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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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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 and
the timing of enrollment, obtaining results and conclusion of trials, including without
limitation, our expectation that we will initiate two six-month Phase III clinical trials
if our Phase IIb three-month dosing clinical trial is successful, and our expectation
to file a New Drug Application thereafter;
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our
belief that our technology has the potential to deliver medications and vaccines orally
that today can only be delivered via injection;
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the
competitive ability of our technology based product efficacy, safety, patient convenience,
reliability, value and patent position;
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the
potential market demand for our products;
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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.
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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, 2017, or our Annual Report, as filed with the Securities
and Exchange Commission, or the SEC, on November 29, 2017, as well as those discussed elsewhere in our Annual Report and this
Quarterly
Report on Form 10-Q and expressed from time to time in our other filings with the SEC. In addition,
historic results of scientific research, clinical and preclinical trials do not guarantee that the conclusions of future research
or trials would not suggest different conclusions. Also, historic results referred to in this Quarterly Report on Form 10-Q could
be interpreted differently in light of additional research, clinical and preclinical trials results. 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 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
Orally
Ingestible Insulin
In
August 2017, we had a call with the U.S. Food and Drug Administration, or FDA, regarding our proprietary flagship product, an
orally ingestible insulin capsule, or ORMD-0801. During the call, the FDA advised that the regulatory pathway for the submission
of ORMD-0801 would be a Biologics License Application. If approved, such a pathway would grant us 12 years of marketing exclusivity
for ORMD-0801, from the approval date, and an additional six months of exclusivity may be granted if the product also receives
approval for use in pediatric patients. The FDA confirmed that the approach to nonclinical toxicology, chemistry manufacturing
controls and qualification of excipients would be driven by their published guidance documents. We plan to initiate in the first
quarter of calendar year 2018 a three-month dose-ranging clinical trial on approximately 240 type 2 diabetic patients to assess
the safety and evaluate the effect of ORMD-0801 on HbA1c, the main FDA registrational endpoint and a clamp study on six type 1
diabetic patients.
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 better define the optimal dosing of ORMD-0801 moving forward.
The results of the trial indicated a positive safety profile and potentially meaningful efficacy of ORMD-0801, as the efficacy
data suggest ORMD-0801 improves glucose control.
In
March 2017, we initiated a six month toxicology study to allow for the use of our oral insulin capsule for a longer period than
previously performed, in preparation for our proposed upcoming three-month clinical trial for type 2 diabetes. We anticipate receiving
the final report of this study in the first quarter of calendar year 2018.
In
April 2016, we completed a Phase IIb clinical trial on 180 type 2 adult diabetic patients that was initiated in June 2015
and conducted in 33 sites in the United States. This double-blind, randomized, 28-day dosing clinical trial was conducted under
an Investigational New Drug application, or IND, with the FDA. The clinical trial, designed to assess the safety and efficacy
of our ORMD-0801, investigated ORMD-0801 over a 28 day treatment period and had statistical power to give us greater insight into
the drug’s efficacy. The trial indicated a statistically significant lowering of blood glucose levels versus placebo across
several endpoints, with no serious or severe adverse issues related to the drug. The trial successfully met all of its primary
and most of its secondary and exploratory endpoints for both safety and efficacy.
Should
our Phase IIb three-month dose-ranging clinical trial successfully meet its primary endpoints, we anticipate initiating two six-month
Phase III clinical trials on both type 1 and type 2 diabetic patients, following which we expect to file a New Drug Application
with a potential FDA approval by the third quarter of calendar year 2023.
GLP-1
Analog
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 clinical trial outside of the United States
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 demonstrated encouraging efficacy data. We completed a three-month pre-clinical
toxicology study in March 2017 and the final report will be submitted to the FDA with our IND. We expect to file an IND during
the first quarter of calendar year 2018 and move directly into a small pharmacokinetics study on healthy volunteers followed by
a large Phase II trial on type 2 diabetic patients which will be conducted in the United States under an IND.
Other
products
During
the first quarter of calendar 2017, we began developing a new drug candidate, a weight loss treatment in the form of an oral leptin
capsule, and in April 2017, Israel’s Ministry of Health approved our commencement of a proof of concept single dose study
for our oral leptin drug candidate to evaluate its pharmacokinetic and pharmacodynamics (glucagon reduction) in 10 type 1 adult
diabetic patients. The study is projected to initiate in calendar year 2018 and be completed during calendar year 2019.
In
November 2017, Israel’s Ministry of Health approved us to initiate an exploratory clinical study of our oral insulin capsule,
ORMD-0801, in patients with nonalcoholic steatohepatitis (NASH). The proposed three-month treatment study will assess the effectiveness
of ORMD-0801 in reducing liver fat content, inflammation and fibrosis in patients with NASH. We expect to initiate the study in
calendar year 2018 and complete it during calendar year 2019.
The
table below gives an overview of our primary 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
Q1
’17: Phase IIa - dose finding study completed
Q1
’18: Phase IIb 90-day multi-center study projected initiation (projected completion Q2 ’19)
Q4
’19: Phase III study projected initiation (projected completion Q2 ’21)
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Type
1 diabetes
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Q3
’14: Phase IIa study completed
Q1
’18: Clamp study projected initiation (projected completion Q3 ’18)
Q4
’19: Phase III projected initiation (projected completion Q2 ’21)
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ORMD-0901
oral GLP-1
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Type
2 diabetes
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Q2
’16: Phase Ib non-US study completed
Q1
’18: Pharmacokinetics clinical study projected initiation (projected completion Q3 ’18)
H2
’18: Phase II projected initiation (projected completion Q4 ’19)
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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 the 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 $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 the 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 Securities 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 $500,000 as a no-shop fee.
Results
of Operations
Comparison
of three month periods ended November 30, 2017 and 2016
The
following table summarizes certain statements of operations data of the Company for the three month periods ended November 30,
2017 and 2016 (in thousands of dollars except share and per share data):
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Three months ended
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November 30,
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2017
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2016
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Revenues
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$
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611
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$
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610
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Cost of revenues
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187
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Research and development expenses
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2,327
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2,353
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General and administrative expenses
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1,016
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468
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Financial income, net
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201
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162
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Taxes on income
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400
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Net loss for the period
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$
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2,531
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$
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2,636
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Loss per common share - basic and diluted
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$
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0.18
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$
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0.20
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Weighted average common shares outstanding
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14,239,346
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13,205,971
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Revenues
Revenues
consist of proceeds related to the License Agreement that are recognized over the term of the License Agreement through June 2023.
Revenues
for the three month period ended November 30, 2017 totaled $611,000, consistent with $610,000 for the three month period ended
November 30, 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 revenue recognition accounting and the Law for the Encouragement of Industrial Research, Development and Technological
Innovation, 1984, as amended, including any regulations or tracks promulgated thereunder.
No
cost of revenues was recognized during the three month period ended November 30, 2017 compared to cost of revenues of $187,000
for the three month period ended November 30, 2016. The decrease is due to no additional milestone payments having been received
during the three month period ended November 30, 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, 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 three month period ended November 30, 2017 decreased by 1% to $2,327,000, from $2,353,000 for
the three month period ended November 30, 2016. The decrease is mainly due to completion of our dose finding clinical trial and
is partially offset by an increase in expenses related to progress in toxicology studies and preparations for our Phase IIb three-month
clinical trial. Stock-based compensation costs for the three month period ended November 30, 2017 totaled $171,000, as compared
to $136,000 during the three month period ended November 30, 2016. The increase is mainly attributable to awards granted to employees
and a consultant during fiscal year 2017.
Government
grants
In
the three month periods ended November 30, 2017 and 2016, we did not recognize any research and development grants. As of November
30, 2017, we incurred liabilities to pay royalties to the Israel Innovation Authority of the Israeli Ministry of Economy &
Industry of $533,000.
General
and administrative expenses
General
and administrative expenses include the salaries and related expenses of our management, consulting costs, legal and professional
fees, travel expenses, business development costs, insurance expenses and other general costs.
General
and administrative expenses for the three month period ended November 30, 2017 increased by 117% to $1,016,000 from $468,000 for
the three month period ended November 30, 2016. The increase in costs related to general and administrative activities during
the three month period ended November 30, 2017 is mainly attributable to an increase in stock-based compensation costs, consulting
and travel expenses related to the relocation of our Chief Executive Officer to New York, where the Company has leased an office
since September 2017. Stock-based compensation costs for the three month period ended November 30, 2017 totaled $352,000, as compared
to $23,000 during the three month period ended November 30, 2016. The increase is mainly attributable to awards granted to employees
and a consultant during fiscal year 2017.
Financial
income, net
Net
financial income increased by 24% from net income of $162,000 for the three month period ended November 30, 2016 to net income
of $201,000 for the three month period ended November 30, 2017. The increase is mainly attributable to an increase in income from
bank deposits and held to maturity bonds as a result of an increase in interest rates.
Taxes
on income
No
taxes on income were recognized for the three month period ended November 30, 2017 as compared to $400,000 for the three month
period ended November 30, 2016. The decrease is due to a decrease in withholding tax deducted from milestone payments received
related to the License Agreement that resulted from a decrease in such proceeds. The Company estimates that withholding tax will
not be utilized in the next five years, and therefore it was deducted.
Other
comprehensive income
Unrealized
gains on available for sale securities for the three month period ended November 30, 2017 of $326,000, compared to losses of $63,000
for the three month period ended November 30, 2016, resulted from the increase in fair value of the ordinary shares of D.N.A Biomedical
Solutions Ltd. that we hold.
Liquidity
and capital resources
From
inception through November 30, 2017, we have incurred losses in an aggregate amount of $59,027,000. 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 $60,309,000, net of transaction costs. During that period, we also received cash consideration of $5,810,000
from the exercise of warrants and options. We will seek to obtain additional financing through similar sources in the future,
as needed. As of November 30, 2017, we had $1,258,000 of available cash, $32,772,000 of short-term and long-term bank
deposits and $7,320,000 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 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 November 30, 2017, our total current assets were $19,135,000 and our total current liabilities were $5,124,000. On November
30, 2017, we had a working capital surplus of $14,011,000 and an accumulated loss of $59,027,000. As of August 31, 2017,
our total current assets were $20,297,000 and our total current liabilities were $5,165,000. On August 31, 2017, we had a working
capital surplus of $15,132,000 and an accumulated loss of $56,496,000. The decrease in working capital from August 31, 2017 to
November 30, 2017 was primarily due to investment in long-term deposits and marketable securities.
During
the three month period ended November 30, 2017, cash and cash equivalents decreased to $1,258,000 from the $3,969,000 reported
as of August 31, 2017, which is due to the reasons described below.
Operating
activities used cash of $2,728,000 in the three month period ended November 30, 2017, as compared to $1,498,000 provided in the
three month period ended November 30, 2016. Cash used in operating activities in the three month period ended November 30, 2017
primarily consisted of net loss resulting from research and development and general and administrative expenses, as well as changes
in deferred revenues due to the License Agreement and is partially offset by changes in stock-based compensation, while cash provided
by operating activities in the three month period ended November 30, 2016 primarily consisted of changes in deferred revenues
and is partially offset by net loss resulting from research and development and general and administrative expenses.
Investing
activities used cash of $5,146,000 in the three month period ended November 30, 2017, as compared to $3,436,000 used in the three
month period ended November 30, 2016. Cash used in investing activities in the three month periods ended November 30, 2017 and
2016 consisted primarily of the purchase of short-term and long-term bank deposits and marketable securities.
Financing
activities provided cash of $5,160,000 in the three month period ended November 30, 2017, as compared to $320,000 that were provided
in the three month period ended November 30, 2016. Financing activities in the three month period ended November 30, 2017 consisted
of aggregate net proceeds of $4,230,000 from our issuance of 453,919 common stock under an At The Market Issuance Sales Agreement,
dated April 2, 2015, or the Sales Agreement, with B. Riley FBR, Inc., as successor to FBR Capital Markets & Co., or FBR, as
amended, and proceeds from exercise of warrants and options while financing activities in the three month period ended November
30, 2016 consisted of proceeds from the exercise of options. Pursuant to the Sales Agreement, we may, from time to time and at
our option, issue and sell shares of our common stock having an aggregate offering price of up to $25,000,000 through FBR as sales
agent, subject to certain terms and conditions. Any shares sold will be sold pursuant to our effective shelf registration statement
on Form S-3 including a prospectus dated February 2, 2017, as supplemented by a prospectus supplement dated April 5, 2017. We
will pay FBR a commission of 3.0% of the gross proceeds of the sale of any shares sold through FBR.
Off-balance
sheet arrangements
As
of November 30, 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.
Significant
Accounting Policies
Our
significant accounting policies are described in the notes to the consolidated financial statements as of August 31, 2017 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.