ORAMED PHARMACEUTICALS INC. - Quarter Report: 2017 February (Form 10-Q)

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended February 28, 2017

 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number: 000-50298

 

ORAMED PHARMACEUTICALS INC.

(Exact Name of Registrant as Specified in Its Charter)

 

+ 972-2-566-0001

(Registrant's Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes ☒    No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes ☒    No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes ☐    No ☒

 

As of April 4, 2017, there were 13,294,492 shares of the issuer's common stock, $0.012 par value per share, outstanding.

 

ORAMED PHARMACEUTICALS INC.

FORM 10-Q

TABLE OF CONTENTS

 

 

As used in this Quarterly Report on Form 10-Q, the terms "we," "us," "our" and the "Company" mean Oramed Pharmaceuticals Inc. and our wholly-owned Israeli subsidiary, Oramed Ltd., unless otherwise indicated.  All dollar amounts refer to U.S. Dollars unless otherwise indicated.

 

On February 28, 2017, the exchange rate between the New Israeli Shekel, or NIS, and the dollar, as quoted by the Bank of Israel, was NIS 3.659 to $1.00. Unless indicated otherwise by the context, statements in this Quarterly Report on Form 10-Q that provide the dollar equivalent of NIS amounts or provide the NIS equivalent of dollar amounts are based on such exchange rate.

 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1 - FINANCIAL STATEMENTS

 

 

ITEM 2 - 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 the condensed consolidated financial statements and the related notes included elsewhere herein and in our consolidated financial statements, accompanying notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in our Annual Report (as defined below).

 

Forward-Looking Statements

 

The statements contained in this Quarterly Report on Form 10-Q that are not historical facts are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. 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. We remind readers that forward-looking statements are merely predictions and therefore inherently subject to uncertainties and other factors and involve known and unknown risks that could cause the actual results, performance, levels of activity, or our achievements, or industry results, to be materially different from any future results, performance, levels of activity, or our achievements, or industry results, expressed or implied by such forward-looking statements. Such forward-looking statements include, among other statements, statements regarding the following:

 

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the expected development and potential benefits from our products in treating diabetes;

 

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future milestones, conditions and royalties under the license agreement with Hefei Tianhui Incubation of Technologies Co. Ltd., or HTIT;

 

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our research and development plans, including pre-clinical and clinical trials plans, the timing of conclusion of trials and trials' results;

 

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our expectation that in the upcoming years our research and development expenses, net, will continue to be our major expenditure;

 

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our expectations regarding our short- and long-term capital requirements;

 

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our outlook for the coming months and future periods, including but not limited to our expectations regarding future revenue and expenses; and

 

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information with respect to any other plans and strategies for our business.

 

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, 2016, or our Annual Report, as filed with the Securities and Exchange Commission, or the SEC, on November 25, 2016, 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 attempts 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 oral 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

 

Product Candidates

 

We completed a Phase IIb clinical trial on 180 type 2 diabetic patients that was conducted in 33 sites in the United States. This double-blind, randomized, 28-day clinical trial was conducted under an Investigational New Drug application, or IND, with the U.S. Food and Drug Administration, or FDA. The clinical trial, designed to assess the safety and efficacy of our oral insulin capsule, or ORMD-0801, investigated ORMD-0801 over a longer treatment period and had statistical power to give us greater insight into the drug's efficacy. The trial was initiated in June 2015, was completed during April 2016 and indicated a statistically significant lowering of blood glucose levels relative to placebo across several endpoints. The trial successfully met its primary and most of its secondary and exploratory endpoints for safety and efficacy.

 

In February 2017, we completed a Phase IIa dose finding clinical trial which was initiated in October 2016. This randomized, double-blind trial was conducted on 32 type 2 adult diabetic patients in order to define the optimal dosing of ORMD-0801 moving forward. We anticipate receiving the clinical study report in the second quarter of calendar year 2017.

 

In March 2017, we initiated a six month toxicology study for use of our oral insulin capsule for a longer period than previously performed, as preparation for our future Phase III study. We anticipate receiving the results in the third quarter of calendar year 2017.

 

In September 2013, we submitted a pre-IND package to the FDA for ORMD-0901, our oral exenatide capsule, for a Phase II clinical trial on healthy volunteers and type 2 diabetic patients. In August 2015, we began a non-FDA approved clinical trial on type 2 diabetic patients. The trial was completed during the second quarter of calendar year 2016 and indicated positive results as it showed ORMD-0901 to be safe and well tolerated and also demonstrated encouraging efficacy data. We completed a toxicology study in March 2017 and anticipate receiving the results during the second quarter of calendar year 2017 and expect to file an IND and move directly into a pharmacokinetics study followed by a large Phase II trial in the United States.

 

The table below gives an overview of our product pipeline (calendar quarters):

 

 

Out-Licensed Technology

 

On November 30, 2015, we, our Israeli subsidiary and HTIT entered into a Technology License Agreement, and on December 21, 2015 these parties entered into an Amended and Restated Technology License Agreement that was further amended by these parties on June 3, 2016 and July 24, 2016, or the License Agreement. According to the License Agreement, we granted HTIT an exclusive commercialization license in the territory of the People's Republic of China, Macau and Hong Kong, or the Territory, related to our oral insulin capsule, ORMD-0801, or the Product. Pursuant to the License Agreement, HTIT will conduct, at its own expense, certain pre-commercialization and regulatory activities with respect to our technology and ORMD-0801 capsule, and will pay (i) royalties of 10% on net sales of the related commercialized products to be sold by HTIT in the Territory, or Royalties, and (ii) an aggregate of approximately $37.5 million, of which $3 million is payable immediately, $8 million will be paid subject to our entry into certain agreements with certain third parties, and $26.5 million will be payable upon achievement of certain milestones and conditions. In the event that we will not meet certain conditions, the Royalties rate may be reduced to a minimum of 8%. Following the final expiration of our patents covering the technology in the Territory in 2033, the Royalties rate may be reduced, under certain circumstances, to 5%. The royalty payment obligation shall apply during the period of time beginning upon the first commercial sale of the Product in the Territory, and ending upon the later of (i) the final expiration of the last-to-expire licensed patent in the Territory and (ii) 15 years after the first commercial sale of the Product in the Territory, or the Royalty Term. The License Agreement shall remain in effect until the expiration of the Royalty Term. The License Agreement contains customary termination provisions. The initial payment of $3 million was received in January 2016. Following achievement of certain milestones, the second and third milestone payments of $6.5 million and $4 million, respectively, were received in July 2016, and the fourth milestone payment of $4 million was received in October 2016.

 

On November 30, 2015, we also entered into a separate Stock Purchase Agreement with HTIT, or the SPA, , pursuant to which, in December 2015, we issued to HTIT 1,155,367 shares of our common stock for total consideration of $12 million.  In connection with the License Agreement and the SPA, we received a non-refundable payment of $500,000 as a no-shop fee.

Results of Operations

 

Comparison of six and three month periods ended February 28, 2017 and February 29, 2016

 

The following table summarizes certain statements of operations data of the Company for the six and three month periods ended February 28, 2017 and February 29, 2016 (in thousands of dollars except share and per share data):

 

 

Revenues

 

Revenues consist of proceeds related to the License Agreement that are recognized over the period from which we are entitled to each milestone payment through June 2023.

 

 

Revenues for the six month period ended February 28, 2017 increased by 877% to $1,221,000 from $125,000 for the six month period ended February 29, 2016.

 

Revenues for the three month period ended February 28, 2017 increased by 389% to $611,000 from $125,000 for the three month period ended February 29, 2016.

 

Cost of revenues

 

Cost of revenues consists of royalties related to the License Agreement that will be paid over the term of the License Agreement in accordance with the revenue recognition accounting policy and the Israeli Law for the Encouragement of Industrial Research and Development, 1984, as amended.

 

Cost of revenues for the six month period ended February 28, 2017 increased  to $187,000 from $4,000 for the six month period ended February 29, 2016. The increase is attributable to additional milestone payments received during the period in connection with the License Agreement.

 

No cost of revenues was recognized during the three month period ended February 28, 2017 compared to cost of revenues of $4,000 for the three month period ended February 29, 2016. The decrease is due to no additional milestone payments having been received during the three month period ended February 28, 2017.

 

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 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 drugs for use in research, and 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 contract research organizations, or 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 and exenatide capsules, payments for patient recruitment and treatment, as well as salaries and related expenses of research and development staff.

 

Research and development expenses for the six month period ended February 28, 2017 increased by 71% to $5,478,000, from $3,204,000 for the six month period ended February 29, 2016. The increase is mainly attributable to expenses related to process development and production of our capsules and the required ingredients, as well as progress in toxicology studies, and is partially offset by a decrease in clinical trials due to completion of our Phase IIb clinical trial. Stock-based compensation costs for the six month period ended February 28, 2017 totaled $308,000, as compared to $250,000 during the six month period ended February 29, 2016. The increase is mainly attributable to RSUs granted to employees in November 2016 and is partially offset by a decrease due to the progress in amortization of awards granted in prior periods.

 

Research and development expenses for the three month period ended February 28, 2017 increased by 140% to $3,125,000, from $1,303,000 for the three month period ended February 29, 2016. The increase is mainly attributable to expenses related to process development and production of our capsules and the required ingredients as well as to progress in toxicology studies and is partially offset by a decrease in clinical trials due to completion of our Phase IIb clinical trial. Stock-based compensation costs for the three month period ended February 28, 2017 totaled $172,000, as compared to $66,000 during the three month period ended February 29, 2016. The increase is mainly attributable to restricted stock units granted to employees in November 2016 and is partially offset by a decrease due to the progress in amortization of awards granted in prior periods.

 

Government grants

 

In the six month periods ended February 28, 2017 and February 29, 2016, we did not recognize any research and development grants. As of February 28, 2017, we incurred liabilities to pay royalties to the Israel Innovation Authority of the Israeli Ministry of Economy & Industry of $606,000.

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.

 

General and administrative expenses for the six month period ended February 28, 2017 increased by 3.2% to $1,319,000 from $1,278,000 for the six month period ended February 29, 2016. The increase in costs related to general and administrative activities during the six month period ended February 28, 2017 is mainly due to an increase in salaries and consulting expenses and is partially offset by a decrease in stock-based compensation costs. Stock-based compensation costs for the six month period ended February 28, 2017 totaled $185,000, as compared to $235,000 during the six month period ended February 29, 2016. The decrease is mainly attributable to the progress in amortization of awards granted in prior periods and is partially offset by an increase due to awards granted to directors and employees during the period.

 

General and administrative expenses for the three month period ended February 28, 2017 increased by 16.6% to $851,000 from $730,000 for the three month period ended February 29, 2016. The increase in costs related to general and administrative activities during the three month period ended February 28, 2017 is mainly attributable to an increase in stock-based compensation costs and consulting expenses. Stock-based compensation costs for the three month period ended February 28, 2017 totaled $163,000, as compared to $99,000 during the three month period ended February 29, 2016. The increase is mainly attributable to awards granted to directors and employees in the period and is partially offset by a decrease due to the progress in amortization of awards granted in prior periods.

 

Financial income, net

 

Net financial income increased by 124.8% from net income of $153,000 for the six month period ended February 29, 2016 to net income of $344,000 for the six month period ended February 28, 2017. The increase is mainly attributable  to an increase in income from bank deposits and held to maturity bonds as a result of the increase in cash and investment balances.

 

During the three month period ended February 28, 2017, net financial income increased by 93.6% to $182,000 from $94,000 for the three month period ended February 29, 2016.  This increase is mainly attributable to an increase in income from bank deposits and held to maturity bonds as a result of the increase in cash and investment balances.

 

Taxes on income

 

We had taxes on income of $400,000 for the six month period ended February 28, 2017 as compared to no taxes on income for the six month period ended February 29, 2016. The increase is due to withholding tax deducted from revenues received from the License Agreement, since according to the Company's estimations, the withholding tax is not expected to be utilized in the next five years. No taxes on income were recognized for the three month periods ended February 28, 2017 and February 29, 2016.

 

Other comprehensive income

 

Unrealized gains on available for sale securities for the six month period ended February 28, 2017 of $105,000, compared to losses of $328,000 for the six month period ended February 29, 2016, resulted from the increase in fair value of the ordinary shares of D.N.A Biomedical Solutions Ltd., or D.N.A, that we hold.

 

Unrealized gains on available for sale securities for the three month periods ended February 28, 2017 and February 29, 2016 of $168,000 and $78,000, respectively, resulted from the increase in fair value of the ordinary shares of D.N.A that we hold.

 

Liquidity and capital resources

 

From inception through February 28, 2017, we have incurred losses in an aggregate amount of $51,835,000. During that period we have financed our operations through several private placements of our common stock, as well as public offerings of our common stock, raising a total of $56,054,000, net of transaction costs. During that period, we also received cash consideration of $3,639,000 from the exercise of warrants and options. We will seek to obtain additional financing through similar sources in the future, as needed. As of February 28, 2017, we had $1,452,000 of available cash, $35,559,000 of short-term and long-term bank deposits and $4,630,000 of marketable securities.

 

Management continues to evaluate various financing alternatives for funding future research and development activities and general and administrative expenses through fundraising 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 future third party investments. Based on our current cash resources, including the investment and milestone payments by HTIT, and commitments, we believe we will be able to maintain our current planned development activities and the corresponding level of expenditures for at least the next 12 months and beyond.

 

As of February 28, 2017, our total current assets were $29,780,000 and our total current liabilities were $4,933,000. On February 28, 2017, we had a working capital surplus of $24,847,000 and an accumulated loss of $51,835,000. As of August 31, 2016, our total current assets were $31,230,000 and our total current liabilities were $3,621,000. On August 31, 2016, we had a working capital surplus of $27,609,000 and an accumulated loss of $46,016,000. The decrease in working capital from August 31, 2016 to February 28, 2017 was primarily due to the investment of a portion of the milestone payments received in accordance with the License Agreement in long-term marketable securities and due to the cash used in operating activities.

 

During the six month period ended February 28, 2017, cash and cash equivalents decreased to $1,452,000 from the $3,907,000 reported as of August 31, 2016, which is due to the reasons described below.

 

Operating activities used cash of $1,427,000 in the six month period ended February 28, 2017, as compared to $77,000 provided in the six month period ended February 29, 2016. Cash used in operating activities in the six month period ended February 28, 2017 primarily consisted of net loss resulting from research and development and general and administrative expenses, partially offset by changes in deferred revenues due to the License Agreement and changes in accounts payable and accrued expenses, while cash provided by operating activities in the six month period ended February 29, 2016 primarily consisted of deferred revenues and stock-based compensation amounts, partially offset by net loss resulting from research and development and general and administrative expenses.

 

Investing activities used cash of $1,349,000 in the six month period ended February 28, 2017, as compared to $11,942,000 used in the six month period ended February 29, 2016. Cash used in investing activities in the six month period ended February 28, 2017 consisted primarily of the purchase of marketable securities, while cash used in investing activities in the six month period ended February 29, 2016 consisted primarily of the purchase of short-term and long-term bank deposits, as well as the purchase of marketable securities.

 

Financing activities provided cash of $320,000 in the six month period ended February 28, 2017, as compared to $11,880,000 that were provided in the six month period ended February 29, 2016. Financing activities in the six month period ended February 28, 2017 consisted of proceeds from the exercise of options while financing activities in the six month period ended February 29, 2016 consisted of proceeds from our issuance of common stock and proceeds from exercise of warrants and options.

 

Off-balance sheet arrangements

 

As of February 28, 2017, 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.

 

Critical Accounting Policies

Our significant accounting policies are described in the notes to the consolidated financial statements as of August 31, 2016 included in our Annual Report.

 

Planned Expenditures

 

We invest heavily in research and development, and we expect that in the upcoming years our research and development expenses will continue to be our major operating expense.

 

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

There has been no significant change in our exposure to market risk during the three month period ended February 28, 2017. For a discussion of our exposure to market risk, refer to Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," contained in our Annual Report.

 

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 February 28, 2017. 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 February 28, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II – OTHER INFORMATION

 

ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

On February 1, 2017, we issued 2,500 shares of our common stock to Corporate Profile, LLC, or Corporate Profile, in payment of a portion of the consulting fee for investor relations services owed to Corporate Profile pursuant to a Letter Agreement and a Stock Purchase Agreement, dated May 18, 2016 between us and Corporate Profile. We issued these shares pursuant to an exemption from registration contained in Section 4(a)(2) of the Securities Act of 1933, as amended.

 

ITEM 6 - EXHIBITS

 

___________________

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

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