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
completed a Phase IIb clinical trial on 180 type 2 diabetic patients in 33 sites in the United States. This double-blind,
randomized, 28-day study 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 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, all follow-up visits of this study were completed during April 2016, and in May 2016 we reported positive
top-line results as the trial’s primary objective, a significant reduction of weighted mean night-time glucose, was successfully
achieved.
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. All follow-up visits of this study were completed during the second quarter of calendar year
2016 and we anticipate the results analysis to be completed during the third quarter of calendar year 2016.
The
table below gives an overview of our product pipeline (calendar quarters):
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Phase
I
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Phase
II
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Phase
III
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Timeline
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ORMD-0801
oral
insulin
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Type
2 diabetes
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Q1
’14: Phase IIa completed
Q2
’16: Phase IIb multi-center study completed
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Type
1 diabetes
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Q3
’14: Phase IIa completed
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ORMD-0901
oral
GLP-1
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Type
2 diabetes
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Q3
’14: Preclinical/IND studies initiated
Q3
’15: Phase Ib ex-US study initiated
Q2
’17: Phase II multi-center study projected initiation
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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 granted 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. In June 2016, HTIT
informed us that it intends to make a milestone payment of $6.5 million under the License Agreement following our reporting of
the positive top-line data of the ORMD-0801 phase IIb clinical trial described above. The payment is expected to be received in
the third quarter of calendar year 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 $38,883,000 to the License Agreement. Amounts received relating to the License Agreement are recognized
over the period from which we are entitled to the respective payment, and the expected product submission date (June 2023).
Results
of Operations
Comparison
of nine and three month periods ended May 31, 2016 and 2015
The
following table summarizes certain statements of operations data of the Company for the nine and three month periods ended May
31, 2016 and 2015 (in thousands of dollars except share and per share data):
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Nine months ended
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Three months ended
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May 31,
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May 31,
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2016
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2015
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2016
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2015
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Revenues
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$
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288
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$
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-
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$
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163
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$
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-
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Research and development expenses, net
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4,926
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3,353
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1,718
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915
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General and administrative expenses
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1,833
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1,857
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555
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719
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Financial income, net
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(267
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(94
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(114
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(51
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Net loss for the period
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$
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6,204
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$
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5,116
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$
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1,996
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$
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1,583
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Loss per common share – basic and diluted
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$
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(0.50
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$
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(0.48
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$
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(0.15
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$
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(0.15
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Weighted average common shares outstanding
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12,450,497
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10,598,692
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13,118,611
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10,827,898
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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 nine and three month periods ended May 31, 2016 totaled $288,000 and $163,000, respectively, following the meeting of
the License Agreement's closing conditions during December 2015. No revenues were recorded in the nine and three month periods
ended May 31, 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 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 nine month period ended May 31, 2016 increased by 47% to $4,926,000 from $3,353,000 for the nine
month period ended May 31, 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 nine month period ended May 31, 2016 totaled $288,000, as compared
to $479,000 during the nine month period ended May 31, 2015.
Research
and development expenses for the three month period ended May 31, 2016 increased by 88% to $1,718,000, from $915,000 for the three
month period ended May 31, 2015. The increase is mainly attributable to expenses related to clinical materials and clinical trials
and mainly our Phase IIb clinical trial. Stock-based compensation costs for the three month period ended May 31, 2016 totaled
$38,000, as compared to $186,000 during the three month period ended May 31, 2015.
Government
grants
In
the nine and three month periods ended May 31, 2016, we did not recognize any research and development grants, and in the
nine
and three month periods ended May 31, 2015, we recognized research and development grants in an amount of $48,000 and $31,000,
respectively. As of May 31, 2016, we had contingent liabilities to pay royalties to the Israel Innovation Authority (previously
the Office of the Chief Scientist) of the Israeli Ministry of Economy & Industry, of $5,000. For further details see note
2 to the condensed consolidated 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 nine month period ended May 31, 2016 decreased by 1% to $1,833,000 from $1,857,000 for the
nine month period ended May 31, 2015. The decrease in costs related to general and administrative activities during the nine month
period ended May 31, 2016 is due to a decrease in stock-based compensation costs and in public relations expenses. This decrease
was partially offset by an increase in salaries and consulting expenses resulting from cash bonuses to employees and consultants
for the Company's 2015 achievements. Stock-based compensation costs for the nine month period ended May 31, 2016 totaled $302,000,
as compared to $550,000 during the nine month period ended May 31, 2015.
General
and administrative expenses for the three month period ended May 31, 2016 decreased by 23% to $555,000 from $719,000 for the three
month period ended May 31, 2015. The decrease in costs related to general and administrative activities during the three month
period ended May 31, 2016 is due to a decrease in stock-based compensation costs and in legal expenses. This decrease was partially
offset by an increase in travel expenses and in salaries and consulting expenses resulting from cash bonuses to employees and
consultants for the Company's 2015 achievements. Stock-based compensation costs for the three month period ended May 31, 2016
totaled $67,000, as compared to $278,000 during the three month period ended May 31, 2015.
Financial
income, net
Net
financial income increased by 184% from net income of $94,000 for the nine month period ended May 31, 2015 to net income of $267,000
for the nine month period ended May 31, 2016. The increase is mainly due 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 May 31, 2016, net financial income increased by 124% to $114,000 from $51,000 for the three month
period ended May 31, 2015. 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.
Other
comprehensive income
Unrealized
losses on available for sale securities for the nine month period ended May 31, 2016 and 2015 of $244,000 and $289,000, 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 month period ended May 31, 2016 and 2015 of $84,000 and $63,000, respectively,
resulted from the increase in fair value of our D.N.A ordinary shares.
Liquidity
and capital resources
From
inception through May 31, 2016, we have incurred losses in an aggregate amount of $41,256,000. 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 $3,208,000
from the exercise of warrants and options. We will seek to obtain additional financing through similar sources in the future as
needed. As of May 31, 2016, we had $3,302,000 of available cash, $28,640,000 of short-term and long-term bank deposits
and $3,898,000 of marketable securities. We anticipate that we will require approximately $15.8 million to finance our activities
during the 12 months following May 31, 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 May 31, 2016, our total current assets were $25,142,000 and our total current liabilities were $1,338,000. On May 31, 2016,
we had a working capital surplus of $23,804,000 and an accumulated loss of $41,256,000. 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 May 31,
2016 was primarily due to proceeds from our private placement to HTIT completed in December 2015.
During
the nine month period ended May 31, 2016, cash and cash equivalents increased to $3,302,000 from the $3,213,000 reported as of
August 31, 2015, which is due to the reasons described below.
Operating
activities used cash of $2,148,000 in the nine month period ended May 31, 2016, as compared to $3,917,000 used in the nine month
period ended May 31, 2015. Cash used in operating activities in the nine month period ended May 31, 2016 primarily consisted of
net loss resulting from research and development and general and administrative expenses, partially offset by deferred revenues
and stock-based compensation amounts, while cash used for operating activities in the nine month period ended May 31, 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 nine month period ended May 31, 2016, we received no grants from the Israel Innovation Authority. During the nine month period
ended May 31, 2015, we received $93,000 in Israel Innovation Authority grants towards our research and development expenses, while
we recognized the amount of $48,000 during such period. The amounts that were received but not recognized during the nine month
period ended May 31, 2015, were recognized during fiscal year 2014. The Israel Innovation Authority supported our activity until
December 2014.
Investing
activities used cash of $9,700,000 in the nine month period ended May 31, 2016, as compared to $1,173,000 that were provided in
the nine month period ended May 31, 2015. Cash used for investing activities in the nine month period ended May 31, 2016 consisted
primarily of the purchase of short-term and long-term bank deposits, as well as the purchase of marketable securities, while cash
provided by investing activities in the nine month period ended May 31, 2015 consisted primarily of the proceeds from short term
bank deposits.
Financing
activities provided cash of $11,932,000 in the nine month period ended May 31, 2016, as compared to $4,841,000 that were provided
in the nine month period ended May 31, 2015. Financing activities in the nine month period ended May 31, 2016 and 2015 consisted
of proceeds from our issuance of common stock and proceeds from exercise of warrants and options.
Off-balance
sheet arrangements
As
of May 31, 2016, we had no off balance sheet arrangements that have had or that we expect would be reasonably likely to have a
future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources.
Critical
Accounting Policies
Our
significant accounting policies are described in the notes to the consolidated financial statements as of August 31, 2015. The
significant accounting policy regarding the License Agreement is described in the notes to the condensed financial statements
as of May 31, 2016.
Planned
Expenditures
The
estimated expenses referenced herein are in accordance with our business plan. Since our technology is still in the development
stage, it can be expected that there will be changes in some budgetary items. Our planned expenditures for the 12 months beginning
June 1, 2016 are as follows (in thousands):
Category
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Amount
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Research and development
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$
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13,539
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General and administrative expenses
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2,216
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Total
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$
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15,755
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In
April 2016 we completed 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.