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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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 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.
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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, 2015, or our Annual Report, as filed with the Securities
and Exchange Commission, or the SEC, on November 25, 2015, 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
initiated a Phase IIb clinical trial on approximately 180 type 2 diabetic patients in approximately 30 sites in the United
States, beginning in June 2015. This double-blind, randomized, 28-day study clinical trial is 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 ORMD-0801, will investigate ORMD-0801 over a longer treatment period and will have statistical power to give us
greater insight into the drug’s efficacy. During April 2016, all follow-up visits of this study have been completed and
we expect to report top-line results during the second quarter of calendar year 2016.
We
are also conducting a glucose clamp study of our oral insulin capsule on type 2 diabetic volunteers that is performed at The University
of Texas Health Science Center at San Antonio and University Health System’s Texas Diabetes Institute. The glucose clamp
is a method for quantifying insulin absorption in order to measure a patient’s insulin sensitivity and how well a patient
metabolizes glucose. We anticipate completing the study in the third quarter of calendar year 2016.
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. We began pre-clinical studies in September 2014 and expect to begin
IND-enabling studies in the first quarter of calendar year 2017. We then intend to file an IND and move immediately and directly
into a large Phase II multi-center trial in the United States.
In
August 2015, we began a non-FDA approved clinical
trial on type 2 diabetic patients, and we anticipate it will be completed during the second quarter of calendar year 2016.
The
table below gives an overview of our product pipeline (calendar quarters):
Out-Licensed
Technology
On
November 30, 2015, we, our Israeli subsidiary and Hefei Tianhui Incubation of Technologies Co. Ltd., or HTIT, entered into a Technology
License Agreement, and on December 21, 2015 these parties entered into an Amended and Restated Technology License Agreement, or
the License Agreement. According to the License Agreement, we will grant HTIT an exclusive commercialization license in the territory
of the Peoples Republic of China, Macau and Hong Kong, or the Territory, related to our oral insulin capsule, ORMD-0801. 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 in near term installments 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 expiration of our
patents covering the technology in the Territory, the Royalties rate may be reduced, under certain circumstances, to 5%. The initial
payment of $3 million was received in January 2016. We also entered into a separate securities purchase agreement with HTIT, or
the SPA, pursuant to which HTIT invested $12 million in us in December 2015 (see – “Liquidity and capital resources”
below). In connection with the License Agreement and the SPA, we received a non-refundable payment of $500,000 as a no-shop fee.
The
License Agreement and the SPA were considered a single arrangement with multiple deliverables. We allocated the total consideration
of $49,500,000 between the License Agreement and the SPA according to their fair value, as follows: $10,617,000 was allocated
to the issuance of shares (less of issuance expenses), based on the quoted price of our common stock on the closing date of the
SPA at December 28, 2015, and $38,883,000 to the License Agreement. Amounts received relating to the License Agreement are recognized
over the period from which we are entitled to the respective payment, and the expected product submission date (June 2023).
Results
of Operations
Comparison
of six and three month periods ended February 29, 2016 and February 28, 2015
The
following table summarizes certain statements of operations data for the Company for the six and three month periods ended February
29, 2016 and February 28, 2015 (in thousands of dollars except share and per share data):
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Six months ended
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Three months ended
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February 29,
2016
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February 28,
2015
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February 29,
2016
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February 28, 2015
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Revenues
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$
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125
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$
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-
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$
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125
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$
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-
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Research and development expenses, net
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3,208
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2,438
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1,307
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1,136
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General and administrative expenses
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1,278
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1,138
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730
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538
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Financial income, net
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(153
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)
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(43
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)
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(94
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)
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(37
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)
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Net loss for the period
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$
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4,208
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$
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3,533
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$
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1,818
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$
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1,637
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Loss per common share – basic and diluted
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$
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(0.35
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)
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$
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(0.34
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$
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(0.14
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$
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(0.15
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Weighted average common shares outstanding
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12,112,771
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10,482,190
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12,652,733
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10,826,146
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Revenues
Revenues
consist of proceeds related to the License Agreement with HTIT that are recognized over the term of the License Agreement through
June 2023.
Revenues
for the six and three month periods ended February 29, 2016 totaled $125,000 following the meeting of the License Agreement's
closing conditions during December 2015. No revenues were recorded in the six and three month periods ended February 28, 2015.
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 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 months ended February 29, 2016 increased by 32% to $3,208,000 from $2,438,000 for the six
months ended February 28, 2015. The increase is mainly attributable to expenses related to clinical trials and mainly our Phase
IIb clinical trial. Stock-based compensation costs for the six months ended February 29, 2016 totaled $250,000, as compared to
$293,000 during the six months ended February 28, 2015.
Research
and development expenses for the three months ended February 29, 2016 increased by 15% to $1,307,000, from $1,136,000 for the
three months ended February 28, 2015. The increase is mainly attributable to expenses related to clinical trials and mainly our
Phase IIb clinical trial. Stock-based compensation costs for the three months ended February 29, 2016 totaled $66,000, as compared
to $129,000 during the three months ended February 28, 2015.
Government
grants
In
the six and three month periods ended February 29, 2016, we did not recognize any research and development grants, and in
the six and three month periods ended February 28, 2015, we recognized research and development grants in an amount of
$17,000 and $1,000, respectively. As of February 29, 2016, we had contingent liabilities to pay royalties to the Office of
the Chief Scientist of the Ministry of Economy of Israel, or OCS, of $2,000. For further details see note 2 to the condensed
financial statements.
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 months ended February 29, 2016 increased by 12% to $1,278,000 from $1,138,000 for the
six months ended February 28, 2015. The increase in costs related to general and administrative activities during the six months
ended February 29, 2016 reflects an increase in salaries and consulting expenses resulting from cash bonuses to employees and
consultants for the Company's 2015 achievements. This increase was partially offset by a decrease in stock-based compensation
costs and a decrease in public relations expenses. Stock-based compensation costs for the six months ended February 29, 2016 totaled
$235,000, as compared to $272,000 during the six months ended February 28, 2015.
General
and administrative expenses for the three months ended February 29, 2016 increased by 36% to $730,000 from $538,000 for the three
months ended February 28, 2015. The increase in costs related to general and administrative activities during the three months
ended February 29, 2016 derives from the same reasons described above. Stock-based compensation costs for the three months ended
February 29, 2016 totaled $99,000, as compared to $136,000 during the three months ended February 28, 2015.
Financial
income, net
Net
financial income increased by 256% from net income of $43,000 for the six months ended February 28, 2015 to net income of $153,000
for the six months ended February 29, 2016. The increase is mainly due to an increase in income from bank deposits and held to
maturity bonds.
During
the three months ended February 29, 2016, net financial income increased by 154% to $94,000 from $37,000 for the three months
ended February 28, 2015. This increase is mainly attributable to an increase in income from bank deposits and held
to maturity bonds.
Other
comprehensive income
Unrealized
losses on available for sale securities for the six months ended February 29, 2016 and February 28, 2015 of $328,000 and $352,000,
respectively, resulted from the decrease 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 months ended February 29, 2016 and February 28, 2015 of $78,000 and $7,000,
respectively, resulted from the increase in fair value of our D.N.A ordinary shares.
Liquidity
and capital resources
From
inception through February 29, 2016, we have incurred losses in an aggregate amount of $39,260,000. 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
$3,156,000 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 29, 2016, we had $3,230,000 of available cash, $30,846,000 of short-term and long-term
bank deposits and $3,843,000 of marketable securities. We anticipate that we will require approximately $14.6 million to
finance our activities during the 12 months following February 29, 2016.
On
November 30, 2015, we entered into the SPA with HTIT, pursuant to which HTIT agreed to buy and we agreed to sell 1,155,367 shares
of our common stock at a price of approximately $10.39 per share, for the aggregate amount of $12 million. The transaction closed
on December 28, 2015.
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 recent investment 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 29, 2016, our total current assets were $26,035,000 and our total current liabilities were $1,519,000. On February
29, 2016, we had a working capital surplus of $24,519,000 and an accumulated loss of $39,260,000. As of August 31, 2015,
our total current assets were $17,372,000 and our total current liabilities were $1,489,000. On August 31, 2015, we had a working
capital surplus of $15,883,000 and an accumulated loss of $35,052,000. The increase in working capital from August 31, 2015 to
February 29, 2016 was primarily due to proceeds from our private placement to HTIT completed in December 2015.
During
the six month period ended February 29, 2016, cash and cash equivalents increased to $3,230,000 from the $3,213,000 reported as
of August 31, 2015, which is due to the reasons described below.
Operating
activities provided cash of $77,000 in the six month period ended February 29, 2016, as compared to $3,003,000 used in the six
months ended February 28, 2015. Cash provided by operating activities in the six months 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, while cash used for operating activities in the six months ended February 28, 2015 primarily
consisted of net loss resulting from research and development and general and administrative expenses, partially offset by stock-based
compensation expenses.
During
the six month period ended February 29, 2016, we received no grants from the OCS. During the six month period ended February 28,
2015, we received $93,000 in OCS grants towards our research and development expenses, while we recognized the amount of $17,000
during such period. The amounts that were received but not recognized during the six month period ended February 28, 2015, were
recognized during fiscal year 2014. The OCS supported our activity until December 2014.
Investing
activities used cash of $11,942,000 in the six month period ended February 29, 2016, as compared to $2,477,000 that were used
in the six month period ended February 28, 2015. Cash used for investing activities in the six months 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,
while cash used for investing activities in the six months ended February 28, 2015 consisted primarily of the investment in short-term
and long-term bank deposits.
Financing
activities provided cash of $11,880,000 in the six month period ended February 29, 2016, as compared to $4,841,000 that were provided
in the six month period ended February 28, 2015. Financing activities in the six month period ended February 29, 2016 and February
28, 2015 consisted of proceeds from our issuance of common stock and proceeds from exercise of warrants and options.
Off-balance
sheet arrangements
As
of February 29, 2016, we had no off balance sheet arrangements that have had or that we expect would be reasonably likely to have
a future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources.
Critical
Accounting Policies
Our
significant accounting policies are described in the notes to the consolidated financial statements as of August 31, 2015. The
significant accounting policy regarding the License Agreement is described in the notes to the condensed financial statements
as of February 29, 2016.
Planned
Expenditures
The
estimated expenses referenced herein are in accordance with our business plan. Since our technology is still in the development
stage, it can be expected that there will be changes in some budgetary items. Our planned expenditures for the twelve months beginning
March 1, 2016 are as follows (in thousands):
Category
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Amount
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Research and development
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$
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12,670
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General and administrative expenses
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2,080
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Financial income, net
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(160
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)
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Total
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$
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14,590
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In
June 2015, we initiated a Phase IIb clinical trial for our orally ingested insulin and we are conducting, or planning to conduct,
further clinical studies, including those with regard to our oral exenatide capsule. 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.