Oramed Pharmaceuticals Inc. — Form 10-Q Summary
Business context and period. This is the unaudited quarter ended November 30, 2012, Oramed’s first quarter of fiscal 2013. The development-stage biotechnology company is developing an oral insulin capsule and other oral peptide-delivery products. It had generated no operating revenue through the period.
Financial performance and position
| Metric | Three months ended Nov. 30, 2012 | Prior-year quarter |
|---|---|---|
| Revenue | None | None |
| Research and development, net | $392,626 | $184,016 |
| General and administrative | $339,213 | $281,901 |
| Net financial expense | $226,914 | $12,602 |
| Net loss | $958,753 | $478,519 |
| Loss per share, basic and diluted | $0.01 | $0.01 |
| Operating cash used | $792,826 | $484,070 |
Total comprehensive loss was $722,885, reflecting other comprehensive income related to available-for-sale securities. No revenue-based margin is applicable.
- At November 30, cash and cash equivalents were $5.53 million; marketable securities were $1.06 million, and current assets totaled $6.81 million.
- Current liabilities were $334,554; total assets were $6.82 million and stockholders’ equity was $6.25 million. The company reported no conventional borrowings. A $228,272 provision for an uncertain tax position remained outstanding.
- Cash increased $1.10 million during the quarter, including $1.46 million of net financing proceeds and $454,227 from investing activities. Operating activities used $792,826.
Material changes versus the prior comparable period
- Net loss approximately doubled, mainly as R&D spending rose in preparation for the planned U.S. Phase 2 trial. R&D stock-based compensation was $78,438 versus $24,605.
- G&A increased 20% to $339,213; stock-option costs in G&A rose to $139,770 from $26,691.
- Net financial expense increased to $226,914, including a $296,982 expense associated mainly with changes to warrant terms and issuance of a replacement warrant.
- Shares outstanding increased from 80.08 million at August 31 to 86.51 million at November 30. The quarter included equity financing and shares issued in exchange for an option to acquire D.N.A Biomedical shares.
Outlook, risks, contingencies, and unusual items
- Management estimated planned expenditures of $4.852 million for the 12 months beginning December 1, 2012: $3.840 million for net R&D, $1.024 million for G&A, and $12,000 of net financial income. It anticipated needing approximately $4.9 million to fund activity over the following 12 months.
- Management believed existing resources and financing proceeds would support planned activity for at least 12 months, but stated additional financing might be needed and was not assured. It expected a significant R&D increase as the Phase 2 study progressed.
- The filing described an FDA IND filing planned for the fourth calendar quarter of 2012 and a Phase 2 oral-insulin trial expected to start in the first calendar quarter of 2013 and finish in September 2013. Medpace was engaged as CRO for approximately $3.5 million, payable based on milestones; none had been paid or recognized by quarter-end.
- The company remained dependent on successful development and regulatory approvals, which are uncertain. It reported cumulative development-stage losses of $18.85 million and no assurance that products would receive approval or generate sufficient revenue.
- The D.N.A transaction exchanged 2,390,057 Oramed shares for an option to acquire up to 21,637,611 D.N.A shares. The Israeli Securities Authority questioned D.N.A’s approval procedure; Oramed said it believed the process was proper based on legal advice. The option’s fair value was $747,151 at quarter-end, using Level 3 inputs.
- Warrant amendments removed anti-dilution protection for a leading investor; related warrants ceased to be classified as liabilities. The transaction included a new warrant and a CEO’s personal share-purchase undertaking, creating potential dilution.
- Management disclosed a material weakness in disclosure controls due to inadequate segregation of duties: the CFO was the sole qualified internal accounting and reporting employee, without independent internal checks. No material change in internal control over financial reporting was reported during the quarter.
Important facts for investors to verify
- Whether the planned IND submission and Phase 2 trial proceeded on the stated timetable, and whether trial costs remain consistent with the $3.5 million CRO commitment.
- Whether cash, marketable securities, financing access, and grant receipts are sufficient to fund the development plan without further dilution.
- The status and outcome of the D.N.A option and the Israeli Securities Authority’s concern regarding its approval process.
- The full potential dilution from outstanding warrants, finder’s fees, and the CEO’s personal share-purchase undertaking.
- Whether the disclosed segregation-of-duties weakness has been remediated and whether the uncertain tax provision or other commitments have changed.