Pluri Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. We are a biotechnology company with an advanced cell-based technology platform. We have developed a unique three-dimensional, or 3D, technology platform for cell expansion with an industrial scale in-house GMP cell manufacturing facility. We are utilizing our technology in the field of regenerative medicine and food tech and plan to utilize it in other industries and verticals that have a need for our mass scale and cost-effective cell expansion platform. We use our advanced cell-based technology platform in the field of regenerative medicine to develop placenta-based cell therapy product candidates for the treatment of inflammatory, muscle injuries and hematologic conditions. Our PLX cells are adherent stromal cells that are expanded using our 3D platform. Our PLX cells can be administered to patients off-the-shelf, without blood or tissue matching or additional manipulation prior to administration. PLX cells are believed to release a range of therapeutic proteins in response to the patient’s condition. Our operations are focused on the research, development and manufacturing of cells and cell-based products, conducting clinical studies and the business development of cell therapeutics and cell-based technologies, such as our recent collaboration with Tnuva Food Industries – Agricultural Cooperative in Israel Ltd., through its fully owned subsidiary, Tnuva, to use our technology to establish a cultivated food platform. We expect to demonstrate a real-world impact and value from our cell-based technology platform, our current PLX pipeline and from other cell-based product candidates that may be developed based on our platform. Our business model for commercialization and revenue generation includes, but is not limited to, licensing deals, joint ventures, partnerships, joint development agreements and direct sale of our products. We are now completing a multinational Phase III clinical study in muscle recovery following surgery for hip fracture, with sites in the United States, Europe and Israel. In the last year, we have completed a Phase II clinical study in Acute Respiratory Distress Syndrome, or ARDS, associated with COVID-19 and a Phase I clinical study for incomplete recovery following bone marrow transplantation. Additional areas of focus for clinical development include an investigator-led Phase I/II Chronic Graft versus Host Disease, or cGVHD, study in Israel, and an Acute Radiation Syndrome, or ARS, program under the U.S. Food and Drug Administration, or FDA, animal rule. We believe that each of these indications represents a severe unmet medical need. We were incorporated in Nevada on May 11, 2001. Pluri Inc. has a wholly owned subsidiary, Pluri Biotech Ltd., or the Subsidiary, previously named Pluristem Ltd., which is incorporated under the laws of the State of Israel. In January 2020, the Subsidiary established a wholly owned subsidiary, Pluristem GmbH, which is incorporated under the laws of Germany. In January 2022, the Subsidiary established an additional subsidiary, Plurinuva Ltd., or Plurinuva, which is incorporated under the laws of Israel, which followed the execution of the collaboration agreement with Tnuva . On July 26, 2022, we completed our legal entity name change from Pluristem Therapeutics Inc. to Pluri Inc., by merging a wholly-owned subsidiary with and into the Company, with us being the surviving corporation. The name change reflects a broader strategy of leveraging our 3D cell expansion technology to develop innovative cell-based products that can be harnessed for a range of fields beyond medicine, providing solutions for various areas of life. Effective July 26, 2022, our Nasdaq ticker symbol was changed to “PLUR.” 36 RESULTS OF OPERATIONS – YEAR ENDED JUNE 30, 2022 COMPARED TO YEAR ENDED JUNE 30, 2021. Revenues Revenues for the year ended June 30, 2022 were $234,000, compared to no revenues for the year ended June 30, 2021. The revenues in the year ended June 30, 2022 were related to the revenue derived from our license agreement with Takeda and the sale of our PLX cells for research use. Research and Development, Net Research and development, net (costs less participation and grants by the IIA, Horizon 2020 and other parties) decreased by 19% from $30,066,000 for the year ended June 30, 2021, to $24,377,000 for the year ended June 30, 2022. The decrease is mainly attributed to a decrease in clinical study expenses following the termination of our CLI study, end of enrollment of our Phase II studies of ARDS associated with COVID-19, and end of enrollment in our Phase III hip study , as well as a decrease in share-based compensation expenses related to restricted share units, or RSUs, granted to employees and consultants. The decrease was partially offset by an increase in materials purchased to support our manufacturing plans, increased payroll expenses related to payroll adjustments and exchange rate fluctuations, and an increase in building lease costs following the extension of our lease contract. General and Administrative General and administrative expenses decreased by 15% from $20,557,000 for the year ended June 30, 2021, to $17,450,000 for the year ended June 30, 2022. The decrease is mainly attributed to a decrease in share-based compensation expenses related to market based vesting conditioned RSUs granted to our CEO and Chairman, partially offset by an increase in share-based compensation expenses related to the allocation of shares of Plurinuva to our CEO, CFO and Chairman pursuant to their employment or consulting agreement (see also notes 1e and 9b1 to the consolidated financial statements included elsewhere in this Annual Report) and increased payroll expenses related to new employees, payroll adjustments and exchange rate fluctuations. Total Financial Income, Net Financial income, net decreased from $758,000 for the year ended June 30, 2021 to $219,000 for the year ended June 30, 2022. This decrease is mainly attributable to an increase in interest expenses related to the EIB loan provided to us in June 2021 pursuant to the EIB Finance Agreement and losses from hedging transactions due to strength of the U.S Dollar against the Euro, partially offset by exchange rate income on lease liability due to the strength of the U.S Dollar against the NIS and exchange rates adjustments relating to the EIB loan. Net Loss for the Year Net loss decreased from $49,865,000 for the year ended June 30, 2021 to $41,374,000 for the year ended June 30, 2022. The decrease was mainly due to a decrease in research and development expenses , net, and a decrease in general and administrative expenses for the reasons mentioned above. We had a net loss attributed to our non-controlling interest in Plurinuva for the year ended June 30, 2022 of $132,000. 37 Loss per share for the year ended June 30, 2022 was $1.28, as compared to $1.77 loss per share for the year ended June 30, 2021. The change in the loss per share was mainly as a result of a decrease in the loss for the year, partially offset by an increase in our weighted average number of shares due to the issuance of additional shares during Fiscal Year 2022. The increase in weighted average common shares outstanding reflects the issuance of additional shares upon settlement of RSUs issued to directors, employees and consultants. Liquidity and Capital Resources As of June 30, 2022, our total current assets were $57,747,000 and our total current liabilities were $6,829,000. On June 30, 2022, we had a working capital surplus of $50,918,000 and an accumulated deficit of $371,263,000. As of June 30, 2021, our total current assets were $67,371,000 and our total current liabilities were $11,517,000. On June 30, 2021, we had a working capital surplus of $55,854,000 and an accumulated deficit of $330,021,000. Our cash and cash equivalents and restricted cash as of June 30, 2022, amounted to $10,779,000, which reflects a decrease of $21,059,000 from the $31,838,000 reported as of June 30, 2021. Our bank deposits as of June 30, 2022, amounted to $45,244,000 compared to $56,978,000 as of June 30, 2021. Our cash equivalents and restricted cash decreased in the year ended June 30, 2022 for the reasons presented below. Our cash used in operating activities was $36,501,000 during the year ended June 30, 2022, and $30,910,000 during the year ended June 30, 2021. Cash used in operating activities in the year ended June 30, 2022, and in the year ended on June 30, 2021 primarily consisted of payments to subcontractors, suppliers, and professional services providers related to our ongoing clinical studies and payments of salaries to our employees, offset by participation of the IIA, Horizon 2020 or other third parties. Cash provided by investing activities was $11,783,000 during the year ended June 30, 2022, as opposed to cash used for investing activities of $7,265,000 during the year ended June 30, 2021. Cash provided by investing activities in the year ended June 30, 2022 consisted primarily of the withdrawal of $23,269,000 of long-term deposits, partially offset by cash investment in short-term deposits of $11,206,000 and payments of $280,000 related to investments in property and equipment. Cash used for investing activities in the year ended June 30, 2021, consisted primarily of cash used for investment in long-term deposits of $10,953,000 and payments of $373,000 related to investments in property and equipment, partially offset by the withdrawal of $4,061,000 of short-term deposits. Financing activities provided cash in the amount of $7,500,000 during the year ended June 30, 2022, and $61,402,000 during the year ended June 30, 2021. The cash provided in the year ended June 30, 2022, from financing activities is related to net proceeds of $7,500,000 received from an investment by Tnuva in Plurinuva . The cash provided in the year ended June 30, 2021 from financing activities is related to: (1) net proceeds of $36,589,000 from our registered direct offering which closed in February 2021 and common share issuances made under the Open Market Sale Agreement SM , or the ATM Agreement, that we entered into with Jefferies LLC, or Jefferies, on July 16, 2020, (2) proceeds of $24,449,000 received from the EIB pursuant to the EIB Finance Agreement, and (3) net proceeds of $364,000 from the exercise of outstanding warrants. On July 16, 2020, we entered into the ATM Agreement with Jefferies, pursuant to which we may issue and sell shares of our common shares having an aggregate offering price of up to $75,000,000 from time to time through Jefferies. Upon entering into the ATM Agreement, we filed a new shelf registration statement on Form S-3, which was declared effective by the SEC on July 23, 2020. During the year ended June 30, 2021, we sold 1,045,097 of our common shares under the ATM Agreement at an average price of $8.50 per share for aggregate net proceeds of approximately $8,506,000, net of issuance expenses of $380,000. During the year ended June 30, 2022, we did not sell of our any common shares under the ATM Agreement. 38 In the year ended June 30, 2021, warrants to purchase up to 51,999 shares from our April 2019 firm commitment public offering were exercised by investors at an exercise price of $7.00 per share, resulting in the issuance of 51,999 common shares for net proceeds of approximately $364,000. During the year ended June 30, 2022, no warrants to purchase shares were exercised. On February 2, 2021, we entered into a securities purchase agreement with several institutional investors, or the Investors, pursuant to which we sold, in a registered direct offering, directly to the Investors, 4,761,905 common shares, for gross proceeds of $30,000,000. The aggregate net proceeds were approximately $28,077,000, net of issuance expenses of approximately $1,923,000. In April 2020, we and our subsidiaries, Pluristem Ltd. and Pluristem GmbH, executed the EIB Finance Agreement for funding of up to €50 million in the aggregate, payable in three tranches. The proceeds from the EIB Finance Agreement are intended to support our research and development in the European Union to further advance our regenerative cell therapy platform, and to bring the products in our pipeline to market. The proceeds from the EIB Finance Agreement are expected to be deployed in three tranches, subject to the achievement of certain clinical, regulatory and scaling up milestones. We do not expect to receive additional funds pursuant to the EIB Finance Agreement. During June 2021, we received the first tranche in the amount of €20 million pursuant to the EIB Finance Agreement. The amount received is due to be repaid on June 1, 2026 and bears annual interest of 4% to be paid together with the principal of the loan. As of June 30, 2022, the interest accrued was in the amount of €865,000. In addition to the interest payable to the EIB, the EIB is also entitled to royalty payments, pro-rated to the amount disbursed from the EIB loan, on our consolidated revenues beginning in the fiscal year 2024 up to and including its fiscal year 2030, in an amount equal to up to 2.3% of our consolidated revenues below $350 million, 1.2% of our consolidated revenues between $350 million and $500 million and 0.2% of our consolidated revenues exceeding $500 million. Non-dilutive grants During the year ended June 30, 2022, we did not receive any cash grants from the European Union research and development consortiums relating to the Horizon 2020 program, as opposed to approximately $239,000 received in cash during the year ended June 30, 2021. According to the IIA grant terms, we are required to pay royalties at a rate of 3% on sales of products and services derived from technology developed using this and other IIA grants until 100% of the dollar-linked grants amount plus interest are repaid. In the absence of such sales, no payment is required. During the year ended June 30, 2022, no royalties were paid to the IIA. Through June 30, 2022 , total grants obtained from the IIA aggregated to approximately $27,743,000 and total royalties paid and accrued amounted to $169,000. The IIA may impose certain conditions on any arrangement under which the IIA permits the Company to transfer technology or development out of Israel or outsource manufacturing out of Israel. While the grant is given to the Company over a certain period of time (usually a year), the requirements and restrictions under the Israeli Law for the Encouragement of Industrial Research and Development, 1984 continue and do not have a set expiration period, except for the royalties, which requirement to pay them expires after payment in full. In June 2020, we announced that we were selected as a member of the CRISPR-IL consortium, a group funded by the IIA. CRISPR-IL brings together the leading experts in life science and computer science from academia, medicine, and industry, to develop AI based end-to-end genome-editing solutions. CRISPR-IL is funded by the IIA with a total budget of approximately $10,000,000 of which, an amount of approximately $480,000 was a direct grant allocated to us, for an initial period of 18 months. During October 2021, we received an approval for an additional grant of approximately $583,000 from the IIA pursuant to the CRISPR-IL consortium program, for an additional period of eighteen months. The CRISPR-IL consortium program does not include any obligation to pay royalties. 39 As of June 30, 2022 and 2021, we received total grants of approximately $694,000 and $401,000 in cash from the IIA pursuant to the CRISPR-IL consortium program, respectively. In July 2017, we were awarded the Smart Money grant of approximately $229,000 from Israel’s Ministry of Economy. The Israeli government granted us budget resources to advance our product candidate towards marketing in China-Hong Kong markets. The Smart Money program ended on April 2022. As of June 30, 2022, we received total grants of approximately $179,000 in cash from Israel’s Ministry of Economy for the Smart Money program. In August 2016, our CLI program in the European Union was awarded a €7,600,000 non-royalty bearing grant. The grant is part of the European Union’s Horizon 2020 program. The Phase III study of PLX-PAD in CLI will be a collaborative project carried out by an international consortium led by the Berlin-Brandenburg Center for Regenerative Therapies together with the Company and with participation of additional third parties. The grant covered a significant portion of the CLI program costs. An amount of €1,900,000 is a direct grant allocated to us, and the Company also had cost savings resulting from grant amounts allocated to the other consortium members. In July 2017, the consortium amended the consortium agreement, pursuant to which the original grant allocation was amended such that we will receive an additional direct grant of €1,177,000. The additional direct grant was allocated to us from the total amount of the original grant. As of June 30, 2022, we received a total of €2,615,000 (approximately $2,946,000) and we expect to receive an additional €461,000 (approximately $479,000). In September 2017, our Phase III study of PLX-PAD cell therapy in the treatment of muscle injury following surgery for hip fracture was awarded a €7,400,000 grant, as part of the European Union’s Horizon 2020 program. This Phase III study was a collaborative project carried out by an international consortium led by Charité, together with us, and with participation of additional third parties. The grant covered a significant portion of the project costs. An amount of € 2,550,000 is a direct grant allocated to us for manufacturing and other costs, and we also expect to have a direct benefit from cost savings resulting from grant amounts allocated to the other consortium members. As of June 30, 2022, we received a total of €2,166,000 (approximately $2,540,000) and we expect to receive an additional €382,000 (approximately $397,000). In October 2017, the nTRACK, a collaborative project carried out by an international consortium led by Leitat was awarded a €6,800,000 non-royalty bearing grant. An amount of €500,000 is a direct grant allocated to us. We also expect to benefit from cost savings resulting from grant amounts allocated to the other consortium members. As of June 30, 2022, we received a total of €414,000 (approximately $473,000) and we expect to receive an additional €73,000 (approximately $76,000). Outlook We have accumulated a deficit of $371,263,000 since our inception in May 2001. We do not expect to generate any significant revenues from sales of products in the next twelve months. We expect to generate revenues, from the sale of licenses to use our technology or products, but in the short and medium terms will unlikely exceed our costs of operations. We may be required to obtain additional liquidity resources in order to support the commercialization of our products and technology and maintain our research and development and clinical study activities. We are continually looking for sources of funding, including non-diluting sources such as collaboration with other companies via licensing agreements, the IIA grants, the European Union grant and other research grants, and sales of our common shares. We believe that we have sufficient cash to fund our operations for at least the next twelve months. Application of Critical Accounting Policies and Estimates Our significant accounting policies are more fully described in Note 2 to our consolidated financial statements appearing in this Annual Report. We believe that the accounting policies below are critical for one to fully understand and evaluate our financial condition and results of operations. The discussion and analysis of our financial condition and results of operations is based on our financial statements, which we prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate such estimates and judgments, including those described in greater detail below. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. 40 Share-Based Compensation Share-based compensation is considered a critical accounting policy due to the significant expenses of RSUs which were granted to our employees, directors and consultants. In Fiscal Year 2022, we recorded share-based compensation expenses related to options, restricted shares and RSUs in the amount of $8,909,000. In accordance with ASC 718, “Compensation-Stock Compensation”, or ASC 718, RSUs granted to employees and directors are measured at their fair value on the grant date. All RSUs granted in fiscal years 2022 and 2021 were granted for no consideration; therefore, their fair value was equal to the share price at the date of grant unless the RSUs include a market-based condition in which case the fair value RSUs at the date of grant was calculated using the Monte Carlo model. The RSUs granted in Fiscal Year 2022 to non-employee consultants were measured at their fair value on the grant date in accordance with ASU No. 2018-07 - “Compensation—Share Compensation”. The fair value of shares of Plurinuva granted to CEO, CFO and Chairman (see details in Item 11 below) was calculated using the Monte Carlo model, and fair value of the options of Plurinuva granted to employees and officers were calculated using the Black Scholes model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in our consolidated statements of operations. We have graded vesting based on the accelerated method over the requisite service period of each of the awards. The expected pre-vesting forfeiture rate affects the number of the shares. Based on our historical experience, the pre-vesting forfeiture rate per grant is 16% for the shares granted to employees and 0% for the shares granted to our directors and officers and non-employee consultants. Research and Development Expenses, Net We expect our research and development expenses to remain our primary expense in the near future as we continue to develop our product candidates. Our research and development expenses consist primarily of clinical study expenses, consultant and subcontractor expenses, payroll and related expenses, lab material expenses, share-based compensation expenses, rent and maintenance expenses. The following table provides a breakdown of the related costs for fiscal years 2021 and 2022 (in thousands of dollars): Year ended June 30, 2022 2021 Payroll and related expenses $ 11,128 $ 10,563 Materials expenses 3,468 2,843 Clinical trials expenses 5,036 10,024 Depreciation expenses 964 1,252 Consultants and subcontractor expenses 1,013 2,411 Rent and maintenance expenses 1,781 1,369 Share-based compensation expenses 592 1,538 Other Research and development expenses 623 533 Total expenses 24,605 30,533 Less: Research and development participation grants (228 ) (467 ) Research and development expenses, net $ 24,377 $ 30,066 We invest heavily in research and development. Research and development expenses, net, were our major operating expenses, representing 59% of the total operating expenses for each of our fiscal years 2022 and 2021, respectively. We expect that in the upcoming years our research and development expenses, net, will continue to be our major operating expense. Item 7A. Quantitative and Qualitative Disclosures about Market Risk. Not applicable. 41