PolyPid(PYPD) - 2022 Q4 - Annual Report

Introduction Company Overview and Lead Product Development PolyPid is a Phase 3 biopharma company developing PLEX technology for prolonged drug release, led by D-PLEX100 for SSIs - PolyPid Ltd. is a Phase 3 clinical-stage biopharmaceutical company focused on developing targeted, locally administered, and prolonged-release therapeutics using its proprietary PLEX technology[20] - The lead product candidate, D-PLEX100, is in a pivotal Phase 3 confirmatory trial for the prevention of open abdominal SSIs, utilizing doxycycline for prolonged and continuous release at the surgical site for 30 days[20] - The SHIELD I Phase 3 study (September 2022) did not achieve its primary endpoint in the ITT population (23% decrease, p=0.1520), but a pre-specified subgroup of 423 subjects with large incisions showed a significant 54% reduction in the primary endpoint (p=0.0032), with SSIs decreasing from 9.7% to 4.4% within 30 days post-surgery[24] - Following positive Type D meeting communication in January 2023, the FDA acknowledged SHIELD I results for complex surgeries as supportive evidence and recommended an additional study (SHIELD II) to support a potential NDA submission[25] - SHIELD II patient recruitment is expected to resume in Q2 2023, with an estimated 550 additional patients over approximately 12 months, and top-line results anticipated in mid-2024[26] - In September 2022, the EMA confirmed D-PLEX100's eligibility for Marketing Authorization Application (MAA) submission under the EMA's centralized procedure[27] - The company's pipeline includes OncoPLEX, an early-stage oncology program utilizing PLEX technology for intra-tumoral delivery of docetaxel to reduce local tumor reoccurrence[28] Cautionary Note Regarding Forward-Looking Statements This section emphasizes that the annual report contains forward-looking statements, which are not guarantees of future performance and are subject to various risks and uncertainties - Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties, based on management's assumptions and assessments[34] - Important factors that could cause actual results to differ materially include dependence on clinical trial enrollment, outcomes of interim analyses, ability to raise capital, and regulatory approvals[35][38] - The company undertakes no obligation to publicly update or revise any forward-looking statements, except as required by law[36] Summary Risk Factors This section provides a high-level overview of the principal risks associated with an investment in the company, categorized into financial condition, product discovery and development, and operational challenges - The company has never generated revenues, incurred significant losses since inception, and anticipates continued losses, potentially never achieving profitability[44] - Substantial additional funding is expected to be required, and failure to obtain it on acceptable terms may lead to curtailment or discontinuation of product development[44] - Heavy dependence on the success of D-PLEX100, including obtaining regulatory approval in the United States and European Union, is a key risk[44] - Regulatory approval processes are lengthy, time-consuming, costly, and unpredictable, and the PLEX technology's novelty makes development time and cost difficult to predict[44] - Reliance on third parties for preclinical studies, clinical trials, analytical tests, and manufacturing poses risks if they fail to meet contractual duties or regulatory requirements[44] - Inability to obtain and maintain effective patent rights or protect trade secrets for product candidates could impair competitive position[49] - The company has limited manufacturing experience and no marketing and sales organization, which could hinder commercialization efforts if products are approved[46] - Risks related to ownership of Ordinary Shares include market price volatility, significant control by executive officers/directors/principal shareholders, potential classification as a passive foreign investment company (PFIC), and risk of Nasdaq delisting[47] - Operations in Israel expose the company to political, economic, and military instability, and Israeli government grants may impose restrictions on technology transfer and require royalty payments[48] Part I Item 1. Identity of Directors, Senior Management and Advisers This item is not applicable to the report Item 2. Offer Statistics and Expected Timetable This item is not applicable to the report Item 3. Key Information This section provides critical information about the company's financial status, capitalization, and a comprehensive overview of significant risks - The company has incurred operating losses each year since its inception, including $38.9 million in 2022 and $43.1 million in 2021, resulting in an accumulated deficit of $214.4 million as of December 31, 2022[58] - The company has never generated any revenue from product sales and does not anticipate doing so for at least the next few years, with future profitability dependent on successful product development, regulatory approvals, and commercialization[60] - The report of the independent registered public accounting firm contains an explanatory paragraph regarding substantial doubt about the company's ability to continue as a going concern[64] - Substantial additional funding will be required to advance D-PLEX100 through clinical development and regulatory approval, and to fund other product candidates and operations[65][66] A. Selected Financial Data. [Reserved] This sub-item is reserved and contains no information B. Capitalization and Indebtedness This sub-item is not applicable to the report C. Reasons for the Offer and Use of Proceeds This sub-item is not applicable to the report D. Risk Factors This extensive section details significant risks that could materially affect the company's business, financial condition, and operations - The company has incurred significant losses since inception, with an accumulated deficit of $214.4 million as of December 31, 2022, and expects to continue incurring losses for the foreseeable future[58] - The company is heavily dependent on the success of D-PLEX100, including obtaining regulatory approval in the United States and the European Union, and the regulatory approval processes are lengthy, costly, and unpredictable[75][82] - Reliance on third parties for clinical trials, raw material manufacturing, and other tasks exposes the company to risks if these third parties fail to perform or comply with regulations[145][149][152] - Inability to obtain and maintain effective patent rights or protect the confidentiality of trade secrets for its product candidates could impair the company's competitive position[158][168] - The company has limited manufacturing experience and no marketing and sales organization, which could hinder its ability to generate product revenue if its candidates are approved[208][213] - The market price of the company's Ordinary Shares may be highly volatile, and there is a risk of delisting from Nasdaq if the minimum bid price requirement is not met[263][244] - Operations in Israel expose the company to political, economic, and military instability, and Israeli government grants may impose restrictions on technology transfer and require royalty payments[248][255] Item 4. Information on the Company This section provides a comprehensive overview of PolyPid Ltd., including its history, business model, product pipeline, and strategic goals - PolyPid Ltd. was incorporated in Israel in 2008 and its Ordinary Shares have been trading on the Nasdaq Global Market under the symbol 'PYPD' since June 2020[273] - The company operates as an 'emerging growth company' and a 'foreign private issuer,' which provides certain exemptions from U.S. reporting and corporate governance requirements[274][275] - Capital expenditures are primarily for manufacturing facility and equipment, computers, software, research and development equipment, and office improvements, substantially all in Israel[276] Capital Expenditures (2020-2022) | Year | Capital Expenditures (in millions) | | :--- | :------------------------------- | | 2022 | $2.2 | | 2021 | $4.0 | | 2020 | $0.8 | A. History and Development of the Company PolyPid Ltd. was incorporated in Israel in 2008, with its Ordinary Shares trading on Nasdaq since June 2020, operating as an emerging growth company - PolyPid Ltd. was incorporated in the State of Israel on February 28, 2008[273] - Ordinary Shares are listed for trading on the Nasdaq Global Market under the symbol 'PYPD' since June 2020[273] - The company is an 'emerging growth company' and a 'foreign private issuer,' allowing it to take advantage of certain exemptions from reporting and governance requirements[274][275] Capital Expenditures (2020-2022) | Year | Capital Expenditures (in millions) | | :--- | :------------------------------- | | 2022 | $2.2 | | 2021 | $4.0 | | 2020 | $0.8 | B. Business Overview PolyPid is a Phase 3 biopharmaceutical company leveraging its PLEX technology for targeted, prolonged drug release, with lead candidate D-PLEX100 for SSIs - PolyPid is a Phase 3 clinical-stage biopharmaceutical company focused on developing targeted, locally administered, and prolonged-release therapeutics using its proprietary PLEX technology[277] - D-PLEX100, the lead product candidate, is in a pivotal Phase 3 confirmatory trial for the prevention of open abdominal SSIs, combining PLEX technology with doxycycline[277] - SSIs are estimated to cost up to $10 billion annually in the U.S. and €11 billion in the EU, occurring in 2% to 5% of inpatient surgeries worldwide[278] - The SHIELD I Phase 3 study did not achieve its primary endpoint in the ITT population, but a pre-specified subgroup analysis of 423 subjects with large incisions (>20 cm) showed a significant 54% reduction in the primary endpoint (p=0.0032)[281] SHIELD I Large-Incision Subgroup Analysis (30 days post-surgery) | Parameter | D-PLEX (N=212) | Control (N=211) | Effect | | :------------------------------------------------ | :------------- | :-------------- | :----- | | Primary endpoint | 17 (8%) | 37 (17.5%) | 54% | | Infection rate | 9 (4.4%) | 19 (9.7%) | 55% | | DSSI rate | 0 | 2 (1.0%) | 100% | | Mortality rate | 6 (2.8%) | 10 (4.7%) | 40% | - The FDA acknowledged SHIELD I results for complex surgeries as supportive evidence and recommended an additional study (SHIELD II) for potential NDA submission[283][287] - D-PLEX100 has received three Qualified Infectious Disease Product (QIDP) designations, Fast Track Designation, and Breakthrough Therapy Designation from the FDA, and EMA eligibility for centralized MAA submission[293][295][298] - The company has a license, distribution, and supply agreement with Advanz Pharma for D-PLEX100 in the European Economic Area and the United Kingdom, including an upfront payment of €2.5 million (approx. $2.6 million) and potential milestones up to €110 million[296][297] - OncoPLEX, an early-stage oncology program, utilizes PLEX technology for intra-tumoral delivery of docetaxel, showing positive preclinical data in colon carcinoma and glioblastoma models, including 98% tumor growth inhibition in a glioblastoma mouse model[299][370] - The PLEX technology platform consists of a proprietary matrix of chemically inactive and biocompatible polymers and lipids, designed for controlled, prolonged local drug release (days to months) without chemical modification to the embedded drug[303][315][318] - The company operates a state-of-the-art, sterile manufacturing facility in Israel, cGMP certified by the IMOH and inspected by an EU-qualified person, capable of meeting clinical and initial commercial demand for D-PLEX100[301][307][379][380] - The intellectual property portfolio includes 146 issued patents, 5 allowed patent applications, and 10 pending patent applications, with issued patents expiring between 2029 and 2035[305][387][388] - The biopharmaceutical industry is intensely competitive, with competitors including major multinational and specialty pharmaceutical companies developing similar or more advanced products and drug delivery systems[374][377][378] C. Organizational Structure PolyPid Ltd. operates with two wholly-owned subsidiaries: PolyPid Inc. in Delaware and PolyPid Pharma SRL in Romania - PolyPid Ltd. has two wholly owned subsidiaries: PolyPid Inc. (Delaware corporation with operations in New Jersey) and PolyPid Pharma SRL (Romania)[463] D. Property, Plants and Equipment The company's primary operational facilities, including headquarters, R&D labs, and manufacturing, are located in a leased 49,000 sq ft facility in Petach Tikva, Israel - The principal executive offices, research and development laboratories, and state-of-the-art manufacturing facility are located at 18 Hasivim Street, Petach Tikva, Israel, in an approximately 49,000 square foot leased facility[464] - The monthly rent payment for the Israeli facility is NIS 264,844 (approximately $79,221)[464] Item 4.A Unresolved Staff Comments This item is not applicable to the report Item 5. Operating and Financial Review and Prospects This section analyzes the company's financial condition and results of operations, highlighting significant losses, absence of revenue, and ongoing funding needs - The company has incurred significant operating losses since inception, with an accumulated deficit of $214.4 million as of December 31, 2022[470] - Operating losses were $38.9 million for the year ended December 31, 2022, and $43.1 million for the year ended December 31, 2021[470] - The company has not generated any revenue from product sales and does not expect to for at least the next few years[471][475] - A cost reduction plan, including a 20% reduction in headcount across all departments, was announced in October 2022[472] - Future expenses are expected to increase due to ongoing clinical development of D-PLEX100, regulatory filings, preclinical R&D for OncoPLEX, investment in manufacturing, establishment of commercial infrastructure, and public company operating costs[474] A. Operating Results The company continues to incur significant operating losses, with a net loss of $39.6 million in 2022, driven by R&D and G&A expenses without product sales revenue Consolidated Statements of Operations (2021 vs. 2022) | Metric | Year Ended Dec 31, 2021 (in thousands) | Year Ended Dec 31, 2022 (in thousands) | | :----------------------------- | :------------------------------------- | :------------------------------------- | | Research and development, net | $30,553 | $27,990 | | Marketing and business development | $2,983 | $2,888 | | General and administrative | $9,609 | $8,010 | | Operating loss | $43,145 | $38,888 | | Financial (income) expense, net | $(544) | $540 | | Loss before income tax | $42,601 | $39,428 | | Income tax expense | $- | $129 | | Net loss | $42,601 | $39,557 | - Research and development, net, decreased by $2.6 million in 2022 compared to 2021, primarily due to decreased costs related to the completion of the SHIELD I trial and paused SHIELD II trial[488] - General and administrative expenses decreased by $1.6 million in 2022, mainly due to lower directors' and officers' insurance premiums and personnel costs[490] - Financial (income) expense, net, changed by $1.1 million in 2022, primarily driven by the loan provided by Kreos[491] - Net loss decreased by $3.1 million in 2022 compared to 2021, mainly due to decreases in R&D and G&A expenses, partially offset by increased financial expenses[493] - The company is exposed to foreign currency exchange risk, with approximately 50% of expenses denominated in NIS[494] - The company has elected to use the extended transition period under the JOBS Act for complying with new or revised accounting standards[498] B. Liquidity and Capital Resources The company relies on equity sales, loans, and grants for funding, with $12.6 million in cash as of December 31, 2022, and requires substantial additional funding to continue operations - As of December 31, 2022, the company had $12.6 million in cash, cash equivalents, and short-term deposits[506] - In April 2022, the company entered into a secured loan agreement with Kreos Capital VI (Expert Fund) LP for up to $15 million, drawing $12.5 million in two tranches[500][501][502][514][515] - An amendment to the Kreos Credit Line in March 2023 delayed 70% of principal and interest repayments to August 2024-May 2026, increased the interest rate to 10.00%, and included a restructuring fee and a potential claw-back payment ($1.5 million to $3 million)[502][514][880] - During 2022, the company sold 1,065,057 Ordinary Shares under an At-The-Market (ATM) offering for a total of $4.6 million (net $4.4 million)[505][513] Cash Flows (2021 vs. 2022) | Cash Flow Activity | Year Ended Dec 31, 2021 (in thousands) | Year Ended Dec 31, 2022 (in thousands) | | :----------------------------- | :------------------------------------- | :------------------------------------- | | Net cash used in operating activities | $(32,386) | $(34,317) | | Net cash provided by investing activities | $36,900 | $16,575 | | Net cash provided by financing activities | $1,034 | $16,428 | - Net cash used in operating activities increased in 2022 primarily due to ongoing and closing costs of SHIELD I and continued patient recruitment for SHIELD II[509] - Net cash provided by investing activities in 2022 was mainly from the release of short-term and long-term deposits[511] - Net cash provided by financing activities in 2022 increased significantly due to proceeds from the Kreos loan and ATM sales[512] - In March 2023, the company completed a public offering of 16,859,000 Ordinary Shares for gross proceeds of $7.1 million and a concurrent private placement of pre-funded warrants for 10,357,139 Ordinary Shares for gross proceeds of $4.4 million[517][882] - Existing cash and cash equivalents are expected to fund operating expenses and capital expenditure requirements well into Q1 2024[520] C. Research and Development, Patents and Licenses, etc. The company's R&D focuses on D-PLEX100 and OncoPLEX, supported by an extensive intellectual property portfolio of 146 issued patents and a team of 48 R&D professionals - The company's preclinical and clinical development efforts are focused on D-PLEX100 for the prevention of abdominal (soft tissue) and sternal (bone) SSIs, and the early-stage oncology program OncoPLEX[524] - The R&D team comprises 48 scientists, doctors, and clinicians based at the corporate headquarters in Petach Tikva, Israel[524] - The patent estate includes 146 issued patents, 5 allowed patent applications, 10 pending patent applications, and one published PCT application, covering the PLEX technology platform and product candidates[524] D. Trend Information The company has not generated product sales revenue and anticipates continued significant R&D and commercialization expenses, requiring additional funding for future performance - The company has not generated any revenue from product sales to date and does not expect to for at least the next few years[525] - From inception through December 31, 2022, the company incurred $135.5 million in research and development expenses, net[525] - The company expects to continue incurring significant expenses for ongoing clinical trials, marketing approval, and future product development, as well as commercialization expenses if products are approved[525] E. Critical Accounting Estimates The company's financial statements rely on critical accounting estimates for share-based compensation, accrued R&D expenses, and warrant valuation, involving significant judgment and assumptions - Share-based compensation is accounted for using the Black-Scholes-Merton model, requiring subjective assumptions such as share price, volatility, expected option term, risk-free interest rates, and dividend yield[528][530][531] Non-Cash Share-Based Compensation Expense (2020-2022) | Year | Expense (in millions) | | :--- | :-------------------- | | 2022 | $4.3 | | 2021 | $4.8 | | 2020 | $4.6 | - Accrued research and development expenses are estimated based on services performed by third-party providers (CROs, investigative sites, vendors) for which invoices have not yet been received[534][536] - Warrants to purchase convertible preferred shares were classified as a liability and measured at fair value prior to the IPO, then reclassified to equity[535] - Royalty-bearing grants from the Israeli Innovation Authority (IIA) totaling $4.9 million as of December 31, 2022, are recognized as a deduction from R&D expenses[537][538] - The company adopted ASC 842, 'Leases,' on January 1, 2022, recognizing operating lease right-of-use (ROU) assets and lease liabilities of $3.4 million[540][541] Item 6. Directors, Senior Management and Employees This section outlines the company's leadership, including executive officers and directors, their compensation, board practices, employee numbers, and share ownership - The executive officers include Dikla Czaczkes Akselbrad (CEO, Director), Noam Emanuel (Chief Scientific Officer, retiring Q2 2023), Dalit Hazan (EVP, R&D, Clinical & Regulatory Affairs), Ori Warshavsky (Chief Operating Officer - US), and Jonny Missulawin (Senior Vice President of Finance)[544][545][546][547][548][549] - The board of directors consists of eight members, with seven deemed 'independent' under Nasdaq Stock Market rules, including Jacob Harel (Chairman)[544][568][578] Aggregate Compensation for Directors and Senior Management (2022) | Category | Amount (in thousands) | | :-------------------- | :-------------------- | | Salary and Related Benefits | $2,394.858 | | Benefits and Perquisites | $437.904 | | Share-Based Compensation | $2,129.958 | | Total | $4,962.720 | - The company is exempt from certain Israeli Companies Law requirements regarding external directors and committee composition due to its status as a foreign private issuer and compliance with Nasdaq rules[576] - The Audit Committee consists of Dr. Krinsky (Chairman), Ms. Tsour Segal, and Prof. Barenholz, all meeting independence requirements, with Dr. Krinsky and Ms. Segal identified as financial experts[584] - The Compensation, Nominating and Corporate Governance Committee is responsible for recommending and overseeing the compensation policy for office holders[593] - As of December 31, 2022, the company had 57 full-time and 3 part-time employees[604] - The 2012 Share Option Plan had 1,116,820 shares reserved but unissued and 3,388,008 options outstanding as of March 26, 2023[611][612] Item 7. Major Shareholders and Related Party Transactions This section details beneficial ownership of Ordinary Shares by major shareholders, directors, and executive officers, and outlines related party transactions, primarily compensation Major Shareholders and Directors/Executive Officers Beneficial Ownership (as of March 30, 2023) | Holder | Number of Shares Beneficially Owned | Percentage Owned | | :------------------------------------ | :---------------------------------- | :--------------- | | Aurum Ventures M.K.I. Ltd. | 1,891,152 | 8.7% | | All directors and executive officers as a group (12 persons) | 4,340,213 | 19.8% | - Over 2022, there were no material increases in major shareholder percentage ownership, but decreases for entities affiliated with Shavit Capital Funds (from 6.1% to 2.1%)[627][628] - As of March 22, 2023, there were 63 record holders of shares, with 38 having registered addresses in the United States[629] - Related party transactions primarily involve compensation to directors and officers, as detailed in Item 6.B[631][633][634] Item 8. Financial Information This item refers to the consolidated financial statements in Item 18 and notes no significant operational changes or cash dividend payments since the financial statement date - Consolidated statements and other financial information are provided in Item 18[636] - No significant change, other than as otherwise described in this annual report, has occurred in the company's operations since the date of its consolidated financial statements[640] - The company has never declared or paid any cash dividends on its Ordinary Shares and does not anticipate paying any in the foreseeable future[637][638] Item 9. The Offer and Listing This section confirms the company's Ordinary Shares have been trading on the Nasdaq Global Market under 'PYPD' since June 2020, with other sub-items not applicable - The company's Ordinary Shares have been trading under the symbol 'PYPD' on the Nasdaq Global Market since June 2020[641][643] A. Offer and Listing Details The company's Ordinary Shares have been trading on the Nasdaq Global Market under the symbol 'PYPD' since June 2020 - Ordinary Shares have been trading under the symbol 'PYPD' on the Nasdaq Global Market since June 2020[641] B. Plan of Distribution This sub-item is not applicable to the report C. Markets The company's Ordinary Shares have been listed for trading on the Nasdaq Global Market since June 2020 - Ordinary Shares have been listed for trading on the Nasdaq Global Market since June 2020[643] D. Selling Shareholders This sub-item is not applicable to the report E. Dilution This sub-item is not applicable to the report F. Expenses of the Issue This sub-item is not applicable to the report Item 10. Additional Information This section provides additional legal and regulatory information, including material contracts, exchange controls, and extensive tax considerations for shareholders - Material contracts include the Sales Agreement with Cantor Fitzgerald & Co., Officer Indemnity and Exculpation Agreement, Compensation Policy, Loan Facility Agreement with Kreos Capital VI (Expert Fund) LP, and License, Distribution and Supply Agreement with Advanz Pharma Holdings[651] - There are currently no Israeli currency control restrictions on remittances of dividends, proceeds from share sales, or interest payments to non-residents of Israel, except for shareholders from countries in a state of war with Israel[650] - Israeli resident companies are generally subject to a corporate tax rate of 23.0% in 2023[653] - Dividends paid to Israeli individual shareholders are generally taxed at 25.0% (or 30.0% for 'substantial shareholders')[655] - Non-Israeli resident shareholders are generally exempt from Israeli capital gains tax on the sale of Ordinary Shares, provided the gains are not derived from a permanent establishment or business activity in Israel[666] - The company may be classified as a Passive Foreign Investment Company (PFIC) for U.S. federal income tax purposes, which could result in adverse tax consequences for U.S. Holders, including additional taxes and interest charges on distributions and gains[680][681][682] - As a foreign private issuer, the company files reports with the SEC (www.sec.gov), including annual reports on Form 20-F and unaudited quarterly financial information on Form 6-K[700][701] A. Share Capital This sub-item is not applicable to the report B. Memorandum and Articles of Association A copy of the company's articles of association is attached as Exhibit 1.1 to this annual report on Form 20-F - A copy of the company's articles of association is attached as Exhibit 1.1 to this annual report on Form 20-F[649] C. Material Contracts This section summarizes the key material contracts the company has entered into, including financing agreements, licensing deals, and corporate governance documents - Material contracts include the Sales Agreement with Cantor Fitzgerald & Co., Officer Indemnity and Exculpation Agreement, Compensation Policy, Loan Facility Agreement with Kreos Capital VI (Expert Fund) LP, and License, Distribution and Supply Agreement with Advanz Pharma Holdings[651] D. Exchange Controls There are currently no Israeli currency control restrictions on remittances of dividends, proceeds from share sales, or interest payments to non-residents of Israel, with an exception for shareholders from countries in a state of war with Israel - There are currently no Israeli currency control restrictions on remittances of dividends on Ordinary Shares, proceeds from the sale of shares, or interest/other payments to non-residents of Israel, except for shareholders who are subjects of countries that are, or have been, in a state of war with Israel[650] E. Taxation This section provides a detailed summary of Israeli and U.S. federal income tax considerations for the company and its shareholders, including corporate tax rates and PFIC consequences - Israeli resident companies are generally subject to a corporate tax rate of 23.0% in 2023[653] - Israeli individual shareholders are generally subject to a 25.0% income tax on dividends (30.0% for 'substantial shareholders')[655][656] - Non-Israeli residents are generally subject to a 25.0% Israeli income tax on dividends (30.0% for 'substantial shareholders'), which is withheld at source, unless a tax certificate authorizes a reduced rate under a tax treaty[662] - Non-Israeli resident shareholders are generally exempt from Israeli capital gains tax on the sale of Ordinary Shares, provided the gains were not derived from a permanent establishment or business activity in Israel[666] - Israel's Investment Law provides tax incentives for 'Preferred Enterprise' and 'Preferred Technological Enterprise,' including reduced corporate tax rates (e.g., 7.5%-16% for corporate tax and 4%-20% for dividend withholding tax for non-Israeli residents)[668][669][672][673][674][675] - The company may be classified as a Passive Foreign Investment Company (PFIC) for the taxable year ended December 31, 2022, and in future taxable years, particularly if it does not generate revenue from operations[680][681] - If classified as a PFIC, U.S. Holders could face additional taxes and interest charges under the 'PFIC excess distribution regime' on distributions and gains, and a Qualified Electing Fund (QEF) election is not expected to be available[682][685][687] - Dividends paid to U.S. Holders are generally treated as ordinary income, but may qualify for reduced capital gains rates for non-corporate holders if the company is a 'qualified foreign corporation'[690][692][693] - U.S. Holders may be required to file certain U.S. information reporting returns with the IRS, including Form 8938 and Form 8621 (for PFIC shareholders)[695] F. Dividends and Paying Agents This sub-item is not applicable to the report G. Statement by Experts This sub-item is not applicable to the report H. Documents on Display The company is subject to SEC information reporting requirements as a foreign private issuer and files reports electronically with the SEC, which are publicly available - The company is subject to SEC information reporting requirements as a foreign private issuer and files reports with the SEC, which are available on www.sec.gov[700](index=700&type=chunk) - As a foreign private issuer, the company is exempt from certain proxy rules and Section 16 reporting obligations, and files annual reports on Form 20-F and may submit unaudited quarterly information on Form 6-K[701] I. Subsidiary Information This sub-item is not applicable to the report J. Annual Report to Security Holders This sub-item is not applicable to the report Item 11. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks primarily from foreign currency exchange rate fluctuations and interest rates, partially hedged but not fully protected - The company is exposed to market risks primarily from changes in foreign currency exchange rates and interest rates[706][707] - Approximately 50% of the company's expenses are denominated in New Israeli Shekels (NIS)[708] - The company currently partially hedges its foreign currency exchange rate risk, but these measures may not adequately protect against material adverse effects[709] - Investments consist primarily of cash, cash equivalents, and short-term deposits, with the primary objective of preserving principal while maximizing income without significantly increasing risk[707] Item 12. Description of Securities Other Than Equity Securities This item is not applicable to the report Part II Item 13. Defaults, Dividend Arrearages and Delinquencies This item is not applicable to the report Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds In June 2020, the company completed its IPO, selling 4,312,500 Ordinary Shares for net proceeds of $62.8 million, utilized as described in the prospectus - In June 2020, the company sold 4,312,500 Ordinary Shares in its IPO at a public offering price of $16.00 per share[716] - The aggregate gross proceeds from the IPO were $69.0 million, with net proceeds of approximately $62.8 million after deducting underwriting discounts and offering expenses[716] - The net proceeds from the IPO have been used as described in the final prospectus for the IPO filed with the SEC on June 29, 2020[717] Item 15. Controls and Procedures Management evaluated the effectiveness of disclosure controls and internal control over financial reporting as of December 31, 2022, concluding both were effective - Management, with the participation of the CEO and Senior Vice President of Finance, evaluated the effectiveness of disclosure controls and procedures as of December 31, 2022, and concluded they were effective[719] - Management is responsible for establishing and maintaining adequate internal control over financial reporting and concluded that it was effective as of December 31, 2022[721] - An attestation report of the independent registered public accounting firm regarding internal control over financial reporting is not included due to an exemption for emerging growth companies under the JOBS Act[722] - During the year ended December 31, 2022, there were no changes in internal control over financial reporting that materially affected, or are reasonably likely to materially affect, internal control over financial reporting[723] Item 16. [Reserved] This item is reserved and contains no information Item 16A. Audit Committee Financial Expert The board determined that Dr. Itzhak Krinsky and Ms. Anat Tsour Segal qualify as audit committee financial experts and meet Nasdaq independence requirements - Dr. Krinsky and Ms. Segal have been determined by the board of directors to be audit committee financial experts as defined by SEC rules and possess the requisite financial experience as defined by Nasdaq Rules[724] - Each member of the audit committee is 'independent' as defined in Rule 10A-3(b)(1) under the Exchange Act and satisfies the independent director requirements under the Nasdaq Rules[724] Item 16B. Code of Ethics The company has adopted a Corporate Code of Ethics and Conduct, applicable to all directors and employees, including senior financial officers - The company has adopted a Corporate Code of Ethics and Conduct applicable to all directors and employees, including the Chief Executive Officer and Senior Vice President of Finance[725] - The full text of the Corporate Code of Ethics and Conduct is posted on the company's website at www.polypid.com[725](index=725&type=chunk) Item 16C. Principal Accountant Fees and Services Kost, Forer, Gabbay & Kasierer served as the principal independent registered public accounting firm, with total fees increasing to $373,900 in 2022, all pre-approved - Kost, Forer, Gabbay & Kasierer, Certified Public Accountants (Israel), a member firm of Ernst & Young Global, served as the principal independent registered public accounting firm for 2021 and 2022[727] Fees Paid to Principal Accountant (2021-2022) | Category | Year Ended Dec 31, 2021 (in thousands) | Year Ended Dec 31, 2022 (in thousands) | | :---------------- | :------------------------------------- | :------------------------------------- | | Audit fees | $240 | $252 | | Audit-related fees | $24 | $77 | | Tax fees | $21.251 | $44.9 | | All other fees | $- | $- | | Total | $285.251 | $373.9 | - All fees for audit and non-audit services were pre-approved by the audit committee[730] Item 16D. Exemptions from the Listing Standards for Audit Committees This item is not applicable to the report Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers This item is not applicable to the report Item 16F. Change in Registrant's Certifying Accountant This item is not applicable to the report Item 16G. Corporate Governance As a foreign private issuer, the company follows certain Israeli corporate governance practices instead of corresponding Nasdaq Stock Market rules, maintaining compliance under applicable regulations - As a foreign private issuer, the company elects to follow Israeli Companies Law provisions instead of certain Nasdaq Stock Market rules regarding corporate governance[735][736] - Specific exemptions include not complying with Nasdaq rules on proxy statements, quorum requirements, director nominations, independent director meetings, shareholder approval for certain security issuances, and approval of related party transactions[736] - The company intends to take all necessary actions to maintain compliance as a foreign private issuer under the Sarbanes-Oxley Act, SEC rules, and Nasdaq Stock Market corporate governance rules[737] - Directors and senior management are not subject to short-swing profit and insider trading reporting obligations under Section 16 of the Exchange Act, but are subject to Section 13 reporting[737] Item 16H. Mine Safety Disclosure This item is not applicable to the report Item 16I. Disclosure Regarding Foreign Jurisdictions That Prevent Inspections. This item is not applicable to the report Part III Item 17. Financial Statements The company has elected to provide its financial statements and related information pursuant to Item 18 of this annual report - The company has elected to provide financial statements and related information pursuant to Item 18[742] Item 18. Financial Statements This section contains the audited consolidated financial statements of PolyPid Ltd. for the period ended December 31, 2022, prepared in U.S. GAAP - The consolidated financial statements and related notes are included in this annual report on Form 20-F, starting on page F-1 (page 156 of the document)[743][751] - The financial statements are prepared in conformity with U.S. generally accepted accounting principles (U.S. GAAP)[755][784] - The Report of Independent Registered Public Accounting Firm highlights a 'substantial doubt about the Company's ability to continue as a going concern' due to recurring losses from operations[756] - The company's functional and reporting currency is the U.S. dollar[785] Report of Independent Registered Public Accounting Firm Kost, Forer, Gabbay & Kasierer issued an unqualified opinion on the consolidated financial statements but noted substantial doubt about the company's going concern ability - The independent registered public accounting firm, Kost, Forer, Gabbay & Kasierer, issued an unqualified opinion on the consolidated financial statements for the three years ended December 31, 2022[755] - The report contains an explanatory paragraph regarding substantial doubt about the company's ability to continue as a going concern, citing recurring losses from operations[756] - The company is not required to have, nor was the auditor engaged to perform, an audit of its internal control over financial reporting[758] Consolidated Balance Sheets The consolidated balance sheets show a decrease in total assets to $26.0 million in 2022 and a significant decrease in shareholders' equity to $5.8 million Consolidated Balance Sheet Highlights (in thousands USD) | Metric | December 31, 2022 | December 31, 2021 | | :-------------------------------- | :------------------ | :------------------ | | Cash and cash equivalents | $8,552 | $9,819 | | Short-term deposits | $4,042 | $22,384 | | Total current assets | $14,194 | $34,811 | | Property and equipment, net | $9,247 | $8,761 | | Operating lease right-of-use assets | $2,431 | $- | | Total assets | $25,971 | $44,235 | | Current maturities of long-term debt | $4,024 | $- | | Accrued expenses and other current liabilities | $2,429 | $3,940 | | Trade payables | $1,141 | $4,136 | | Total current liabilities | $8,553 | $8,076 | | Long-term debt | $7,574 | $- | | Deferred revenues | $2,548 | $- | | Long-term operating lease liabilities | $1,173 | $- | | Total long-term liabilities | $11,589 | $199 | | Total liabilities | $20,142 | $8,275 | | Total shareholders' equity | $5,829 | $35,960 | - Total assets decreased by $18.26 million from 2021 to 2022, primarily due to an $18.34 million decrease in short-term deposits[761] - Total liabilities increased by $11.87 million from 2021 to 2022, mainly driven by the recognition of current and long-term debt ($11.6 million) and deferred revenues ($2.5 million)[763] - Shareholders' equity decreased by $30.13 million from 2021 to 2022, reflecting the net loss incurred during the period[763] Consolidated Statements of Operations The consolidated statements of operations show a net loss of $39.6 million in 2022, an improvement from $42.6 million in 2021, driven by reduced R&D and G&A expenses Consolidated Statements of Operations (in thousands USD) | Metric | Year Ended Dec 31, 2022 | Year Ended Dec 31, 2021 | Year Ended Dec 31, 2020 | | :----------------------------- | :---------------------- | :---------------------- | :---------------------- | | Research and development, net | $27,990 | $30,553 | $16,954 | | Marketing and business development | $2,888 | $2,983 | $1,614 | | General and administrative | $8,010 | $9,609 | $7,704 | | Operating loss | $38,888 | $43,145 | $26,272 | | Financial (income) expense, net | $540 | $(544) | $10,597 | | Income tax expense | $129 | $- | $- | | Net loss | $39,557 | $42,601 | $36,869 | | Basic and diluted net loss per Ordinary share | $2.04 | $2.28 | $4.48 | - Net loss decreased by $3.04 million from $42.60 million in 2021 to $39.56 million in 2022[765] - Operating loss decreased by $4.26 million from $43.15 million in 2021 to $38.89 million in 2022[765] - Financial (income) expense, net, shifted from an income of $0.54 million in 2021 to an expense of $0.54 million in 2022[765] Consolidated Statements of Changes in Convertible Preferred Shares and Shareholders' Equity (Deficit) The consolidated statements of changes in equity reflect a significant decrease in total shareholders' equity to $5.83 million in 2022, primarily due to the net loss incurred Shareholders' Equity (Deficit) Changes (in thousands USD) | Metric | As of Dec 31, 2021 | As of Dec 31, 2022 | | :----------------------------- | :----------------- | :----------------- | | Additional paid-in capital | $210,847 | $220,273 | | Accumulated deficit | $(174,887) | $(214,444) | | Total shareholders' equity | $35,960 | $5,829 | - Total shareholders' equity decreased by $30.13 million from $35.96 million in 2021 to $5.83 million in 2022, primarily driven by the net loss of $39.56 million[767] - Share-based compensation contributed $4.31 million to additional paid-in capital in 2022, and issuance of Ordinary shares (net) added $4.42 million[767] - The number of issued and outstanding Ordinary shares increased from 18,756,570 in 2021 to 19,851,833 in 2022[767] Consolidated Statements of Cash Flows Net cash used in operating activities increased to $34.3 million in 2022, while financing activities significantly increased cash provided due to debt and share issuance Consolidated Statements of Cash Flows (in thousands USD) | Cash Flow Activity | Year Ended Dec 31, 2022 | Year Ended Dec 31, 2021 | Year Ended Dec 31, 2020 | | :------------------------------------- | :---------------------- | :---------------------- | :---------------------- | | Net cash used in operating activities | $(34,317) | $(32,386) | $(21,596) | | Net cash provided by (used in) investing activities | $16,575 | $36,900 | $(40,768) | | Net cash provided by financing activities | $16,428 | $1,034 | $62,774 | | Increase (decrease) in cash, cash equivalents and restricted cash | $(1,314) | $5,548 | $410 | - Net cash used in operating activities increased by $1.93 million in 2022, primarily due to ongoing and closing costs of SHIELD I and continued patient recruitment for SHIELD II[509][770] - Net cash provided by investing activities decreased by $20.33 million in 2022, mainly due to a lower release of short-term and long-term deposits compared to the prior year[511][770] - Net cash provided by financing activities significantly increased by $15.39 million in 2022, driven by $11.71 million from long-term debt (Kreos loan) and $4.42 million from the issuance of Ordinary shares (ATM)[512][770] - Overall cash, cash equivalents, and restricted cash decreased by $1.31 million in 2022, ending the year at $9.14 million[770][771] Notes to Consolidated Financial Statements These notes provide detailed information supporting the consolidated financial statements, including accounting policies, R&D activities, debt arrangements, and going concern status - The company is a Phase 3 biopharmaceutical company focused on developing targeted, locally administered, and prolonged-release therapeutics using its proprietary PLEX technology, with D-PLEX100 as its lead product candidate for surgical site infection prevention[773] - The company has incurred substantial losses and negative cash flows from operations, leading to a 'substantial doubt about the Company's ability to continue as a going concern' as of December 31, 2022, with an accumulated deficit of $214.4 million[778][781] - The consolidated financial statements are prepared in U.S. GAAP, with the U.S. dollar as the functional and reporting currency[784][785] - The company adopted ASC 842, 'Leases,' on January 1, 2022, recognizing $3.388 million in operating lease right-of-use (ROU) assets and liabilities[789] - Research and development expenses are expensed as incurred and presented net of government grants[792] - As of December 31, 2022, the company received $4.888 million in royalty-bearing grants from the Israeli Innovation Authority (IIA), with a commitment to pay 3% royalties on sales of developed products[794][797] - Share-based compensation expense is recognized using the Black-Scholes option pricing model[797] - Total share-based compensation expense was $4.31 million in 2022, $4.75 million in 2021, and $4.58 million in 2020[865] - The company entered into a secured line of credit agreement with Kreos Capital for up to $15 million, drawing $12.5 million in 2022[839] - An amendment in March 2023 delayed repayments, increased the interest rate to 10%, and repriced warrants[880] - As of December 31, 2022, the company had accumulated net operating losses (NOLs) of approximately $152.1 million for tax purposes, with a full valuation allowance provided for deferred tax assets[850][851] - Subsequent events in Q1 2023 include additional ATM sales ($2.19 million net), repricing of employee options to $0.77, the Kreos credit line amendment, a public offering ($7.08 million gross), and a private placement of pre-funded warrants ($4.35 million gross)[881][882] Item 19. Exhibits This section lists all exhibits filed as part of the Form 20-F annual report, including articles of association, warrant forms, and various agreements and certifications - The exhibits include the Articles of Association, Form of Warrant to purchase Series E-1 Preferred Shares, Description of Securities, Form of Officer Indemnity and Exculpation Agreement, Compensation Policy, Amended and Restated PolyPid Ltd. 2012 Share Option Plan, various Lease Agreements, Sales Agreement with Cantor Fitzgerald & Co., Agreement for the Provision of a Loan Facility with Kreos Capital VI (Expert Fund) LP, and License, Distribution and Supply Agreement with Mercury Pharma Group Limited (Advanz Pharma Holdings)[744][651] - Also included are certifications from the Principal Executive Officer and Principal Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 and 18 U.S.C. 1350, and the Consent of Kost, Forer, Gabbay & Kasierer[745]