ABEONA THERAPEUTICS INC. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with our consolidated financial statements and related notes included in this Form 10-K. Abeona is a clinical-stage biopharmaceutical company developing cell and gene therapies for life-threatening diseases. Our lead clinical program is EB-101, an autologous, engineered cell therapy currently in development for recessive dystrophic epidermolysis bullosa (“RDEB”). In November 2022, we announced positive topline data from the VIITAL™ study evaluating the efficacy, safety and tolerability of EB-101. The VIITAL™ study met its two co-primary efficacy endpoints demonstrating statistically significant, clinically meaningful improvements in wound healing and pain reduction in large chronic RDEB wounds. Based on the positive topline results, we intend to submit a Biologics License Application (“BLA”) for EB-101 to the U.S. Food and Drug Administration (“FDA”) in late second quarter of 2023 or early third quarter of 2023. Our development portfolio also features adeno-associated virus (“AAV”) based gene therapies designed to treat ophthalmic diseases using the novel AIM™ capsid platform that we have exclusively licensed from the University of North Carolina at Chapel Hill, and internal AAV vector research programs. We have continued to prepare our current Good Manufacturing Practices (“cGMP”) commercial facility in Cleveland, Ohio for manufacturing EB-101 drug product to support our planned BLA filing to the FDA. EB-101 study drug product for all our VIITAL™ study participants has been manufactured at our Cleveland facility. Preclinical Pipeline Our preclinical programs are investigating the use of novel AAV capsids in AAV-based therapies for serious eye diseases, including ABO-504 for Stargardt disease, ABO-503 for X-linked retinoschisis (XLRS) and ABO-505 for autosomal dominant optic atrophy (ADOA). In 2022, we evaluated the ability of our gene constructs and capsids to deliver and express the recombinant protein in target eye tissues and rescue mutant phenotypes in mouse disease models. The Company has submitted a pre-Investigational New Drug (IND) application meeting request for XLRS to the FDA to gain alignment on IND enabling toxicity studies and clinical trial design. The Company expects to present new preclinical data from these programs at a future medical meeting in second quarter of 2023. 56 RESULTS OF OPERATIONS Comparison of Years Ended December 31, 2022 and December 31, 2021 For the year ended December 31, Change ($ in thousands) 2022 2021 $ % Revenues: License and other revenues $ 1,414 $ 3,000 $ (1,586 ) (53 )% Expenses: Royalties 450 — 450 N/A Research and development 28,965 38,726 (9,761 ) (25 )% General and administrative 17,256 21,644 (4,388 ) (20 )% Impairment of goodwill — 32,466 (32,466 ) N/A Impairment of licensed technology 1,355 — 1,355 N/A Impairment of right-of-use lease assets 2,511 — 2,511 N/A Impairment of construction-in-progress 1,792 — 1,792 N/A Total expenses 52,329 92,836 (40,507 ) (44 )% Loss from operations (50,915 ) (89,836 ) 38,921 (43 )% Gain on settlement with licensor — 6,743 (6,743 ) N/A PPP loan payable forgiveness income — 1,758 (1,758 ) N/A Interest income 431 40 391 978 % Interest expense (736 ) (3,656 ) 2,920 (80 )% Change in fair value of warrant liabilities 11,383 — 11,383 N/A Other income 141 15 126 840 % Net loss $ (39,696 ) $ (84,936 ) $ 45,240 (53 )% N/A - not applicable or not meaningful License and other revenues License and other revenues for the year ended December 31, 2022 was $1.4 million, as compared to $3.0 million for the same period of 2021. The revenue in 2022 resulted from a clinical milestone achieved in the second quarter of 2022 under a sublicense agreement we entered into with Taysha Gene Therapies (“Taysha”) in October 2020 relating to an investigational AAV-based gene therapy for Rett syndrome, including certain intellectual property relating to MECP2 gene constructs and regulation of their expression. There was also revenue consisting of the recognition of deferred revenue related to grants for the ABO-102 and ABO-101 development programs and revenue related to the sublet of a portion of our existing leases. The revenue in 2021 resulted from a clinical milestone achieved in December 2021 under a sublicense agreement we entered into with Taysha in August 2020 for ABO-202, an AAV gene therapy for CLN1 disease (also known as infantile Batten disease). Royalties Total royalties expenses were $0.4 million for the year ended December 31, 2022, as compared to nil for the same period of 2021, an increase of $0.4 million. The increase in expense was due to royalties owed to our licensors resulting from the $1.0 million milestone due from Taysha. Research and development Research and development expenses include, but are not limited to, payroll and personnel expense, lab supplies, preclinical and development costs, clinical trial costs, manufacturing and manufacturing facility costs, costs associated with regulatory approvals, depreciation on lab supplies and manufacturing facilities, and consultant-related expenses. Total research and development spending for the year ended December 31, 2022 was $28.9 million, as compared to $38.7 million for the same period of 2021, a decrease of $9.8 million. The decrease in expenses was primarily due to: ● decreased clinical and development work for our cell and gene therapy product candidates and other related costs of $5.7 million which primarily relates to the license out/discontinuation of our MPSIII programs; ● decreased non-cash stock compensation expenses of $3.2 million; and ● decreased salary and related costs of $1.0 million; partially offset by ● increased other costs of $0.1 million. 57 We expect our research and development activities to continue as we attempt to advance our product candidates towards potential regulatory approval, reflecting costs associated with: ● employee and consultant-related expenses; ● preclinical and developmental costs; ● clinical trial costs; ● the cost of acquiring and manufacturing clinical trial materials; and ● costs associated with regulatory approvals. General and administrative General and administrative expenses primarily consist of payroll and personnel costs, office facility costs, public reporting company related costs, professional fees (e.g., legal expenses) and other general operating expenses not otherwise included in research and development expenses. Total general and administrative expenses were $17.2 million for the year ended December 31, 2022, as compared to $21.6 million for the same period of 2021, a decrease of $4.4 million. The decrease in expenses was primarily due to: ● decreased professional fees of $3.9 million; ● decreased non-cash stock-based compensation of $2.7 million; partially offset by ● increased other costs of $0.8 million; and ● increased salary and related costs of $1.4 million. Impairment of goodwill Goodwill impairment charge was nil for the year ended December 31, 2022, as compared to $32.5 million in the same period of 2021. As of year-end 2021, the carrying value of our net assets was determined to exceed the fair value of our net assets, and therefore, we recorded a goodwill impairment charge of $32.5 million. Impairment of licensed technology Impairment of licensed technology was $1.4 million for the year ended December 31, 2022, as compared to nil in the same period of 2021. The licensed technology was for the ABO-102 and ABO-101 development programs, which, as a result of our shift in priorities, we determined the licensed technology had no future value and thus recorded impairment of $1.4 million for the year ended December 31, 2022. Impairment of right-of-use lease assets Impairment of right-of-use lease assets was $2.5 million for the year ended December 31, 2022, as compared to nil in the same period of 2021. A portion of the impairment was related to a lease for a future manufacturing facility for the ABO-102 and ABO-101 development programs, which, as a result of our shift in priorities, we determined the portion of this lease had no future value and thus recorded impairment of $1.6 million for the for the year ended December 31, 2022. In addition, we sublet a portion of our leased properties which indicated that a portion of the lease had a reduced future value and thus recorded impairment of $0.9 million for the year ended December 31, 2022. Impairment of construction-in-progress Impairment of construction-in-progress was $1.8 million for the year ended December 31, 2022, as compared to nil in the same period of 2021. The construction-in-progress was for a facility for the ABO-102 and ABO-101 development programs. As a result of our shift in priorities, we determined the construction-in-progress facility had no future value and thus recorded impairment of $1.8 million for the for the year ended December 31, 2022, which was net of a cash refund from the builder of approximately $1.5 million. Gain on settlement with licensor Gain on settlement with licensor was nil for the year ended December 31, 2022, as compared to $6.7 million in the same period of 2021. On November 12, 2021, we entered into a settlement agreement with REGENXBIO, Inc. (“REGENXBIO”) to resolve all current disputes between us and REGENXBIO. The accounting for this settlement agreement resulted in a $6.7 million gain on settlement with REGENXBIO in the year ended December 31, 2021. PPP loan payable forgiveness income PPP loan payable forgiveness income was nil for the year ended December 31, 2022, as compared to $1.8 million in the same period of 2021. In July 2021, we received notice from the SBA that our PPP loan had been forgiven so the PPP loan payable was reversed in the year ended December 31, 2021. 58 Interest income Interest income was $0.4 million for the year ended December 31, 2022, as compared to $40,000 in the same period of 2021. The increase resulted from higher earnings on short-term investments driven by higher interest rates and a higher average balance of short-term investments. Interest expense Interest expense was $0.7 million for the year ended December 31, 2022, as compared to $3.7 million in the same period of 2021. The decrease results primarily from the resolution of a disputed liability owed to our prior licensor, REGENXBIO. Change in fair value of warrant liabilities The change in fair value of warrant liabilities was $11.4 million for the year ended December 31, 2022, as compared to nil in the same period of 2021. We issued stock purchase warrants that are required to be classified as a liability and valued at fair market value at each reporting period. The change in the fair value of warrant liabilities resulted in a gain of $11.4 million due primarily to the reduction in our stock price year over the year and a shorter term. Other income Other income was $0.1 million for the year ended December 31, 2022, as compared to $15,000 in the same period of 2021. The increase was primarily a result of a gain on lease termination of $0.3 million partially offset by $0.1 million of losses on the disposal of fixed assets. LIQUIDITY AND CAPITAL RESOURCES Cash Flows for the Years Ended December 31, 2022 and 2021 For the year ended December 31, ($ in thousands) 2022 2021 Total cash, cash equivalents and restricted cash (used in) provided by: Operating activities $ (43,483 ) $ (65,665 ) Investing activities (23,964 ) 66,062 Financing activities 43,173 24,861 Net (decrease) increase in cash, cash equivalents and restricted cash $ (24,274 ) $ 25,258 Operating activities Net cash used in operating activities was $43.5 million for the year ended December 31, 2022, primarily comprised of our net loss of $39.7 million and decrease in operating assets and liabilities of $5.9 million and net non-cash charges of $2.1 million. Net cash used in operating activities was $65.7 million for the year ended December 31, 2021, primarily comprised of our net loss of $84.9 million and decrease in operating assets and liabilities of $18.3 million, partially offset by net non-cash charges of $37.5 million. Investing activities Net cash used in investing activities was $24.0 million for the year ended December 31, 2022, primarily comprised of purchases of short-term investments of $78.2 million and capital expenditures of $0.1 million, partially offset by proceeds from maturities of short-term investments of $52.6 million and proceeds from the disposal of property and equipment of $1.7 million. Net cash provided by investing activities was $66.1 million for the year ended December 31, 2021, primarily comprised of proceeds from maturities of short-term investments of $90.4 million, partially offset by purchases of short-term investments of $20.2 million and capital expenditures of $4.1 million. Financing activities Net cash provided by financing activities was $43.2 million for the year ended December 31, 2022, primarily comprised of proceeds of $12.8 million from open market sales of common stock pursuant to the ATM Agreement (as defined below) and proceeds of $34.1 million from a private offering of common stock and warrants on November 3, 2022, partially offset by the proceeds and redemption of our convertible redeemable preferred stock. Net cash provided by financing activities was $24.9 million for the year ended December 31, 2021, primarily comprised of proceeds of $17.4 million from the issuance of common stock and warrants in a public offering, proceeds of $8.0 million from open market sales of common stock pursuant to the ATM Agreement and proceeds of $0.8 million from the exercise of stock options, partially offset by the payment of offering costs in a public offering of $1.5 million. 59 We have historically funded our operations primarily through sales of common stock. Our principal source of liquidity is cash, cash equivalents, restricted cash and short-term investments, collectively referred to as our cash resources. As of December 31, 2022, our cash resources were $52.5 million. We believe that our current cash and cash equivalents, restricted cash and short-term investments are sufficient resources to fund operations through at least the next 12 months from the date of this report on Form 10-K. We may need to secure additional funding to carry out all of our planned research and development activities. If we are unable to obtain additional financing or generate license or product revenue, the lack of liquidity and sufficient capital resources could have a material adverse effect on our future prospects. We have an open market sale agreement with Jefferies LLC (as amended, the “ATM Agreement”) pursuant to which, we may sell from time to time, through Jefferies LLC, shares of our common stock for an aggregate sales price of up to $150.0 million. Any sales of shares pursuant to this agreement are made under our effective “shelf” registration statement on Form S-3 that is on file with and has been declared effective by the SEC. We are currently subject to General Instruction I.B.6 of Form S-3, as a result of which the amount of funds we can raise through primary public offerings of securities in any 12-month period using our registration statement on Form S-3 is limited to one-third of the aggregate market value of the voting and non-voting common equity held by non-affiliates. We remain subject to this one-third limitation until such time our public float exceeds $75 million. We sold 146,872 shares of our common stock under the ATM Agreement and received $8.1 million of net proceeds during the year ended December 31, 2021. We sold 3,479,016 shares of our common stock under the ATM Agreement and received $12.8 million of net proceeds during the year ended December 31, 2022. Since our inception, we have incurred negative cash flows from operations and have expended, and expect to continue to expend substantial funds to complete our planned product development efforts. We have not been profitable since inception and to date have received limited revenues from the sale of products or licenses. We expect to incur losses for the next several years as we continue to invest in product research and development, preclinical studies, clinical trials, and regulatory compliance and cannot provide assurance that we will ever be able to generate sufficient product sales or royalty revenue to achieve profitability on a sustained basis, or at all. If we raise additional funds by selling additional equity securities, the relative equity ownership of our existing investors will be diluted, and the new investors could obtain terms more favorable than previous investors. If we raise additional funds through collaborations, strategic alliances, or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs, or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financing when needed, we may be required to delay, limit, or terminate our product development programs or any future commercialization efforts or grant rights to develop and market product candidates to third parties that we would otherwise prefer to develop and market ourselves. Our future capital requirements and adequacy of available funds depend on many factors, including: ● the successful development, regulatory approval and commercialization of our cell and gene 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; ● any continuing impact to our business, operations, and clinical programs from the COVID-19 pandemic and government actions related thereto; ● 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. 60 Due to uncertainties and certain of the risks described above, our ability to successfully commercialize our product candidates, our ability to obtain applicable regulatory approval to market our product candidates, our ability to obtain necessary additional capital to fund operations in the future, our ability to successfully manufacture our products and our product candidates in clinical quantities or for commercial purposes, government regulation to which we are subject, the uncertainty associated with preclinical and clinical testing, intense competition that we face, the potential necessity of licensing technology from third parties and protection of our intellectual property, it is not possible to reliably predict future spending or time to completion by project or product category or the period in which material net cash inflows from significant projects are expected to commence. If we are unable to timely complete a particular project, our research and development efforts could be delayed or reduced, our business could suffer depending on the significance of the project and we might need to raise additional capital to fund operations, as discussed in the risks above. We plan to continue our policy of investing any available funds in suitable certificates of deposit, money market funds, government securities and investment-grade, interest-bearing securities. We do not invest in derivative financial instruments. Contractual Obligations We enter into agreements in the normal course of business with clinical research organizations for clinical trials and clinical manufacturing organizations for supply manufacturing and with vendors for preclinical research studies and other services and products for operating purposes. These contractual obligations are cancelable at any time by us, generally upon prior written notice to the vendor, and are thus not included in the contractual obligations table. Operating lease amounts represent future minimum lease payments under our non-cancelable operating lease agreements. The minimum lease payments above do not include any related common area maintenance charges or real estate taxes. On November 12, 2021, we entered into a Settlement Agreement with REGENXBIO to resolve all current disputes between the parties including the aforementioned AAA arbitration and New York State Supreme Court action. In accordance with the Settlement Agreement, we agreed to pay REGENXBIO a total of $30 million, payable as follows: (1) $20 million payable that was paid in 2021 after execution of the Settlement Agreement, (2) $5 million on the first anniversary of the effective date of the Settlement Agreement, and (3) $5 million upon the earlier of: (i) the third anniversary of the effective date of the Settlement Agreement or (ii) the closing of a Strategic Transaction, as defined in the Settlement Agreement. As of December 31, 2022, we have recorded the payable to licensor in the contractual obligations as the one remaining payments due to REGENXBIO under the Settlement Agreement. In addition, we are also party to other license agreements, which include contingent payments. However, contingent payments related to these license agreements are not disclosed as the satisfaction of these contingent payments is uncertain as of December 31, 2022 and, if satisfied, the timing of payment for these amounts was not reasonably estimable as of December 31, 2022. Commitments related to the license agreements include contingent payments that will become payable if and when certain development, regulatory and commercial milestones are achieved. During the next 12 months, we do not expect to make milestone payments related to such license agreements. Critical Accounting Estimates The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts and related disclosures in the financial statements. Management considers an accounting estimate to be critical if: ● it requires assumptions to be made that were uncertain at the time the estimate was made, and ● changes in the estimate or different estimates that could have been selected could have a material impact in our results of operations or financial condition. While we base our estimates and judgments on our experience and on various other factors that we believe to be reasonable under the circumstances, actual results could differ from those estimates and the differences could be material. 61 Leases We account for leases pursuant to ASC 842, Leases (“ASC 842”). ASC 842 requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases . We determine if an arrangement is a lease at inception or when amended. Right-of-use lease assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. The classification of our leases as operating or finance leases along with the initial measurement and recognition of the associated right-of-use assets and lease liabilities is performed at the lease commencement date or when amended. The measurement of lease liabilities is based on the present value of future lease payments over the lease term. As our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the lease commencement date in determining the present value of future lease payments. The right-of-use asset is based on the measurement of the lease liability and includes any lease payments made prior to or on lease commencement or lease amendment and excludes lease incentives and initial direct costs incurred, as applicable. Rent expense for our operating leases is recognized on a straight-line basis over the lease term. We do not have any leases classified as finance leases. Our leases do not have significant rent escalation, holidays, concessions, material residual value guarantees, material restrictive covenants or contingent rent provisions. Our leases include both lease (e.g., fixed payments including rent, taxes, and insurance costs) and non-lease components (e.g., common-area or other maintenance costs), which are accounted for as a single lease component as we have elected the practical expedient to group lease and non-lease components for all leases. We have elected the practical expedient to exclude short-term leases from our right-of-use assets and lease liabilities. Most leases include one or more options to renew. The exercise of lease renewal options is typically at our sole discretion; therefore, the majority of renewals to extend the lease terms are not included in our right-of-use assets and lease liabilities as they are not reasonably certain of exercise. We regularly evaluate the renewal options and when they are reasonably certain of exercise, we include the renewal period in our lease term. On March 31, 2022, we announced that we were pursuing a strategic partner to take over development activities of ABO-102 and we were discontinuing development of ABO-101. As a result of this shift in priorities, we determined the portion of the lease that was dedicated to the future facility for the ABO-101 and ABO-102 programs, had no future value and thus, we recorded an impairment charge of $1.6 million for the year ended December 31, 2022. In addition, we sublet a portion of our leased properties which indicated that a portion of the lease had a reduced future value and thus recorded impairment of $0.9 million for the year ended December 31, 2022 Licensed Technology We maintain licensed technology on our consolidated balance sheet until either the licensed technology agreement underlying it is completed or the asset becomes impaired. When we determine that an asset has become impaired or we abandon a project, we write down the carrying value of the related intangible asset to its fair value and take an impairment charge in the period in which the impairment occurs. Generally, licensed technology is amortized over the life of the patent or the agreement. We test our intangible assets for impairment if indicators are present or changes in circumstance suggest that impairment may exist. Events that could result in an impairment, or trigger an interim impairment assessment, include the receipt of additional clinical or nonclinical data regarding our drug candidate or a potentially competitive drug candidate, changes in the clinical development program for a drug candidate or new information regarding potential sales for the drug. In connection with any impairment assessment, we compare the fair value of the asset as of the date of the assessment with the carrying value of the asset on our consolidated balance sheets. During 2022, in connection with the license of our ABO-102 asset for the treatment of Sanfilippo syndrome type A (MPS IIIA) to Ultragenyx and the discontinuation of the ABO-101 program for the treatment of Sanfilippo syndrome type B (MPS IIIB), we recorded an impairment charge of $1.4 million as we determined that there was no remaining value of the licensed technology. In 2021, we did not impair any licensed technology. Impairment of Long-Lived Assets Long-Lived Assets consist of property and equipment, licensed technology, and right-of-use (“ROU”) assets. We test our long-lived assets for impairment on an annual basis, or when events and circumstances indicate that the carrying value of an asset or group of assets may not be fully recoverable. If indicators are present or changes in circumstance suggest that impairment may exist. We assess the recoverability of the affected long-lived assets by determining whether the carrying value of such assets can be recovered through undiscounted future operating cash flows. If the carrying amount is not recoverable, we measure the amount of any impairment by comparing the carrying value of the asset to the present value of the expected future cash flows associated with the use of the asset. 62 Goodwill In accordance with ASC 350 — Intangibles — Goodwill and Other, we test goodwill for impairment on an annual basis and in the interim if events and circumstances indicate that goodwill may be impaired. The events and circumstances that are considered include business climate and market conditions, legal factors, operating performance indicators and competition. Impairment of goodwill is evaluated on a qualitative basis before calculating the fair value of the entity. If the qualitative assessment suggests that impairment is more likely than not, a quantitative impairment analysis is performed. The quantitative analysis involves comparison of the fair value of the entity with its carrying value. The valuation of an entity requires judgment. In making these judgments, we evaluate the financial health of our business. Decreases in the value of our common stock could cause the carrying value of the entity to exceed its fair value. If the carrying amount of the entity exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited to the total amount of goodwill. If an event occurs that would cause a revision to the estimates and assumptions used in analyzing the value of the goodwill, the revision could result in a noncash impairment charge that could have a material impact on the financial results. We experienced a steep decline in our share price during the year ended December 31, 2021. We performed our annual goodwill impairment tested as of year-end 2021 and determined that the carrying value of our net assets exceeded fair value using our market capitalization as a proxy for fair value. In accordance with ASC 350, we recognized an impairment loss for that excess of carrying value over fair value but limited to the total amount of goodwill recorded on our consolidated balance sheets. As a result, we recorded a goodwill impairment charge of $32.5 million during the year ended December 31, 2021. Revenue Recognition We account for revenue under ASC 606, Revenue from Contracts with Customers , (“ASC 606”). We recognize revenue when our customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services. To determine revenue recognition for arrangements that we determine are within the scope of ASC 606, we perform the following five steps: (i) identify the contract(s) with our customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy a performance obligation. Sublicense and Inventory Purchase Agreements Relating to CLN1 Disease : In August 2020, we entered into sublicense and inventory purchase agreements with Taysha Gene Therapies (“Taysha”) relating to a potential gene therapy for CLN1 disease. Under the sublicense agreement, Taysha received worldwide exclusive rights to intellectual property and know-how relating to the research, development, and manufacture of the potential gene therapy, which we had referred to as ABO-202. Under the inventory purchase agreement, we sold to Taysha certain inventory and other items related to ABO-202. We assessed these contracts at contract inception and determined that, under ASC 606, the two contracts would be combined and accounted for as a single contract, with a single performance obligation. We assessed the nature of the promised license to determine whether the license has significant stand-alone functionality and evaluated whether such functionality can be retained without ongoing activities by us and determined that the license has significant stand-alone functionality. Furthermore, we have no ongoing activities associated with the license to support or maintain the license’s utility. Based on this, we determined that the pattern of transfer of control of the license to Taysha was at a point in time. The transaction price of the contract includes (i) $7.0 million of fixed consideration, (ii) up to $26.0 million of variable consideration in the form of event-based milestone payments, (iii) up to $30.0 million of variable consideration in the form of sales-based milestone payments, and (iv) other royalty-based payments based on net sales. The event-based milestone payments are based on certain development and regulatory events occurring. At inception, we evaluated whether the milestone conditions had been achieved and if it was probable that a significant revenue reversal would not occur before recognizing the associated revenue and determined that these milestone payments were not within our control or the licensee’s control, such as regulatory approvals, and were not considered probable of being achieved until those approvals were received. Accordingly, at inception, we fully constrained the $26.0 million of event-based milestone payments until such time that it is probable that significant revenue reversal would not occur. The sales-based milestone payments and other royalty-based payments are based on a level of sales for which the license is deemed to be the predominant item to which the royalties relate. We will recognize revenue for these payments at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied or partially satisfied. To date, we have not recognized any sales-based or royalty revenue resulting from this licensing arrangement. 63 During the year ended December 31, 2021, Taysha achieved an event-based milestone payment and, accordingly, we recognized $3.0 million of revenue as of December 31, 2021. There was no revenue recognized under this agreement during the year ended December 31, 2022. As of December 31, 2022 and 2021, we have a contract asset for nil and $3.0 million but did not have any contract liabilities as a result of this transaction. We collected the $3.0 million of cash in January 2022 in full satisfaction of the contract asset. Sublicense Agreement Relating to Rett Syndrome : In October 2020, we entered into a sublicense agreement with Taysha for a gene therapy for Rett syndrome and MECP2 gene constructs and regulation of their expression. The agreement grants Taysha worldwide exclusive rights to intellectual property developed by scientists at the University of North Carolina at Chapel Hill, the University of Edinburgh and us, and our know-how relating to the research, development, and manufacture of the gene therapy for Rett syndrome and MECP2 gene constructs and regulation of their expression. We assessed the nature of the promised license to determine whether the license has significant stand-alone functionality and evaluated whether such functionality can be retained without ongoing activities by us and determined that the license has significant stand-alone functionality. Furthermore, we have no ongoing activities associated with the license to support or maintain the license’s utility. Based on this, we determined that the pattern of transfer of control of the license to Taysha was at a point in time. The transaction price of the contract includes (i) $3.0 million of fixed consideration, (ii) up to $26.5 million of variable consideration in the form of event-based milestone payments, (iii) up to $30.0 million of variable consideration in the form of sales-based milestone payments, and (iv) other royalty-based payments based on net sales. The event-based milestone payments are based on certain development and regulatory events occurring. We evaluated whether the milestone conditions have been achieved and if it is probable that a significant revenue reversal would not occur before recognizing the associated revenue. We determined that these milestone payments are not within our control or the licensee’s control, such as regulatory approvals, and are not considered probable of being achieved until those approvals are received. Accordingly, we have fully constrained the $26.5 million of event-based milestone payments until such time that it is probable that significant revenue reversal would not occur. The sales-based milestone payments and other royalty-based payments are based on a level of sales for which the license is deemed to be the predominant item to which the royalties relate. We will recognize revenue for these payments at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied or partially satisfied. To date, we have not recognized any sales-based or royalty revenue resulting from this licensing arrangement. Under this arrangement, we recognized $1.0 million of revenue during the year ended December 31, 2022, which amount related solely to fixed consideration. We did not recognize any related revenue during the year ended December 31, 2021. As of December 31, 2022 and 2021, we do not have any contract assets or contract liabilities as a result of this transaction. Accrued Research and Development Expenses As part of the process of preparing our consolidated financial statements, we are required to estimate our accrued research and development expenses. This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated costs incurred for the services when we have not yet been invoiced or otherwise notified of the actual costs. The majority of our service providers invoice us in arrears for services performed, on a pre-determined schedule or when contractual milestones are met; however, some require advanced payments. We make estimates of our accrued expenses as of each balance sheet date in our consolidated financial statements based on facts and circumstances known to us at that time. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the clinical expense. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or amount of prepaid expense accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in us reporting amounts that are too high or too low in any particular period. To date, we have not made any material adjustments to our prior estimates of accrued research and development expenses. 64 Share-Based Compensation Expense We account for share-based compensation expense in accordance with ASC 718, Stock Based Compensation . We have two share-based compensation plans under which incentive and qualified stock options and restricted shares may be granted to employees, directors, and consultants. We measure the cost of the employee/director/consultant services received in exchange for an award of equity instruments based on the fair value for employees and directors and vesting date fair value of the award for consultants. We use the Black-Scholes option pricing model to determine the fair value of options as of the grant date and the Hull White I lattice model as of any option repricing dates. The models used to determine the fair value of options includes assumptions for expected volatility, risk-free interest rate, dividend yield and estimated expected term. We use the closing price of our common stock as quoted on Nasdaq to determine the fair value of restricted stock. We account for forfeitures as they occur, which may result in the reversal of compensation costs in subsequent periods as the forfeitures arise. Stock option-based compensation expense recognized for the years ended December 31, 2022 and 2021 was approximately $2.0 million and $5.3 million, respectively. Restricted stock-based compensation expense recognized for the years ended December 31, 2022 and 2021 was approximately $1.1 million and $3.7 million, respectively. Warrants We have issued warrants associated with capital raises from time to time. We determine the accounting and value of any issued warrants in accordance with ASC 480 , Distinguishing Liabilities from Equity and ASC 815, Derivatives and Hedging . The first step is to determine if the warrants are to be classified as either a liability or equity depending on the warrant terms. The second step is to then determine the value of the warrants. We measure the value of any liability classified warrants on their issuance date based on their fair value using the Black-Scholes pricing model. The models used to determine the fair value of these warrants includes assumptions for expected volatility, risk-free interest rate, dividend yield and estimated expected term. The liability classified warrants are revalued on each subsequent balance sheet date until such instruments are exercised or expire, with any changes in the fair value between reporting periods recorded in the consolidated statements of operations and comprehensive loss. Change in fair value of warrant liability recognized for the years ended December 31, 2022 and 2021 was approximately $11.4 million and nil, respectively. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Financial statements required by this Item are incorporated in this Annual Report on Form 10-K starting on page F-1 hereto. Reference is made to Item 15 of this Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.