ORAMED PHARMACEUTICALS INC. 10-K

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.” 21 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. 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. 22 Comparison of Fiscal 2021 to Fiscal 2020 The following table summarizes certain statements of operations data for us for the twelve month periods ended August 31, 2021 and 2020: Year ended August 31, Operating Data: 2021 2020 (dollar amounts in thousands, except per share data) Revenues $ 2,703 $ 2,710 Cost of revenues - - Research and development expenses 20,989 10,235 General and administrative expenses 5,937 4,232 Financial income, net 1,234 246 Loss before taxes on income 22,989 11,511 Taxes on income - - Net loss for the year 22,989 11,511 Net loss attributable to Company’s shareholders 22,238 11,511 Net loss attributable to non-controlling interest 751 - Net loss for the year 22,989 11,511 Loss per common share – basic and diluted $ 0.78 $ 0.56 Weighted average common shares outstanding 28,469,068 20,532,347 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 2021 totaled $2,703,000, consistent with $2,710,000 for fiscal 2020. 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. There were no cost of revenues for fiscal 2021 and 2020. 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. 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. 23 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 during such period) 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 2021 increased by 105% to $20,989,000 from $10,235,000 for fiscal 2020. The increase is primarily due to an increase in expenses related to our Phase III clinical trial in addition to expenses related to the in process research and development costs related to Oravax, partially offset by a decrease in expenses related to our Phase II clinical trial. During fiscal 2021, stock-based compensation costs totaled $1,120,000, as compared to $458,000 during fiscal 2020. The increase is mainly attributable to new grants in fiscal 2021. 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 2021 and 2020, we did not recognize any research and development grants. As of August 31, 2021, our liability to pay royalties to the IIA was $243,000. 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. 24 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 40% from $4,232,000 for fiscal 2020 to $5,937,000 for fiscal 2021. The increase in costs incurred related to general and administrative activities during fiscal 2021, is primarily attributable to an increase in stock-based compensation costs, an increase in costs related to the directors and officers insurance policy and an increase in legal expenses, partially offset by a decrease in public and investor relations expenses. During fiscal 2021, as part of our general and administrative expenses, we incurred expenses of $1,575,000 related to stock-based compensation costs, as compared to an expense of $714,000 during fiscal 2020. The increase is mainly attributable to new grants during fiscal 2021. Financial income, net Net financial income, was $1,234,000 for fiscal 2021 as compared to net financial income of $246,000 for fiscal 2020. The increase is mainly attributable to an increase in the fair market value of some investments. Taxes on income No taxes on income were recognized for fiscal 2021 and 2020. Fiscal 2020 compared with Fiscal 2019 For a discussion of fiscal 2020 compared with fiscal 2019, 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, 2020. Liquidity and Capital Resources From our inception through August 31, 2021, we have incurred losses in an aggregate amount of $114,852,000. 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 $181,492,000, net of transaction costs. During that period we also received cash consideration of $27,300,000 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, 2021, we had $77,245,000 of available cash, $11,044,000 of short term deposits, $25,016,000 of long term deposits and $12,543,000 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. As of August 31, 2021, our total current assets were $95,337,000 and our total current liabilities were $6,679,000. On August 31, 2021, we had a working capital surplus of $88,658,000 and an accumulated loss of $114,852,000. 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. The increase in working capital surplus from August 31, 2020 to August 31, 2021 was primarily due to an increase in cash and cash equivalents. During fiscal 2021, cash and cash equivalents increased to $77,245,000 from $19,296,000 as of August 31, 2020, which is due to the reasons described below. 25 Operating activities used cash of $21,181,000 in fiscal 2021 compared to $12,440,000 used in fiscal 2020. Cash used in operating activities in fiscal 2021 and 2020 primarily consisted of net loss resulting from research and development and general and administrative expenses. Investing activities used cash of $23,764,000 in fiscal 2021, as compared to $4,626,000 provided by investing activities in fiscal 2020. Cash used in investing activities in fiscal 2021 consisted primarily of the acquisition of short-term and long-term investments, and acquisition of short-term and long-term marketable securities, partially offset by proceeds from short-term investments and proceeds from the sale of marketable securities. Financing activities provided cash of $102,892,000 in fiscal 2021, as compared to $23,786,000 in fiscal 2020. Cash provided by financing activities during fiscal 2021 consisted of proceeds from our issuance of common stock and proceeds from exercise of warrants and options. Our primary financing activities since the beginning of fiscal 2021 were as follows: ● During fiscal 2021, 3,175,645 warrants were exercised and 103,782 options were exercised and resulted in the issuance of 3,253,334 shares of common stock. Out of these exercised options, 24,646 options were exercised for cash and 79,136 via cashless method. The cash consideration received for the exercise of options was $125,593. 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. ● On December 1, 2020, we entered into an Equity Distribution Agreement, or the New Sales Agreement, pursuant to which we could, from time to time and at our option, issue and sell shares of our common stock having an aggregate offering price of up to $40,000,000 through a sales agent, subject to certain terms and conditions. Any shares sold were to be sold pursuant to our effective shelf registration statement on Form S-3 including a prospectus dated February 10, 2020 as supplemented by a prospectus supplement dated December 1, 2020. We paid 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 New Sales Agreement. As of August 31, 2021, 4,061,956 shares were issued under the New Sales Agreement for aggregate net proceeds of $38,799,000. ● On June 16, 2021, we entered into an Equity Distribution Agreement, or the Equity Distribution Agreement, pursuant to which we could, from time to time and at our option, issue and sell shares of our common stock having an aggregate offering price of up to $28,000,000 through a sales agent, subject to certain terms and conditions. Any shares sold were to 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 Equity Distribution Agreement). We paid 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 Equity Distribution Agreement. As of August 31, 2021, 1,823,287 shares were issued under the Equity Distribution Agreement for aggregate net proceeds of $27,119,000. ● On July 15, 2021, we entered into an additional Equity Distribution Agreement, or the New Equity Distribution 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 $100,000,000 through a sales agent, subject to certain terms and conditions. Any shares sold was sold pursuant to our effective shelf registration statement on Form S-3 including a prospectus and prospectus supplement, each dated July 15, 2021. We paid 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 New Equity Distribution Agreement. As of August 31, 2021 and through November 24, 2021, 208,451 and 273,997 shares were respectively issued under the New Equity Distribution Agreement for aggregate net proceeds of $3,884,000 and $5,129,000 respectively. ● On November 3, 2021, we entered into a Securities Purchase Agreement with several institutional and accredited investors, pursuant to which we agreed to sell, in a registered direct offering, 2,000,000 shares of our common stock for an aggregate offering price of $50,000,000 to the Purchasers. The net proceeds from this offering were approximately $46,375,000. 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. We have expected obligations with respect to an aggregate of approximately $31 million of clinical research obligations over the next three years.