UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark one)

For the transition period from                                 to                                        

Commission file number 001-15771

ABEONA THERAPEUTICS INC.

(Exact name of registrant as specified in its charter)

1330 Avenue of the Americas, 33^rd Floor, New York, NY 10019

(Address of principal executive offices, zip code)

(646) 813-4701

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [  ]

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [  ] No [X]

The number of shares outstanding of the registrant’s common stock as of November 7, 2019 was 51,154,395 shares.

ABEONA THERAPEUTICS INC.

INDEX

CAUTIONARY STATEMENT RELATED TO FORWARD-LOOKING STATEMENTS

This Form 10-Q (including information incorporated by reference) contains statements that express management’s opinions, expectations, beliefs, plans, objectives, assumptions or projections regarding future events or future results and therefore are, or may be deemed to be, “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “could,” “would,” “seeks,” “estimates,” and variations of such words and similar expressions, and the negatives thereof, are intended to identify such forward-looking statements. We caution readers not to place undue reliance on any such “forward-looking statements,” which speak only as of the date made, and advise readers that these forward-looking statements are not guarantees of future performance and involve certain risks, uncertainties, estimates, and assumptions by management that are difficult to predict. Various factors, some of which are beyond the Company’s control, could cause actual results to differ materially from those expressed in, or implied by, such forward-looking statements. All such forward-looking statements, whether written or oral, and whether made by us or on our behalf, are expressly qualified by these cautionary statements and any other cautionary statements that may accompany the forward-looking statements. In addition, we disclaim any obligation to update any forward-looking statements to reflect events or circumstances after the date of this report, except as may otherwise be required by the federal securities laws.

Forward-looking statements necessarily involve risks and uncertainties, and our actual results could differ materially from those anticipated in the forward-looking statements due to a number of factors. These statements include statements about the timing for Chemistry, Manufacturing and Controls (“CMC”) clearance for the phase III clinical trial for patients with recessive dystrophic epidermolysis bullosa (“RDEB”) and the Company’s beliefs relating thereto; the Company’s ability to provide additional transport stability data points in response to the Food and Drug Administration (“FDA”) clinical hold letter for our RDEB phase III clinical trial and the timing thereof; the Company’s belief that completion of its CMC work and the durable safety and efficacy data will ultimately be critical to support a future Biologics License Application; and the Company’s plans to consider exploring a broad range of strategic alternatives, including, but not limited to, the partnering of its various clinical and pre-clinical programs, or a sale or merger of the Company. Important factors that could affect performance and cause results to differ materially from management’s expectations are described in the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Form 10-K for the fiscal year ended December 31, 2018, as updated from time to time in the Company’s Securities and Exchange Commission filings, including this Form 10-Q. These factors include: our estimates regarding expenses, future revenues, capital requirements, and needs for additional financing; our ability to raise capital; our ability to fund our operating expenses and capital expenditure requirements for at least the next 12 months with our existing cash and cash equivalents; our plans to consider exploring a broad range of strategic alternatives, including, but not limited to, the partnering of its various clinical and pre-clinical programs, or a sale or merger of the Company; the Company’s ability to obtain additional equity funding from current or new stockholders, out-licensing technology and/or other assets, deferring and/or eliminating planned expenditures, restructuring operations and/or reducing headcount, and sales of assets; our expectation that we will continue to incur losses; our belief that we will expend substantial funds to conduct research and development programs; our future ability to achieve profitability at all or on a sustained basis; our cash burn rate; the dilutive effect that raising additional funds by selling additional equity securities would have on the relative equity ownership of our existing investors; our belief that we have a rich pipeline of products and product candidates; our ability to continue to develop our novel adeno-associated virus (“AAV”)-based gene therapy platform technology to treat neurologic disorders, cystic fibrosis and eye disorders in human subjects; our belief that EB-101 could potentially benefit patients with RDEB; the outcome of any interactions with the FDA or other regulatory agencies relating to any of our products or product candidates; whether or when the FDA will lift the clinical hold relating to the Company’s planned phase III clinical trial for patients with RDEB; our ability to initiate a phase III clinical trial for patients with RDEB in the fourth quarter of 2019; our ability to complete enrollment of patients into clinical trials to secure sufficient data to assess efficacy and safety; our belief that AAV treatment could potentially benefit patients with Sanfilippo syndrome type A (“MPS IIIA”) and Sanfilippo syndrome type B (“MPS IIIB”); our ability to add clinical sites and identify additional patients for our phase I/II clinical trial for patients with MPS IIIA and MPS IIIB; our ability to continue to secure and maintain regulatory designations for our product candidates; our ability to develop manufacturing capability compliant with current good manufacturing practices for our product candidates; our ability to manufacture gene and cell therapy products and produce an adequate product supply to support clinical trials and potentially future commercialization; our ability to secure timely regulatory review related to our clinical programs; our belief in the adequacy of the data from clinical trials in EB-101 and expansion cohort of our phase I/II clinical trial in ABO-102 (AAV-SGSH) for MPS IIIA, together with the data generated in the program to date, to support regulatory approvals; our intellectual property position and our ability to obtain, maintain and enforce intellectual property protection and exclusivity for our proprietary assets; the rate and degree of market acceptance of our product candidates for any indication once approved; our estimates regarding the size of the potential markets for our product candidates, the strength of our commercialization strategies and our ability to serve and supply those markets; our ability to meet our obligations contained in license agreements to which we are party; and the terms of future licensing arrangements or collaborations.

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Abeona Therapeutics Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

The accompanying notes are an integral part of these condensed consolidated statements.

Abeona Therapeutics Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)

The accompanying notes are an integral part of these condensed consolidated statements.

Abeona Therapeutics Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

The accompanying notes are an integral part of these condensed consolidated statements.

Abeona Therapeutics Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

The accompanying notes are an integral part of these condensed consolidated statements.

ABEONA THERAPEUTICS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

NOTE 1 – NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

Background

Abeona Therapeutics Inc., a Delaware corporation (together with our subsidiaries, “we,” “our,” “Abeona” or the “Company”), is a clinical-stage biopharmaceutical company developing gene and cell therapies for life-threatening rare genetic diseases. Our lead programs include EB-101, an autologous, gene-corrected cell therapy for recessive dystrophic epidermolysis bullosa (“RDEB”); ABO-102, an adeno-associated virus (“AAV”)-based gene therapy for Sanfilippo syndrome type A (“MPS IIIA”); and ABO-101, an AAV-based gene therapy for Sanfilippo syndrome type B (“MPS IIIB”). We also are developing ABO-202 and ABO-201, which are AAV-based gene therapies for the CLN1 and CLN3 forms of Batten Disease, respectively, ABO-401 for the treatment of cystic fibrosis, and ABO-5OX for the treatment of retinal diseases. In addition, we are developing next-generation AAV-based gene therapy though our novel AIM™ capsid platform and internal AAV vector research programs. Our efforts since inception have been principally devoted to research and development, resulting in significant losses.

Basis of Presentation

The condensed consolidated balance sheet as of September 30, 2019, the condensed consolidated statements of operations and stockholders’ equity for the three and nine months ended September 30, 2019 and 2018 and the condensed consolidated statements of cash flows for the nine months ended September 30, 2019 and 2018, were prepared by management without audit. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, except as otherwise disclosed, necessary for the fair presentation of the financial position, results of operations, and changes in financial position for such periods, have been made.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted. These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Form 10-K for the year ended December 31, 2018. The results of operations for the periods ended September 30, 2019 are not necessarily indicative of the operating results that may be expected for a full year. The condensed consolidated balance sheet as of December 31, 2018 contains financial information taken from the audited Abeona consolidated financial statements as of that date.

As of September 30, 2019, we had 6,697,980 options and 1,820,686 warrants that were not included in the EPS calculation as their effect would be antidilutive. As of September 30, 2018, we had 5,999,544 options and 2,220,687 warrants that were not included in the earnings per share calculation as their effect would be antidilutive.

Effective January 1, 2018, we adopted Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, as amended (ASC 606). At year-end 2018, we determined that we should adjust the amounts originally reported for the quarters ended March 31, 2018 and June 30, 2018 to correct for an error in the determination of the cumulative effect related to the adoption of ASC 606 as of January 1, 2018. The adjusted amounts for March 31, 2018 reflect a $2,067,000 reduction in foundation revenues and corresponding increases in the loss from operations and net loss of $2,067,000 and an increase in the diluted loss per share of $0.04, as compared to the originally reported amounts. The adjusted amounts for June 30, 2018 reflect a $543,000 reduction in foundation revenues and corresponding increases in the loss from operations and net loss of $543,000 and an increase in the diluted loss per share of $0.01, as compared to the originally reported amounts.

Uses and Sources of Liquidity

The financial statements have been prepared on a going concern basis, which assumes the Company will have sufficient cash to pay its operating expenses, as and when they become payable, for a period of at least 12 months from the date the financial report was issued. Therefore, we believe it is appropriate to prepare the financial statements on a going concern basis.

As of September 30, 2019, we had cash, cash equivalents and short-term investments of $47.9 million and net assets of $96.1 million. For the nine months ended September 30, 2019, we had cash outflows from operations of $48.6 million.

In early 2019, the Company implemented a multi-faceted program to seek sufficient liquidity through at least the end of 2020. This program considered the possibility of accessing additional equity funding from current or new stockholders, out-licensing technology and/or other assets, deferring and/or eliminating planned expenditures, restructuring operations and/or reducing headcount and sales of assets. In September 2019, the Company announced that it has retained Jefferies LLC as its financial advisor to assist with the review of strategic options focused on advancing the Company’s mission and maximizing stockholder value. In an effort to unlock potential additional value, the Company initiated this more formal process to explore a broad range of strategic alternatives including but not limited to the partnering of its various clinical and pre-clinical programs, or a sale or merger of the Company.

NOTE 2 – NEW ACCOUNTING STANDARD IMPLEMENTED

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases, as amended (“ASC 842”), which requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. We adopted the provisions of ASC 842 effective January 1, 2019 using the cumulative-effect adjustment transition method, which applies the provisions of the standard as of the effective date without adjusting the comparative periods presented. As a result of the adoption, we recorded operating lease right-of-use assets of $8.9 million and operating lease liabilities of $8.9 million. The adoption had an immaterial impact on our net assets as of January 1, 2019. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard, which allowed us to carry forward the historical lease classification.

Additional information and disclosures required by this new standard are contained in Note 8.

NOTE 3 – SHORT-TERM INVESTMENTS

The following table summarizes the available-for-sale investments held:

The amortized cost of the available-for-sale investments is adjusted for amortization of premiums and accretion of discounts to maturity. There were no material realized gains or losses recognized on the sale or maturity of available-for-sale investments during the three and nine months ended September 30, 2019 and 2018.

NOTE 4 – LICENSED TECHNOLOGY

On November 4, 2018, we entered into a license agreement with REGENXBIO to obtain rights to an exclusive worldwide license (subject to certain non-exclusive rights previously granted for MPS IIIA), with rights to sublicense, to REGENXBIO’s NAV AAV9 vector for the development and commercialization of gene therapies for the treatment of MPS IIIA, MPS IIIB, CLN1 Disease and CLN3 Disease. In return for these rights, REGENXBIO received a guaranteed $20 million upfront payment, $10 million of which was paid on signing of the agreement on November 4, 2018 and $10 million of which was originally required under the agreement to be paid by November 4, 2019. In addition, REGENXBIO will receive a total of $100 million in annual fees, payable upon the second through sixth anniversaries of the agreement, $20 million of which is guaranteed and payable on November 4, 2020. REGENXBIO is also eligible to receive potential commercial milestone payments of up to $60 million as well as royalties payable in the low double digits to low teens on net sales of products incorporating the licensed intellectual property. The license is amortized over the life of the patent of eight years.

On November 1, 2019, we entered into an amendment of the original license agreement.  The amended agreement replaced the $10 million payment due on November 4, 2019 with a $3 million payment due on November 4, 2019 and an additional $8 million payment due on April 1, 2020.

On August 3, 2016, we announced that we entered into an agreement (the “EB Agreement”) with EB Research Partnership (“EBRP”) and Epidermolysis Bullosa Medical Research Foundation (“EBMRF”) to collaborate on gene therapy treatments for EB. The EB Agreement became effective August 3, 2016 on the execution of two licensing agreements with The Board of Trustees of Leland Stanford Junior University (“Stanford”). On August 3, 2016, we recorded the issuance of 375,000 of our common shares to each of EBRP and EBMRF and recorded licensed technology of $2.45 million, which was being amortized over 20 years. In connection with an arbitration proceeding relating to the EB Agreement, on May 15, 2019, the arbitrator issued a decision in favor of the Company requiring the Company to cancel any and all shares of its common stock issued to EBRP and EBMRF that were still in their possession. As a result, we have recorded the return of 450,000 shares of our common stock and the reversal of the licensed technology from our financial statements. The net of these transactions resulted in a non-cash charge to expense of $367,000 recorded during the nine months ended September 30, 2019.

On May 15, 2015, we acquired Abeona Therapeutics LLC, which had an exclusive license through Nationwide Children’s Hospital to the AB-101 and AB-102 patent portfolios for developing treatments for patients with Sanfilippo Syndrome Type A and Type B. The license is amortized over the life of the license of 20 years.

Licensed technology consists of the following:

The aggregate estimated amortization expense for intangible assets remaining as of September 30, 2019 is as follows:

Amortization on licensed technology was $1,293,000 and $3,931,000 for the three and nine months ended September 30, 2019, respectively, and $87,000 and $260,000 for the three and nine months ended September 30, 2018, respectively.

NOTE 5 – RESTRICTED CASH

Restricted cash, which is reported within other assets and restricted cash on the condensed consolidated balance sheets, consists of cash and cash equivalents held as collateral for a corporate credit card and office space in New York. As such, the cash and cash equivalents are restricted in use.

NOTE 6 – FAIR VALUE MEASUREMENTS

We calculate the fair value of our assets and liabilities that qualify as financial instruments and include additional information in the notes to the consolidated financial statements when the fair value is different than the carrying value of these financial instruments. The estimated fair value of receivables, prepaid expenses, other assets, accounts payable, accrued expenses, payable to licensor and deferred revenue approximate their carrying amounts due to the relatively short maturity of these instruments.

U.S. GAAP defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. This guidance establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

The guidance requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. We have segregated all financial assets and liabilities that are measured at fair value on a recurring basis (at least annually) into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date in the table below.

Financial assets and liabilities measured at fair value on a recurring and non-recurring basis as of September 30, 2019 and December 31, 2018 are summarized below:

NOTE 7 – STOCK-BASED COMPENSATION

The following table summarizes option-based compensation expense for the three and nine months ended September 30, 2019 and 2018:

We estimate the fair value of each option award on the date of grant using the Black-Scholes option valuation model. We then recognize the grant date fair value of each option as compensation expense ratably using the straight-line attribution method over the service period (generally the vesting period). The Black-Scholes model incorporates the following assumptions:

We used the following weighted-average assumptions to estimate the fair value of the options granted for the periods indicated:

The following table summarizes the options granted for the periods indicated:

The following table summarizes restricted common stock-based compensation expense for the three and nine months ended September 30, 2019 and 2018:

We granted 376,625 shares of restricted common stock to employees during the three and nine months ended September 30, 2019. We did not grant any restricted common stock to employees during the three and nine months ended September 30, 2018.

NOTE 8 – OPERATING LEASES

We lease space under non-cancelable operating leases for manufacturing and laboratory facilities and administrative offices in Cleveland as well as administrative offices in New York. The 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 also lease office space in Madrid, Spain as well as certain office equipment under operating leases, which have a non-cancelable lease term of less than one year and therefore, we have elected the practical expedient to exclude these short-term leases from our right-of-use assets and lease liabilities.

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.

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 the lease payments.

Components of lease cost are as follows:

The following table presents information about the amount and timing of cash flows arising from operating leases as of September 30, 2019:

NOTE 9 – COMMITMENTS AND CONTINGENCIES

On January 18, 2018, William Mahon, a Company stockholder, served a demand upon the Company’s board of directors (the “Board”) pursuant to Section 220 of the Delaware General Corporation Law (the “Demand”) seeking to inspect certain of the Company’s books and records. Generally, the Demand’s stated purpose was to investigate allegedly excessive compensation awarded to non-employee Board members for the fiscal years 2015–2017. The Board denied the allegations in the Demand, and agreed to provide limited books and records to Mahon. On September 17, 2018, another Company stockholder, Francisco Dos Ramos, filed a stockholder derivative complaint in the Delaware Chancery Court (the “Dos Ramos Action”) against Steven Rouhandeh, Frank Carsten Thiel, Mark Alvino, Stefano Buono, Stephen Howell, Richard Van Duyne, and Todd Wider as defendants, and the Company as nominal defendant (the “Dos Ramos Defendants”). Dos Ramos generally alleged that the Board breached its fiduciary duties, were unjustly enriched, and committed corporate waste by approving allegedly excessive compensation to non-employee Board members for the fiscal years 2015–2017. Dos Ramos generally sought disgorgement of the allegedly improper payments to the Board, money damages, an order requiring corporate governance reforms, costs and attorneys’ fees. On November 28, 2018, Mahon filed a stockholder derivative complaint (the “Mahon Action”) in the United States District Court for the District of Delaware (the “District Court”) against Mark Ahn, Mark Alvino, Jeffrey Davis, Stephen Howell, Todd Wider, and Steven Rouhandeh, as defendants, and the Company as a nominal defendant (“Mahon Defendants”). The allegations in the Mahon Action were substantially similar to those set forth in his Demand, as well as those in the Dos Ramos Action. Mahon generally sought the disgorgement of the allegedly improper payments to the Board, a constructive trust, money damages, costs and attorneys’ fees. On December 6, 2018, Mahon and the Mahon Defendants filed a joint motion for preliminary approval of settlement, along with a stipulation of settlement (the “Stipulation”) intending to settle all claims asserted in the Mahon Action.

On January 8, 2019, the District Court approved the parties’ notice of settlement, enjoining all Company stockholders from commencing or further prosecuting any claims asserted in the Mahon Action, and scheduled a settlement approval hearing for May 1, 2019. On January 25, 2019, the Chancery Court entered an order staying the Dos Ramos Action until May 8, 2019—one week after the May 1, 2019 settlement hearing in the Mahon Action. On May 2, 2019 the District Court entered an Order and Final Judgment approving the Stipulation. On August 6, 2019, the plaintiff in the Dos Ramos Action filed a voluntary notice of dismissal. On August 7, 2019, the Chancery Court entered an order of dismissal.

On October 22, 2018, EB Research Partnership, Inc. (“EBRP”) served upon the Company a Request for Arbitration (the “Request”), alleging that the Company was in breach of an Agreement executed in July 2016 (the “Agreement”) between and among the Company, EBRP, and Epidermolysis Bullosa Medical Research Foundation (“EBMRF” and together with EBRP, “Claimants”). EBRP alleged that Abeona had refused to lift trading restrictions on certain shares of Abeona common stock issued to EBRP, purportedly in breach of the Agreement. On November 21, 2018, the Company filed an action in the United States District Court for the Southern District of New York seeking a declaration that it was not required to arbitrate its dispute with EBRP on the basis that the Agreement was void for lack of consideration. On February 4, 2019, the court granted Claimants’ motion to compel arbitration. EBMRF was subsequently joined as a party to the arbitration. The parties submitted briefs to the arbitrator on March 18 and April 18, 2019. On May 15, 2019, the arbitrator issued a decision in favor of the Company (the “Final Award”). Specifically, the Final Award provides that the Agreement is void for lack of consideration; that Claimants fraudulently induced Abeona to enter into the Agreement; that Claimants cannot enforce the Agreement; that Claimants are not entitled to any relief under the Agreement; that, in view of their status as charitable organizations, Claimants would not be required to repay to Abeona the value of Abeona common stock they already sold; that the Company shall cancel any and all shares of Abeona common stock issued to Claimants that were still in Claimants’ possession; and that, as the losing parties, Claimants must bear the costs and expenses of the arbitration and Abeona’s costs and expenses.

OVERVIEW

Abeona Therapeutics Inc., a Delaware corporation (together with our subsidiaries, “we,” “our,” “Abeona” or the “Company”), is a clinical-stage biopharmaceutical company developing gene and cell therapies for life-threatening rare genetic diseases. Our lead programs include EB-101, an autologous, gene-corrected cell therapy for recessive dystrophic epidermolysis bullosa (“RDEB”); ABO-102, an adeno-associated virus (“AAV”)-based gene therapy for Sanfilippo syndrome type A (“MPS IIIA”); and ABO-101, an AAV-based gene therapy for Sanfilippo syndrome type B (“MPS IIIB”). We also are developing ABO-202 and ABO-201, which are AAV-based gene therapies for the CLN1 and CLN3 forms of Batten Disease, respectively, ABO-401 for the treatment of cystic fibrosis, and ABO-5OX for the treatment of retinal diseases. In addition, we are developing next-generation AAV-based gene therapies though our novel AIM™ capsid platform and internal AAV vector research programs. We believe our product candidates are eligible for orphan drug designation, breakthrough therapy designation, or other expedited review processes in the U.S., Europe or Japan. Our pipeline includes five product candidates for which we hold several U.S. and EU regulatory designations:

Our robust and diverse pipeline features early-stage and late-stage candidates with the potential to transform the treatment of devastating genetic diseases, and we are conducting clinical trials in the U.S. and abroad.

Our Mission and Strategy

Abeona is at the forefront of gene and cell therapy research and development. We are a fully-integrated company featuring therapies in clinical development, in-house manufacturing facilities, a robust pipeline, and scientific, clinical, and commercial leadership. We see our mission as working to create, develop, manufacture and deliver gene and cell therapies for people impacted by serious diseases. We partner with leading academic researchers, patient advocacy organizations and caregivers to develop therapies that address the underlying cause of a broad spectrum of rare genetic diseases for which no effective treatment options exist today.

Since our last fiscal year, we made progress toward fulfilling our goal of harnessing the promise of genetic medicine to transform the lives of people impacted by serious diseases and redefining the standard of care through gene and cell therapies. Our strategy to achieve this goal consists of:

Advancing our Clinical Gene and Cell Therapy Programs and Research and Development with a Focus on Rare and Orphan Diseases.

We have four programs in clinical development—EB-101, ABO-101, ABO-102 and ABO-202—and a pipeline of additional earlier stage programs. Through our gene and cell therapy expertise in research and development, we are positioned to introduce meaningful therapeutics to transform the standard of care in devastating diseases and establish our leadership position in the field.

Applying Novel Next-Generation AIM™ Capsid Technology to Develop New In-Vivo Gene Therapies.

We are researching and developing a next-generation of AAV-based gene therapy using our novel capsids developed from the AIM™ Capsid Technology Platform and additional Company invented AAV capsids. We aim to continue to develop chimeric AAV capsids capable of improved tissue targeting for various indications and potentially evading immunity to wildtype AAV vectors.

Establishing Leadership Position in Commercial-Scale Gene and Cell Therapy Manufacturing.

We established current Good Manufacturing Practice (“cGMP”), clinical-scale manufacturing capabilities for gene-corrected cell therapy and AAV-based gene therapies in our state-of-the-art Cleveland, OH facility. We believe that our platform provides us with distinct advantages, including flexibility, scale, reliability, and the potential for reduced development risk, cost, and faster times to market. We have focused on establishing internal Chemistry, Manufacturing and Controls (“CMC”) capabilities that drive value for our organization through process development, assay development and manufacturing. We have also deployed robust quality systems governing all aspects of product lifecycle from preclinical through commercial stage.

Establishing Additional Gene and Cell Therapy Franchises and Adjacencies through In-Licensing and Strategic Partnerships.

We seek to be the partner of choice in rare disease and have closely collaborated with leading academic institutions, key opinion leaders, patient foundations and industry partners to generate novel intellectual property, accelerate research and development, and understand the needs of patients and their families.

Maintaining and Growing IP Portfolio.

We strive to have a leading intellectual property portfolio. To that end, we seek patent rights for various aspects of our programs, including vector engineering and construct design, our production process, and all features of our clinical products including composition of matter and method of administration and delivery. We expect to continue to expand our intellectual property portfolio by aggressively seeking patent rights for promising aspects of our product engine and product candidates.

RESULTS OF OPERATIONS FOR THREE MONTHS ENDED SEPTEMBER 30, 2019 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2018

Foundation revenues relate to a collaborative agreement between nine Sanfilippo foundations and us to provide up to approximately $13.9 million of grants to us in installments for the advancement of our clinical stage gene therapies for MPS IIIA and MPS IIIB, subject to the achievement of certain milestones. We have received $5.7 million of such grants cumulatively as of September 30, 2019. The cash received upfront from the foundations is deferred on the condensed consolidated balance sheet until the costs of the activities as outlined in the manufacturing and clinical work plan are incurred by installment as outlined in the agreement with the foundations. As a result, we record foundation revenues to match the costs of the activities by installment performed under the collaborative agreement. Our foundation revenue was $0 in the third quarter of 2019 and $1.7 million in the third quarter of 2018. We did not record foundation revenue in the third quarter of 2019 since we have previously recognized revenue up to the amount of cash received to date by installment performed.

We recorded royalty revenue for MuGard of $0 in the third quarter of 2019 and $0.1 million in the third quarter of 2018. We licensed MuGard to AMAG Pharmaceuticals, Inc. (“AMAG”) and Norgine B.V. (“Norgine”).

Total research and development spending for the third quarter of 2019 was $10.9 million, as compared to $13.2 million for the same period of 2018, a decrease of $2.3 million. The decrease in expenses was primarily due to decreased clinical and development work ($3.0 million) as we carefully reviewed third-party services contracts and delayed activities for certain clinical programs, partially offset by increased salary and related costs ($0.8 million) from the hiring of additional scientific staff.

Total general and administrative expenses were $4.7 million for the third quarter of 2019, as compared to $5.0 million for the same period of 2018, a decrease of $0.3 million. The decrease in expenses was primarily due to:

Depreciation and amortization were $2.0 million for the third quarter of 2019, as compared to $0.5 million for the same period in 2018, an increase of $1.5 million. The increase was driven by increased amortization expense of $1.2 million resulting primarily from the amortization of the cost of the REGENXBIO license, which we entered into in November 2018, and increased depreciation expense of $0.3 million resulting primarily from the build-out of our production facility in Cleveland, Ohio and, to a much lesser extent, the build-out of our corporate offices in New York, New York.

Net loss for the third quarter of 2019 was $17.4 million, or a $0.35 basic and diluted loss per common share as compared to a net loss of $16.4 million, or a $0.34 basic and diluted loss per common share, for the same period in 2018.

RESULTS OF OPERATIONS FOR NINE MONTHS ENDED SEPTEMBER 30, 2019 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2018

Our foundation revenue was $0 for the first nine months of 2019 and $2.4 million for the same period of 2018.

We recorded royalty revenue for MuGard of $0 for the first nine months of 2019 and $0.1 million for the same period of 2018. We licensed MuGard to AMAG and Norgine.

Total research and development spending for the first nine months of 2019 was $39.0 million, as compared to $29.2 million for the same period of 2018, an increase of $9.8 million. The increase in expenses was primarily due to:

Total general and administrative expenses were $16.0 million for the first nine months of 2019, as compared to $12.5 million for the same period of 2018, an increase of $3.5 million. The increase in expenses was primarily due to:

Depreciation and amortization were $5.7 million for the first nine months of 2019, as compared to $1.0 million for the same period in 2018, an increase of $4.7 million. The increase was driven by increased amortization expense of $3.6 million resulting primarily from the amortization of the cost of the REGENXBIO license, which we entered into in November 2018, and increased depreciation expense of $1.1 million resulting primarily from the build-out of our production facility in Cleveland, Ohio and, to a much lesser extent, the build-out of our corporate offices in New York, New York.

Net loss for the first nine months of 2019 was $59.9 million, or a $1.22 basic and diluted loss per common share as compared to a net loss of $39.2 million, or a $0.83 basic and diluted loss per common share, for the same period in 2018.

LIQUIDITY AND CAPITAL RESOURCES

We have historically funded our operations primarily through sales of equity securities and, to a significantly lesser extent, foundation grants and licensing agreements. Our principal sources of liquidity are cash, cash equivalents and short-term investments. The Company believes that it has access to sufficient resources to fund business operations for the next 12 months.

As of September 30, 2019 and December 31, 2018, our cash, cash equivalents and short-term investments were $47.9 million and $85.0 million, respectively. As of September 30, 2019 and December 31, 2018, our working capital was $29.4 million and $68.5 million, respectively. The decrease in working capital during the nine months ended September 30, 2019 resulted primarily from $48.6 million of cash used for operating activities and $6.2 million for capital expenditures, partially offset by $17.0 million of proceeds from open market sales of common stock.

In early 2019, the Company implemented a multi-faceted program to seek sufficient liquidity through at least the end of 2020. This program includes the possibility of accessing additional equity funding from current or new stockholders, out-licensing technology and/or other assets, deferring and/or eliminating planned expenditures, restructuring operations and/or reducing headcount, and sales of assets. In September 2019, the Company announced that it has retained Jefferies LLC as its financial advisor to assist with the review of strategic options focused on advancing the Company’s mission and maximizing stakeholder value. The Company initiated this more formal process to explore a broad range of strategic alternatives, including, but not limited to, the partnering of its various clinical and pre-clinical programs, or a sale or merger of the Company, in an effort to unlock the potential of those assets.

On November 4, 2018, we entered into a license agreement with REGENXBIO to obtain rights to an exclusive worldwide license (subject to certain non-exclusive rights previously granted for MPS IIIA), with rights to sublicense, to REGENXBIO’s NAV AAV9 vector for the development and commercialization of gene therapies for the treatment of MPS IIIA, MPS IIIB, CLN1 Disease and CLN3 Disease. In return for these rights, REGENXBIO received a guaranteed $20 million upfront payment, $10 million of which was paid on signing of the agreement on November 4, 2018 and $10 million of which was originally required under the agreement to be paid by November 4, 2019. In addition, REGENXBIO will receive a total of $100 million in annual fees, payable upon the second through sixth anniversaries of the agreement, $20 million of which is guaranteed and payable on November 4, 2020. REGENXBIO is also eligible to receive potential commercial milestone payments of up to $60 million as well as royalties payable in the low double digits to low teens on net sales of products incorporating the licensed intellectual property.

On November 1, 2019, we entered into an amendment of the original license agreement.  The amended agreement replaced the $10 million payment due on November 4, 2019 with a $3 million payment due on November 4, 2019 and an additional $8 million payment due on April 1, 2020.

On August 17, 2018, we entered into an open market sale agreement with Jefferies LLC. Pursuant to the terms of this agreement, we may sell from time to time, through Jefferies LLC, shares of our common stock for an aggregate sales price of up to $150 million. Any sales of shares pursuant to this agreement will be 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 3,086,950 shares of our common stock under this agreement and received $17.0 million of proceeds during the nine months ended September 30, 2019.

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. Since inception, our expenses have significantly exceeded revenues, resulting in an accumulated deficit of $470.0 million as of September 30, 2019. We have not been profitable since inception and to date have received limited revenues from the sale of products. We expect to incur losses for the next several years as we continue to invest in product research and development, preclinical studies, clinical trials and regulatory compliance and cannot provide assurance that we will ever be able to generate sufficient product sales or royalty revenue to achieve profitability on a sustained basis, or at all.

If we raise additional funds by selling additional equity securities, the relative equity ownership of our existing investors will be diluted and the new investors could obtain terms more favorable than previous investors. If we raise additional funds through collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs, or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financing when needed, we may be required to delay, limit or terminate our product development programs or any future commercialization efforts or grant rights to develop and market product candidates to third parties that we would otherwise prefer to develop and market ourselves.

We plan to expend substantial funds to conduct research and development programs, expand our manufacturing capabilities and conduct preclinical studies and clinical trials of potential products, including research and development with respect to our acquired and developed technology. Our future capital requirements and adequacy of available funds will depend on many factors, including:

Due to uncertainties and certain risks described in our most recent Form 10-K, including those relating to our ability to successfully commercialize our product candidates, our ability to obtain necessary additional capital to fund operations in the future, our ability to successfully manufacture our products and our product candidates in clinical quantities or for commercial purposes, government regulation to which we are subject, the uncertainty associated with preclinical and clinical testing, intense competition that we face, market acceptance of our products, the potential necessity of licensing technology from third parties and protection of our intellectual property, it is not possible to reliably predict future spending or time to completion by project or product category or the period in which material net cash inflows from significant projects are expected to commence. If we are unable to timely complete a particular project, our research and development efforts could be delayed or reduced, our business could suffer depending on the significance of the project and we might need to raise additional capital to fund operations, as discussed in the risk factors in our most recent Form 10-K, including those relating to the uncertainty of the success of our research and development activities and our ability to obtain necessary additional capital to fund operations in the future. As discussed in such risk factors, delays in our research and development efforts and any inability to raise additional funds could cause us to eliminate one or more of our research and development programs.

In September 2019, we received a clinical hold letter from the FDA clarifying that the FDA will not provide approval for us to begin our planned phase III clinical trial for EB-101 until we submit to the FDA additional data points on transport stability of EB-101 to clinical sites. We have worked closely with the FDA to address and narrow open CMC items including this one item identified in the FDA clinical hold letter. However, we cannot predict whether or when the FDA will lift the clinical hold with respect to the Company’s planned phase III clinical trial for patients with RDEB.

We plan to continue our policy of investing any available funds in certificates of deposit, money market funds, government securities and/or investment-grade, interest-bearing securities. We do not invest in derivative financial instruments.

OFF-BALANCE SHEET ARRANGEMENTS

We did not have, during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under applicable SEC rules.

Our business and financial results are not materially affected by fluctuations in currency exchange rates or interest rates. We do not use derivative financial instruments for trading or speculative purposes.

Interest Rate Risk

Our exposure to market risk for changes in interest rates relates to our investment portfolio. Our investment strategy is focused on preserving capital and supporting our liquidity requirements, while earning a reasonable market return. We invest only in U.S. government, U.S. agency and U.S. treasury securities. The market value of our investments would not materially decline if current market interest rates rise given the short duration of our investments.

Concentrations of Risk

We invest excess cash in short-term, fixed-rate debt securities, and diversify the investments between financial institutions.

Foreign Currency Fluctuation Risk

We are not currently exposed to significant market risk related to changes in foreign currency exchange rates; however, we have contracted with and may continue to contract with foreign vendors that are located in Europe and Australia.

Inflation Fluctuation Risk

Inflation can affect us by increasing our cost of labor and clinical trial costs. We do not believe that inflation had a material effect on our business, financial condition or results of operations during the three and nine months ended September 30, 2019 and 2018.

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management and consultants, including the Executive Chairman (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, 2019, as such term is defined in Exchange Act Rules 13a-15(e) 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 Executive Chairman and Chief Financial Officer concluded that our Disclosure Controls and Procedures were effective as of September 30, 2019.

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, 2019 that have materially affected, or are reasonable likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

On November 1, 2019, Sudipta Majumdar filed a putative securities class action lawsuit against the Company and certain of its current and former executive officers, in the U.S. District Court for the Southern District of New York, purportedly on behalf of purchasers of the Company’s securities between May 31, 2018 and September 23, 2019. The complaint alleges, among other things, that the defendants made materially false and misleading statements regarding the Company’s business, and operational and compliance policies, in violation of Sections 10(b) and 20(a) of the Exchange Act. The complaint seeks unspecified damages, fees, interest, and costs. The Company intends to defend this suit vigorously. 

On January 18, 2018, William Mahon, a Company stockholder, served a demand upon the Company’s board of directors (the “Board”) pursuant to Section 220 of the Delaware General Corporation Law (the “Demand”) seeking to inspect certain of the Company’s books and records. Generally, the Demand’s stated purpose was to investigate allegedly excessive compensation awarded to non-employee Board members for the fiscal years 2015–2017. The Board denied the allegations in the Demand, and agreed to provide limited books and records to Mahon. On September 17, 2018, another Company stockholder, Francisco Dos Ramos, filed a stockholder derivative complaint in the Delaware Chancery Court (the “Dos Ramos Action”) against Steven Rouhandeh, Frank Carsten Thiel, Mark Alvino, Stefano Buono, Stephen Howell, Richard Van Duyne, and Todd Wider as defendants, and the Company as nominal defendant (the “Dos Ramos Defendants”). Dos Ramos generally alleged that the Board breached its fiduciary duties, were unjustly enriched, and committed corporate waste by approving allegedly excessive compensation to non-employee Board members for the fiscal years 2015–2017. Dos Ramos generally sought disgorgement of the allegedly improper payments to the Board, money damages, an order requiring corporate governance reforms, costs and attorneys’ fees. On November 28, 2018, Mahon filed a stockholder derivative complaint (the “Mahon Action”) in the United States District Court for the District of Delaware (the “District Court”) against Mark Ahn, Mark Alvino, Jeffrey Davis, Stephen Howell, Todd Wider, and Steven Rouhandeh, as defendants, and the Company as a nominal defendant (“Mahon Defendants”). The allegations in the Mahon Action were substantially similar to those set forth in his Demand, as well as those in the Dos Ramos Action. Mahon generally sought the disgorgement of the allegedly improper payments to the Board, a constructive trust, money damages, costs and attorneys’ fees. On December 6, 2018, Mahon and the Mahon Defendants filed a joint motion for preliminary approval of settlement, along with a stipulation of settlement (the “Stipulation”) intending to settle all claims asserted in the Mahon Action.

On January 8, 2019, the District Court approved the parties’ notice of settlement, enjoining all Company stockholders from commencing or further prosecuting any claims asserted in the Mahon Action, and scheduled a settlement approval hearing for May 1, 2019. On January 25, 2019, the Chancery Court entered an order staying the Dos Ramos Action until May 8, 2019—one week after the May 1, 2019 settlement hearing in the Mahon Action. On May 2, 2019 the District Court entered an Order and Final Judgment approving the Stipulation. On August 6, 2019, the plaintiff in the Dos Ramos Action filed a voluntary notice of dismissal. On August 7, 2019, the Chancery Court entered an order of dismissal.

On October 22, 2018, EB Research Partnership, Inc. (“EBRP”) served upon the Company a Request for Arbitration (the “Request”), alleging that the Company was in breach of an Agreement executed in July 2016 (the “Agreement”) between and among the Company, EBRP, and Epidermolysis Bullosa Medical Research Foundation (“EBMRF” and together with EBRP, “Claimants”). EBRP alleged that Abeona had refused to lift trading restrictions on certain shares of Abeona common stock issued to EBRP, purportedly in breach of the Agreement. On November 21, 2018, the Company filed an action in the United States District Court for the Southern District of New York seeking a declaration that it was not required to arbitrate its dispute with EBRP on the basis that the Agreement was void for lack of consideration. On February 4, 2019, the court granted Claimants’ motion to compel arbitration. EBMRF was subsequently joined as a party to the arbitration. The parties submitted briefs to the arbitrator on March 18 and April 18, 2019. On May 15, 2019, the arbitrator issued a decision in favor of the Company (the “Final Award”). Specifically, the Final Award provides that the Agreement is void for lack of consideration; that Claimants fraudulently induced Abeona to enter into the Agreement; that Claimants cannot enforce the Agreement; that Claimants are not entitled to any relief under the Agreement; that, in view of their status as charitable organizations, Claimants would not be required to repay to Abeona the value of Abeona common stock they already sold; that the Company shall cancel any and all shares of Abeona common stock issued to Claimants that were still in Claimants’ possession; and that, as the losing parties, Claimants must bear the costs and expenses of the arbitration and Abeona’s costs and expenses.

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 for the year ended December 31, 2018 should be carefully considered. Other than the risk factor provided below, there have been no material changes to the risk factors from those set forth in our Annual Report on Form 10-K for the year ended December 31, 2018.

We may encounter substantial delays in our clinical studies, such as clinical holds, or we may fail to demonstrate safety and efficacy to the satisfaction of applicable regulatory authorities.

Before obtaining marketing approval from regulatory authorities for the sale of our product candidates, we must conduct extensive clinical studies to demonstrate the safety, purity and potency, and efficacy, of the product candidates in humans. Clinical testing is expensive, time-consuming and uncertain as to outcome. We cannot guarantee that any clinical studies will be conducted as planned or completed on schedule, if at all. A failure of one or more clinical studies can occur at any stage of testing. Events that may prevent successful or timely completion of clinical development include: