Abeona Therapeutics Inc.: Form 10-Q for the period ended Sep 30, 2023

You should read the following discussion and analysis together with our unaudited condensed consolidated financial statements and accompanying notes included elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements included in our Annual Report on Form 10-K/A for the year ended December 31, 2022 (the “Annual Report”). 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 Quarterly Report on Form 10-Q and in our Annual Report, 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 EB-101, a genetically engineered, autologous cell therapy, 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 EB-101. 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 EB-101 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 10 months under standard review.

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 commercial launch of EB-101, if approved. EB-101 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 EB-101. We have also begun discussions with high volume treatment centers of excellence to onboard them for EB-101 application upon potential FDA approval.

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 July 6, 2023, we closed on a $25.0 million registered direct offering priced at-the market under Nasdaq rules to certain existing institutional investors. After offering costs, net proceeds consisted of $23.0 million. We sold 3,284,407 shares of our common stock (and, in lieu of common stock for certain investors, pre-funded warrants to purchase 2,919,140 shares of our common stock) at an offering price of $4.03 per share (or $4.0299 per pre-funded warrant, which represents the per share offering price for the common stock less the $0.0001 per share exercise price for each pre-funded warrant). The pre-funded warrants are immediately exercisable at a nominal exercise price of $0.0001 per share and may be exercised at any time.

On September 12, 2023, we announced the appointment of Madhav Vasanthavada, Ph.D., M.B.A. to the role of Chief Commercial Officer and Head of Business Development. In this capacity, in addition to his current business development responsibilities, Dr. Vasanthavada will oversee all aspects of commercial strategy, planning and operations as we prepare for a potential launch of EB-101.

On September 25, 2023, we submitted a BLA for EB-101 to the 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 10 months under standard review.

RESULTS OF OPERATIONS

Comparison of Three Months Ended September 30, 2023 and September 30, 2022

($ in thousands)

N/A – not applicable or not meaningful

Royalties

Total royalties were $30,000 for the three months ended September 30, 2023, as compared to nil for the same period of 2022, an increase of $30,000. The increase in expense was due to milestones owed to our licensors.

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 three months ended September 30, 2023 was $7.1 million, as compared to $5.5 million for the same period of 2022, an increase of $1.6 million. The increase in expenses was primarily due to:

• increased clinical and development work and related costs of $0.8 million associated with our BLA filing for EB-101;
• increased salary and related costs of $0.9 million; and partially offset by
• decrease other costs of $0.1 million.

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 $4.2 million for the three months ended September 30, 2023, as compared to $3.9 million for the same period of 2022, an increase of $0.3 million. The increase in expenses was primarily due to:

• increased non-cash stock-based compensation of $0.8 million; partially offset by
• decreased professional fees of $0.3 million; and
• decreased rent and utilities of $0.2 million.

Interest income

Interest income was $0.6 million for the three months ended September 30, 2023, as compared to $0.1 million in the same period of 2022. The increase resulted from higher earnings on short-term investments driven by higher interest rates and increased short-term investment balances.

Interest expense

Interest expense was $0.1 million for the three months ended September 30, 2023, as compared to $0.2 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 $1.1 million for the three months ended September 30, 2023, as compared to a gain of $3.0 million for the same period in 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 was primarily due to the fluctuation in our stock price year over year and a shorter term.

Other income (expense)

Other income was $0.1 million for the three months ended September 30, 2023, as compared to other expense of $19,000 in the same period of 2022. The change was primarily a result of the Company subletting certain office space during 2023.

Comparison of Nine Months Ended September 30, 2023 and September 30, 2022

($ in thousands)

N/A – not applicable or not meaningful

License and other revenues

License and other revenues for the nine months ended September 30, 2023 was $3.5 million, as compared to $1.3 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 revenue consisting of the recognition of deferred revenue related to grants for the ABO-102 and ABO-101 development programs.

Royalties

Total royalties were $1.6 million for the nine months ended September 30, 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

Total research and development spending for the nine months ended September 30, 2023 was $23.7 million, as compared to $22.7 million for the same period of 2022, an increase of $1.0 million. The increase in expenses was primarily due to an increase of $1.0 million in salaries and related costs due to increased headcount related to the filing of our BLA.

General and administrative

Total general and administrative expenses were $13.2 million for the nine months ended September 30, 2023, as compared to $11.6 million for the same period of 2022, an increase of $1.6 million. The increase in expenses was primarily due to:

• increased salary and related costs of $1.5 million;
• increased non-cash stock-based compensation of $1.0 million; partially offset by
• decreased other costs of $0.9 million.

Impairment of licensed technology

Impairment of licensed technology was nil for the nine months ended September 30, 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 nine months ended September 30, 2022.

Loss/(gain) of right-of-use lease assets

The gain on right-of-use lease assets was $1.1 for the nine months ended September 30, 2023, as compared to a loss on right-of-use assets of $1.6 million in the same period of 2022. The gain on 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 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 nine months ended September 30, 2022.

Impairment of construction-in-progress

Construction-in-progress impairment charge was nil for the nine months ended September 30, 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 nine months ended September 30, 2022.

Interest income

Interest income was $1.4 million for the nine months ended September 30, 2023, as compared to $0.1 million in the same period of 2022. The increase resulted from higher earnings on short-term investments driven by higher interest rates and increased short-term investment balances.

Interest expense

Interest expense was $0.3 million for the nine months ended September 30, 2023, as compared to $0.6 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 $7.5 million for the nine months ended September 30, 2023, as compared to a gain of $6.0 million for the same period in 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 (expense)

Other income was $2.7 million for the nine months ended September 30, 2023, as compared to other expense of $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 have submitted for 2020 and 2021.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows for the Nine Months Ended September 30, 2023 and 2022

($ in thousands)

Operating activities

Net cash used in operating activities was $27.8 million for the nine months ended September 30, 2023, primarily comprised of our net loss of $37.6 million, increases in operating assets and liabilities of $2.8 million and net non-cash charges of $12.6 million.

Net cash used in operating activities was $29.5 million for the nine months ended September 30, 2022, primarily comprised of our net loss of $32.6 million and a decrease in operating assets and liabilities of $1.9 million, partially offset by net non-cash charges of $5.0 million.

Investing activities

Net cash used in investing activities was $11.3 million for the nine months ended September 30, 2023, primarily comprised of purchases of short-term investments of $48.2 million, partially offset by proceeds from maturities of short-term investments of $37.0 million.

Net cash provided by investing activities was $1.3 million for the nine months ended September 30, 2022, primarily comprised of proceeds from maturities of short-term investments of $43.7 million and proceeds from disposal of property and equipment of $1.6 million, partially offset by purchases of short-term investments of $43.9 million and capital expenditures of $0.1 million.

Financing activities

Net cash provided by financing activities was $29.6 million for the nine months ended September 30, 2023, primarily comprised of $23.0 million in net proceeds from our direct placement sale of common stock and $6.6 million in net proceeds from ATM sales of common stock pursuant to our ATM Agreement (as defined below).

Net cash provided by financing activities was $0.4 million for the nine months ended September 30, 2022, primarily comprised of proceeds of $4.2 million from open market sales of common stock pursuant to the ATM Agreement (as defined below), 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 September 30, 2023, our cash resources were $54.1 million. We believe that our current cash and cash equivalents, restricted cash and short-term investments are sufficient to fund operations through at least the next 12 months from the date of this report on Form 10-Q. 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 1,990,321 shares of our common stock under the ATM Agreement resulting in net proceeds of $6.6 million for the nine months ended September 30, 2023.

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.

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.

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 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. For a discussion of the critical accounting estimates that affect the unaudited condensed consolidated financial statements, see “Critical Accounting Estimates” included in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report.

See Note 1 to our unaudited condensed consolidated financial statements for a discussion of our significant accounting policies.

Recently Issued Accounting Standards Not Yet Effective or Adopted

See Note 1 to our unaudited condensed consolidated financial statements for a discussion of recently issued accounting standards not yet effective or adopted.

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management and consultants, including the Chief Executive Officer (our principal executive officer) and Chief Financial Officer (our principal financial officer), we have conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (“Disclosure Controls and Procedures”), as of September 30, 2023, as such term is defined in Rules 13a-15I and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

Conclusion of Evaluation — Based on this Disclosure Controls and Procedures evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our Disclosure Controls and Procedures as of September 30, 2023 were effective.

Changes in Internal Control Over Financial Reporting – There were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Our business and financial results are subject to numerous risks and uncertainties. As a result, the risks and uncertainties discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K/A for the year ended December 31, 2022 should be carefully considered. There have been no material changes in the assessment of our risk factors from those set forth in our Annual Report on Form 10-K/A for the year ended December 31, 2022.