ABEONA THERAPEUTICS INC. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW 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 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. A number of our product candidates are eligible for orphan drug designation, breakthrough therapy designation, or other expedited review processes in the U.S., Europe, Japan, or other world markets. Our pipeline includes three programs in clinical development—EB-101, ABO-101 and ABO-102—for which we hold several U.S. and European Union (“EU”) regulatory designations, and a pipeline of additional earlier stage programs: Our robust pipeline features early- and late-stage candidates with the potential to transform the treatment of devastating genetic diseases, and we are conducting clinical trials in the U.S. and abroad. Our Mission and Strategy Abeona is at the forefront of gene and cell therapy research and development. We are a fully-integrated company featuring therapies in clinical development, in-house manufacturing facilities, a robust pipeline, and scientific and clinical leadership. We see our mission as working to create, develop, manufacture, and deliver gene and cell therapies for people impacted by serious diseases. We partner with leading academic researchers, patient advocacy organizations and caregivers to develop therapies that address the underlying cause of a broad spectrum of rare genetic diseases for which no effective treatment options exist today. 14 Since our last fiscal year, we have continued to make progress toward fulfilling our goal of harnessing the promise of genetic medicine to transform the lives of people impacted by serious diseases and redefining the standard of care through gene and cell therapies. Our strategy to achieve this goal consists of: Advancing Our Clinical Gene and Cell Therapy Programs and Research and Development with a Focus on Rare and Orphan Diseases. We have three programs in clinical development—EB-101, ABO-101 and ABO-102—and a pipeline of additional earlier stage programs. Through our gene and cell therapy research and development expertise, we believe we are positioned to introduce efficacious and safe therapeutics to transform the standard of care in devastating diseases and establish our leadership position in the field. Applying Novel Next Generation AAV Capsid Technology to Develop New In-Vivo Gene Therapies. We are researching and developing next-generation AAV-based gene therapy using our novel capsids developed from the AIM™ Capsid Technology Platform and additional Company-invented AAV capsids. We plan to continue to develop chimeric AAV capsids capable of improved tissue targeting for various indications and potentially evading immunity to wildtype AAV vectors. Establishing Leadership Position in Commercial-Scale Gene and Cell-Therapy Manufacturing. We established current Good Manufacturing Practice (“cGMP”), clinical-scale manufacturing capabilities for gene-corrected cell therapy and AAV-based gene therapies in our state-of-the-art Cleveland facility. We believe that our platform provides us with distinct advantages, including flexibility, scale, reliability, and the potential for reduced development risk, reduced cost, and faster times to market. We have focused on establishing internal Chemistry, Manufacturing and Controls (“CMC”) capabilities that drive value for our organization through process development, assay development and manufacturing. We have also deployed robust quality systems governing all aspects of product lifecycle from preclinical through commercial stage. Establishing Additional Gene and Cell Therapy Franchises and Adjacencies through In-Licensing and Strategic Partnerships. We seek to be the partner of choice in gene therapy treatment and have closely collaborated with leading academic institutions, key opinion leaders, patient foundations, and industry partners to generate novel intellectual property, accelerate research and development, and understand the needs of patients and their families. Maintaining and Growing IP Portfolio. We strive to have a leading intellectual property portfolio. To that end, we seek patent rights for various aspects of our programs, including vector engineering and construct design, our production process, and all features of our clinical products including composition of matter and method of administration and delivery. We expect to continue to expand our intellectual property portfolio by aggressively seeking patent rights for promising aspects of our product engine and product candidates. IMPACT OF COVID-19 PANDEMIC ON OUR BUSINESS We continue to monitor the impact of the COVID-19 pandemic on our business and take appropriate actions to manage our spending activities and preserve our cash resources. While there have been vaccines developed and administered, and the spread of COVID-19 may eventually be contained or mitigated, we cannot predict the timing of vaccine adoption or roll-out globally or the efficacy of such vaccines, including against variants that emerge, and we do not yet know how businesses and our partners will operate in a post COVID-19 environment. While we are unable to determine or predict the extent, duration or scope of the overall impact the COVID-19 pandemic will have on our business, operations, financial condition or liquidity, we believe it is important to keep our stakeholders informed about how our response to COVID-19 is progressing and how our operations and financial condition may change. The extent of the impact of the COVID-19 pandemic on our business, operations, and clinical trials continues to evolve and will depend on certain developments, including: (i) the duration of the declared health emergencies; (ii) future actions taken by governmental authorities and regulators with respect to the pandemic, including reinstituting state and local lockdowns; (iii) the impact on our partners, collaborators, and suppliers; and (iv) actions being taken by us in response to this crisis. We remain dedicated to communicating regularly and openly with our stakeholders as more information becomes available, including updates on material changes to prior guidance as we continue to follow applicable government, regulatory and institutional guidelines. 15 RESULTS OF OPERATIONS Comparison of Three Months Ended September 30, 2021 and September 30, 2020 License and other revenues for the third quarter of 2021 were nil, as compared to $7.0 million for the same period of 2020. The revenues in the third quarter of 2020 were due to the sublicense and inventory purchase agreements we entered into with Taysha Gene Therapies (“Taysha”) in August 2020 for ABO-202, an AAV gene therapy for CLN1 disease (also known as infantile Batten disease). The agreements grant to Taysha worldwide exclusive rights to intellectual property developed by scientists at the University of North Carolina at Chapel Hill and us, and our know-how relating to the research, development and manufacture of the gene therapy. Total research and development spending was $8.0 million for each of the third quarters of 2021 and 2020. Total general and administrative spending was $6.1 million in the third quarter of 2021, as compared to $4.4 million for the same period of 2020, an increase of $1.7 million. The increase in expenses was primarily due to: ● increased stock-based compensation of $1.3 million; and ● increased professional fees of $0.7 million; partially offset by ● decreased salary and related costs of $0.3 million. Depreciation and amortization was $0.8 million in each of the third quarters of 2021 and 2020. Gain on settlement with licensor was $6.7 million in the third quarter of 2021, as compared to nil in the same period of 2020. On November 12, 2021, we entered into a Settlement Agreement with REGENXBIO to resolve all current disputes between us and REGENXBIO. As of September 30, 2021, we have recorded the payable to licensor in the balance sheet based on the present value of the payments due to REGENXBIO under the Settlement Agreement. The accounting for the Settlement Agreement resulted in a $6.7 million gain on settlement with REGENXBIO in the third quarter of 2021. PPP loan payable forgiveness income was $1.8 million in the third quarter of 2021, as compared to nil in the same period of 2020. 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 third quarter of 2021. Interest and miscellaneous income was nil for the third quarter of 2021, as compared to $0.3 million for the same period in 2020. The decrease resulted from lower earnings on short-term investments driven by lower interest rates and a lower average balance of short-term investments. Interest expense was $0.7 million for the third quarter of 2021, as compared to $1.3 million for the same period of 2020. The interest expense results from accrued interest under the prior license agreement with REGENXBIO, which is discussed in Note 3 of our Notes to Condensed Consolidated Financial Statements. The decrease results from a $0.6 million adjustment to accrued interest recorded in the third quarter of 2020 after it was determined and ordered by the American Arbitration Association (“AAA”) tribunal that in accordance with the license agreement, interest should be computed without compounding. Net loss was $7.0 million for the third quarter of 2021, or a $0.07 basic and diluted loss per common share as compared to a net loss of $7.2 million, or a $0.08 basic and diluted loss per common share, for the same period in 2020. Comparison of Nine Months Ended September 30, 2021 and September 30, 2020 License and other revenues for the first nine months of 2021 were nil, as compared to $7.0 million for the same period of 2020. The decrease in revenue was due to the aforementioned sublicense and inventory purchase agreements we entered into with Taysha in August 2020. Total research and development spending was $22.6 million for the first nine months of 2021, as compared to $20.9 million for the same period of 2020, an increase of $1.7 million. The increase in expenses was primarily due to increased clinical and development work for our gene and cell therapy product candidates and other related costs of $1.7 million. Total general and administrative spending was $18.1 million for the first nine months of 2021, as compared to $16.4 million for the same period of 2020, an increase of $1.7 million. The increase in expenses was primarily due to: ● increased stock-based compensation of $1.9 million; and ● increased professional fees of $3.0 million; partially offset by ● decreased salary and related costs of $3.1 million resulting from severance costs of $1.3 million recorded in the first nine months of 2020 and lower compensation costs of $1.8 million due to reduced general and administrative headcount in the first nine months of 2021; and ● decreased other costs of $0.1 million. 16 Depreciation and amortization was $2.4 million for the first nine months of 2021, as compared to $3.7 million for the same period in 2020, a decrease of $1.3 million. The decrease was driven by decreased amortization expense of $1.3 million on licensed technology in the first nine months of 2021, as compared to the same period in 2020, due to the write-off of the REGENXBIO licensed technology in the first quarter of 2020. Our license agreement with REGENXBIO terminated on May 2, 2020. Since our impairment testing indicated that the carrying value of the license agreement with REGENXBIO exceeded its fair value, we recorded a $32.9 million non-cash impairment charge in the first six months of 2020. Gain on settlement with licensor was $6.7 million in the first nine months of 2021, as compared to nil in the same period of 2020. On November 12, 2021, we entered into a Settlement Agreement with REGENXBIO to resolve all current disputes between us and REGENXBIO. As of September 30, 2021, we have recorded the payable to licensor in the balance sheet based on the present value of the payments due to REGENXBIO under the Settlement Agreement. The accounting for the Settlement Agreement resulted in a $6.7 million gain on settlement with REGENXBIO in the first nine months of 2021. PPP loan payable forgiveness income was $1.8 million in the first nine months of 2021, as compared to nil in the same period of 2020. 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 first nine months of 2021. Interest and miscellaneous income was nil for the first nine months of 2021, as compared to $1.3 million for the same period of 2020. The decrease resulted from lower earnings on short-term investments driven by lower interest rates and a lower average balance of short-term investments. Interest expense was $3.6 million for the first nine months of 2021, as compared to $2.7 million for the same period of 2020. The increase results primarily from accrued interest under the prior license agreement with REGENXBIO, which is discussed in Note 3 of our Notes to Condensed Consolidated Financial Statements. Net loss was $38.3 million for the first nine months of 2021, or a $0.40 basic and diluted loss per common share as compared to a net loss of $68.4 million, or a $0.74 basic and diluted loss per common share, for the same period in 2020. The decrease in the net loss resulted primarily from a licensed technology impairment charge of $32.9 million in the first nine months of 2020. LIQUIDITY AND CAPITAL RESOURCES We have historically funded our operations primarily through sale of common stock. The COVID-19 pandemic has negatively affected the global economy and created significant volatility and disruption of financial markets. An extended period of economic disruption could negatively affect our business, financial condition, and access to sources of liquidity. Our principal source of liquidity is cash, cash equivalents and short-term investments. As of September 30, 2021 and December 31, 2020, our cash, cash equivalents and short-term investments were $67.0 million and $95.0 million, respectively. 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. As of September 30, 2021 and December 31, 2020, our working capital was $41.4 million and $55.8 million, respectively. The decrease in working capital as of September 30, 2021 resulted primarily from $35.4 million of cash used for operating activities, partially offset by $8.5 million of cash provided by financing activities and the positive impact on working capital of the Settlement Agreement with REGENXBIO as described further below. On August 17, 2018, we entered into an open market sale agreement with Jefferies LLC (the “2018 ATM Agreement”). Pursuant to the terms of the 2018 ATM Agreement, we were able to sell from time to time, through Jefferies LLC, shares of our common stock for an aggregate sales price of up to $150 million. Any sales of shares pursuant to the 2018 ATM Agreement are made under an effective “shelf” registration statement on Form S-3 that is on file with and has been declared effective by the SEC. We sold 3,083,286 shares of our common stock under the 2018 ATM Agreement and received $7.7 million of net proceeds during the nine months ended September 30, 2021. Cumulatively, as of September 30, 2021, we have sold an aggregate of 6,170,236 shares of our common stock under the 2018 ATM Agreement and received $27.7 million of net proceeds. 17 License Agreement On November 4, 2018, we entered into a license agreement with 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 to 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 an agreement, 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 (“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. 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 in connection with the parties’ arbitration claims and counterclaims. The tribunal awarded REGENXBIO $28.0 million plus interest. On August 9, 2021, we filed a second arbitration claim with the AAA asserting that a settlement had been reached before the tribunal’s award in the first arbitration was issued. On September 14, 2021, REGENXBIO filed its answer, a counterclaim seeking attorney fees and costs, and a request for permission to file a case dispositive motion. A preliminary hearing was held on November 1, 2021, during which the AAA Tribunal set timetables for discovery and for REGENXBIO’s filing of its case dispositive motion. Those timetables were formalized in a procedural order issued by the Tribunal on November 8, 2021. Under the schedule set by the Tribunal, REGENXBIO’s opening brief in support of its case dispositive motion was filed on November 8, 2021, briefing was scheduled to be completed on December 29, 2021, and oral argument was scheduled for January 14, 2022. REGENXBIO had also filed suit in the New York State Supreme Court Commercial Division seeking enforcement of the original arbitration award, and we had requested that the Court stay that proceeding until the second arbitration is complete. Oral argument on our request for a stay was set for March 10, 2022. On November 12, 2021, we entered into a settlement agreement (“Settlement Agreement”) with REGENXBIO to resolve all current disputes between the parties including the aforementioned AAA arbitration and New York State 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 within one business day of the 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. Under the Settlement Agreement’s terms, the prior license agreement between the parties was not reinstituted, and any future license agreement would need to be negotiated separately and require consideration in addition to the consideration set forth in the Settlement Agreement. As of September 30, 2021, we have recorded the payable to licensor in the balance sheet based on the present value of the payments due to REGENXBIO under the Settlement Agreement. 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. 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. 18 We are carefully and continually reassessing key business activities and all associated spending decisions. Nonetheless, we are spending necessary funds on manufacturing activities and preclinical studies and clinical trials of potential products, including research and development with respect to our acquired and developed technology. Our future capital requirements and adequacy of available funds depend on many factors, including: ● the impact to our business, operations, and clinical programs from the COVID-19 pandemic and related effects on the U.S. and global economy; ● the successful development and commercialization of our gene and cell therapy and other product candidates; ● the ability to establish and maintain collaborative arrangements with corporate partners for the research, development, and commercialization of products; ● 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 ability to establish and maintain effective commercialization arrangements and activities; and ● the successful outcome of our regulatory filings. Due to uncertainties and certain of the risks described above, including those relating to the COVID-19 pandemic, 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, market acceptance of our products, 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. OFF-BALANCE SHEET ARRANGEMENTS We did not have, during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under applicable SEC rules. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable.