Forward-Looking Statements
This Quarterly Report on Form 10-Q (including the section regarding Management’s Discussion and Analysis of Financial Condition and Results of Operations) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other federal securities laws, regarding our business, clinical trials, financial condition, expenditures, results of operations and prospects. Words such as “expects,” “anticipates,” “intends,” “plans,” “planned expenditures,” “believes,” “seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not deemed to represent an all-inclusive means of identifying forward-looking statements as denoted in this Quarterly Report on Form 10-Q. Additionally, statements concerning future matters are forward-looking statements.
Although forward-looking statements in this Quarterly
Report on Form 10-Q reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed under the heading “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended August 31, 2012, or our Annual Report, as filed with the Securities and Exchange Commission, or the SEC, on December 12, 2012, as amended on December 21, 2012, as well as those discussed elsewhere in our Annual Report and in this Quarterly
Report on Form 10-Q. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly
Report on Form 10-Q. Except as required by law, we undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this Quarterly Report on Form 10-Q. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this Quarterly
Report on Form 10-Q which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.
Overview of Operations
We are a pharmaceutical company currently engaged in the research and development of innovative pharmaceutical solutions, including an orally ingestible insulin capsule to be used for the treatment of individuals with diabetes, and the use of orally ingestible capsules or pills for delivery of other polypeptides.
Recent business developments and financing activities
In September 2012, we entered into a Master Services Agreement with Medpace, Inc., or Medpace, to retain Medpace as a contract research organization, or CRO, for our upcoming Phase 2 clinical trial for an oral insulin capsule that was expected to start in the first calendar quarter of 2013 in the United States. As consideration for its services, we will pay Medpace a total amount of approximately $3,500,000 during the term of the engagement, based on the achievement of certain milestones. In March 2013, due to a request from the U.S. Food and Drug Administration, or FDA, for us to perform a sub study before proceeding with the Phase 2 clinical trial, we instructed Medpace to temporarily cease all work under the Master Services Agreement. We intend to resume the clinical trial at such time as we receive approval from the FDA.
In October 2012, we entered into a Securities Purchase Agreement with D.N.A Biomedical Solutions Ltd., or D.N.A, an Israeli company listed on the Tel Aviv Stock Exchange, according to which we issued to D.N.A 199,172 shares of our common stock in consideration for an option to purchase up to 21,637,611 ordinary shares of D.N.A, or the D.N.A Option. We had previously acquired 8,404,667 ordinary shares of D.N.A issued in March 2011. In February 2013, we exercised the D.N.A Option. In addition, in February and March 2013 we sold a total amount of 7,000,000 of our D.N.A ordinary shares, of which 5,250,000 ordinary shares were issued to us in March 2011 and 1,750,000 ordinary shares were issued to us in February 2013 upon our exercise of the D.N.A Option. The ordinary shares were sold in private transactions for a total of NIS 840,000 (or approximately $226,670, based on the exchange rate between the NIS and the U.S. dollar, as quoted by the Bank of Israel on the dates of sale), before brokerage fees. The selling price per share in both transactions was below market price. As of July 16, 2013, we own approximately 11.1% of D.N.A’s outstanding ordinary shares.
Between September and November 2012, we completed private placements pursuant to which we sold to certain investors an aggregate of 335,477 “units” at a purchase price of $4.44 per unit for total consideration of $1,489,518. Each unit consisted of one share of common stock and a five-year warrant to purchase 0.50 of a share of common stock at an exercise price of $6.00 per share. In connection with such private placements, we paid cash compensation of $12,885 as a finder’s fee. We also issued 1,127 shares of common stock and warrants to purchase 564 shares of common stock as a finder’s fee to a third-party in connection with the private placements and issued 12,745 shares of common stock and warrants to purchase 6,373 shares of common stock as a finder’s fee to one of our directors, Leonard Sank.
In November 2012, we entered into a letter agreement, or the Agreement, with Regals Fund LP, or Regals, in connection with (1) the warrant originally issued in January 2011, as amended in August 2012 and November 2012, to purchase up to 290,459 shares of our common stock, (2) the warrant dated August 28, 2012, to purchase up to 112,613 shares of our common stock and (3) the warrant dated November 5, 2012, to purchase up to 16,892 shares of our common stock , or together, the Warrants. Pursuant to the Agreement, we and Regals agreed to amend the Warrants to provide that the anti-dilution protection of the Warrants shall be deleted in its entirety. In addition, as to the warrants issued in August and November 2012, the parties agreed to reduce the exercise price to $3.7656 per share, the current exercise price per share of the warrants originally issued in January 2011. At such time, we also issued to Regals a warrant, or the New Warrant, pursuant to which Regals shall have the right to purchase up to 137,311 shares of our common stock over a period of four years at an exercise price of $7.20 per share.
In connection with the New Warrant, Nadav Kidron, our President, Chief Executive Officer and a director, in his personal capacity as one of our shareholders, agreed that following the execution and delivery of the Agreement, in the event that an adjustment pursuant to the anti-dilution protection of the Warrants (had they not been amended by the Agreement) would have been triggered and the number of shares of our common stock that Regals would have been able to purchase under the Warrants would have increased by an aggregate number in excess of 137,311 common shares, then Regals shall have the right to purchase from Mr. Kidron such number of shares of our common stock owned by Mr. Kidron, up to a maximum of 112,690 shares of our common stock. This right shall survive until the termination of the Warrants.
In December 2012 and March 2013, we were issued patents by the South African and Japanese Patent Offices, respectively, which cover part of our technology with respect to the oral delivery of peptides.
In December 2012, we filed an Investigational New Drug, or IND, application with the FDA to begin a Phase 2 clinical trial of our orally ingested insulin capsule, in order to evaluate the safety, tolerability and efficacy of our oral insulin capsule on type 2 diabetic volunteers. We have been communicating with the FDA regarding such Phase 2b IND application, and, according to the FDA’s request, are conducting a Phase 2a sub study before we may proceed with the Phase 2b clinical trial. We expect to begin the Phase 2b clinical trial in the second quarter of 2014.
In January 2013, we began a clinical trial for our oral exenatide capsule on healthy volunteers and type 2 diabetic patients. We expect to receive results from such trial in the third quarter of calendar year 2013.
In January 2013, we effected a reverse stock split of our shares of common stock at a ratio of one-for-twelve.
In February 2013, we commenced a first human clinical trial on healthy volunteers with our oral insulin capsule delivered in combination with our oral exenatide capsule.
In February 2013, our common stock began trading on The Nasdaq Capital Market under the symbol ORMP.
In April 2013, we filed a new IND application with the FDA for the above discussed sub study on our oral insulin capsule.
In May 2013, the FDA cleared the Phase 2a sub study IND application, which is an in-patient study with 30 individuals that began in July 2013, and is expected to be completed in the third quarter of 2013.
In July 2013, we entered into a Placement Agency Agreement with Aegis Capital Corp. as representative of the several placement agents, or the Placement Agents, pursuant to which the Placement Agents agreed to use their reasonable best efforts to arrange for the sale of up to 658,144 shares of our common stock. In connection therewith, on July 10, 2013, we also entered into a Securities Purchase Agreement, pursuant to which we agreed to sell an aggregate of 658,144 shares of common stock, at a price of $7.00 per share, to various investors in a registered direct offering, or the Offering. We had received all funds and issued all shares of common stock in connection with the Offering as of July 17, 2013. Our aggregate net proceeds from the offering are approximately $4,200,000, after deducting Placement Agents' commissions and offering expenses.
Results of Operations
Comparison of nine and three month periods ended May 31, 2013 and May 31, 2012
The following
table
summarizes certain statements of operations data for the Company for the nine and three month periods ended May 31, 2013 and May 31, 2012:
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Research and development expenses
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$
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1,977,258
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$
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1,144,415
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$
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835,636
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$
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249,752
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General and administrative expenses
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1,349,081
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802,273
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499,034
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290,668
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Impairment of available for sale securities
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-
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43,111
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-
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-
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Financial (income) expense, net
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114,629
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24,460
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(78,329
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)
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9,945
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Net loss for the period
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$
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3,440,968
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$
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2,014,259
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$
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1,256,341
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$
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550,365
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Research and development expenses
Research and development expenses include costs directly attributable to the conduct of research and development programs, including the cost of salaries, payroll taxes, employee benefits, costs of registered patents materials, supplies, the cost of services provided by outside contractors, including services related to our clinical trials, clinical trial expenses, the full cost of manufacturing drug for use in research, preclinical development. All costs associated with research and development are expensed as incurred.
Clinical trial costs are a significant component of research and development expenses and include costs associated with third-party contractors. We outsource a substantial portion of our clinical trial activities, utilizing external entities such as CROs, independent clinical investigators, and other third-party service providers to assist us with the execution of our clinical studies.
Clinical activities which relate principally to clinical sites and other administrative functions to manage our clinical trials are performed primarily by CROs. CROs typically perform most of the start-up activities for our trials, including document preparation, site identification, screening and preparation, pre-study visits, training, and program management.
Clinical trial and pre-clinical trial expenses include regulatory and scientific consultants’ compensation and fees, research expenses, purchase of materials, cost of manufacturing of the oral insulin capsules, payments for patient recruitment and treatment, costs related to the maintenance of our registered patents, costs related to the filings of patent applications, as well as salaries and related expenses of research and development staff.
During the nine months ended May 31, 2013, research and development expenses totaled $1,977,258, compared to $1,144,415 for the nine months ended May 31, 2012. The increase is mainly attributable to the preparation for the FDA approved Phase 2a and Phase 2b clinical trials as well as to the increase in stock based compensation costs, which during the nine months ended May 31, 2013 totaled $301,804, as compared to $53,111 during the nine months ended May 31, 2012.
During the three months ended May 31, 2013, research and development expenses totaled $835,636, compared to $249,752 for the three months ended May 31, 2012. The increase in research and development expenses during the three months ended May 31, 2013, as compared to the three months ended May 31, 2012, is attributable to the same reasons discussed above.
Government grants
In May 2012, Oramed Ltd. was granted a third grant amounting to a total net amount of NIS 595,000 (approximately $148,000) from the Office of the Chief Scientist of the Ministry of Industry, Trade and Labor of Israel, or OCS, which was designated for research and development expenses for the period of September 2012 to December 2012. In May 2013, Oramed Ltd. was granted a fourth grant amounting to a total net amount of NIS 975,000 (approximately $265,000) from the OCS, which was designated for research and development expenses for the period of January 2013 to December 2013. We used, and are using with respect to the May 2013 grant, the funds to support further research and development and clinical studies of our oral insulin capsule and oral GLP-1 analog.
In the nine and three months ended May 31, 2013, we recognized research and development grants in an amount of $89,319 and $79,261, respectively, and in the nine and three months ended May 31, 2012, we recognized research and development grants in an amount of $263,463 and $206,425, respectively. As of May 31, 2013, we had no contingent liabilities to the OCS.
Grants from the Bio-Jerusalem fund
We are committed to pay royalties to the Bio-Jerusalem fund on proceeds from future sales at a rate of 4% and up to 100% of the amount of the grant received by the Company (Israeli CPI linked) in the total amount of $65,053. As of May 31, 2013, we had not yet realized any revenues since inception and thus did not incur any royalty liability to the Bio-Jerusalem fund.
For the nine month periods ended May 31, 2013 and May 31, 2012, we received $12,320 and $0, respectively, from the Bio-Jerusalem fund.
General and administrative expenses
General and administrative expenses include the salaries and related expenses of our management, consulting costs, legal and professional fees, traveling, business development costs, insurance expenses and other general costs.
For the nine months ended May 31, 2013, general and administrative expenses totaled $1,349,081 compared to $802,273 for the nine months ended May 31, 2012. The increase in costs incurred related to general and administrative activities during the nine months ended May 31, 2013, reflects an increase in stock based compensation costs, arising from options granted to employees and consultants, of $224,619, as well as an increase in legal fees and consulting expenses. During the nine months ended May 31, 2013, as part of our general and administrative expenses, we incurred $325,707 related to stock options granted to employees and consultants, as compared to $101,088 during the nine months ended May 31, 2012.
For the three months ended May 31, 2013, general and administrative expenses totaled $499,034 compared to $290,668 for
the three months ended May 31, 2012. The increase in general and administrative expenses during the three months ended May 31, 2013, as compared to the three months ended May 31, 2012, is mainly attributable to an increase in legal fees and accounting expenses.
Financial income/expense, net
Financial expenses for the nine months ended May 31, 2013 includes an expense of $114,629 resulting mainly from the removal of the anti-dilution protections from warrant liabilities and the grant of new warrants.
In the nine months ended May 31, 2013, we incurred income from exchange rate differences resulting from the decrease in the exchange rate between the NIS and the dollar during the period and its effect on our NIS linked bank deposits, as well as interest income on available cash and cash equivalents that were partially offset by bank charges. In the nine months ended May 31, 2013, we received a higher amount of interest income on available cash and cash equivalents, as compared to the nine months ended May 31, 2012, which was offset by bank charges.
During the three months ended May 31, 2013, financial income totaled $78,329, compared to financial expenses of $9,945 for the three months ended May 31, 2012. Financial income during the three months ended May 31, 2013, as compared to the three months ended May 31, 2012, is attributable to the same reasons discussed above.
Other comprehensive income
Subsequent increase in the fair value of available for sale securities previously written down as impaired for the nine months ended May 31, 2013 of $84,010 resulted from the increase in fair value of our D.N.A ordinary shares, at the amount of the impairment that was recognized in previous periods. Reclassification adjustment for gains included in net loss for the nine months ended May 31, 2013 of $69,178, resulted from the sale of 7,000,000 of our D.N.A ordinary shares in February and March 2013. Unrealized gain on available for sale securities for the nine months ended May 31, 2013 of $117,092, resulted from the increase in fair value of our D.N.A ordinary shares.
Reclassification adjustment for gains included in net loss and unrealized gain on available for sale securities for the three months ended May 31, 2013, resulted from the same reasons discussed above.
Impairment of available for sale securities for the nine months ended May 31, 2012 of $43,111 resulted from the decrease in fair value of our D.N.A ordinary shares.
Liquidity and capital resources
From inception through May 31, 2013, we incurred losses in an aggregate amount of $21,332,745. We have financed our operations through the private placements of equity financing, raising a total of $16,595,571, net of transaction costs. We will seek to obtain additional financing through similar sources, or public offerings, in the future as needed. As of May 31, 2013, we had $1,104,897 of available cash, $2,323,947 of short term bank deposits and $803,372 of marketable securities. Marketable securities are presented at fair value and their realization is subject to certain limitations if sold through the market, and are exposed to market risk. There is no assurance that at the time of sale of the marketable securities the price per share will be the same or higher, nor that we will be able to sell all of the securities at once given the volume of securities we hold. We anticipate that we will require approximately $5.2 million to finance our activities during the 12 months following May 31, 2013.
In July 2013, we entered into a Placement Agency Agreement with Aegis Capital Corp. as representative of the several placement agents, or the Placement Agents, pursuant to which the Placement Agents agreed to use their reasonable best efforts to arrange for the sale of up to 658,144 shares of our common stock. In connection therewith, on July 10, 2013, we also entered into a Securities Purchase Agreement, pursuant to which we agreed to sell an aggregate of 658,144 shares of common stock, at a price of $7.00 per share, to various investors in a registered direct offering, or the Offering. We had received all funds and issued all shares of common stock in connection with the Offering as of July 17, 2013. Our aggregate net proceeds from the offering are approximately $4,200,000, after deducting Placement Agents' commissions and offering expenses.
Management is in the process of evaluating various additional financing alternatives, as we will need to finance future research and development activities and general and administrative expenses through fund raising in the public or private equity markets. Although there is no assurance that we will be successful with those initiatives, management believes that it will be able to secure the necessary financing as a result of ongoing financing discussions with third party investors and existing stockholders as well as through additional funding from the OCS.
During the nine month period ended May 31, 2013, cash and cash equivalents decreased to $1,104,897 from the $4,430,740 reported as of August 31, 2012, which is due to the reasons described below.
Operating activities used cash of $3,115,165 in the nine months ended May 31, 2013, as compared to $1,959,262 used in the nine months ended May 31, 2012. Cash used for operating activities in the nine months ended May 31, 2013 primarily consisted of net loss resulting from research and development and general and administrative expenses, partially offset by stock based compensation adjustments and exchange of warrants, while cash used by operating activities in the nine months ended May 31, 2012 primarily consisted of net loss resulting from research and development and general and administrative expenses.
During the nine month period ended May 31, 2013, of the $89,319 in OCS grants we recognized during such period, we received none towards our research and development expenses, while in the nine months ended May 31, 2012, we received $158,672 towards our research and development expenses. The amounts that were recognized but not received during the nine months ended May 31, 2013 are expected to be received from the OCS following the submission of periodic and final reports by Oramed Ltd., and their examination by the OCS. The OCS has supported our activity in the past three years.
Investing activities used cash of $1,643,828 in the nine months ended May 31, 2013, as compared to $1,745,762 that was provided in the nine months ended May 31, 2012. Cash used in investing activities in the nine months ended May 31, 2013 consisted primarily of acquisition of short-term bank deposits. Cash provided by investing activities in the nine months ended May 31, 2012 consisted primarily of proceeds from the sale of our investment in Entera Bio Ltd.
Financing activities provided cash of $1,450,936
in the nine months ended May 31, 2013, as compared to $0 for the nine months ended May 31, 2012. Cash provided by financing activities during the nine months ended May 31, 2013 consisted of proceeds from our issuance of common stock and warrants as further discussed above under “Overview of Operations—Recent business developments and financing activities”.
Off-balance sheet arrangements
As of May 31, 2013, we had no off balance sheet arrangements that have had or that we expect would be reasonably likely to have a future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Planned Expenditures
The estimated expenses referenced herein are in accordance with our business plan. Since our technology is still in the development stage, it can be expected that there will be changes in some budgetary items. Our planned expenditures for the twelve months beginning June 1, 2013 are as follows:
Category
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Amount
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Research and development, net of OCS funds
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$
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3,592,000
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General and administrative expenses
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1,628,000
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Total
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$
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5,220,000
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As indicated above, in December 2012 and April 2013, we filed IND applications with the FDA for our orally ingested insulin and we are conducting, or planning to conduct, further clinical studies with our exenatide capsule and the combination therapy, respectively, and others. Our ability to complete these expected activities is dependent on several major factors including the ability to attract sufficient financing on terms acceptable to us and receiving additional grants from the OCS.
ITEM
3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, we are not required to provide the information required by this Item.
ITEM
4 - CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of May 31, 2013. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the quarter ended May 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.