ABEONA THERAPEUTICS INC. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion and analysis together with our consolidated financial statements and related notes included in this Form 10-K. This discussion and analysis contains forward-looking statements, which involve risks and uncertainties. As a result of many factors, such as those described under “Forward-Looking Statements,” “Risk Factors” and elsewhere in this Form 10-K, our actual results may differ materially from those anticipated in these forward-looking statements. OVERVIEW Abeona is a clinical-stage biopharmaceutical company developing cell and gene therapies for life-threatening diseases. Our lead clinical program is pz-cel, investigational autologous, COL7A1 gene-corrected epidermal sheets, currently in development for recessive dystrophic epidermolysis bullosa (“RDEB”). We have announced positive data from the VIITAL™ study evaluating the efficacy, safety and tolerability of pz-cel. The VIITAL™ study met both its two co-primary efficacy endpoints demonstrating statistically significant, clinically meaningful improvements in wound healing and pain reduction in large chronic RDEB wounds. On September 25, 2023, we submitted a Biologics License Application (“BLA”) for pz-cel to the U.S. Food and Drug Administration (“FDA”). As part of the submission, we requested Priority Review, which, if granted, would shorten the FDA’s review period to six months from the filing acceptance of the BLA instead of ten months under standard review. In November 2023, the FDA accepted and granted priority review for our BLA for pz-cel. Under the Prescription Drug User Fee Act (“PDUFA”), the FDA has set a target action date of May 25, 2024. We have continued to prepare our current Good Manufacturing Practices (“cGMP”) commercial facility in Cleveland, Ohio for manufacturing pz-cel drug product to support our planned commercial launch of pz-cel, if approved. Pz-cel study drug product for all our VIITAL™ study participants has been manufactured at our Cleveland facility. As part of our commercial planning, we continue to engage with stakeholders across the healthcare system, including public and private payors, and healthcare providers to better understand market access and potential pricing for pz-cel. We have also begun discussions with high volume treatment centers of excellence to onboard them for pz-cel application upon potential FDA approval. 58 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. Preclinical Pipeline Our preclinical programs are investigating the use of novel AAV capsids in AAV-based therapies for serious genetic eye diseases, including ABO-504 for Stargardt disease, ABO-503 for X-linked retinoschisis (“XLRS”) and ABO-505 for autosomal dominant optic atrophy (“ADOA”). We completed pre-Investigational New Drug Application (“pre-IND”) meetings with the FDA regarding the preclinical development plans and regulatory requirements to support first-in-human trials. Recent Developments On January 8, 2024, we entered into a $50 million credit facility with the Avenue Venture Opportunities Fund, L.P. The credit agreement, which has a term of three and a half years, includes a first tranche of $20 million at closing, a second tranche of $10 million of committed capital, and an additional accordion option to upsize the credit facility by an additional $20 million upon satisfaction of certain terms and conditions. Additionally, the Bioresearch Monitoring (“BIMO”) inspection was conducted from January 22, 2024 through January 24, 2024 at our headquarters in Cleveland, Ohio, and reviewed the conduct and practices that pertain to the clinical studies of pz-cel. The FDA inspector did not issue any observations or FDA Form 483s during the inspection. The formal report from the FDA regarding the BIMO inspection will be received at a later date. FDA’s BIMO program is a comprehensive program of on-site inspections, data audits, and remote regulatory assessments designed to monitor all aspects of the conduct and reporting of FDA regulated research. The BIMO program was established to assure the quality and integrity of data submitted to the agency in support of new product approvals and marketing applications. Following the BIMO inspection, the BLA mid-cycle review meeting took place on January 25, 2024. The FDA reaffirmed its earlier indication that it does not currently plan to convene an Advisory Committee for pz-cel. In addition, the FDA advised that Risk Evaluation and Mitigation Strategies (REMS) are not anticipated for the pz-cel application at this time, though application review is ongoing, and reconfirmed the PDUFA target action date of May 25, 2024, on which an approval decision on the pz-cel BLA is expected. Subsequent to the mid-cycle review meeting, the FDA completed a Pre-License Inspection (PLI) of our Cleveland, Ohio manufacturing facility related to our BLA for pz-cel. During the inspection, the FDA reviewed the facilities, systems, and processes at our Cleveland site. The FDA also observed the manufacturing process for pz-cel, as well as performance of in-process and release assays. The two-week PLI, which was conducted by five FDA inspectors, concluded on March 1, 2024. Upon completion of the inspection, a Form 483 was issued with observations related to process controls. On March 15, 2024, we submitted a response to the FDA, outlining already implemented and ongoing steps toward resolution that follow FDA guidance provided during the audit. In addition, the FDA completed the clinical study site inspections of the two clinical sites in the U.S. that enrolled subjects in the pivotal Phase 3 VIITAL™ study supporting the pz-cel BLA with no Form 483 observations noted. 59 RESULTS OF OPERATIONS Comparison of Years Ended December 31, 2023 and December 31, 2022 For the year ended December 31, Change ($ in thousands) 2023 2022 $ % Revenues: License and other revenues $ 3,500 $ 1,414 $ 2,086 148 % Expenses: Royalties 1,605 450 1,155 257 % Research and development 31,091 28,965 2,126 7 % General and administrative 19,004 17,256 1,748 10 % Impairment of licensed technology — 1,355 (1,355 ) N/A Loss/(gain) on operating lease right-of-use assets (1,065 ) 2,511 (3,576 ) (142 )% Impairment of construction-in-progress — 1,792 (1,792 ) N/A Total expenses 50,635 52,329 (1,694 ) (3 )% Loss from operations (47,135 ) (50,915 ) 3,780 (7 )% Interest income 2,117 431 1,686 391 % Interest expense (418 ) (736 ) 318 (43 )% Change in fair value of warrant liabilities (11,695 ) 11,383 (23,078 ) (203 )% Other income 2,943 141 2,802 1,987 % Net loss $ (54,188 ) $ (39,696 ) $ (14,492 ) 37 % N/A - not applicable or not meaningful License and other revenues License and other revenues for the year ended December 31, 2023 was $3.5 million, as compared to $1.4 million for the same period of 2022. The revenues in both periods mainly result from clinical milestones achieved under a sublicense agreement we entered into with Taysha Gene Therapies in October 2020 relating to an investigational AAV-based gene therapy for Rett syndrome. In 2022, there was also $0.3 million in revenue consisting of the recognition of deferred revenue related to grants for the ABO-102 and ABO-101 development programs. Royalties Total royalty expenses were $1.6 million for the year ended December 31, 2023, as compared to $0.4 million for the same period of 2022, an increase of $1.2 million. The increase in expense was due to royalties owed to our licensors resulting from the milestones due from Taysha related to Rett syndrome. 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, 2023 was $31.1 million, as compared to $29.0 million for the same period of 2022, an increase of $2.1 million. The increase in expenses was primarily due to an $2.2 million increase in salaries and $0.1 million in non-cash stock-based compensation costs due to increased headcount related to the filing of our BLA. 60 We expect our research and development activities to continue as we work towards advancing our product candidates towards potential regulatory approval, reflecting costs associated with the following: ● 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), pre-commercial launch activity costs and other general operating expenses not otherwise included in research and development expenses. Total general and administrative expenses were $19.0 million for the year ended December 31, 2023, as compared to $17.3 million for the same period of 2022, an increase of $1.7 million. The increase in expenses was primarily due to: ● increased salary and related costs of $1.8 million; ● increased pre-commercial preparation costs of $1.2 million; ● increased non-cash stock-based compensation of $1.6 million; partially offset by ● decreased other costs such as insurance, rent and offering costs of $2.9 million. Impairment of licensed technology Impairment of licensed technology was nil for the year ended December 31, 2023, as compared to $1.4 million in the same period of 2022. The licensed technology was for the ABO-102 and ABO-101 development programs and as a result of our shift in priorities in 2022, we determined the remaining value of the licensed technology had no future value and thus recorded an impairment charge of $1.4 million for the year ended December 31, 2022. Loss/(gain) on operating lease right-of-use assets The gain on operating lease right-of-use assets was $1.1 million for the year ended December 31, 2023, as compared to a loss on operating lease right-of-use assets of $2.5 million in the same period of 2022. The gain on operating lease right-of-use assets for 2023 was related to the termination of our operating leases for office space that we no longer use, resulting in a gain from the difference between the carrying value of the right-of-use lease assets and the related lease liabilities. The loss on operating lease right-of-use assets for 2022 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 in 2022, we determined the remaining value of the portion of this lease had no future value and thus 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. Impairment of construction-in-progress Impairment of construction-in-progress was nil for the year ended December 31, 2023, as compared to $1.8 million in the same period of 2022. 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 remaining value of the construction-in-progress facility had no future value and thus, we 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 $1.5 million. 61 Interest income Interest income was $2.1 million for the year ended December 31, 2023, as compared to $0.4 million in the same period of 2022. The increase resulted from higher earnings on short-term investments driven by higher interest rates and increased average short-term investment balances. Interest expense Interest expense was $0.4 million for the year ended December 31, 2023, as compared to $0.7 million in the same period of 2022. The decrease results primarily from the $5.0 million settlement payment made in November 2022 of a disputed liability owed to our prior licensor, REGENXBIO, Inc. Change in fair value of warrant liabilities The change in fair value of warrant liabilities was a loss of $11.7 million for the year ended December 31, 2023, as compared to a gain of $11.4 million in the same period of 2022. 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 is primarily due to the fluctuation in our stock price year over year and a shorter term. Other income Other income was $2.9 million for the year ended December 31, 2023, as compared to $0.1 million in the same period of 2022. The change was primarily a result of $2.1 million in other income related to the impact of the employee retention credit that we submitted for 2020 and 2021. LIQUIDITY AND CAPITAL RESOURCES Cash Flows for the Years Ended December 31, 2023 and 2022 For the year ended December 31, ($ in thousands) 2023 2022 Total cash, cash equivalents and restricted cash (used in) provided by: Operating activities $ (37,009 ) $ (43,483 ) Investing activities 208 (23,964 ) Financing activities 37,057 43,173 Net increase (decrease) in cash, cash equivalents and restricted cash $ 256 $ (24,274 ) Operating activities Net cash used in operating activities was $37.0 million for the year ended December 31, 2023, primarily comprised of our net loss of $54.2 million and increases in operating assets and liabilities of $1.8 million partially offset by net non-cash charges of $19.0 million. Non-cash charges consisted primarily of $11.7 million of the change in fair value of warrant liabilities, $4.8 million of stock-based compensation and $2.2 million of depreciation and amortization. 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 partially offset by net non-cash charges of $2.1 million. 62 Investing activities Net cash provided by investing activities was $0.2 million for the year ended December 31, 2023, primarily comprised of proceeds from maturities of short-term investments of $51.9 million and proceeds from the disposal of property and equipment of $0.2 million, partially offset by purchases of short-term investments of $51.6 million and capital expenditures of $0.3 million. 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. Financing activities Net cash provided by financing activities was $37.1 million for the year ended December 31, 2023, primarily comprised of proceeds of $14.4 million from open market sales of common stock pursuant to the ATM Agreement (as defined below) and net proceeds of $23.0 million from our July 2023 direct placement offering of common stock. 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. 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, 2023, our cash resources were $52.6 million. We believe that our current cash and cash equivalents, restricted cash and short-term investments, as well as our credit facility with Avenue Venture Opportunities Fund, L.P, are sufficient 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 and potential commercialization 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 sold 3,659,882 shares of our common stock under the ATM Agreement and received $14.4 million of net proceeds during the year ended December 31, 2023. 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. Subsequent to December 31, 2023 and through March 1, 2024, we sold 724,659 shares of our common stock under the ATM Agreement resulting in $5.3 million in net proceeds. 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 and potential commercialization 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 commercialization, 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. 63 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; ● 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, 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 that was paid in 2022, 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, 2023, we have recorded the payable to licensor in the contractual obligations as the one remaining payment due to REGENXBIO under the Settlement Agreement. 64 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, 2023 and, if satisfied, the timing of payment for these amounts was not reasonably estimable as of December 31, 2023. 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, certain contingent payments could become due upon potential BLA approval and sales of pz-cel 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. While our significant accounting policies are described in greater detail in Note 1 to our consolidated financial statements appearing elsewhere in this Annual Report, we believe that the following accounting policies are the most critical to the judgements and estimates used in the preparation of our consolidated financial statements. 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. As we have no external borrowings, the incremental borrowing rates are determined using information on indicative borrowing rates that would be available to us based on the value, currency and borrowing term provided by financial institutions, adjusted for company and market specific factors. Although we do not expect our estimates of the incremental borrowing rates to generate material differences within a reasonable range of sensitivities, judgement is involved in selecting an appropriate rate, and the rate selected for each lease will have an impact on the value of the lease liability and corresponding right-of-use lease asset in the consolidated balance sheets. 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. In June 2023, we terminated one of our operating leases for office space. The termination resulted in a gain of $1.1 million for the year ended December 31, 2023, representing the difference between the carry value of the right-of-use assets and the related lease liabilities. This gain is included in loss/(gain) on right-of-use lease assets in the consolidated statement of operations and comprehensive loss. 65 In June of 2023, we modified one of our operating leases for office space to add up to 14,032 square feet to our existing facility in Cleveland, Ohio. The lease modification resulted in the recognition of $0.4 million of additional right-of-use assets and related lease liabilities in our consolidated balance sheet during the year ended December 31, 2023. 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. Both impairment charges are included in loss/(gain) on operating lease right-of-use assets in the consolidated statement of operations and comprehensive loss. 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. The undiscounted future operating cash flows require considerable judgement and are sensitive to changes in underlying assumptions such as operating costs related to our current facilities, headcount requirements and our clinical costs. As a result, there can be no assurance that the estimates and assumptions made for purpose of our impairment determinations would prove to be an accurate predication of the future. 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. Exclusive Licenses For licenses that are combined with other performance obligation, we utilize judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue. We evaluate the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition. The measure of progress, and thereby periods over which revenue should be recognized, are subject to estimates by management and may change over the course of the research and development and licensing agreement. Such a change could have a material impact on the amount of revenue we record in future periods. Milestone Payments At the inception of each arrangement that includes research or development milestone payments, we evaluate whether the milestones are considered probable of being achieved and estimate the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant cumulative revenue reversal would not occur, the associated milestone value is included in the transaction price. An output method is generally used to measure progress toward complete satisfaction of a milestone. Milestone payments that are not within our control or the licensee, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. We evaluate factors such as the scientific, clinical, regulatory, commercial, and other risks that must be overcome to achieve the particular milestone in making this assessment. There is considerable judgment involved in determining whether it is probable that a significant cumulative revenue reversal would not occur. At the end of each subsequent reporting period, we re-evaluate the probability of achievement of all milestones subject to constraint and, if necessary, adjust our estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenue and earnings in the period of adjustment. 66 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 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 cumulative 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 cumulative 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. There was no revenue recognized under this agreement during the years ended December 31, 2023 and 2022. As of December 31, 2023 and 2022, we have no contract assets or contract liabilities as a result of this transaction. 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 cumulative 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 cumulative 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. 67 Under this arrangement, we recognized $3.5 million and $1.0 million of revenue during the years ended December 31, 2023 and 2022, respectively, which amount related solely to variable consideration. As of December 31, 2023 and 2022, 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 advance 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 expense. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period . If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or amount of prepaid expense accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in us reporting amounts that are too high or too low in any particular period. To date, we have not made any material adjustments to our prior estimates of accrued research and development expenses. Share-Based Compensation Expense We account for share-based compensation expense in accordance with ASC 718, Stock Based Compensation . We have 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 model used to determine the fair value of options includes assumptions for expected volatility, risk-free interest rate, dividend yield and estimated expected term. Expected volatility is estimated considering the Company’s own historical volatility. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected term of the stock options. The expected dividend yield is assumed to be zero as we have never paid dividends and have no current plans to pay any dividends on our common stock. Expected term is estimated using the “simplified” method, as outlined in SEC Staff Accounting Bulletin No. 107, “Share-Based Payment.” 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, 2023 and 2022 was $1.4 million and $2.0 million, respectively. Restricted stock-based compensation expense recognized for the years ended December 31, 2023 and 2022 was $3.4 million and $1.1 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 model used to determine the fair value of these warrants utilizes certain unobservable inputs and this therefore considered a Level 3 fair value measurement. Inputs used in the model include 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. Certain inputs used in this Black-Scholes pricing model may fluctuate in future periods based upon factors that are outside of our control, including a potential change in control. A significant change in one or more of these inputs used in the calculation of the fair value may cause a significant change to the fair value of our warrant liabilities, which could also result in material non-cash gains or losses being reported in the Company’s statement of operations. In addition, the inputs we utilized to value our warrant liabilities are highly subjective. The assumptions used in calculating the fair value of our warrant liabilities represent our best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, the fair value of the warrant liabilities may be materially different in the future. The change in fair value of warrant liability recognized for the year ended December 31, 2023 resulted in a loss of $11.7 million. The change in fair value of warrant liability recognized for the year ended December 31, 2022 resulted in a gain of $11.4 million. 68 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.