ORAMED PHARMACEUTICALS INC. 10-K

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. Market Price for our Common Stock Our common stock is traded on Nasdaq and on the Tel Aviv Stock Exchange, in each case under the symbol “ORMP.” Holders As of November 24, 2020, there were 23,675,530 shares of our common stock issued and outstanding held of record by approximately 36 registered stockholders. We believe that a significant number of stockholders hold their shares of our common stock in brokerage accounts and registered in the name of stock depositories and are therefore not included in the number of stockholders of record. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities were made during the three months ended August 31, 2020. ITEM 6. SELECTED FINANCIAL DATA. The selected data presented below under the captions Statements of Comprehensive Loss and Balance Sheet for, and as of the end of, each of the fiscal years in the five-year period ended August 31, 2020, are derived from, and should be read in conjunction with, our audited consolidated financial statements. The selected information contained in this table should also be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K. The selected consolidated statements of comprehensive loss data for fiscals 2020 and 2019 and the selected consolidated balance sheet data as of August 31, 2020 and 2019, are derived from the audited consolidated financial statements included elsewhere in this Annual Report. The statement of operations data for the years ended August 31, 2018, 2017 and 2016 and the balance sheet data as of August 31, 2018, 2017 and 2016 are derived from financial statements not included in this Annual Report. The historical results presented below are not necessarily indicative of future results. For the year ended August 31, 2020 2019* 2018 2017 2016 (in thousands except share and per share data) Statements of Comprehensive Loss: Revenues $ 2,710 $ 2,703 $ 2,449 $ 2,456 $ 641 Cost of revenues (income) - 90 (86 ) 187 490 Research and development expenses 10,235 13,522 11,979 10,281 7,709 General and administrative expenses 4,232 3,722 4,083 2,759 2,452 Financial income 690 1,061 903 792 474 Financial expenses 444 485 103 101 93 Loss before taxes on income 11,511 14,055 12,727 10,080 9,629 Taxes on income - 300 - 400 1,335 Net loss for the year $ 11,511 $ 14,355 $ 12,727 $ 10,480 $ 10,964 Loss per common share – basic and diluted $ 0.56 $ 0.82 $ 0.86 $ 0.79 $ 0.87 Weighted average common shares outstanding 20,532,347 17,454,489 14,882,356 13,309,372 12,624, 356 23 As of August 31, 2020 2019* 2018 2017 2016 (in thousands of dollars ) Balance Sheet Data: Cash, cash equivalents, short-term deposits, restricted cash and marketable securities $ 39,900 $ 32,282 $ 30,463 $ 20,138 $ 31,032 Other current assets 611 1,042 574 159 198 Long-term deposits and other assets 2 1 13,575 16,262 11,070 Long-term marketable securities 3,928 1,295 2,785 2,151 530 Total assets 44,633 34,663 47,397 38,712 42,830 Current liabilities 4,536 5,308 4,553 5,165 3,621 Long-term liabilities 7,218 9,962 11,732 14,309 13,019 Stockholders’ equity 32,879 19,393 31,112 19,238 26,190 * As discussed in Note 1(k) to our audited consolidated financial statements included in this Annual Report on Form 10-K, the Company changed the manner in which it accounts for revenues from contracts with customers during fiscal 2019. ITEM 7. 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 consolidated financial statements and the related notes included elsewhere herein and in our consolidated financial statements. In addition to our consolidated financial statements, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in “Cautionary Statement Regarding Forward-Looking Statements” and “Item 1A. Risk Factors.” Overview of Operations We are a pharmaceutical company currently engaged in the research and development of innovative pharmaceutical solutions, including an orally ingestible insulin capsule to be used for the treatment of individuals with diabetes, and the use of orally ingestible capsules or pills for delivery of other polypeptides. An overview of our current clinical studies can be found in “Item 1. Business - Research and Development.” Results of Operations Critical accounting policies Our significant accounting policies are more fully described in the notes to our accompanying consolidated financial statements. We believe that the accounting policies below are critical for one to fully understand and evaluate our financial condition and results of operations. The discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which we prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate such estimates and judgments. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. 24 Valuation of options and warrants : We grant options to purchase shares of our common stock to employees and consultants and have and may in the future issue warrants in connection with some of our financings and to certain other consultants. We account for share-based payments to employees, directors and consultants in accordance with the guidance that requires awards classified as equity awards to be accounted for using the grant-date fair value method. The fair value of share-based payment transactions is based on the Black Scholes option-pricing model or Monte Carlo model when appropriate and is recognized as an expense over the vesting period. We elected to recognize compensation cost for awards to employees, directors and consultants that have a graded vesting schedule using the accelerated method based on the multiple-option award approach. Revenue recognition : Revenue is recognized when delivery has occurred, evidence of an arrangement exists, title and risks and rewards for the products are transferred to the customer and collection is reasonably assured. Under Accounting Standards Codification, or ASC, 605 (which was the authoritative revenue recognition guidance applied for all periods prior to September 1, 2018) given our continuing involvement through the expected product submission in June 2023, amounts received relating to the License Agreement were recognized over the period from which we were entitled to the respective payment, and the expected product submission date using a time-based model approach over the periods that the fees were earned. However, under ASC 606, we are required to recognize the total transaction price (which includes consideration related to milestones once the criteria for recognition have been satisfied) using the input method over the period the performance obligation is fulfilled. Accordingly, once the consideration associated with a milestone is included in the transaction price, incremental revenue is recognized immediately based on the period of time that has elapsed towards complete satisfaction of the performance obligation. Since the customer benefits from the services as the entity performs, revenue is recognized over time through the expected product submission date in June 2023, using the input method. The Company used the input method to measure the process for the purpose of recognizing revenue, which approximates the straight line attribution. The Company used significant judgment when it determined the product submission date. Under ASC 606, the consideration that the Company would be entitled to upon the achievement of contractual milestones, which are contingent upon the occurrence of future events, are a form of variable consideration. When assessing the portion, if any, of such milestones-related consideration to be included in the transaction price, the Company first assesses the most likely outcome for each milestone and excludes the consideration related to milestones of which the occurrence is not considered the most likely outcome. The Company then evaluates if any of the variable consideration determined in the first step is constrained by including in the transaction price variable consideration to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The Company used significant judgment when it determined the first step of variable consideration. 25 Comparison of Fiscal 2020 to Fiscal 2019 The following table summarizes certain statements of operations data for us for the twelve month periods ended August 31, 2020 and 2019: Year ended August 31, Operating Data: 2020 2019 (dollar amounts in thousands) Revenues $ 2,710 $ 2,703 Cost of revenues - 90 Research and development expenses 10,235 13,522 General and administrative expenses 4,232 3,722 Financial income, net 246 576 Loss before taxes on income 11,511 14,055 Taxes on income - 300 Net loss for the year 11,511 14,355 Loss per common share – basic and diluted $ 0.56 $ 0.82 Weighted average common shares outstanding 20,532,347 17,454,489 Revenues Revenues consist of proceeds related to the License Agreement that are recognized over the period from which the Company is entitled to the respective payments and through June 2023. Revenues for fiscal 2020 totaled $2,710,000, consistent with $2,703,000 for fiscal 2019. 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, or the R&D Law. Cost of revenues for fiscal 2020 decreased to no expense compared to expense of $90,000 for fiscal 2019. The decrease is attributable to a milestone payment which was received during fiscal 2019. 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 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. 26 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. From August 2009 to March 2014, Oramed Ltd. was awarded five government grants amounting to a total net amount of NIS 8 million (approximately $2,194,000) from the IIA. We used the funds to support further research and development and clinical studies of our oral insulin capsule and oral GLP-1 analog during the period from February 2009 to December 2014. The five grants are subject to repayment according to the terms determined by the IIA and applicable law. See “—Government grants” below. Research and development expenses for fiscal 2020 decreased by 24% to $10,235,000 from $13,522,000 for fiscal 2019. The decrease is mainly attributed to expenses related to our Phase IIb three-month dose-ranging clinical trial which was terminated during fiscal 2020 and is partially offset by an increase in regulatory expenses and an increase in raw material expenses related to our phase III trial. During fiscal 2020, stock-based compensation costs totaled $458,000, as compared to $218,000 during fiscal 2019. The increase is mainly attributable to new grants in fiscal 2020. Government grants The Government of Israel encourages research and development projects through the IIA, pursuant to the R&D Law. Under the R&D Law, a research and development plan that meets specified criteria is generally eligible for a grant of up to 50% of certain approved research and development expenditures. Each plan must be approved by the IIA. In fiscals 2020 and 2019, we did not recognize any research and development grants. As of August 31, 2020, our liability to pay royalties to the IIA was $317,000. Under the terms of the grants we received from the IIA, we are obligated to pay royalties of 3% on all revenues derived from the sale of the products developed pursuant to the funded plans, including revenues from licensed ancillary services. Royalties are generally payable up to a maximum amount equaling 100% of the grants received (dollar linked) with the addition of interest at an annual rate based on the LIBOR rate. The R&D Law generally requires that a product developed under a program be manufactured in Israel. However, when applying for a grant, the applicant may declare that part of the manufacturing will be performed outside of Israel or by non-Israeli residents and if the IIA is convinced that performing some of the manufacturing abroad is essential for the execution of the program, it may still approve the grant. This declaration will be a significant factor in the determination of the IIA as to whether to approve a program and the amount and other terms of the benefits to be granted. If a company wants to increase the volume of manufacturing outside of Israel after the grant has been approved, it may transfer up to 10% of the company’s approved Israeli manufacturing volume, measured on an aggregate basis, outside of Israel after first notifying the IIA thereof (provided that the IIA does not object to such transfer within 30 days). In addition, upon the approval of the IIA, a portion greater than 10% of the manufacturing volume may be performed outside of Israel. In any case of transfer of manufacturing out of Israel, the grant recipient is required to pay royalties at an increased rate, which may be substantial, and the aggregate repayment amount is increased up to 120%, 150% or 300% of the grant, depending on the portion of the total manufacturing volume that is performed outside of Israel. The approval we received from the IIA for the License Agreement was subject to payment of increased royalties and an increased ceiling, all in accordance with the provisions of the R&D Law. The R&D Law further permits the IIA, among other things, to approve the transfer of manufacturing rights outside of Israel in exchange for the import of different manufacturing into Israel as a substitute, in lieu of the increased royalties. The R&D Law also provides that know-how developed under an approved research and development program may not be transferred or licensed to third parties in Israel without the approval of the research committee. Such approval is not required for the sale or export of any products resulting from such research or development. The R&D Law further provides that the know-how developed under an approved research and development program may not be transferred or licensed to any third parties outside Israel absent IIA approval which may be granted in certain circumstances as follows: (a) the grant recipient pays to the IIA a portion of the sale or license price paid in consideration for the purchase or license of such IIA-funded know-how or the price paid in consideration for the sale of the grant recipient itself, as the case may be, in accordance with certain formulas included in the R&D Law; (b) the grant recipient receives know-how from a third party in exchange for its IIA-funded know-how; or (c) such transfer of IIA-funded know-how is made in the context of IIA approved research and development cooperation projects or consortia. 27 The R&D Law imposes reporting requirements with respect to certain changes in the ownership of a grant recipient. The R&D Law requires the grant recipient to notify the IIA of any change in control of the recipient or a change in the holdings of the means of control of the recipient that results in a non-Israeli entity becoming an interested party in the recipient, and requires the new non-Israeli interested party to undertake to the IIA to comply with the R&D Law. In addition, the rules of the IIA may require the provision of additional information or representations in respect of certain such events. For this purpose, “control” is defined as the ability to direct the activities of a company other than any ability arising solely from serving as an officer or director of the company. A person is presumed to have control if such person holds 50% or more of the means of control of a company. “Means of control” refers to voting rights or the right to appoint directors or the chief executive officer. An “interested party” of a company includes a holder of 5% or more of its outstanding share capital or voting rights, its chief executive officer and directors, someone who has the right to appoint its chief executive officer or at least one director, and a company with respect to which any of the foregoing interested parties holds 25% or more of the outstanding share capital or voting rights or has the right to appoint 25% or more of the directors. Failure to meet the R&D Law’s requirements may subject us to mandatory repayment of grants received by us (together with interest and penalties), as well as expose us to criminal proceedings. In addition, the Israeli government may from time to time audit sales of products which it claims incorporate technology funded through IIA programs which may lead to additional royalties being payable on additional products. 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 increased by 14% from $3,722,000 for fiscal 2019 to $4,232,000 for fiscal 2020. The increase in costs incurred related to general and administrative activities during fiscal 2020, is primarily attributable to an increase in costs related to the directors and officers insurance policy and an increase in legal expenses and increase in stock-based compensation costs and is partially offset by a decrease in travel expenses and a decrease in costs related to patents. During fiscal 2020, as part of our general and administrative expenses, we incurred expenses of $714,000 related to stock-based compensation costs, as compared to an expense of $591,000 during fiscal 2019. The increase is mainly attributable to new grants during fiscal 2020. Financial income, net Net financial income, was $246,000 for fiscal 2020 as compared to net financial income of $576,000 for fiscal 2019. The decrease is mainly attributable to a decrease in the fair market value of some investments. Taxes on income No taxes on income were recognized for fiscal 2020 as compared to $300,000 for fiscal 2019. The decrease is due to withholding taxes in connection with the receipt of a milestone payment pursuant to the License Agreement during 2019. Fiscal 2019 compared with Fiscal 2018 For a discussion of fiscal 2019 compared with fiscal 2018, see Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended August 31, 2019. Liquidity and Capital Resources From our inception through August 31, 2020, we have incurred losses in an aggregate amount of $92,614,000. 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 $101,509,000, net of transaction costs. During that period we also received cash consideration of $5,892,000 from the exercise of warrants and options. We will seek to obtain additional financing through similar sources in the future as needed. As of August 31, 2020, we had $19,296,000 of available cash, $11,060,000 of short term deposits and $13,472,000 of marketable securities. 28 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. As of August 31, 2020, our total current assets were $40,511,000 and our total current liabilities were $4,536,000. On August 31, 2020, we had a working capital surplus of $35,975,000 and an accumulated loss of $92,614,000. As of August 31, 2019, our total current assets were $33,324,000 and our total current liabilities were $5,308,000. On August 31, 2019, we had a working capital surplus of $28,016,000 and an accumulated loss of $81,103,000. The increase in working capital surplus from August 31, 2019 to August 31, 2020 was primarily due to an increase in cash and cash equivalents. During fiscal 2020, cash and cash equivalents increased to $19,296,000 from $3,329,000 as of August 31, 2019, which is due to the reasons described below. Operating activities used cash of $12,440,000 in fiscal 2020 compared to $12,940,000 used in fiscal 2019. Cash used in operating activities in fiscal 2020 and 2019 primarily consisted of net loss resulting from research and development and general and administrative expenses and changes in stock based compensation. Investing activities provided cash of $4,626,000 in fiscal 2020, as compared to $11,259,000 used in fiscal 2019. Cash provided in investing activities in fiscal 2020 consisted primarily of the proceeds from short term deposits and redemption of held to maturity securities, partially offset by the acquisition of short and long terms marketable securities, while cash used in investing activities in fiscal 2019 consisted primarily of the proceeds from short term deposits, partially offset by the acquisition of short and long term marketable securities. Financing activities provided cash of $23,786,000 in fiscal 2020, as compared to no financing activities in fiscal 2019. Cash provided by financing activities during fiscal 2020 consisted of proceeds from our issuance of common stock and warrants and proceeds from exercise of warrants and options. Our primary financing activities in fiscal 2020 were as follows: ● During fiscal 2020, no warrants were exercised and 12,253 options were exercised for cash and resulted in the issuance of 12,253 shares of common stock. The cash consideration received for the exercise of options was $12,253. During fiscal 2019, no warrants or options were exercised. ● In September and November 2019 and February and May 2020, we issued a total of 10,000 shares of our common stock, valued approximately $38,000, in the aggregate, to certain service providers as remuneration for services rendered. ● On September 5, 2019, we entered into an Equity Distribution Agreement, or the Sales Agreement, pursuant to which 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 $15,000,000 through a 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 and prospectus supplement, each dated February 10, 2020 (which superseded a prior registration statement, prospectus and prospectus supplement that related to shares sold under the Sales Agreement). We will pay the sales agent a cash commission of 3.0% of the gross proceeds of the sale of any shares sold through the sales agent under the Sales Agreement. As of August 31, 2020, 839,537 shares were issued under the Sales Agreement for aggregate net proceeds of $3,879,000. ● On February 27, 2020, we entered into an underwriting agreement with National Securities Corporation, or the Underwriter, in connection with a public offering, or the Offering of 5,250,000 shares of our common stock, at an offering price of $4.00 per share. We also granted the Underwriter a 45-day option to purchase from us up to an additional 787,500 shares of common stock at the public offering price, or the Over-Allotment Option. In connection with the Offering, we also agreed to issue to the Underwriter, or its designees, warrants, or the Underwriter’s Warrants, to purchase up to an aggregate of 7% of the shares of common stock sold in the Offering (including any additional shares sold during the 45-day option period), at an exercise price of $4.80 per share. The Underwriter’s Warrants issued in the Offering will be exercisable at any time and from time to time, in whole or in part, commencing six months from issuance for a period of three years from the date of issuance. The closing of the sale of the Offering occurred on March 2, 2020. On April 9, 2020, we issued 180,561 shares of our common stock and 12,640 Underwriter’s Warrants pursuant to a partial exercise by the Underwriter of the Over-Allotment Option, or the Partial Over-Allotment Option Exercise. The net proceeds to us from the Offering, including from the Partial Over-Allotment Option Exercise, after deducting the underwriting discount and our Offering expenses were $19,894,000. 29 Contractual Obligations The following table summarizes our significant contractual obligations and commercial commitments at August 31, 2020, and the effects such obligations are expected to have on our liquidity and cash flows in future periods (in thousands): Contractual Obligations Total Less than 1 year 1-3 years 3-5 years Over 5 years Clinical research study obligations $ 4,801 $ 2,967 $ 1,834 $ - $ - Operating lease obligations 698 147 292 259 - Royalty payment obligations 289 81 208 - - Accrued severance pay, net 18 - - - 18 Total $ 5,806 $ 3,195 $ 2,334 $ 259 $ 18 Off-Balance Sheet Arrangements As of August 31, 2020, we had no off balance sheet arrangements that have had or that we expect would be reasonably likely to have a future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. Planned Expenditures We invest heavily in research and development, and we expect that in the upcoming years our research and development expenses, net, will continue to be our major operating expense.