ABEONA THERAPEUTICS INC. (ABEO)

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”). In 2022, we announced positive data from the VIITAL™ study evaluating the efficacy, safety and tolerability
of pz-cel. The VIITAL™ study met both its co-primary efficacy endpoints demonstrating statistically significant, clinically
meaningful improvements in wound healing and pain reduction in large chronic RDEB wounds. In September 2023, we submitted a Biologics
License Application (“BLA”) for pz-cel to the U.S. Food and Drug Administration (“FDA”). In November 2023, the
FDA accepted and granted priority review for our BLA for pz-cel, and subsequently, under the Prescription Drug User Fee Act (“PDUFA”),
the FDA set a target action date of May 25, 2024. In April 2024, the FDA issued a Complete Response Letter (“CRL”) in response
to the BLA. The CRL noted that certain additional information needed to satisfy the Chemistry Manufacturing and Controls (“CMC”)
requirements of the pz-cel BLA must be satisfactorily resolved before the application can be approved. The CRL did not identify any deficiencies
related to the clinical efficacy or clinical safety data in the BLA, and the FDA did not request any new clinical trials or clinical
data to support the approval of pz-cel. In August 2024, we completed a Type A Meeting with the FDA to discuss our forthcoming resubmission
of our BLA and in October 2024, we resubmitted our BLA. The FDA notified the Company in November 2024 that the BLA was accepted
for review, with an assigned PDUFA target action date of April 29, 2025.

We
have continued to prepare our current Good Manufacturing Practices (“cGMP”) facility in Cleveland, Ohio for
manufacturing commercial grade 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.

Our
development portfolio also features adeno-associated virus (“AAV”) based gene therapies designed to treat ophthalmic diseases
using the novel AIM™ capsids that we have exclusively licensed from the University of North Carolina at Chapel Hill and developed
internally through our 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
October 18, 2024, we signed a lease for 16,566 square feet of office space at 6700 Euclid Avenue, Cleveland, Ohio. The lease commences
on January 1, 2025 and the lease term matches the term for our existing 6555 Carnegie Avenue facility. The additional space at the 6700
Euclid Avenue facility will allow us to convert office space at the 6555 Carnegie Avenue facility into additional manufacturing space
to increase pz-cel manufacturing capacity.

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RESULTS
OF OPERATIONS

Comparison
of Years Ended December 31, 2024 and December 31, 2023

N/A
- not applicable or not meaningful

License
and other revenues

License
and other revenues for the year ended December 31, 2024 was nil, as compared to $3.5 million for the same period of 2023. There was no
license or other revenue in 2024 as no clinical development milestones were met in 2024. The revenue in 2023 consists of revenue resulting
from achieving clinical development 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.

Royalties

Total
royalty expenses were nil for the year ended December 31, 2024, as compared to $1.6 million for the same period of 2023. The royalty
expense in 2023 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, 2024 was $34.4 million, as compared to $31.1 million for the same period
of 2023, an increase of $3.3 million. The increase in expenses was primarily due to a $4.0 million increase in salaries and $0.5 million
in non-cash stock-based compensation costs due to increased headcount related to manufacturing capacity expansion preparing for the potential
launch of pz-cel, partially offset by a decrease in clinical and development work costs of $1.3 million due to reduced spending on clinical
trials as the majority of our clinical trials have finalized except for our long-term follow up trials.

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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:

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 $29.9 million for the year ended December 31, 2024, as compared to $19.0 million for the same
period of 2023, an increase of $10.9 million. The increase in expenses was primarily due to:

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. 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. There was no such gain
during the year ended December 31, 2024.

Interest
income

Interest
income was $4.2 million for the year ended December 31, 2024, as compared to $2.1 million in the same period of 2023. 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 $4.2 million for the year ended December 31, 2024, as compared to $0.4 million in the same period of 2023. The increase was
primarily due to the Avenue credit facility entered into by the Company in January 2024, resulting in recognized interest expense of
$3.8 million.

Change
in fair value of warrant and derivative liabilities

The
change in fair value of warrant and derivative liabilities was a loss of $0.8 million for the year ended December 31, 2024, as compared
to a loss of $11.7 million in the same period of 2023.

We
issued stock purchase warrants that are required to be classified as a liability and valued at fair market value at each reporting period.
In addition, the conversion feature in our loan agreement is 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 and derivative liabilities was primarily due to the increase in our
stock price year over the year offset by a reduced term of each of the warrants and derivative liabilities. At September 30, 2024, the
conversion feature in our loan agreement no longer met the criteria of a derivative liability, and the derivative liability was reclassified
to equity.

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Other
income

Other
income was $1.2 million for the year ended December 31, 2024, as compared to $2.9 million in the same period of 2023. The change was
primarily a result of $2.1 million in other income related to the impact of the employee retention credit that was recorded in 2023,
partially offset by a refundable job creation tax credit of $0.5 million received in 2024.

LIQUIDITY
AND CAPITAL RESOURCES

Cash
Flows for the Years Ended December 31, 2024 and 2023

Operating
activities

Net
cash used in operating activities was $56.0 million for the year ended December 31, 2024, primarily comprised of our net loss of
$63.7 million and decreases in operating assets and liabilities of $4.4 million, partially offset by net non-cash charges of $12.1
million. Non-cash charges consisted primarily of $0.8 million of the change in fair value of warrant and derivative liabilities,
$6.6 million of stock-based compensation, $1.5 million of non-cash interest expense and $2.0 million of depreciation and
amortization.

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.

Investing
activities

Net
cash used in investing activities was $39.2 million for the year ended December 31, 2024, primarily comprised of purchases of short-term
investments of $157.0 million and capital expenditures of $2.4 million, partially offset by proceeds from maturities of short-term investments
of $120.2 million.

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.

Financing
activities

Net
cash provided by financing activities was $104.1 million for the year ended December 31, 2024, primarily comprised of proceeds of $70.2
million in net proceeds from our May 2024 underwritten offering, $15.5 million from open market sales of common stock pursuant to the
ATM Agreement (as defined below) and net proceeds of $19.0 million from our credit facility entered into in January 2024.

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.

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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, 2024, our cash resources were $98.1 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-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 $75.0 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 2,825,954 shares of our common stock under the ATM Agreement and received $15.5 million
of net proceeds during the year ended December 31, 2024. We sold 3,659,882 shares of our common stock under the ATM Agreement and received
$14.6 million of net proceeds during the year ended December 31, 2023. Subsequent to December 31, 2024 and through March 11, 2025, we
sold 915,925 shares of our common stock under the ATM Agreement resulting in $4.8 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.

Our
future capital requirements and adequacy of available funds depend on many factors, including:

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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.

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, 2024, we have paid all amounts due under the Settlement Agreement.

In
addition, we are also party to other license agreements, which include contingent payments. However, contingent payments related to these
license agreements are not disclosed as the satisfaction of these contingent payments is uncertain as of December 31, 2024 and, if satisfied,
the timing of payment for these amounts was not reasonably estimable as of December 31, 2024. 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 or any other
developmental milestones for sub-licensed products 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:

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.

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While
our significant accounting policies are described in greater detail in Note 2 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.

Derivative
Liability

We
account for the fair value of the conversion right embedded within the loan agreement in accordance with the guidance in ASC 815, which
requires us to bifurcate and separately account for the conversion feature as an embedded derivative contained in our loan agreement.
Accordingly, we account for the conversion feature as a derivative liability in our condensed consolidated balance sheet. Derivatives
are measured at their fair value on the balance sheet. In determining the appropriate fair value, we use a Monte Carlo simulation model,
which incorporated assumptions and estimates to value the derivatives. The derivative liability is remeasured at each reporting period
with the change in fair value recorded to change in fair value of warrant and derivative liabilities in the consolidated statement of
operations until the derivative is exercised, expired, reclassified, or otherwise settled. At September 30, 2024, the conversion feature
in the Company’s loan agreement no longer met the criteria of a derivative liability, and the $1.1 million derivative liability
was reclassified to equity.

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
terms 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
October 2024, we signed a lease for 16,566 square feet of office space at 6700 Euclid Avenue, Cleveland, Ohio. Pursuant to the lease
agreement, the lease commences on January 1, 2025 with an initial term through December 30, 2030. Annual lease payments during the term
of the lease are approximately $0.3 million. The total lease payments over the duration of the lease term are approximately $1.5 million.
The additional space at the 6700 Euclid Avenue facility will allow us to convert office space at the 6555 Carnegie Avenue facility into
additional manufacturing space to increase pz-cel manufacturing capacity. As the lease does not commence and we do not have access to
the leased space until January 1, 2025, the impact of this lease agreement is not reflected in our consolidated financial statements
as of December 31, 2024.

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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 gain on right-of-use lease assets in the consolidated statement of operations and comprehensive loss.

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.

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 prediction 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 obligations, 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 therefore 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.

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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.

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, 2024 and 2023. As of December 31, 2024 and 2023, 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.

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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 a 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.

Under
this arrangement, we recognized nil and $3.5 million of revenue during the years ended December 31, 2024 and 2023, respectively, which
amount related solely to variable consideration. As of December 31, 2024 and 2023, we do not have any contract assets or contract liabilities
as a result of this transaction.

Accrued
Expenses

As
part of the process of preparing our consolidated financial statements, we are required to estimate our accrued 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 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, 2024 and 2023 was $1.1 million and $1.4 million, respectively.
Restricted stock-based compensation expense recognized for the years ended December 31, 2024 and 2023 was $5.6 million and $3.4 million,
respectively.

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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, 2024 and 2023 resulted in a loss of $0.8 million
and $11.7 million, respectively.

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.

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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.

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RESULTS
OF OPERATIONS

Comparison
of Years Ended December 31, 2023 and December 31, 2022

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.

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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:

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:

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.

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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

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.

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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.

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Our
future capital requirements and adequacy of available funds depend on many factors, including:

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.

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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:

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.

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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.

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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.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The
following discussion should be read in conjunction with our consolidated financial statements and related notes included in this Form
10-K.

Abeona
is a clinical-stage biopharmaceutical company developing cell and gene therapies for life-threatening diseases. Our lead clinical program
is EB-101, an autologous, engineered cell therapy currently in development for recessive dystrophic epidermolysis bullosa (“RDEB”).
In November 2022, we announced positive topline data from the VIITAL™ study evaluating the efficacy, safety and tolerability of
EB-101. The VIITAL™ study met its two co-primary efficacy endpoints demonstrating statistically significant, clinically meaningful
improvements in wound healing and pain reduction in large chronic RDEB wounds. Based on the positive topline results, we intend to submit
a Biologics License Application (“BLA”) for EB-101 to the U.S. Food and Drug Administration (“FDA”) in late second
quarter of 2023 or early third quarter of 2023.

Our
development portfolio also features adeno-associated virus (“AAV”) based gene therapies designed to treat ophthalmic
diseases using the novel AIM™ capsid platform that we have exclusively licensed from the University of North Carolina at
Chapel Hill, and internal AAV vector research programs.

We
have continued to prepare our current Good Manufacturing Practices (“cGMP”) commercial facility in Cleveland, Ohio for manufacturing
EB-101 drug product to support our planned BLA filing to the FDA. EB-101 study drug product for all our VIITAL™ study participants
has been manufactured at our Cleveland facility.

Preclinical
Pipeline

Our preclinical programs are investigating the use of novel AAV capsids
in AAV-based therapies for serious eye diseases, including ABO-504 for Stargardt disease, ABO-503 for X-linked retinoschisis (XLRS) and
ABO-505 for autosomal dominant optic atrophy (ADOA). In 2022, we evaluated the ability of our gene constructs and capsids to deliver and
express the recombinant protein in target eye tissues and rescue mutant phenotypes in mouse disease models. The Company has submitted
a pre-Investigational New Drug (IND) application meeting request for XLRS to the FDA to gain alignment on IND enabling toxicity studies
and clinical trial design. The Company expects to present new preclinical data from these programs at a future medical meeting in second
quarter of 2023.

56

RESULTS
OF OPERATIONS

Comparison
of Years Ended December 31, 2022 and December 31, 2021

N/A
- not applicable or not meaningful

License
and other revenues

License
and other revenues for the year ended December 31, 2022 was $1.4 million, as compared to $3.0 million for the same period of 2021. The
revenue in 2022 resulted from a clinical milestone achieved in the second quarter of 2022 under a sublicense agreement we entered into
with Taysha Gene Therapies (“Taysha”) in October 2020 relating to an investigational AAV-based gene therapy for Rett syndrome,
including certain intellectual property relating to MECP2 gene constructs and regulation of their expression. There was also revenue
consisting of the recognition of deferred revenue related to grants for the ABO-102 and ABO-101 development programs and revenue related
to the sublet of a portion of our existing leases.

The
revenue in 2021 resulted from a clinical milestone achieved in December 2021 under a sublicense agreement we entered into with Taysha
in August 2020 for ABO-202, an AAV gene therapy for CLN1 disease (also known as infantile Batten disease).

Royalties

Total
royalties expenses were $0.4 million for the year ended December 31, 2022, as compared to nil for the same period of 2021, an increase
of $0.4 million. The increase in expense was due to royalties owed to our licensors resulting from the $1.0 million milestone due from
Taysha.

Research
and development

Research
and development expenses include, but are not limited to, payroll and personnel expense, lab supplies, preclinical and development costs,
clinical trial costs, manufacturing and manufacturing facility costs, costs associated with regulatory approvals, depreciation on lab
supplies and manufacturing facilities, and consultant-related expenses.

Total
research and development spending for the year ended December 31, 2022 was $28.9 million, as compared to $38.7 million for the same period
of 2021, a decrease of $9.8 million. The decrease in expenses was primarily due to:

57

We
expect our research and development activities to continue as we attempt to advance our product candidates towards potential regulatory
approval, reflecting costs associated with:

General
and administrative

General
and administrative expenses primarily consist of payroll and personnel costs, office facility costs, public reporting company related
costs, professional fees (e.g., legal expenses) and other general operating expenses not otherwise included in research and development
expenses.

Total
general and administrative expenses were $17.2 million for the year ended December 31, 2022, as compared to $21.6 million for the same
period of 2021, a decrease of $4.4 million. The decrease in expenses was primarily due to:

Impairment
of goodwill

Goodwill
impairment charge was nil for the year ended December 31, 2022, as compared to $32.5 million in the same period of 2021. As of year-end
2021, the carrying value of our net assets was determined to exceed the fair value of our net assets, and therefore, we recorded a goodwill
impairment charge of $32.5 million.

Impairment
of licensed technology

Impairment
of licensed technology was $1.4 million for the year ended December 31, 2022, as compared to nil in the same period of 2021. The licensed
technology was for the ABO-102 and ABO-101 development programs, which, as a result of our shift in priorities, we determined the licensed
technology had no future value and thus recorded impairment of $1.4 million for the year ended December 31, 2022.

Impairment
of right-of-use lease assets

Impairment
of right-of-use lease assets was $2.5 million for the year ended December 31, 2022, as compared to nil in the same period of 2021. A
portion of the impairment was related to a lease for a future manufacturing facility for the ABO-102 and ABO-101 development programs,
which, as a result of our shift in priorities, we determined the portion of this lease had no future value and thus recorded impairment
of $1.6 million for the for the year ended December 31, 2022. In addition, we sublet a portion of our leased properties which indicated
that a portion of the lease had a reduced future value and thus recorded impairment of $0.9 million for the year ended December 31, 2022.

Impairment
of construction-in-progress

Impairment
of construction-in-progress was $1.8 million for the year ended December 31, 2022, as compared to nil in the same period of 2021. The
construction-in-progress was for a facility for the ABO-102 and ABO-101 development programs. As a result of our shift in priorities,
we determined the construction-in-progress facility had no future value and thus recorded impairment of $1.8 million for the for the
year ended December 31, 2022, which was net of a cash refund from the builder of approximately $1.5 million.

Gain
on settlement with licensor

Gain
on settlement with licensor was nil for the year ended December 31, 2022, as compared to $6.7 million in the same period of 2021. On
November 12, 2021, we entered into a settlement agreement with REGENXBIO, Inc. (“REGENXBIO”) to resolve all current disputes
between us and REGENXBIO. The accounting for this settlement agreement resulted in a $6.7 million gain on settlement with REGENXBIO in
the year ended December 31, 2021.

PPP
loan payable forgiveness income

PPP
loan payable forgiveness income was nil for the year ended December 31, 2022, as compared to $1.8 million in the same period of 2021.
In July 2021, we received notice from the SBA that our PPP loan had been forgiven so the PPP loan payable was reversed in the year ended
December 31, 2021.

58

Interest
income

Interest
income was $0.4 million for the year ended December 31, 2022, as compared to $40,000 in the same period of 2021. The increase resulted
from higher earnings on short-term investments driven by higher interest rates and a higher average balance of short-term investments.

Interest
expense

Interest
expense was $0.7 million for the year ended December 31, 2022, as compared to $3.7 million in the same period of 2021. The decrease results
primarily from the resolution of a disputed liability owed to our prior licensor, REGENXBIO.

Change
in fair value of warrant liabilities

The
change in fair value of warrant liabilities was $11.4 million for the year ended December 31, 2022, as compared to nil in the same period
of 2021. We issued stock purchase warrants that are required to be classified as a liability and valued at fair market value at each
reporting period. The change in the fair value of warrant liabilities resulted in a gain of $11.4 million due primarily to the reduction
in our stock price year over the year and a shorter term.

Other
income

Other
income was $0.1 million for the year ended December 31, 2022, as compared to $15,000 in the same period of 2021. The increase was primarily
a result of a gain on lease termination of $0.3 million partially offset by $0.1 million of losses on the disposal of fixed assets.

LIQUIDITY
AND CAPITAL RESOURCES

Cash
Flows for the Years Ended December 31, 2022 and 2021

Operating
activities

Net
cash used in operating activities was $43.5 million for the year ended December 31, 2022, primarily comprised of our net loss of $39.7
million and decrease in operating assets and liabilities of $5.9 million and net non-cash charges of $2.1 million.

Net
cash used in operating activities was $65.7 million for the year ended December 31, 2021, primarily comprised of our net loss of $84.9
million and decrease in operating assets and liabilities of $18.3 million, partially offset by net non-cash charges of $37.5 million.

Investing
activities

Net
cash used in investing activities was $24.0 million for the year ended December 31, 2022, primarily comprised of purchases of short-term
investments of $78.2 million and capital expenditures of $0.1 million, partially offset by proceeds from maturities of short-term investments
of $52.6 million and proceeds from the disposal of property and equipment of $1.7 million.

Net
cash provided by investing activities was $66.1 million for the year ended December 31, 2021, primarily comprised of proceeds from maturities
of short-term investments of $90.4 million, partially offset by purchases of short-term investments of $20.2 million and capital expenditures
of $4.1 million.

Financing
activities

Net
cash provided by financing activities was $43.2 million for the year ended December 31, 2022, primarily comprised of proceeds of $12.8
million from open market sales of common stock pursuant to the ATM Agreement (as defined below) and proceeds of $34.1 million from a
private offering of common stock and warrants on November 3, 2022, partially offset by the proceeds and redemption of our convertible
redeemable preferred stock.

Net
cash provided by financing activities was $24.9 million for the year ended December 31, 2021, primarily comprised of proceeds of $17.4
million from the issuance of common stock and warrants in a public offering, proceeds of $8.0 million from open market sales of common
stock pursuant to the ATM Agreement and proceeds of $0.8 million from the exercise of stock options, partially offset by the payment
of offering costs in a public offering of $1.5 million.

59

We
have historically funded our operations primarily through sales of common stock.

Our
principal source of liquidity is cash, cash equivalents, restricted cash and short-term investments, collectively referred to as our
cash resources. As of December 31, 2022, our cash resources were $52.5 million. We believe that our current cash and cash equivalents,
restricted cash and short-term investments are sufficient resources to fund operations through at least the next 12 months from the date
of this report on Form 10-K. We may need to secure additional funding to carry out all of our planned research and development activities.
If we are unable to obtain additional financing or generate license or product revenue, the lack of liquidity and sufficient capital
resources could have a material adverse effect on our future prospects.

We
have an open market sale agreement with Jefferies LLC (as amended, the “ATM Agreement”) pursuant to which, we may sell
from time to time, through Jefferies LLC, shares of our common stock for an aggregate sales price of up to $150.0 million. Any sales
of shares pursuant to this agreement are made under our effective “shelf” registration statement on Form S-3 that is on
file with and has been declared effective by the SEC. We are currently subject to General Instruction I.B.6 of Form S-3, as a result
of which the amount of funds we can raise through primary public offerings of securities in any 12-month period using our
registration statement on Form S-3 is limited to one-third of the aggregate market value of the voting and non-voting common equity
held by non-affiliates. We remain subject to this one-third limitation until such time our public float exceeds $75 million. We sold
146,872 shares of our common stock under the ATM Agreement and received $8.1 million of net proceeds during the year ended December
31, 2021. We sold 3,479,016 shares of our common stock under the ATM Agreement and received $12.8 million of net proceeds during the
year ended December 31, 2022.

Since
our inception, we have incurred negative cash flows from operations and have expended, and expect to continue to expend substantial funds
to complete our planned product development efforts. We have not been profitable since inception and to date have received limited revenues
from the sale of products or licenses. We expect to incur losses for the next several years as we continue to invest in product research
and development, preclinical studies, clinical trials, and regulatory compliance and cannot provide assurance that we will ever be able
to generate sufficient product sales or royalty revenue to achieve profitability on a sustained basis, or at all.

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

Our
future capital requirements and adequacy of available funds depend on many factors, including:

60

Due
to uncertainties and certain of the risks described above, our ability to successfully commercialize our product candidates, our ability
to obtain applicable regulatory approval to market our product candidates, our ability to obtain necessary additional capital to fund
operations in the future, our ability to successfully manufacture our products and our product candidates in clinical quantities or for
commercial purposes, government regulation to which we are subject, the uncertainty associated with preclinical and clinical testing,
intense competition that we face, the potential necessity of licensing technology from third parties and protection of our intellectual
property, it is not possible to reliably predict future spending or time to completion by project or product category or the period in
which material net cash inflows from significant projects are expected to commence. If we are unable to timely complete a particular
project, our research and development efforts could be delayed or reduced, our business could suffer depending on the significance of
the project and we might need to raise additional capital to fund operations, as discussed in the risks above.

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

Contractual
Obligations

We
enter into agreements in the normal course of business with clinical research organizations for clinical trials and clinical manufacturing
organizations for supply manufacturing and with vendors for preclinical research studies and other services and products for operating
purposes. These contractual obligations are cancelable at any time by us, generally upon prior written notice to the vendor, and are
thus not included in the contractual obligations table.

Operating
lease amounts represent future minimum lease payments under our non-cancelable operating lease agreements. The minimum lease payments
above do not include any related common area maintenance charges or real estate taxes.

On
November 12, 2021, we entered into a Settlement Agreement with REGENXBIO to resolve all current disputes between the parties including
the aforementioned AAA arbitration and New York State Supreme Court action. In accordance with the Settlement Agreement, we agreed to
pay REGENXBIO a total of $30 million, payable as follows: (1) $20 million payable that was paid in 2021 after execution of the Settlement
Agreement, (2) $5 million on the first anniversary of the effective date of the Settlement Agreement, and (3) $5 million upon the earlier
of: (i) the third anniversary of the effective date of the Settlement Agreement or (ii) the closing of a Strategic Transaction, as defined
in the Settlement Agreement. As of December 31, 2022, we have recorded the payable to licensor in the contractual obligations as the
one remaining payments due to REGENXBIO under the Settlement Agreement.

In
addition, we are also party to other license agreements, which include contingent payments. However, contingent payments related to these
license agreements are not disclosed as the satisfaction of these contingent payments is uncertain as of December 31, 2022 and, if satisfied,
the timing of payment for these amounts was not reasonably estimable as of December 31, 2022. Commitments related to the license agreements
include contingent payments that will become payable if and when certain development, regulatory and commercial milestones are achieved.
During the next 12 months, we do not expect to make milestone payments related to such license agreements.

Critical
Accounting Estimates

The
preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts and related disclosures in the financial statements. Management
considers an accounting estimate to be critical if:

While
we base our estimates and judgments on our experience and on various other factors that we believe to be reasonable under the circumstances,
actual results could differ from those estimates and the differences could be material.

61

Leases

We
account for leases pursuant to ASC 842, Leases (“ASC 842”). ASC 842 requires the recognition of lease assets and lease
liabilities by lessees for those leases classified as operating leases. We determine if an arrangement is a lease at inception
or when amended. Right-of-use lease assets represent our right to use an underlying asset for the lease term and lease liabilities represent
our obligation to make lease payments arising from the lease. The classification of our leases as operating or finance leases along with
the initial measurement and recognition of the associated right-of-use assets and lease liabilities is performed at the lease commencement
date or when amended. The measurement of lease liabilities is based on the present value of future lease payments over the lease term.
As our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the lease
commencement date in determining the present value of future lease payments. The right-of-use asset is based on the measurement of the
lease liability and includes any lease payments made prior to or on lease commencement or lease amendment and excludes lease incentives
and initial direct costs incurred, as applicable. Rent expense for our operating leases is recognized on a straight-line basis over the
lease term. We do not have any leases classified as finance leases.

Our
leases do not have significant rent escalation, holidays, concessions, material residual value guarantees, material restrictive covenants
or contingent rent provisions. Our leases include both lease (e.g., fixed payments including rent, taxes, and insurance costs) and non-lease
components (e.g., common-area or other maintenance costs), which are accounted for as a single lease component as we have elected the
practical expedient to group lease and non-lease components for all leases. We have elected the practical expedient to exclude short-term
leases from our right-of-use assets and lease liabilities.

Most
leases include one or more options to renew. The exercise of lease renewal options is typically at our sole discretion; therefore, the
majority of renewals to extend the lease terms are not included in our right-of-use assets and lease liabilities as they are not reasonably
certain of exercise. We regularly evaluate the renewal options and when they are reasonably certain of exercise, we include the renewal
period in our lease term.

On
March 31, 2022, we announced that we were pursuing a strategic partner to take over development activities of ABO-102 and we were discontinuing
development of ABO-101. As a result of this shift in priorities, we determined the portion of the lease that was dedicated to the future
facility for the ABO-101 and ABO-102 programs, had no future value and thus, we recorded an impairment charge of $1.6 million for the
year ended December 31, 2022. In addition, we sublet a portion of our leased properties which indicated that a portion of the lease had
a reduced future value and thus recorded impairment of $0.9 million for the year ended December 31, 2022

Licensed
Technology

We
maintain licensed technology on our consolidated balance sheet until either the licensed technology agreement underlying it is completed
or the asset becomes impaired. When we determine that an asset has become impaired or we abandon a project, we write down the carrying
value of the related intangible asset to its fair value and take an impairment charge in the period in which the impairment occurs.

Generally,
licensed technology is amortized over the life of the patent or the agreement. We test our intangible assets for impairment if indicators
are present or changes in circumstance suggest that impairment may exist. Events that could result in an impairment, or trigger an interim
impairment assessment, include the receipt of additional clinical or nonclinical data regarding our drug candidate or a potentially competitive
drug candidate, changes in the clinical development program for a drug candidate or new information regarding potential sales for the
drug. In connection with any impairment assessment, we compare the fair value of the asset as of the date of the assessment with the
carrying value of the asset on our consolidated balance sheets.

During
2022, in connection with the license of our ABO-102 asset for the treatment of Sanfilippo syndrome type A (MPS IIIA) to Ultragenyx and
the discontinuation of the ABO-101 program for the treatment of Sanfilippo syndrome type B (MPS IIIB), we recorded an impairment charge
of $1.4 million as we determined that there was no remaining value of the licensed technology.

In
2021, we did not impair any licensed technology.

Impairment
of Long-Lived Assets

Long-Lived
Assets consist of property and equipment, licensed technology, and right-of-use (“ROU”) assets. We test our long-lived assets
for impairment on an annual basis, or when events and circumstances indicate that the carrying value of an asset or group of assets may
not be fully recoverable. If indicators are present or changes in circumstance suggest that impairment may exist. We assess the recoverability
of the affected long-lived assets by determining whether the carrying value of such assets can be recovered through undiscounted future
operating cash flows. If the carrying amount is not recoverable, we measure the amount of any impairment by comparing the carrying value
of the asset to the present value of the expected future cash flows associated with the use of the asset.

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Goodwill

In
accordance with ASC 350 — Intangibles — Goodwill and Other, we test goodwill for impairment on an annual basis and
in the interim if events and circumstances indicate that goodwill may be impaired. The events and circumstances that are considered include
business climate and market conditions, legal factors, operating performance indicators and competition. Impairment of goodwill is evaluated
on a qualitative basis before calculating the fair value of the entity. If the qualitative assessment suggests that impairment is more
likely than not, a quantitative impairment analysis is performed. The quantitative analysis involves comparison of the fair value of
the entity with its carrying value. The valuation of an entity requires judgment. In making these judgments, we evaluate the financial
health of our business. Decreases in the value of our common stock could cause the carrying value of the entity to exceed its fair value.
If the carrying amount of the entity exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited
to the total amount of goodwill. If an event occurs that would cause a revision to the estimates and assumptions used in analyzing the
value of the goodwill, the revision could result in a noncash impairment charge that could have a material impact on the financial results.

We
experienced a steep decline in our share price during the year ended December 31, 2021. We performed our annual goodwill impairment tested
as of year-end 2021 and determined that the carrying value of our net assets exceeded fair value using our market capitalization as a
proxy for fair value. In accordance with ASC 350, we recognized an impairment loss for that excess of carrying value over fair value
but limited to the total amount of goodwill recorded on our consolidated balance sheets. As a result, we recorded a goodwill impairment
charge of $32.5 million during the year ended December 31, 2021.

Revenue
Recognition

We
account for revenue under ASC 606, Revenue from Contracts with Customers, (“ASC 606”). We recognize revenue when our
customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange
for those goods or services. To determine revenue recognition for arrangements that we determine are within the scope of ASC 606, we
perform the following five steps: (i) identify the contract(s) with our customer; (ii) identify the performance obligations in the contract;
(iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize
revenue when (or as) we satisfy a performance obligation.

Sublicense
and Inventory Purchase Agreements Relating to CLN1 Disease: In August 2020, we entered into sublicense and inventory purchase agreements
with Taysha Gene Therapies (“Taysha”) relating to a potential gene therapy for CLN1 disease. Under the sublicense agreement,
Taysha received worldwide exclusive rights to intellectual property and know-how relating to the research, development, and manufacture
of the potential gene therapy, which we had referred to as ABO-202. Under the inventory purchase agreement, we sold to Taysha certain
inventory and other items related to ABO-202. We assessed these contracts at contract inception and determined that, under ASC 606, the
two contracts would be combined and accounted for as a single contract, with a single performance obligation. We assessed the nature
of the promised license to determine whether the license has significant stand-alone functionality and evaluated whether such functionality
can be retained without ongoing activities by us and determined that the license has significant stand-alone functionality. Furthermore,
we have no ongoing activities associated with the license to support or maintain the license’s utility. Based on this, we determined
that the pattern of transfer of control of the license to Taysha was at a point in time.

The
transaction price of the contract includes (i) $7.0 million of fixed consideration, (ii) up to $26.0 million of variable consideration
in the form of event-based milestone payments, (iii) up to $30.0 million of variable consideration in the form of sales-based milestone
payments, and (iv) other royalty-based payments based on net sales. The event-based milestone payments are based on certain development
and regulatory events occurring. At inception, we evaluated whether the milestone conditions had been achieved and if it was probable
that a significant revenue reversal would not occur before recognizing the associated revenue and determined that these milestone payments
were not within our control or the licensee’s control, such as regulatory approvals, and were not considered probable of being
achieved until those approvals were received. Accordingly, at inception, we fully constrained the $26.0 million of event-based milestone
payments until such time that it is probable that significant revenue reversal would not occur. The sales-based milestone payments and
other royalty-based payments are based on a level of sales for which the license is deemed to be the predominant item to which the royalties
relate. We will recognize revenue for these payments at the later of (i) when the related sales occur, or (ii) when the performance obligation
to which some or all of the royalty has been allocated has been satisfied or partially satisfied. To date, we have not recognized any
sales-based or royalty revenue resulting from this licensing arrangement.

63

During
the year ended December 31, 2021, Taysha achieved an event-based milestone payment and, accordingly, we recognized $3.0 million of revenue
as of December 31, 2021. There was no revenue recognized under this agreement during the year ended December 31, 2022. As of December
31, 2022 and 2021, we have a contract asset for nil and $3.0 million but did not have any contract liabilities as a result of this transaction.
We collected the $3.0 million of cash in January 2022 in full satisfaction of the contract asset.

Sublicense
Agreement Relating to Rett Syndrome: In October 2020, we entered into a sublicense agreement with Taysha for a gene therapy for Rett
syndrome and MECP2 gene constructs and regulation of their expression. The agreement grants Taysha worldwide exclusive rights to intellectual
property developed by scientists at the University of North Carolina at Chapel Hill, the University of Edinburgh and us, and our know-how
relating to the research, development, and manufacture of the gene therapy for Rett syndrome and MECP2 gene constructs and regulation
of their expression.

We
assessed the nature of the promised license to determine whether the license has significant stand-alone functionality and evaluated
whether such functionality can be retained without ongoing activities by us and determined that the license has significant stand-alone
functionality. Furthermore, we have no ongoing activities associated with the license to support or maintain the license’s utility.
Based on this, we determined that the pattern of transfer of control of the license to Taysha was at a point in time.

The
transaction price of the contract includes (i) $3.0 million of fixed consideration, (ii) up to $26.5 million of variable consideration
in the form of event-based milestone payments, (iii) up to $30.0 million of variable consideration in the form of sales-based milestone
payments, and (iv) other royalty-based payments based on net sales. The event-based milestone payments are based on certain development
and regulatory events occurring. We evaluated whether the milestone conditions have been achieved and if it is probable that a significant
revenue reversal would not occur before recognizing the associated revenue. We determined that these milestone payments are not within
our control or the licensee’s control, such as regulatory approvals, and are not considered probable of being achieved until those
approvals are received. Accordingly, we have fully constrained the $26.5 million of event-based milestone payments until such time that
it is probable that significant revenue reversal would not occur. The sales-based milestone payments and other royalty-based payments
are based on a level of sales for which the license is deemed to be the predominant item to which the royalties relate. We will recognize
revenue for these payments at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or
all of the royalty has been allocated has been satisfied or partially satisfied. To date, we have not recognized any sales-based or royalty
revenue resulting from this licensing arrangement.

Under
this arrangement, we recognized $1.0 million of revenue during the year ended December 31, 2022, which amount related solely to fixed
consideration. We did not recognize any related revenue during the year ended December 31, 2021. As of December 31, 2022 and 2021, we
do not have any contract assets or contract liabilities as a result of this transaction.

Accrued
Research and Development Expenses

As
part of the process of preparing our consolidated financial statements, we are required to estimate our accrued research and development
expenses. This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that
have been performed on our behalf and estimating the level of service performed and the associated costs incurred for the services when
we have not yet been invoiced or otherwise notified of the actual costs. The majority of our service providers invoice us in arrears
for services performed, on a pre-determined schedule or when contractual milestones are met; however, some require advanced payments.
We make estimates of our accrued expenses as of each balance sheet date in our consolidated financial statements based on facts and circumstances
known to us at that time. There may be instances in which payments made to our vendors will exceed the level of services provided and
result in a prepayment of the clinical expense. If the actual timing of the performance of services or the level of effort varies from
our estimate, we adjust the accrual or amount of prepaid expense accordingly. Although we do not expect our estimates to be materially
different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status
and timing of services performed may vary and may result in us reporting amounts that are too high or too low in any particular period.
To date, we have not made any material adjustments to our prior estimates of accrued research and development expenses.

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Share-Based
Compensation Expense

We
account for share-based compensation expense in accordance with ASC 718, Stock Based Compensation. We have two share-based compensation
plans under which incentive and qualified stock options and restricted shares may be granted to employees, directors, and consultants.
We measure the cost of the employee/director/consultant services received in exchange for an award of equity instruments based on the
fair value for employees and directors and vesting date fair value of the award for consultants. We use the Black-Scholes option pricing
model to determine the fair value of options as of the grant date and the Hull White I lattice model as of any option repricing dates.
The models used to determine the fair value of options includes assumptions for expected volatility, risk-free interest rate, dividend
yield and estimated expected term. We use the closing price of our common stock as quoted on Nasdaq to determine the fair value of restricted
stock. We account for forfeitures as they occur, which may result in the reversal of compensation costs in subsequent periods as the
forfeitures arise.

Stock
option-based compensation expense recognized for the years ended December 31, 2022 and 2021 was approximately $2.0 million and $5.3 million,
respectively. Restricted stock-based compensation expense recognized for the years ended December 31, 2022 and 2021 was approximately
$1.1 million and $3.7 million, respectively.

Warrants

We
have issued warrants associated with capital raises from time to time. We determine the accounting and value of any issued warrants in
accordance with ASC 480, Distinguishing Liabilities from Equity and ASC 815, Derivatives and Hedging. The first step is
to determine if the warrants are to be classified as either a liability or equity depending on the warrant terms. The second step is
to then determine the value of the warrants. We measure the value of any liability classified warrants on their issuance date based on
their fair value using the Black-Scholes pricing model. The models used to determine the fair value of these warrants includes assumptions
for expected volatility, risk-free interest rate, dividend yield and estimated expected term. The liability classified warrants are revalued
on each subsequent balance sheet date until such instruments are exercised or expire, with any changes in the fair value between reporting
periods recorded in the consolidated statements of operations and comprehensive loss.

Change
in fair value of warrant liability recognized for the years ended December 31, 2022 and 2021 was approximately $11.4 million and nil,
respectively.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The
following discussion should be read in conjunction with our consolidated financial statements and related notes included in this Form
10-K.

Abeona is a clinical-stage biopharmaceutical company
developing cell and gene therapies for life-threatening rare genetic diseases. Our lead clinical program is EB-101, an autologous, gene-corrected
cell therapy for recessive dystrophic epidermolysis bullosa (“RDEB”), which is currently in the pivotal Phase 3 VIITAL™
clinical trial. Following a comprehensive portfolio review in early 2022, we have decided
to focus our research and development resources on the VIITAL™ readout while actively pursuing a potential commercialization partner
for EB-101 with the objective of reducing operating expenses and extending our cash runway. As part of this portfolio prioritization,
we have intensified our pursuit of a strategic partnership to take over development activities for our adeno-associated virus
(“AAV”)-based gene therapy ABO-102 for Sanfilippo syndrome type A (“MPS IIIA”) and we have discontinued development
of our AAV-based gene therapy ABO-101 for Sanfilippo syndrome type B (“MPS IIIB”).

We
plan to continue to develop AAV-based gene therapies designed to treat ophthalmic and other diseases and next-generation AAV-based gene
therapies using the novel AIM™ capsid platform that we have exclusively licensed from the University of North Carolina at Chapel
Hill, and internal AAV vector research programs.

MANAGEMENT’S
REVIEW OF KEY ACTIVITIES IN 2021

In
2021, we continued our mission of providing novel cell and gene therapies to patients who currently have no approved treatment
options as we continued to advance the EB-101 pivotal study toward completion to support a U.S. Biologics License Application
(BLA) submission. At the same time, we continued to make steady progress with other preclinical programs. Here is a recap of our
recent accomplishments.

EB-101
(Autologous, Gene-Corrected Cell Therapy) for RDEB

In 2021, we continued to enroll patients in
our pivotal Phase 3 VIITAL™ study for our investigational product for recessive dystrophic epidermolysis bullosa (RDEB),
EB-101. Under the study protocol, the enrollment target is approximately 36 randomized large chronic wounds. To increase patient
enrollment, we activated a second clinical trial site in the VIITAL™ study. We achieved target enrollment in the first quarter
of 2022. We anticipate topline data readout in the third quarter of 2022. We are focusing our research and development resources on
the VIITAL™ readout while actively pursuing a potential commercialization partner. We are optimistic about EB-101’s
potential based on updated Phase 1/2a results presented at various medical congresses.

We
have continued to prepare our cGMP commercial facility in Cleveland, Ohio for manufacturing EB-101 drug product to support our planned
BLA filing. EB-101 study drug product for all our VIITAL study participants has been manufactured at our Cleveland facility and we have
now completed of the update to Module 3 of the Investigational New Drug Application describing the in-house production of both retroviral vector and the final drug product. Based on feedback from the FDA, we believe that we have alignment with the FDA on
the CMC requirements for EB-101, including characterization and validation plans.

ABO-102
(AAV-based Gene Therapy) for MPS IIIA

As
part of our portfolio prioritization in early 2022, we have intensified our pursuit of a strategic partnership to take over development
activities for ABO-102. As part of the FDA’s feedback on the Statistical Analysis Plan in January 2022, the FDA recommended that
all participants be followed to an age of at least 60 months, which would shift timing of the neurocognitive outcomes data readout to
late-2024/early-2025, as compared to our prior projection of the second quarter of 2023.

ABO-101
(AAV-based Gene Therapy) for MPS IIIB

In 2021, we discontinued enrollment in our ABO-101 study and in March
2022, we decided to discontinue all further ABO-101 development activities.

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Preclinical
Pipeline

While
our clinical programs are currently focused on rare diseases, we intend to address larger areas of unmet medical need in the future,
and our preclinical programs are investigating novel AAV capsids in five undisclosed ophthalmic conditions each with estimated U.S. prevalence
ranging from 5,000 to 15,000 patients. In 2021, we shared data from studies in non-human primates that will help to determine
optimal routes of administration and believe we have made significant progress toward measuring efficacy in the preclinical setting.
We have also generated appropriate mouse models, produced recombinant capsids, and started dosing mice in proof-of-concept studies that
we hope will yield data beginning in mid-2022 to support pre-IND meetings with the FDA.

IMPACT
OF COVID-19 PANDEMIC ON OUR BUSINESS

We
continue to monitor the impact of the COVID-19 pandemic on our business and take appropriate actions to manage our spending activities
and preserve our cash resources. While there have been vaccines developed and administered, and the spread of COVID-19 may eventually
be contained or mitigated, we cannot predict the timing of vaccine adoption or roll-out globally or the efficacy of such vaccines, including
against variants that emerge, and we do not yet know how businesses and our partners will operate in a post COVID-19 environment. While
we are unable to determine or predict the extent, duration or scope of the overall impact the COVID-19 pandemic will have on our business,
operations, financial condition or liquidity, we believe it is important to keep our stakeholders informed about how our response to
COVID-19 is progressing and how our operations and financial condition may change.

The
extent of the impact of the COVID-19 pandemic on our business, operations, and clinical trials continues to evolve and will depend on
certain developments, including: (i) the duration of the declared health emergencies; (ii) future actions taken by governmental authorities
and regulators with respect to the pandemic, including reinstituting state and local lockdowns; (iii) the impact on our partners, collaborators,
and suppliers; and (iv) actions being taken by us in response to this crisis. We remain dedicated to communicating regularly and openly
with our stakeholders as more information becomes available, including updates on material changes to prior guidance as we continue to
follow applicable government, regulatory and institutional guidelines.

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RESULTS
OF OPERATIONS

Comparison
of Years Ended December 31, 2021 and December 31, 2020

N/A - not applicable or not meaningful.

License and other revenues

License
and other revenues for the year ended December 31, 2021 were $3.0 million, as compared to $10.0 million for the same period of 2020.
The revenue in 2021 resulted from a clinical milestone achieved in December 2021 under a sublicense agreement we entered into with Taysha
Gene Therapies (“Taysha”) in August 2020 for ABO-202, an AAV gene therapy for CLN1 disease (also known as infantile Batten
disease). The revenue in 2020 resulted from (i) the aforementioned sublicense agreement with Taysha along with an inventory purchase
agreement we entered into with Taysha in August 2020 for ABO-202 and (ii) a sublicense agreement we entered into with Taysha in October
2020 for a gene therapy for Rett syndrome and MECP2 gene constructs and regulation of their expression. The sublicense agreements grant
to 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 therapies for
CLN1 and Rett syndrome.

The
sublicense agreements for CLN1 and Rett include additional event-based milestone payments, sales-based milestone payments and other royalty-based
payments based on net sales. We will recognize revenue for these payments at the later of (i) when the related event or sales occur,
or (ii) when the performance obligation has been satisfied.

Research
and development

Research
and development expenses include, but are not limited to, payroll and personnel expense, lab supplies, preclinical, and development cost,
clinical trial expense, manufacturing, regulatory, and consulting. The cost of materials and equipment or facilities that are acquired
for research and development activities and that have alternative future uses are capitalized when acquired.

Total
research and development spending for the year ended December 31, 2021 was $34.3 million, as compared to $30.1 million for the
same period of 2020, an increase of $4.2 million. The increase in expenses was primarily due to:

We
expect our research and development activities to continue as we attempt to advance our product
candidates towards potential regulatory approval reflecting costs associated with the following:

General
and administrative

General
and administrative expenses primarily consist of personnel, contract personnel, personnel-related expenses to support our administrative
and operating activities, facility costs and professional expenses (i.e., legal expenses) and investor relations fees. We
expect our general and administrative costs to continue as we seek potential regulatory approval and potential commercialization of our
product candidates.

Total
general and administrative expenses were $22.8 million for the year ended December 31, 2021, as compared to $23.8 million for
the same period of 2020, a decrease of $1.0 million. The decrease in expenses was primarily due to:

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Depreciation and amortization

Depreciation
and amortization was $3.3 million for the year ended December 31, 2021, as compared to $4.6 million for the same period in 2020, a decrease
of $1.3 million. The decrease was driven by decreased amortization expense of $1.3 million on licensed technology in 2021, as compared
to 2020, due to the write-off of the REGENXBIO licensed technology in the first quarter of 2020.

Goodwill impairment charge

Goodwill
impairment charge was $32.5 million for the year ended December 31, 2021, as compared to nil in the same period of 2020. As of year-end
2021, the carrying value of our net assets was determined to exceed the fair value of our net assets, and therefore, we
recorded a goodwill impairment charge of $32.5 million.

Licensed technology impairment charge

Our
license agreement with REGENXBIO terminated on May 2, 2020. Since our impairment testing indicated that the carrying value of the license
agreement with REGENXBIO exceeded its fair value, we recorded a $32.9 million non-cash impairment charge during the year ended December
31, 2020.

Gain on settlement with licensor

Gain
on settlement with licensor was $6.7 million for the year ended December 31, 2021, as compared to nil in the same period of 2020. On
November 12, 2021, we entered into a Settlement Agreement with REGENXBIO to resolve all current disputes between the parties. As of December
31, 2021, we have recorded the payable to licensor in the balance sheet based on the present value of the remaining payments due to REGENXBIO
under the Settlement Agreement. The accounting for the Settlement Agreement resulted in a $6.7 million gain on settlement with REGENXBIO
during the year ended December 31, 2021.

PPP loan payable forgiveness income

Paycheck Protection Program (“PPP”)
loan payable forgiveness income was $1.8 million
for the year ended December 31, 2021, as compared to nil in the same period of 2020. In July 2021, we received notice from the SBA that
our PPP loan had been forgiven so the PPP loan payable was reversed during the year ended December 31, 2021.

Interest and miscellaneous income

Interest
and miscellaneous income was $0.1 million for the year ended December 31, 2021, as compared to $1.3 million of the same period in 2020.
The decrease resulted from lower earnings on short-term investments driven by lower interest rates and a lower average balance of short-term
investments.

Interest and other expense

Interest
and other expense was $3.7 million for the year ended December 31, 2021, as compared to $4.1 million for the same period of 2020. The
decrease results primarily from accrued interest under the prior license agreement with REGENXBIO, which amount is discussed in Note
4 of Notes to Consolidated Financial Statements in Part II, Item 8.

Net loss

Net
loss for the year ended December 31, 2021 was $84.9 million, or a $0.86 basic and diluted loss per common share as compared
to a net loss of $84.2 million, or a $0.91 basic and diluted loss per common share, for the same period in 2020.

Liquidity
and Capital Resources

We
have historically funded our operations primarily through sales of common stock. The COVID-19 pandemic has negatively affected the global
economy and created significant volatility and disruption of financial markets. An extended period of economic disruption could negatively
affect our business, financial condition, and access to sources of liquidity.

Our
principal source of liquidity is cash, cash equivalents, restricted cash and short-term investments. As of December 31, 2021 and 2020,
our cash resources were $50.9 million and $96.0 million, respectively. Following a comprehensive portfolio review in early 2022, we
have decided to focus our research and development resources on the EB-101 program with the objective of reducing operating expenses
and extending our cash runway. As part of this portfolio prioritization, we have intensified our pursuit of a strategic partnership to
take over development activities for our AAV-based gene therapy ABO-102 for MPS IIIA and we have discontinued development
of our AAV-based gene therapy ABO-101 for MPS IIIB. Based upon these current operating plans, our ability to access additional financial
resources and/or our financial flexibility to further reduce operating expenses if required, we believe that we have sufficient resources
to fund operations through at least the next 12 months from the date of this report on Form 10-K. We will need to secure additional funding
beyond the next 12 months to carry out all of our planned research and development activities. If we are unable to obtain additional
financing or generate license or product revenue, the lack of liquidity and sufficient capital resources could have a material adverse
effect on our future prospects.

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Operating
activities

Net
cash used in operating activities was $65.7 million for the year ended December 31, 2021, primarily comprised of our net loss of $84.9
million and decrease in operating assets and liabilities of $18.3 million, partially offset by net non-cash charges of $37.5 million.

Net
cash used in operating activities was $35.0 million for the year ended December 31, 2020, primarily comprised of our net loss of $84.2
million, partially offset by an increase in operating assets and liabilities of $1.6 million and net non-cash charges of $47.6 million.

Investing
activities

Net
cash provided by investing activities was $66.1 million for the year ended December 31, 2021, primarily comprised of proceeds from maturities
of short-term investments of $90.4 million, partially offset by purchases of short-term investments of $20.2 million and capital expenditures
of $4.1 million.

Net
cash used in investing activities was $83.7 million for the year ended December 31, 2020, primarily comprised of purchases of short-term
investments of $170.5 million and capital expenditures of $1.3 million, partially offset by proceeds from maturities of short-term investments
of $88.1 million.

Financing
activities

Net cash provided by financing activities was $24.9 million for the year ended December 31, 2021, primarily comprised of proceeds of $17.4
million from the issuance of common stock and warrants in a public offering, proceeds of $8.0 million from open market sales of common
stock pursuant to the ATM Agreement (as defined below) and proceeds of $0.8 million from the exercise of stock options, partially offset
by the payment of offering costs in a public offering of $1.5 million.

Net
cash provided by financing activities was $1.9 million for the year ended December 31, 2020, primarily comprised of proceeds from loan
payable of $1.7 million and proceeds from the exercise of stock options of $0.2 million.

2021
Equity Offerings

In
an underwritten public offering consummated on December 21, 2021, we issued (1) 44,700,000 shares of common stock at $0.39 per share
and (2) warrants to purchase 44,700,000 shares of common stock with an exercise price of $0.39 per warrant. The gross proceeds to us
were approximately $17.5 million, before deducting the underwriting discounts and commissions and estimated offering expenses payable
by us.

On
August 17, 2018, we entered into an open market sale agreement with Jefferies LLC (the “ATM Agreement”). Pursuant to the
terms of the ATM Agreement, we are able to sell from time to time, through Jefferies LLC, shares of our common stock for an aggregate
sales price of up to $150 million. Any sales of shares pursuant to the ATM Agreement are made under an effective “shelf”
registration statement on Form S-3 that is on file with and has been declared effective by the SEC. On November 19, 2021, we entered
into an amendment to the ATM Agreement (the “Amendment”) in connection with the filing of a new shelf registration statement
on Form S-3 (File No. 333-256850) (the “Registration Statement”), filed with the Securities and Exchange Commission (the
“SEC”) on June 7, 2021 and declared effective by the SEC on October 22, 2021. The Amendment amends the ATM Agreement to reflect
the filing of the new Registration Statement (due to the prior Form S-3 (File No. 333-224867) expiring in June 2021).

We
sold 3,671,794 shares of our common stock under the ATM Agreement and received $8.1 million of net proceeds during the year ended December
31, 2021. Cumulatively, as of December 31, 2021, we have sold an aggregate of 6,758,744 shares of our common stock under the ATM Agreement
and received $25.0 million of net proceeds.

Payments
under Settlement Agreement
with REGENXBIO

As
discussed above in Item 3. Legal Proceedings, we entered into the Settlement Agreement with REGENXBIO on November 12, 2021. Pursuant
to the Settlement Agreement, we paid $20.0 million to REGENXBIO in November 2021, and are required to pay (i) $5.0 million on the first
anniversary of the effective date of the Settlement Agreement and (ii) $5.0 million on the earlier of (a) the third anniversary of the
effective date of the Settlement Agreement, or (b) the closing of a Strategic Transaction, as defined in the Settlement Agreement.

Since
our inception, we have incurred negative cash flows from operations and have expended, and expect to continue to expend, substantial
funds to complete our planned product development efforts. We have not been profitable since inception and to date have received limited
revenues from the sale of products. We expect to incur losses for the next several years as we continue to invest in product research
and development, preclinical studies, clinical trials, and regulatory compliance and cannot provide assurance that we will ever be able
to generate sufficient product sales or royalty revenue to achieve profitability on a sustained basis, or at all.

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

69

We
are carefully and continually reassessing key business activities and all associated spending decisions. Nonetheless, we are spending
necessary funds on manufacturing activities and preclinical studies and clinical trials of potential products, including research and
development with respect to our acquired and developed technology. Our future capital requirements and adequacy of available funds depend
on many factors, including:

Due
to uncertainties and certain of the risks described above, including those relating to the COVID-19 pandemic, our ability to successfully
commercialize our product candidates, our ability to obtain applicable regulatory approval to market our product candidates, our ability
to obtain necessary additional capital to fund operations in the future, our ability to successfully manufacture our products and our
product candidates in clinical quantities or for commercial purposes, government regulation to which we are subject, the uncertainty
associated with preclinical and clinical testing, intense competition that we face, market acceptance of our products, the potential
necessity of licensing technology from third parties and protection of our intellectual property, it is not possible to reliably predict
future spending or time to completion by project or product category or the period in which material net cash inflows from significant
projects are expected to commence. If we are unable to timely complete a particular project, our research and development efforts could
be delayed or reduced, our business could suffer depending on the significance of the project and we might need to raise additional capital
to fund operations, as discussed in the risks above.

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

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Contractual
Obligations

The
following table summarizes our significant contractual obligations as of the payment due date by period as of December 31, 2021:

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.

As
noted above, on November 12, 2021, we entered into a Settlement Agreement with REGENXBIO to resolve all current disputes between the
parties including the aforementioned AAA arbitration and New York State Supreme Court action. In accordance with the Settlement Agreement,
we agreed to pay REGENXBIO a total of $30 million, payable as follows: (1) $20 million payable that was paid in 2021 after execution
of the Settlement Agreement, (2) $5 million on the first anniversary of the effective date of the Settlement Agreement, and (3) $5 million
upon the earlier of: (i) the third anniversary of the effective date of the Settlement Agreement or (ii) the closing of a Strategic Transaction,
as defined in the Settlement Agreement. As of December 31, 2021, we have recorded the payable to licensor in the contractual obligations
as the two remaining payments due to REGENXBIO under the Settlement Agreement.

In
addition, we are also party to other license agreements, which include contingent payments. However, contingent payments related to these
license agreements are not disclosed as the satisfaction of these contingent payments is uncertain as of December 31, 2021 and, if satisfied,
the timing of payment for these amounts was not reasonably estimable as of December 31, 2021. Commitments related to the license agreements
include contingent payments that will become payable if and when certain development, regulatory and commercial milestones are achieved.
During the next 12 months, we do not expect to make milestone payments related to such license agreements.

Critical
Accounting Estimates

The
preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires
us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. In
applying our accounting principles, we must often make individual estimates and assumptions regarding expected outcomes or uncertainties.
As one might expect, the actual results or outcomes are often different than the estimated or assumed amounts. These differences are
usually minor and are included in our consolidated financial statements as soon as they are known. Our estimates, judgments and assumptions
are continually evaluated based on available information and experience. Because of the use of estimates inherent in the financial reporting
process, actual results could differ from those estimates.

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Leases

Effective
January 1, 2019, we adopted the provisions of ASU 2016-02, Leases, as amended (“ASC 842”). ASC 842 requires the recognition
of lease assets and lease liabilities by lessees for those leases classified as operating leases under the previous guidance of ASC 840,
Leases. We determine if an arrangement is a lease at inception or when amended. Right-of-use lease assets represent our right
to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the
lease. The classification of our leases as operating or finance leases along with the initial measurement and recognition of the associated
right-of-use assets and lease liabilities is performed at the lease commencement date or when amended. The measurement of lease liabilities
is based on the present value of future lease payments over the lease term. As our leases do not provide an implicit rate, we use our
incremental borrowing rate based on the information available at the lease commencement date in determining the present value of future
lease payments. The right-of-use asset is based on the measurement of the lease liability and includes any lease payments made prior
to or on lease commencement or lease amendment and excludes lease incentives and initial direct costs incurred, as applicable. Rent expense
for our operating leases is recognized on a straight-line basis over the lease term. We do not have any leases classified as finance
leases.

Our
leases do not have significant rent escalation, holidays, concessions, material residual value guarantees, material restrictive covenants
or contingent rent provisions. Our leases include both lease (e.g., fixed payments including rent, taxes, and insurance costs) and non-lease
components (e.g., common-area or other maintenance costs), which are accounted for as a single lease component as we have elected the
practical expedient to group lease and non-lease components for all leases. We have elected the practical expedient to exclude short-term
leases from our right-of-use assets and lease liabilities.

Most
leases include one or more options to renew. The exercise of lease renewal options is typically at our sole discretion; therefore, the
majority of renewals to extend the lease terms are not included in our right-of-use assets and lease liabilities as they are not reasonably
certain of exercise. We regularly evaluate the renewal options and when they are reasonably certain of exercise, we include the renewal
period in our lease term.

Licensed
Technology

We
maintain licensed technology on our consolidated balance sheet until either the licensed technology agreement underlying it is completed
or the asset becomes impaired. When we determine that an asset has become impaired or we abandon a project, we write down the carrying
value of the related intangible asset to its fair value and take an impairment charge in the period in which the impairment occurs.

Generally,
licensed technology is amortized over the life of the patent or the agreement. We test our intangible assets for impairment on an annual
basis, or more frequently if indicators are present or changes in circumstance suggest that impairment may exist. Events that could result
in an impairment, or trigger an interim impairment assessment, include the receipt of additional clinical or nonclinical data regarding
our drug candidate or a potentially competitive drug candidate, changes in the clinical development program for a drug candidate or new
information regarding potential sales for the drug. In connection with each annual impairment assessment and any interim impairment assessment,
we compare the fair value of the asset as of the date of the assessment with the carrying value of the asset on our consolidated balance
sheet.

We
considered the status of our discussions with REGENXBIO in March 2020 as a potential indicator of impairment in accordance with ASC 360-10-35-21.
Our impairment test indicated that the carrying value of the license agreement exceeded its fair value and we recorded a $32.9 million
non-cash impairment charge in 2020.

In
2021, we did not impair any licensed technology.

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Goodwill

As
of December 31, 2021 and 2020, we had goodwill of nil and $32.5 million, respectively, recorded on our consolidated balance sheet.

In
accordance with ASC 350 — Intangibles — Goodwill and Other, we test goodwill for impairment on an annual basis and
in the interim if events and circumstances indicate that goodwill may be impaired. The events and circumstances that are considered include
business climate and market conditions, legal factors, operating performance indicators and competition. Impairment of goodwill is evaluated
on a qualitative basis before calculating the fair value of the entity. If the qualitative assessment suggests that impairment is more
likely than not, a quantitative impairment analysis is performed. The quantitative analysis involves comparison of the fair value of
the entity with its carrying value. The valuation of an entity requires judgment. In making these judgments, we evaluate the financial
health of our business. Decreases in the value of our common stock could cause the carrying value of the entity to exceed its fair value.
If the carrying amount of the entity exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited
to the total amount of goodwill. If an event occurs that would cause a revision to the estimates and assumptions used in analyzing the
value of the goodwill, the revision could result in a noncash impairment charge that could have a material impact on the financial results.

We
experienced a steep decline in our share price during the year ended December 31, 2021. We performed our annual goodwill impairment tested
as of year-end 2021 and determined that the carrying value of our net assets exceeded fair value using our market capitalization as a
proxy for fair value. In accordance with ASC 350, we recognized an impairment loss for that excess of carrying value over fair value
but limited to the total amount of goodwill recorded on our consolidated balance sheet. As a result, we recorded a goodwill impairment
charge of $32.5 million during the year ended December 31, 2021.

We
performed our annual goodwill impairment test as of year-end 2020 and determined that the fair value of our net assets exceeded carrying
value. As a result, we did not impair goodwill during the year ended December 31, 2020.

Revenue
Recognition

Effective
January 1, 2018, we adopted ASU 2014-09, Revenue from Contracts with Customers, as amended (“ASC 606”). Under ASC
606, we recognize revenue when our customer obtains control of promised goods or services, in an amount that reflects the consideration
which we expect to receive in exchange for those goods or services. To determine revenue recognition for arrangements that we determine
are within the scope of ASC 606, we perform the following five steps: (i) identify the contract(s) with our customer; (ii) identify the
performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance
obligations in the contract; and (v) recognize revenue when (or as) we satisfy a performance obligation.

Sublicense
and Inventory Purchase Agreements Relating to CLN1 Disease: In August 2020, we entered into sublicense and inventory purchase agreements
with Taysha Gene Therapies (“Taysha”) relating to a potential gene therapy for CLN1 disease. Under the sublicense agreement,
Taysha received worldwide exclusive rights to intellectual property and know-how relating to the research, development, and manufacture
of the potential gene therapy, which we had referred to as ABO-202. Under the inventory purchase agreement, we sold to Taysha certain
inventory and other items related to ABO-202. We assessed these contracts at contract inception and determined that, under ASC 606, the
two contracts would be combined and accounted for as a single contract, with a single performance obligation. We assessed the nature
of the promised license to determine whether the license has significant stand-alone functionality and evaluated whether such functionality
can be retained without ongoing activities by us and determined that the license has significant stand-alone functionality. Furthermore,
we have no ongoing activities associated with the license to support or maintain the license’s utility. Based on this, we determined
that the pattern of transfer of control of the license to Taysha was at a point in time.

73

The
transaction price of the contract includes (i) $7.0 million of fixed consideration, (ii) up to $26.0 million of variable consideration
in the form of event-based milestone payments, (iii) up to $30.0 million of variable consideration in the form of sales-based milestone
payments, and (iv) other royalty-based payments based on net sales. The event-based milestone payments are based on certain development
and regulatory events occurring. At inception, we evaluated whether the milestone conditions had been achieved and if it was probable
that a significant revenue reversal would not occur before recognizing the associated revenue and determined that these milestone payments
were not within our control or the licensee’s control, such as regulatory approvals, and were not considered probable of being
achieved until those approvals were received. Accordingly, at inception, we fully constrained the $26.0 million of event-based milestone
payments until such time that it is probable that significant revenue reversal would not occur. The sales-based milestone payments and
other royalty-based payments are based on a level of sales for which the license is deemed to be the predominant item to which the royalties
relate. We will recognize revenue for these payments at the later of (i) when the related sales occur, or (ii) when the performance obligation
to which some or all of the royalty has been allocated has been satisfied or partially satisfied. To date, we have not recognized any
sales-based or royalty revenue resulting from this licensing arrangement.

Under
this arrangement, we recognized $7.0 million of revenue during the year ended December 31, 2020, which amount related solely to fixed
consideration. During the year ended December 31, 2021, Taysha achieved an event-based milestone payment and, accordingly, we recognized
$3.0 million of revenue. As of December 31, 2021, we have a contract asset for $3.0 million but do not have any contract liabilities
as a result of this transaction. We collected the $3.0 million of cash in January 2022 in full satisfaction of the contract asset.

Sublicense
Agreement Relating to Rett Syndrome: In October 2020, we entered into a sublicense agreement with Taysha for a gene therapy for Rett
syndrome and MECP2 gene constructs and regulation of their expression. The agreement grants Taysha worldwide exclusive rights to intellectual
property developed by scientists at the University of North Carolina at Chapel Hill, the University of Edinburgh and us, and our know-how
relating to the research, development, and manufacture of the gene therapy for Rett syndrome and MECP2 gene constructs and regulation
of their expression.

We
assessed the nature of the promised license to determine whether the license has significant stand-alone functionality and evaluated
whether such functionality can be retained without ongoing activities by us and determined that the license has significant stand-alone
functionality. Furthermore, we have no ongoing activities associated with the license to support or maintain the license’s utility.
Based on this, we determined that the pattern of transfer of control of the license to Taysha was at a point in time.

The
transaction price of the contract includes (i) $3.0 million of fixed consideration, (ii) up to $26.5 million of variable consideration
in the form of event-based milestone payments, (iii) up to $30.0 million of variable consideration in the form of sales-based milestone
payments, and (iv) other royalty-based payments based on net sales. The event-based milestone payments are based on certain development
and regulatory events occurring. We evaluated whether the milestone conditions have been achieved and if it is probable that a significant
revenue reversal would not occur before recognizing the associated revenue. We determined that these milestone payments are not within
our control or the licensee’s control, such as regulatory approvals, and are not considered probable of being achieved until those
approvals are received. Accordingly, we have fully constrained the $26.5 million of event-based milestone payments until such time that
it is probable that significant revenue reversal would not occur. The sales-based milestone payments and other royalty-based payments
are based on a level of sales for which the license is deemed to be the predominant item to which the royalties relate. We will recognize
revenue for these payments at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or
all of the royalty has been allocated has been satisfied or partially satisfied. To date, we have not recognized any sales-based or royalty
revenue resulting from this licensing arrangement.

Under
this arrangement, we recognized $3.0 million of revenue during the year ended December 31, 2020, which amount related solely to fixed
consideration. We did not recognize any related revenue during the year ended December 31, 2021. As of December 31, 2021, we do not have
any contract assets or contract liabilities as a result of this transaction.

74

Foundation
Revenues: Foundation revenues relate to a collaborative agreement between nine Sanfilippo foundations to provide up to approximately
$13.9 million of grants to Abeona 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 assessed the ASC 606-10-25-27 criteria used to determine whether foundation
revenue should be recognized over time and determined that our performance does not create an asset with an alternative use to the foundations
and we have an enforceable right to payment for performance completed to date. We determined that the input method based on costs incurred
in accordance with ASC 606-10-55-20 would be the most appropriate method for measuring progress. As a result, we have concluded that
cash received upfront from the foundations should be deferred on the 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. Effectively, this
matches the revenue up to the costs incurred by installment. Should the aggregate cash received exceed the costs incurred by installment,
the excess of aggregate cash over costs will be deferred. We have foundation revenue of $0.3 million recorded as deferred revenue on
the balance sheet as of December 31, 2021 and 2020. In 2021 and 2020, we did not record any foundation revenues since no milestones were
achieved.

Accrued
Research and Development Expenses

As
part of the process of preparing our consolidated financial statements, we are required to estimate our accrued research and development
expenses. This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that
have been performed on our behalf and estimating the level of service performed and the associated costs incurred for the services when
we have not yet been invoiced or otherwise notified of the actual costs. The majority of our service providers invoice us in arrears
for services performed, on a pre-determined schedule or when contractual milestones are met; however, some require advanced payments.
We make estimates of our accrued expenses as of each balance sheet date in our consolidated financial statements based on facts and circumstances
known to us at that time. There may be instances in which payments made to our vendors will exceed the level of services provided and
result in a prepayment of the clinical expense. If the actual timing of the performance of services or the level of effort varies from
our estimate, we adjust the accrual or amount of prepaid expense accordingly. Although we do not expect our estimates to be materially
different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status
and timing of services performed may vary and may result in us reporting amounts that are too high or too low in any particular period.
To date, we have not made any material adjustments to our prior estimates of accrued research and development expenses.

Share-Based
Compensation Expense

We
account for share-based compensation expense in accordance with ASC 718, Stock Based Compensation. We have two share-based compensation
plans under which incentive and qualified stock options and restricted shares may be granted to employees, directors, and consultants.
We measure the cost of the employee/director/consultant services received in exchange for an award of equity instruments based on the
fair value for employees and directors and vesting date fair value of the award for consultants. We use the Black-Scholes option pricing
model to determine the fair value of options as of the grant date and the Hull White I lattice model as of any option repricing dates.
The models used to determine the fair value of options includes assumptions for expected volatility, risk-free interest rate, dividend
yield and estimated expected term. We use the closing price of our common stock as quoted on Nasdaq to determine the fair value of restricted
stock. We account for forfeitures as they occur, which may result in the reversal of compensation costs in subsequent periods as the
forfeitures arise.

Stock
option-based compensation expense recognized for the years ended December 31, 2021 and 2020 was approximately $5.3 million and $5.9 million,
respectively. Restricted stock-based compensation expense recognized for the years ended December 31, 2021 and 2020 was approximately
$3.7 million and $2.3 million, respectively.