Tessera Defense & Homeland Security Inc. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the notes thereto contained elsewhere in this report. Certain information contained in the discussion and analysis set forth below includes forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in any forward-looking statement because of various factors, including those described in the sections titled “Cautionary Statement Regarding Forward-Looking Statements” and “Risk Factors” in this Annual Report. We are a clinical stage microbiome product discovery company developing products using both natural and engineered phage technologies designed to target and destroy specific harmful bacteria associated with chronic diseases, such as CF and AD. Bacteriophage or phage are bacterial, species-specific, strain-limited viruses that infect, amplify and kill the target bacteria and are considered inert to mammalian cells. By utilizing proprietary combinations of naturally occurring phage and by creating novel phage using synthetic biology, we develop phage-based therapies intended to address both large-market and orphan diseases. Since BiomX Ltd.’s inception in 2015, we have devoted substantially all our resources to organizing and staffing our company, raising capital, acquiring rights to or discovering product candidates, developing our technology platforms, securing related intellectual property rights, and conducting discovery, research and development and clinical activities for our product candidates. We do not have any products approved for sale, and we have not generated any revenue from product sales. As we advance our product candidates, we expect our expenses to remain significant. To date, we have funded our operations with proceeds from sales of Common Stock, preferred shares, warrants, governmental grants, collaboration agreements and debt. Through December 31, 2022, we had received gross proceeds of approximately $146 million from sales of our securities. To date, we received approximately $1,134,000 from our collaboration agreements and recorded a reduction from research and development expenses of $921,000. In addition, we have incurred significant operating losses. Our ability to generate revenue from product sales sufficient to achieve profitability will depend on the successful development of, the receipt of regulatory approval for, and eventual commercialization of one or more of our product candidates. Our net losses were approximately $28.3 million and $36.2 million for the years ended December 31, 2022 and 2021, respectively. As of December 31, 2022, we had an accumulated deficit of $136.8 million and expect that for the foreseeable future we will continue to incur significant expenses as we advance our product candidates from discovery through preclinical development and clinical trials and seek regulatory approval of our product candidates. In addition, if we obtain regulatory approval for any of our product candidates, we expect to incur significant commercialization expenses related to product manufacturing, marketing, sales and distribution. We may also incur expenses in connection with in-licensing or acquiring additional product candidates. Because of the numerous risks and uncertainties associated with product development, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations. We may implement cost reduction strategies, which may include amending, delaying, limiting, reducing or terminating one or more of our programs or ongoing or planned clinical trials of our product candidates. In May 2022, we announced, as part of our corporate restructuring plan, or the Corporate Restructuring, our intention to reduce our operating costs, including a 50% reduction in personnel, while prioritizing our ongoing CF program. On December 31, 2022, we had cash, cash equivalents and restricted cash of $32.3 million. We believe that our existing cash and cash equivalents and short-term deposits, will enable us to fund our operating expenses and capital expenditure requirements until at least the middle of 2024, as discussed further below under “-Liquidity and Capital Resources” 71 Components of Our Consolidated Results of Operations Revenue To date, we have not generated any revenue from product sales and do not expect to generate any revenue from product sales in the near future. If development efforts for our product candidates are successful and result in any necessary regulatory approvals or otherwise lead to any commercialized products or additional license agreements with third parties, we may generate revenue in the future from product sales or payments from collaboration or license agreements with third parties. Operating Expenses Research and Development Expenses, net Research and development expenses consist primarily of costs incurred in connection with the discovery and development of our product candidates. We expense research and development costs as incurred, offset by IIA grants and, to a lesser degree, income from research and development collaboration agreements. These expenses include: ● development and operation of our proprietary platform; ● expenses incurred in connection with the preclinical and clinical development of our product candidates, including under agreements with third parties, such as CROs and contract manufacturing organizations, as well as consultants, subcontractors and key opinion leaders providing scientific development services; ● manufacturing scale-up expenses and the cost of acquiring and manufacturing preclinical and clinical trial materials; ● license maintenance fees and milestone fees incurred in connection with various license agreements; ● employee-related expenses, including salaries, related benefits, travel and stock-based compensation expenses for employees engaged in research and development functions, as well as external costs, such as fees paid to outside consultants engaged in such activities; ● costs related to compliance with regulatory requirements and legal fees relating to patent matters; and ● depreciation and other expenses. We recognize external development costs based on an evaluation of the progress to completion of specific tasks using information provided to us by our service providers. We do not allocate employee costs or facility expenses, including depreciation or other indirect costs, to specific programs because these costs are deployed across multiple programs and, as such, are not separately classified. We use internal resources primarily to oversee the research and discovery as well as for managing our preclinical development, process development, manufacturing and clinical development activities. These employees work across multiple programs and, therefore, we do not track their costs by program. 72 The table below summarizes our research and development expenses incurred by program: Year Ended December 31, 2022 2021 USD In thousands BX001 (discontinued in 2021) - 1,792 BX002/BX003 65 1,294 BX004 3,499 4,506 BX005 1,011 2,044 CRC 35 441 Salaries and related benefits (including stock-based compensation) 9,130 14,057 Depreciation 909 986 Rent and related expenses 1,101 1,008 Infrastructure & other unallocated research and development or R&D expenses 1,917 1,174 Less grants from the IIA and consideration from collaboration agreements (1,423 ) (4,626 ) Total research and development expenses, net 16,244 22,676 Research and development activities are central to our business. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. Our research and development expenses reflect, among other things, programs that were discontinued or put on hold as well as new development programs. As a result, we expect that our research and development expenses will increase substantially over the next several years, particularly as we increase personnel costs, including stock-based compensation, contractor costs and facilities costs, as we continue to advance the development of our product candidates. We also may incur additional expenses related to milestone and royalty payments payable to third parties with whom we have entered into license agreements to acquire the rights to our product candidates. General and Administrative Expenses General and administrative expenses consist primarily of salaries, related benefits, travel and stock-based compensation expenses for personnel in executive, finance, corporate, business development and administrative functions. General and administrative expenses also include legal fees relating corporate and securities matters; professional fees for accounting, tax and audit services; insurance costs; travel expenses; and facility-related expenses, including rent, as well as operating related costs. We believe that our general and administrative expenses may increase in the future as we increase our headcount to support our continued research activities and development of our product candidates. We also anticipate that we will continue to incur significant accounting, audit, legal, regulatory, compliance, directors’ and officers’ insurance costs as well as investor and public relations expenses associated with being a public company. We anticipate the additional costs for these services will increase our general and administrative expenses in the future. Additionally, if and when we believe a regulatory approval of a product candidate appears likely, we anticipate an increase in payroll and expenses as a result of our preparation for commercial operations, especially as it relates to the sales and marketing of our product candidate. Amortization of intangible assets Intangible assets consist of in-process research and development, amortized for a period of three years, that started on January 1, 2020. Other income Other income consists of proceeds from sub-leasing a portion of our office space in Ness Ziona, Israel starting in August 2022. Interest expenses Interest expense consists of interest incurred under the Hercules Loan Agreement. Financial expenses, net Financial expenses, net consist primarily of income or expenses related to revaluation of foreign currencies and interest income on our bank deposits and money market funds. 73 Results of Operations Comparison of the Years Ended December 31, 2022 and 2021 The following table summarizes our consolidated results of operations for the years ended December 31, 2022 and 2021: Year ended December 31, 2022 2021 USD In thousands R&D expenses, net 16,244 22,676 Amortization of intangible assets 1,519 1,519 General and administrative expenses 9,456 11,267 Operating loss 27,219 35,462 Interest expenses 2,069 699 Financial income, net (902 ) (2 ) Other income (134 ) - Tax expenses 65 67 Net Loss 28,317 36,226 R&D expenses, net (net of grants received from the IIA and consideration from research collaborations) were $16.2 million for the year ended December 31, 2022, compared to $22.7 million for the year ended December 31, 2021. The decrease of $6.5 million, or 29%, in the year ended December 31, 2022 compared to the prior year, is primarily due to the following: ● a decrease of $4.9 million in salaries and related expenses and stock-based compensation expenses due to a reduction in workforce, as a result of the Corporate Restructuring; ● a decrease of $1.0 million due to delays in the development of BX005, the product candidate for the treatment of AD; ● a decrease of $1.2 million due to the pause in the development of BX003, the product candidate for the treatment of IBD and PSC; and ● a decrease of $1.8 million due to the discontinuation in the development of BX001, the product candidate for the treatment of acne; These were partially offset by a decrease in IIA grants of $2.6 million. We recorded grants from the IIA totaling $1.1 million and $3.7 million for the years ended December 31, 2022 and December 31, 2021, respectively. Amortization of intangible assets remained consistent from 2021 to 2022. General and administrative expenses were $9.5 million for the year ended December 31, 2022, compared to $11.3 million for the year ended December 31, 2021. The decrease of $1.8 million, or 16%, is primarily due to the following: ● a decrease of $0.9 million in salaries and related expenses and stock-based compensation expenses due to a reduction in workforce, as a result of the Corporate Restructuring; and ● a decrease of $0.5 million in recruitment and employee related expenses due to the Corporate Restructuring; Interest expenses were $2.1 million for the year ended December 31, 2022, compared to $0.7 million for the year ended December 31, 2021. The increase of $1.4 million, or 200%, is due interest payments accrued under the Hercules Loan Agreement, entered into in August 2021, in addition to the increase of the U.S. prime rate. Financial income, net was $902,000 for the year ended December 31, 2022, compared to $2,000 for the year ended December 31, 2021. The increase of $900,000 is primarily due to appreciation of the U.S. dollar against the NIS and due to the rising interest rates, which resulted in higher interest income. Other income was $134,000 for the year ended December 31, 2022. The Company had no other income for the year ended December 31, 2021. The increase of $134,000, or 100%, is due to a sublease agreement for a portion of our office space in Ness Ziona, Israel entered into in August 2022 following our Corporate Restructuring. 74 Liquidity and Capital Resources Sources of Liquidity Since BiomX Ltd.’s inception in 2015, we have not generated any revenue from sales of our products and have incurred significant operating losses and negative cash flows from our operations. We have funded our operations to date primarily with proceeds from the sale of our Common Stock, preferred shares and warrants, venture debt, IIA grants and funds from collaboration agreements and through the Business Combination. Through December 31, 2022, we had received gross cash proceeds of approximately $146 million from sales of our Common Stock and preferred shares. In August 2021, we borrowed $15.0 million under the Hercules Loan Agreement. In addition, in 2022 and 2021 we received approximately $1.9 million and $3.2 million from our collaboration agreements and grants from the IIA, respectively. Cash in excess of immediate requirements is invested primarily with a view to liquidity and capital preservation. On December 4, 2020, we filed a shelf registration statement on Form S-3, which was declared effective by the SEC on December 11, 2020. In addition, on December 4, 2020, we entered into the Sale Agreement, with Jefferies, pursuant to which we may issue and sell shares of our Common Stock having an aggregate offering price of up to $50,000,000 from time to time through Jefferies. We are not obligated to make any sales of Common Stock under the Sale Agreement. Through December 31, 2022, we sold an aggregate of 983,184 shares of Common Stock pursuant to the Sale Agreement for aggregate gross proceeds of $5.7 million. From January 1, 2023 through March 24, 2023, we did not sell any shares. Subject to any limitations on aggregate amounts as a result of the value of our Common Stock owned by non-affiliates that are imposed by SEC regulations, we may continue to sell shares under the Sale Agreement and otherwise to use our shelf registration statement to raise additional funds from time to time. On August 16, 2021 we entered into the Hercules Loan Agreement with Hercules, with respect to a venture debt facility. Under the Hercules Loan Agreement, Hercules provided the Company with access to a term loan with an aggregate principal amount of up to $30 million, available in three tranches, subject to certain terms and conditions. The first tranche of $15 million was advanced to the Company on the date the Hercules Loan Agreement was executed. Upon the occurrence of specified milestones and continuing through December 31, 2022, we could receive a loan in the aggregate principal amount of up to $10 million. However, such milestones for such tranche and for the extension of the period of interest only payments to September 1, 2023 did not occur by December 31, 2022 and have expired. Additionally, upon the occurrence of specified milestones and continuing through September 30, 2023, we might be entitled to borrow a loan in the aggregate principal amount of up to $5 million. However, we do not expect that such milestones will occur by September 30, 2023. The Company is required to make interest only payments through March 1, 2023, and is required to repay the principal balance and interest in monthly installments through September 1, 2025. On February 22, 2023, we entered into a securities purchase agreement to issue and sell an aggregate of 30,608,163 shares of its common stock (or pre-funded warrants, and collectively, the “Securities”) at a price of $0.245 per share or $0.244 per pre-funded warrant, through a private investment in public equity, also referred to as PIPE, financing. The gross proceeds from this offering are expected to be approximately $7.5 million, before deducting issuance costs. The financing is expected to close in two parts. The first closing, which covers 5,975,918 Securities for gross proceeds of $1.5 million, occurred on February 27, 2023. The second closing for the remaining Securities, which is contingent upon approval of the issuance of the additional Securities by our stockholders in accordance with NYSE American rules, is expected to take place in the second quarter of 2023. We believe that our existing cash resources will be sufficient to meet our capital requirements and fund our operations for at least until the middle of 2024. In the future, in addition to the remaining funds under the PIPE, we will likely require or desire additional funds to support our operating expenses and capital requirements or for other purposes, such as acquisitions, and may seek to raise such additional funds through public or private equity or debt financings or collaborative agreements or from other sources, as we are doing now with the Sale Agreement and the Hercules Loan Agreement. If certain disruptions due to, for instance, the Russia–Ukraine military conflict, or the Israeli political instability persists and deepens, we could experience an inability to access additional capital, which could in the future negatively affect our capacity to support our operating expenses and capital requirements or to make investments for other purposes, such as acquisitions. We have no other commitments to obtain additional financing, other than with respect to the closing of the second part of the PIPE, and cannot assure you that additional financing will be available at all or, if available, that such financing would be obtainable on terms favorable to us and would not be dilutive. Our future liquidity and cash requirements will depend on numerous factors, including the introduction of new products as well as the ability to continue to maintain controls over our operating expenditures. Cash Flows The following table summarizes our cash flows for each of the periods presented: Year Ended December 31, 2022 2021 USD In thousands Net cash used in operating activities (29,092 ) (27,573 ) Net cash provided by (used in) investing activities (2,107 ) 16,173 Net cash provided by financing activities 292 37,280 Effect of exchange rate changes on cash and cash equivalents and restricted cash 106 (25 ) Net increase (decrease) in cash and cash equivalents (30,801 ) 25,855 75 Operating Activities During the year ended December 31, 2022, operating activities used $29.1 million of net cash, primarily due to a net loss of $28.3 million and by net cash used by changes in our operating assets and liabilities of $4.4 million and non-cash charges of $3.7 million. Non-cash charges for the year ended December 31, 2022, mainly consisted of stock-based compensation expenses of $1.5 million and depreciation and amortization of $2.5 million. Net changes in our operating assets and liabilities for the year ended December 31, 2022, consisted primarily of a decrease in trade account payables of $2.0 million and a decrease in other account payables of $3.3 million, partially offset by a decrease in other current assets of $1.0 million. During the year ended December 31, 2021, operating activities used $27.6 million of net cash, primarily due to a net loss of $36.2 million and by net cash used by changes in our operating assets and liabilities of $3.2 million and non-cash charges of $5.6 million. Non-cash charges for the year ended December 31, 2021 mainly consisted of stock-based compensation expenses of $3.2 million and depreciation and amortization of $2.6 million, partially offset by revaluation of contingent liabilities expenses of $0.5 million. Net changes in our operating assets and liabilities for the year ended December 31, 2021 consisted primarily of an increase in trade account payables of $0.4 million, and an increase in other account payables of $2.7 million. Investing Activities During the year ended December 31, 2022, investing activities used in net cash of $2.1 million, mainly consisting of investment in short-term deposits of $13.5 million, partially offset by proceeds from withdrawal of short-term deposits of $11.5 million. During the year ended December 31, 2021, investing activities provided net cash of $16.2 million, mainly consisting of proceeds from withdrawal of short-term deposits of $19.8 million, partially offset by purchases of property and equipment of $3.7 million, primarily laboratory equipment and leasehold improvements. We have invested, and plan to continue to invest, our existing cash in short-term investments in accordance with our investment policy. These investments may include money market funds and investment securities consisting of U.S. Treasury notes, and high quality, marketable debt instruments of corporations and government sponsored enterprises. We use foreign exchange contracts (mainly option and forward contracts) to hedge balance sheet items from currency exposure. These foreign exchange contracts are not designated as hedging instruments for accounting purposes. In connection with these foreign exchange contracts, we recognize gains or losses that offset the revaluation of the balance sheet items also recorded under financial expenses, net. As of December 31, 2022, we had outstanding foreign exchange contracts in the amount of approximately $4.5 million with a fair value liability of $55,000. As of December 31, 2021, we had outstanding foreign exchange contracts in the amount of approximately $4.2 million, with a fair value asset of $62,000. Financing Activities During the year ended December 31, 2022, financing activities provided net cash of $0.3 million, mainly consisting of $0.3 million due to issuances of Common Stock under the Sale Agreement. During the year ended December 31, 2021, financing activities provided net cash of $37.3 million, consisting of $5.2 million due to issuance of Common Stock under the Sale Agreement, $17.7 million due to issuances of Common Stock under a registered direct offering, as described below, as well as investments by Maruho and the CF Foundation, $14.2 million proceeds from long-term debt and related to the Hercules Loan Agreement and $0.1 million from exercise of stock options. Contractual Obligations, Commitments and Contingencies Our contractual obligations and commitments relate primarily to our Hercules Loan Agreement, operating leases and non-cancelable purchase obligations under agreements with various research and development organizations and suppliers in the ordinary course of business. In September 2020, we entered into a lease agreement for new office and laboratory space in Ness Ziona, Israel. See note 8, “Leases” and note 12, “Long term Debt,” to our financial statements for further information. In the normal course of business, we enter into contracts and agreements that contain a variety of representations and warranties and provide for general indemnifications. Our exposure under these agreements is unknown because it involves claims that may be made against us in the future but have not yet been made. To date, we have not paid any claims or been required to defend any action related to our indemnification obligations. However, we may record charges in the future as a result of these indemnification obligations. In accordance with our certificate of incorporation and bylaws, as well as contractual indemnification agreements, we have potential indemnification obligations to our officers and directors for specified events or occurrences, subject to some limits, while they are serving at our request in such capacities. There have been no claims to date, and we have director and officer insurance that may enable us to recover a portion of any amounts paid for future potential claims. 76 Government Grants and Related Royalties The Government of Israel, through the IIA, encourages research and development projects by providing grants. We may receive grants from the IIA at the rates that range from 20% to 50% of the research and development expenses, as prescribed by the research committee of the IIA. Through December 31, 2022, we had received an aggregate of $6.9 million in the form of grants from the IIA. BiomX Ltd was formed as an incubator company as part of the FutuRx incubator, and, until 2017, the majority of its funding was from IIA grants and funding by the incubator, which is supported by the IIA. We continued to apply for and receive IIA grants after we left the incubator. The requirements and restrictions for such grants are found in the Research Law. Under the Research Law, royalties of 3% to 3.5% on the revenue derived from sales of products or services developed in whole or in part using these IIA grants are payable to the Israeli government. We developed both of our platform technologies, at least in part, with funds from these grants, and, accordingly, we would be obligated to pay these royalties on sales of any of our product candidates that achieve regulatory approval. Below is a description of our obligations in connection with the grants received from the IIA under the Research Law: Local Manufacturing Obligation As long as the manufacturing of our product candidates takes place in Israel and no technology funded with IIA grants is sold or out licensed to a non-Israeli entity, the maximum aggregate royalties paid generally would not exceed 100% of the grants made to us, plus annual interest equal to the 12-month LIBOR rate applicable to U.S. dollar deposits, as published on the first business day of each calendar year. Under the terms of the Research Law, the products may be manufactured outside of Israel by us or by another entity only if prior approval is received from the IIA (such approval is not required for the transfer of up to 10% of the manufacturing capacity in the aggregate, in which case a notice must be provided to the IIA and not be objected to by the IIA within 30 days of such notice). Know-How Transfer Limitation The Research Law restricts the ability to transfer know-how funded by the IIA outside of Israel. Transfer of IIA funded know-how outside of Israel requires prior approval of the IIA and may be subject to payments to the IIA, calculated according to formulae provided under the Research Law. The redemption fee is subject to a cap of six times the total amount of the IIA grants, plus interest accrued thereon (i.e. the total liability to the IIA, including accrued interest, multiplied by six). If we wish to transfer IIA funded know-how, the terms for approval will be determined according to the nature of the transaction and the consideration paid to us in connection with such transfer. Approval of transfer of IIA funded know-how to another Israeli company may be granted only if the recipient abides by the provisions of the Research Law and related regulations, including the restrictions on the transfer of know-how and manufacturing rights outside of Israel. Change of Control Any non-Israeli citizen, resident or entity that, among other things, (i) becomes a holder of 5% or more of our share capital or voting rights, (ii) is entitled to appoint our directors or our chief executive officer or (iii) serves as one of our directors or as our chief executive officer (including holders of 25% or more of the voting power, equity or the right to nominate directors in such direct holder, if applicable) is required to notify the IIA and undertake to comply with the rules and regulations applicable to the grant programs of the IIA, including the restrictions on transfer described above. Approval to manufacture products outside of Israel or consent to the transfer of IIA funded know-how, if requested, is within the discretion of the IIA. Furthermore, the IIA may impose certain conditions on any arrangement under which it permits us to transfer IIA funded know-how or manufacturing out of Israel. The consideration available to our shareholders in a future transaction involving the transfer outside of Israel of know-how developed with IIA funding (such as a merger or similar transaction) may be reduced by any amounts that we are required to pay to the IIA. As of December 31, 2022, no sales were generated and the balance of the principal and interest in respect of our commitments for future payments to the IIA totaled approximately $6.6 million. As part of funding our current and planned product development activities, we have submitted follow-up grant applications for new grants. 77 Outlook We expect our expenses to remain substantially in the same level in connection with our ongoing activities. Our expenses will remain substantial and may also increase as we: ● continue the development of our product candidates; ● complete IND-enabling activities and prepare to initiate clinical trials for our product candidates; ● initiate additional clinical trials and preclinical studies for product candidates in our pipeline; ● seek to identify and develop or in-license or acquire additional product candidates and technologies; ● seek regulatory approvals for our product candidates that successfully complete clinical trials, if any; ● establish a sales, marketing and distribution infrastructure to commercialize any product candidates for which we may obtain regulatory approval; ● hire and retain additional personnel, such as clinical, quality control, commercial and scientific personnel; and ● expand our infrastructure and facilities to accommodate our growing employee base, including adding equipment and physical infrastructure to support our research and development. We believe that our existing cash and cash equivalents will enable us to fund our operating expenses and capital expenditure requirements until at least the middle of 2024. We have based these estimates on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect. If we receive regulatory approval for our product candidates, we expect to incur significant commercialization expenses related to product manufacturing, sales, marketing and distribution, depending on where we choose to commercialize. Until such time, if ever, that we can generate product revenue sufficient to achieve profitability, we expect to finance our cash needs through public or private sales of our equity, including under the Sale Agreement or the second part of the PIPE, loans, including the second and/or third tranches under the Hercules Loan Agreement, milestone payments, possibly additional grants from the IIA or other government or non-profit institutions and other outside funding sources. Our ability to raise additional capital in the equity and debt markets is dependent on a number of factors including, but not limited to, market volatility resulting from the COVID-19 pandemic, armed conflicts such as in Ukraine or other disruptions, market demand for our securities, which itself is subject to a number of development and business risks and uncertainties, as well as the uncertainty that we would be able to raise such additional capital at a price or on terms that are favorable to the Company. To the extent that we raise additional capital through the sale of equity or convertible debt securities, our stockholders’ ownership interests may be materially diluted, and the terms of such securities could include liquidation or other preferences that adversely affect their rights as a common stockholder. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through government and other third-party funding, collaboration agreements, strategic alliances, licensing arrangements or marketing and distribution arrangements, 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 financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market products or product candidates that we would otherwise prefer to develop and market by ourselves. For more information regarding the risks related to our outlook, see “ Risk Factors — Risks Related to Our Business, Technology and Industry.” 78 Foreign Exchange Contracts We entered into forward and option contracts to hedge against the risk of overall changes in future cash flow from payments of salaries and related expenses, as well as other expenses denominated in NIS. As of December 31, 2022 and 2021, we had outstanding foreign exchange contracts in the nominal amount of approximately $4.5 million and $4.2 million, respectively. Critical Accounting Policies and Significant Judgments and Estimates Our consolidated financial statements are prepared in accordance with US GAAP. The preparation of our consolidated financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and the disclosure of contingent assets and liabilities in our financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are described in more detail in Note 2 to our consolidated financial statements, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our consolidated financial statements. 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 applicable personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of 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 the consolidated financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of these estimates with the service providers and make adjustments, if necessary. Examples of estimated accrued research and development expenses include fees paid to: ● vendors in connection with preclinical development activities; ● CROs and investigative sites in connection with preclinical and clinical trials; and ● subcontractors in connection with the manufacturing of materials for preclinical and clinical trials. We measure the expense recognized based on our estimates of the services received and efforts expended pursuant to quotes and contracts with multiple CROs and subcontractors that supply, conduct and manage preclinical studies, human clinical studies and clinical trials on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. 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. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of certain milestones. 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 the estimate, we adjust the accrual or the amount of prepaid expenses 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 changes in estimates that increase or decrease amounts recognized in any particular period. To date, there have not been any material adjustments to our prior estimates of accrued research and development expenses. Stock-Based Compensation We apply ASC 718-10, “Stock-Based Payment,” which requires the measurement and recognition of compensation expenses for all stock-based payment awards made to employees and directors, including employee stock options under our stock plans based on estimated fair values. ASC 718-10 requires that we estimate the fair value of equity-based payment awards on the date of grant using an option-pricing model. The fair value of the award is recognized as an expense over the requisite service periods in our Consolidated Statements of Operations. We recognize stock-based award forfeitures as they occur, rather than estimate by applying a forfeiture rate. 79 We recognize compensation expenses for the fair value of non-employee awards over the requisite service period of each award. We estimate the fair value of stock options granted as equity awards using a Black-Scholes options pricing model. The option-pricing model requires a number of assumptions, of which the most significant are share price, expected volatility and the expected option term (the time from the grant date until the options are exercised or expire). We determine the fair value per share of the underlying stock by taking into consideration our most recent sales of stock. BiomX Ltd. has historically been a private company and lacks company-specific historical and implied volatility information of its stock. We used an average historical stock price volatility based on a combined weighted average of our historical average volatility and that of a selected peer group of comparable public companies within the biotechnology and pharmaceutical industry that were deemed to be representative of future stock price trends as we do not have a sufficient historical trading history of our Common Stock. We will continue to apply this process until a sufficient amount of historical information regarding the volatility of our stock price becomes available. We have historically not paid dividends and has no foreseeable plans to issue dividends. The risk-free interest rate is based on the yield from governmental zero-coupon bonds with an equivalent term. The expected option term is calculated for options granted to employees and directors using the “simplified” method. Grants to non-employees are based on the contractual term. Changes in the determination of each of the inputs can affect the fair value of the options granted and the results of our operations. Intangible assets In-process research and development acquired in a business combination were recognized at fair value as of the acquisition date and subsequently accounted for as indefinite-lived intangible assets until completion or abandonment of the associated research and development efforts. We accounted for the acquisition of RondinX Ltd. using the acquisition method of accounting, which required us to estimate the fair values of the assets acquired and liabilities assumed. This included acquired in-process research and development and contingent consideration. Adjustments to the fair value of contingent consideration are recorded in earnings. On January 1, 2020, the in-process R&D efforts were completed. The Company had determined the useful life of the R&D assets for three years and began amortizing these assets accordingly in the financial statements. As of December 31, 2022, the intangible asset was fully amortized. We review these intangible assets at least annually for impairment, or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Emerging Growth Company Status We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. We may take advantage of these exemptions until we are no longer an emerging growth company. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies. We may take advantage of these exemptions up until the last day of the fiscal year following the fifth anniversary of our first registration statement filed under the Securities Act, or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company if we have more than $1.235 billion in annual revenue, we have more than $700.0 million in market value of our shares held by non-affiliates or we issue more than $1.0 billion of non-convertible debt securities over a three-year period. We shall cease to be an emerging growth company commencing on January 1, 2024. 80 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a smaller reporting company, we are not required to make disclosures under this Item. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Our financial statements and the notes thereto begin on page F-1 of this Annual Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.