 2020, remainder $ 425,000 2021 1,713,000 2022 1,727,000 2023 1,741,000 2024 1,781,000 Thereafter 1,885,000 Total undiscounted operating lease payments 9,272,000 Less: imputed interest 2,046,000 Present value of operating lease liabilities $ 7,226,000 Balance sheet classification: Current portion of lease liability $ 1,709,000 Long-term lease liability 5,517,000 Total operating lease liabilities $ 7,226,000 Other information: Weighted-average remaining lease term for operating leases 64 months Weighted-average discount rate for operating leases 9.6 % 15