ABEONA THERAPEUTICS INC. 10-Q

ITEM 1. FINANCIAL STATEMENTS Abeona Therapeutics Inc. and Subsidiaries Condensed Consolidated Balance Sheets June 30, 2021 December 31, 2020 (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 27,179,000 $ 12,596,000 Short-term investments 50,380,000 82,438,000 Prepaid expenses and other current assets 1,321,000 2,708,000 Total current assets 78,880,000 97,742,000 Property and equipment, net 10,240,000 11,322,000 Right-of-use lease assets 6,489,000 7,032,000 Licensed technology, net 1,442,000 1,500,000 Goodwill 32,466,000 32,466,000 Other assets and restricted cash 1,158,000 1,136,000 Total assets $ 130,675,000 $ 151,198,000 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 1,469,000 $ 4,695,000 Accrued expenses 2,190,000 3,410,000 Current portion of lease liability 1,720,000 1,713,000 Current portion of loan payable 1,758,000 330,000 Payable to licensor 34,434,000 31,515,000 Contract liability 296,000 296,000 Total current liabilities 41,867,000 41,959,000 Loan payable - 1,428,000 Long-term lease liabilities 4,722,000 5,260,000 Total liabilities 46,589,000 48,647,000 Commitments and contingencies - - Stockholders’ equity: Common stock - $ 0.01 par value; authorized 200,000,000 shares; issued and outstanding 101,251,023 at June 30, 2021; issued and outstanding 96,131,678 at December 31, 2020; 1,013,000 961,000 Additional paid-in capital 684,987,000 672,304,000 Accumulated deficit ( 601,913,000 ) ( 570,704,000 ) Accumulated other comprehensive loss ( 1,000 ) ( 10,000 ) Total stockholders’ equity 84,086,000 102,551,000 Total liabilities and stockholders’ equity $ 130,675,000 $ 151,198,000 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) For the three months ended June 30, For the six months ended June 30, 2021 2020 2021 2020 Revenues $ - $ - $ - $ - Expenses: Research and development 7,434,000 6,109,000 14,646,000 12,927,000 General and administrative 5,457,000 5,538,000 12,025,000 11,950,000 Depreciation and amortization 824,000 834,000 1,641,000 2,899,000 Licensed technology impairment charge - - - 32,916,000 Total expenses 13,715,000 12,481,000 28,312,000 60,692,000 Loss from operations ( 13,715,000 ) ( 12,481,000 ) ( 28,312,000 ) ( 60,692,000 ) Interest and miscellaneous income 8,000 271,000 23,000 923,000 Interest expense ( 1,500,000 ) ( 800,000 ) ( 2,920,000 ) ( 1,400,000 ) Net loss $ ( 15,207,000 ) $ ( 13,010,000 ) $ ( 31,209,000 ) $ ( 61,169,000 ) Basic and diluted loss per common share $ ( 0.16 ) $ ( 0.14 ) $ ( 0.33 ) $ ( 0.66 ) Weighted average number of common shares outstanding – basic and diluted 96,509,783 92,704,203 95,378,503 92,533,354 Other comprehensive (loss)/income: Change in unrealized (losses)/gains related to available-for-sale debt securities ( 4,000 ) ( 253,000 ) 9,000 133,000 Comprehensive loss $ ( 15,211,000 ) $ ( 13,263,000 ) $ ( 31,200,000 ) $ ( 61,036,000 ) 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) Accumulated Additional Other Total Common Stock Paid-in Accumulated Comprehensive Stockholders’ Shares Amount Capital Deficit Income/(Loss) Equity For the three months ended June 30, 2021 Balance, March 31, 2021 99,038,933 $ 990,000 $ 680,103,000 $ ( 586,706,000 ) $ 3,000 $ 94,390,000 Stock option-based compensation expense - - 1,327,000 - - 1,327,000 Restricted stock-based compensation expense - - 1,101,000 - - 1,101,000 Common stock issued for cash exercise of options 20,521 - 24,000 - - 24,000 Issuance of common stock in connection with restricted share awards 706,348 7,000 ( 7,000 ) - - - Common stock issued for cash under open market sale agreement 1,485,221 16,000 2,439,000 - - 2,455,000 Net loss - - - ( 15,207,000 ) - ( 15,207,000 ) Other comprehensive loss - - - - ( 4,000 ) ( 4,000 ) Balance, June 30, 2021 101,251,023 $ 1,013,000 $ 684,987,000 $ ( 601,913,000 ) $ ( 1,000 ) $ 84,086,000 For the three months ended June 30, 2020 Balance, March 31, 2020 83,622,135 $ 836,000 $ 665,784,000 $ ( 534,629,000 ) $ 386,000 $ 132,377,000 Stock option-based compensation expense - - 1,578,000 - - 1,578,000 Restricted stock-based compensation expense - - 187,000 - - 187,000 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 1,083,313 11,000 ( 11,000 ) - - - Net loss - - - ( 13,010,000 ) - ( 13,010,000 ) Other comprehensive loss - - - - ( 253,000 ) ( 253,000 ) Balance, June 30, 2020 84,781,241 $ 848,000 $ 667,712,000 $ ( 547,639,000 ) $ 133,000 $ 121,054,000 For the six months ended June 30, 2021 Balance, December 31, 2020 96,131,678 $ 961,000 $ 672,304,000 $ ( 570,704,000 ) $ ( 10,000 ) $ 102,551,000 Stock option-based compensation expense - - 2,410,000 - - 2,410,000 Restricted stock-based compensation expense - - 1,968,000 - - 1,968,000 Common stock issued for cash exercise of options 508,725 5,000 686,000 - - 691,000 Issuance of common stock in connection with restricted share awards 1,547,075 15,000 ( 15,000 ) - - - Common stock issued for cash under open market sale agreement 3,063,545 32,000 7,634,000 - - 7,666,000 Net loss - - - ( 31,209,000 ) - ( 31,209,000 ) Other comprehensive income - - - - 9,000 9,000 Balance, June 30, 2021 101,251,023 $ 1,013,000 $ 684,987,000 $ ( 601,913,000 ) $ ( 1,000 ) $ 84,086,000 For the six months ended June 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 - - 2,834,000 - - 2,834,000 Restricted stock-based compensation expense - - 651,000 - - 651,000 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 1,083,313 11,000 ( 11,000 ) - - - Net loss - - - ( 61,169,000 ) - ( 61,169,000 ) Other comprehensive income - - - - 133,000 133,000 Other comprehensive income (loss) - - - - 133,000 133,000 Balance, June 30, 2020 84,781,241 $ 848,000 $ 667,712,000 $ ( 547,639,000 ) $ 133,000 $ 121,054,000 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) For the six months ended June 30, 2021 2020 Cash flows from operating activities: Net loss $ ( 31,209,000 ) $ ( 61,169,000 ) Adjustments to reconcile net loss to cash used in operating activities: Non-cash licensed technology impairment charge - 32,916,000 Depreciation and amortization 1,641,000 2,899,000 Stock option-based compensation expense 2,410,000 2,834,000 Restricted stock-based compensation expense 1,968,000 651,000 Non-cash interest expense - 600,000 Accretion and interest on short-term investments 266,000 ( 156,000 ) Amortization of right-of-use lease assets 543,000 496,000 Change in operating assets and liabilities: Prepaid expenses and other current assets 1,387,000 2,208,000 Other assets ( 22,000 ) - Accounts payable, accrued expenses and lease liabilities ( 4,977,000 ) ( 4,786,000 ) Change in payable to licensor 2,919,000 800,000 Net cash used in operating activities ( 25,074,000 ) ( 22,707,000 ) Cash flows from investing activities: Capital expenditures ( 501,000 ) ( 1,032,000 ) Purchases of short-term investments ( 15,164,000 ) ( 123,062,000 ) Proceeds from maturities of short-term investments 46,965,000 30,014,000 Net cash provided by (used in)/investing activities 31,300,000 ( 94,080,000 ) Cash flows from financing activities: Proceeds from loan payable - 1,758,000 Proceeds from open market sales of common stock 7,666,000 - Proceeds from exercise of stock options 691,000 175,000 Net cash provided by financing activities 8,357,000 1,933,000 Net increase/(decrease) in cash, cash equivalents and restricted cash 14,583,000 ( 114,854,000 ) Cash, cash equivalents and restricted cash at beginning of period 13,571,000 130,368,000 Cash, cash equivalents and restricted cash at end of period $ 28,154,000 $ 15,514,000 Supplemental cash flow information: Cash and cash equivalents $ 27,179,000 $ 14,542,000 Restricted cash 975,000 972,000 Total cash, cash equivalents and restricted cash $ 28,154,000 $ 15,514,000 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. (together with our subsidiaries, “we,” “our,” “Abeona” or the “Company”), a Delaware corporation, 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 continue to develop additional AAV-based gene therapies designed to treat ophthalmic and other diseases, 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. Basis of Presentation The condensed consolidated balance sheet as of June 30, 2021, the condensed consolidated statements of operations and comprehensive loss and stockholders’ equity for the three and six months ended June 30, 2021 and 2020, and the condensed consolidated statement of cash flows for the six months ended June 30, 2021 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, 2020. The results of operations for the period ended June 30, 2021 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, 2020 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 June 30, 2021, we had cash, cash equivalents and short-term investments of $ 77.6 million and net assets of $ 84.1 million. For the six months ended June 30, 2021, we had cash outflows from operations of $ 25.1 million. We have not generated 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. Based on our existing cash, cash equivalents and short-term investments, our ability to access additional financial resources and/or our financial flexibility to reduce operating expenses if required, we believe that we have sufficient resources to fund operations through at least the next 12 months. We will need to secure additional funding in the future 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. 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. 7 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. 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 are included in Note 7. Restricted Cash Restricted cash, which is recorded within other assets and restricted cash in the accompanying consolidated balance sheets and is included as a component of cash, cash equivalents and restricted cash on our consolidated statements of cash flows, consists of cash and cash equivalents held as collateral for a corporate credit card and office space in New York. As such, the cash and cash equivalents are restricted in use. Loss Per Common Share We have presented basic and diluted loss per common share on the statement of operations and comprehensive loss. 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. The “pre-funded” warrants were included in the computation of basic net loss per share as the exercise price was negligible and the warrants were fully vested and exercisable. In October 2020, all of the 9,017,055 “pre-funded” warrants were exercised and converted into shares of common stock. 8 SCHEDULE OF ANTIDILUTIVE SECURITIES EXCLUDED FROM COMPUTATION OF EARNINGS PER SHARE 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, restricted stock 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: For the three months ended June 30, For the six months ended June 30, 2021 2020 2021 2020 Stock options 7,726,468 7,790,596 7,726,468 7,790,596 Restricted stock 3,328,125 1,083,313 3,328,125 1,083,313 Warrants - 20,000 - 20,000 Total 11,054,593 8,893,909 11,054,593 8,893,909 NOTE 2 – SHORT-TERM INVESTMENTS The following table summarizes the available-for-sale investments held: SCHEDULE OF AVAILABLE-FOR-SALE INVESTMENTS HELD Description June 30, 2021 December 31, 2020 U.S. government and agency securities and treasuries $ 50,380,000 $ 82,438,000 The amortized cost of the available-for-sale debt securities, which is adjusted for amortization of premiums and accretion of discounts to maturity, was $ 50,381,000 and $ 82,448,000 as of June 30, 2021 and December 31, 2020, respectively. There were no significant realized gains or losses recognized on the sale or maturity of available-for-sale debt securities during the six months ended June 30, 2021 or 2020. 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 that 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 are both recorded as payable to licensor on the consolidated balance sheet. The Company disputed that it was responsible for the $ 8 million and $ 20 million payments, and those payments were the subject of an arbitration between the Company and REGENXBIO as noted 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. We considered the status of our discussions with REGENXBIO in March 2020 as a potential indicator of impairment in accordance with ASC 360-10-35-21. Our impairment test indicated that the carrying value of the license agreement exceeded its fair value and we recorded a $ 32.9 million non-cash impairment charge during the three months ended March 31, 2020. 9 On May 25, 2020, we filed an arbitration claim with the American Arbitration Association (“AAA”) 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 were not responsible for payments totaling $ 28 million (which would otherwise have been due in 2020) plus accrued interest ($ 6.4 million as of June 30, 2021 based on invoices received from REGENXBIO). REGENXBIO disputed our arbitration claim and filed a counterclaim seeking payment of the $ 28 million plus interest, which REGENXBIO argued remained due. An arbitration hearing before a tribunal of three AAA arbitrators was held on March 8 and March 9, 2021. On July 13, 2021, the tribunal found in favor of REGENXBIO Inc. in connection with the parties’ arbitration claims and counterclaims. Although the tribunal awarded REGENXBIO $ 28.0 million plus interest, we believe that prior to the arbitration decision, the two companies had entered into a binding settlement agreement, including $ 18.0 million payable to REGENXBIO over a two-year period. We intend to seek enforcement of the settlement agreement. 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 June 30, 2021 December 31, 2020 Licensed technology $ 2,156,000 $ 2,156,000 Less accumulated amortization 714,000 656,000 Licensed technology, net $ 1,442,000 $ 1,500,000 The aggregate estimated amortization expense for intangible assets remaining as of June 30, 2021 is as follows: SCHEDULE OF AMORTIZATION EXPENSE FOR INTANGIBLE ASSETS 2021, remainder $ 58,000 2022 117,000 2023 117,000 2024 117,000 2025 117,000 Thereafter 916,000 Total $ 1,442,000 Amortization on licensed technology was $ 29,000 and $ 58,000 for the three and six months ended June 30, 2021 and $ 44,000 and $ 1.3 million for the three and six months ended June 30, 2020, respectively. NOTE 4 - 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. 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 principal and interest payments to either (i) the date that the SBA remits the borrower’s loan forgiveness amount to the lender or (ii) if the borrower does not apply for forgiveness, 10 months after the end of the borrower’s loan forgiveness covered period. Principal and interest payments on our PPP Loan are deferred until August 15, 2021 and the unforgiven portion of our PPP Loan, if any, matures on October 15, 2023. In July 2021, we received notice from the SBA that our PPP loan has been forgiven. We will record the extinguishment of the PPP loan payable and other income in the third quarter of 2021. 10 NOTE 5 – 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 prepaid expenses and other current assets, other assets, accounts payable, accrued expenses, loan payable, payable to licensor and contract liability 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 lowest level fair value inputs are used to assign a fair value level. 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. 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. Financial assets and liabilities measured at fair value on a recurring and non-recurring basis as of June 30, 2021 and December 31, 2020 are summarized below: SCHEDULE OF FAIR VALUE, ASSETS AND LIABILITIES MEASURED ON RECURRING AND NON-RECURRING BASIS Description June 30, 2021 Level 1 Level 2 Level 3 Total Gains/(Losses) Recurring Assets: Short-term investments $ 50,380,000 $ - $ 50,380,000 $ - $ - Non-recurring Assets: Licensed technology, net $ 1,442,000 $ - $ - $ 1,442,000 $ - Goodwill 32,466,000 - - 32,466,000 - Description December 31, 2020 Level 1 Level 2 Level 3 Total Gains/(Losses) Recurring Assets: Short-term investments $ 82,438,000 $ - $ 82,438,000 $ - $ - Non-recurring Assets: Licensed technology, net $ 1,500,000 $ - $ - $ 1,500,000 $ ( 32,916,000 ) Goodwill 32,466,000 - - 32,466,000 - 11 NOTE 6 – STOCK-BASED COMPENSATION Stock Options : The following table summarizes stock option-based compensation for the three and six months ended June 30, 2021 and 2020: SCHEDULE OF STOCK BASED COMPENSATION For the three months ended June 30, For the six months ended June 30, 2021 2020 2021 2020 Research and development $ 608,000 $ 871,000 $ 1,217,000 $ 1,615,000 General and administrative 719,000 707,000 1,193,000 1,219,000 Stock option-based compensation expense included in operating expense $ 1,327,000 $ 1,578,000 $ 2,410,000 $ 2,834,000 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 June 30, For the six months ended June 30, 2021 2020 2021 2020 Expected volatility 97 % 111 % 98 % 111 % Expected term 5.67 years 6.25 years 5.93 years 6.25 years Risk-free interest rate 0.96 % 0.23 % 0.99 % 0.30 % Expected dividend yield 0 % 0 % 0 % 0 % The following table summarizes the options granted for the periods indicated: SCHEDULE OF OPTIONS ACTIVITY For the three months ended June 30, For the six months ended June 30, 2021 2020 2021 2020 Options granted 1,205,808 1,897,119 3,355,308 3,073,046 Weighted-average: Exercise price $ 1.60 $ 2.83 $ 2.05 $ 2.30 Grant date fair value $ 1.22 $ 2.36 $ 1.59 $ 1.92 Restricted Common Stock : The following table summarizes restricted common stock compensation expense for the three and six months ended June 30, 2021 and 2020: SCHEDULE OF STOCK BASED COMPENSATION For the three months ended June 30, For the six months ended June 30, 2021 2020 2021 2020 Research and development $ 484,000 $ 147,000 $ 1,030,000 $ 472,000 General and administrative 617,000 40,000 938,000 179,000 Restricted stock-based compensation expense included in operating expense $ 1,101,000 $ 187,000 $ 1,968,000 $ 651,000 12 The following table summarizes the restricted common stock granted for the periods indicated: SUMMARY OF RESTRICTED COMMON STOCK For the three months ended June 30, For the six months ended June 30, 2021 2020 2021 2020 Restricted common stock granted 926,484 1,083,313 1,975,734 1,083,313 Restricted common stock forfeited ( 220,136 ) - ( 428,659 ) - Weighted-average: Grant date fair value-granted awards $ 1.60 $ 3.19 $ 1.97 $ 3.19 Grant date fair value-forfeited awards $ 2.05 $ - $ 1.89 $ - NOTE 7 – COMMITMENTS AND CONTINGENCIES Arbitration Proceeding We were 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), 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 (“AAA”) 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 were not responsible for payments totaling $ 28 million (which would otherwise have been due in 2020) plus accrued interest ($ 6.4 million as of June 30, 2021 based on invoices received from REGENXBIO). REGENXBIO disputed our arbitration claim and filed a counterclaim seeking payment of these amounts. An arbitration hearing before a tribunal of three AAA arbitrators was held on March 8 and March 9, 2021. On July 13, 2021, the tribunal found in favor of REGENXBIO Inc. in connection with the parties’ arbitration claims and counterclaims. Although the tribunal awarded REGENXBIO $ 28.0 million plus interest, we believe that prior to the arbitration decision, the two companies had entered into a binding settlement agreement, including $ 18.0 million payable to REGENXBIO over a two-year period. We intend to seek enforcement of the settlement agreement. 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 June 30, For the six months ended June 30, 2021 2020 2021 2020 Operating lease cost $ 434,000 $ 434,000 $ 868,000 $ 868,000 Variable lease cost $ 104,000 $ 92,000 $ 239,000 $ 175,000 Short-term lease cost $ 5,000 $ 6,000 $ 10,000 $ 24,000 13 The following table presents information about the amount and timing of cash flows arising from operating leases as of June 30, 2021: SCHEDULE OF SUPPLEMENTAL CASH FLOW INFORMATION RELATED TO LEASES Maturity of lease liabilities: 2021, remainder $ 858,000 2022 1,727,000 2023 1,741,000 2024 1,781,000 2025 1,799,000 Thereafter 87,000 Total undiscounted operating lease payments 7,993,000 Less: imputed interest 1,551,000 Present value of operating lease liabilities $ 6,442,000 Balance sheet classification: Current portion of lease liability $ 1,720,000 Long-term lease liability 4,722,000 Total operating lease liabilities $ 6,442,000 Other information: Weighted-average remaining lease term for operating leases 55 months Weighted-average discount rate for operating leases 9.6 % 14