| SIGNIFICANT ACCOUNTING POLICIES | NOTE
1 - SIGNIFICANT ACCOUNTING POLICIES:
a. General:
1) Incorporation
and operations Oramed
Pharmaceuticals Inc. (collectively with its subsidiary, the "Company," unless the context indicates otherwise) was
incorporated on April 12, 2002, under the laws of the State of Nevada. From incorporation until March 3, 2006, the Company was
an exploration stage company engaged in the acquisition and exploration of mineral properties. On February 17, 2006, the Company
entered into an agreement with Hadasit Medical Services and Development Ltd. to acquire the provisional patent related to an orally
ingestible insulin capsule to be used for the treatment of individuals with diabetes. On
May 14, 2007, the Company incorporated a wholly-owned subsidiary in Israel, Oramed Ltd. (the "Subsidiary"), which
is engaged in research and development. On
March 11, 2011, the Company was reincorporated from the State of Nevada to the State of Delaware. On
July 30, 2019, the Subsidiary incorporated a wholly-owned subsidiary in Hong Kong, Oramed HK Limited. As of May 31, 2020, Oramed
HK Limited has no operations. On
November 30, 2015, the Company entered into a Technology License Agreement with Hefei Tianhui Incubator of Technologies Co. Ltd.
("HTIT") and on December 21, 2015, the 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 (the "License Agreement"). According to the License
Agreement, the Company granted HTIT an exclusive commercialization license in the territory of the People's Republic of China,
Macau and Hong Kong (the "Territory"), related to the Company's oral insulin capsule, ORMD-0801 (the "Product").
Pursuant to the License Agreement, HTIT will conduct, at its own expense, certain pre-commercialization and regulatory activities
with respect to the Subsidiary's technology and ORMD-0801 capsule, and will pay to the Subsidiary (i) royalties of 10% on
net sales of the related commercialized products to be sold by HTIT in the Territory ("Royalties"), and (ii) an aggregate
of $37,500, of which $3,000 was payable immediately, $8,000 will be paid subject to the Company entering into certain agreements
with certain third parties, and $26,500 will be paid upon achievement of certain milestones and conditions. In the event that
the Company does not meet certain conditions, the Royalties rate may be reduced to a minimum of 8%. Following the final expiration
of the Company's 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 expiration of the last-to-expire licensed patents in the Territory; and (ii) 15
years after the first commercial sale of the Product in the Territory (the "Royalty Term"). The
License Agreement shall remain in effect until the expiration of the Royalty Term. The License Agreement contains customary termination
provisions. Among
others, the Company's involvement through the product submission date will include consultancy for the pre-commercialization activities
in the Territory, as well as advisory services to HTIT on an ongoing basis. As
of May 31, 2020, the Company has received milestone payments in an aggregate amount of $20,500 as follows: the initial payment
of $3,000 was received in January 2016. Following the achievement of certain milestones, the second and third payments of $6,500
and $4,000, respectively, were received in July 2016, the fourth milestone payment of $4,000 was received in October 2016 and
the fifth milestone payment of $3,000 was received in January 2019. In
addition, on November 30, 2015, the Company entered into a Stock Purchase Agreement with HTIT (the "SPA"). According
to the SPA, the Company issued 1,155,367 shares of common stock to HTIT for $12,000. The transaction closed on December 28, 2015. In
July 2015, according to the letter of intent signed between the parties or their affiliates, HTIT's affiliate paid the Subsidiary
a non-refundable amount of $500 as a no-shop fee. The no-shop fee was deferred and the related revenue is recognized over the
estimated term of the License Agreement. For
revenue recognition policy see note 1c.
2) Development
and liquidity risks The
Company is engaged in research and development in the biotechnology field for 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 for delivery of other polypeptides, and has not generated significant revenues from its operations. Based on the Company's
current cash resources and commitments, the Company believes it will be able to maintain its current planned development activities
and the corresponding level of expenditures for at least the next 12 months, although no assurance can be given that the Company
will not need additional funds prior to such time. If there are unexpected increases in its operating expenses, the Company may
need to seek additional financing during the next 12 months. Successful completion of the Company's development programs
and its transition to normal operations is dependent upon obtaining necessary regulatory approvals from the U.S. Food and Drug
Administration prior to selling its products within the United States, obtaining foreign regulatory approvals to sell its products
internationally, or entering into licensing agreements with third parties. There can be no assurance that the Company will receive
regulatory approval of any of its product candidates, and a substantial amount of time may pass before the Company achieves a
level of revenues adequate to support its operations, if at all. The Company also expects to incur substantial expenditures in
connection with the regulatory approval process for each of its product candidates during their respective developmental periods.
Obtaining marketing approval will be directly dependent on the Company's ability to implement the necessary regulatory steps
required to obtain marketing approval in the United States and in other countries. The Company cannot predict the outcome of these
activities. In addition to the foregoing, based on the Company's current assessment, the Company does not expect any material
impact on its development timeline and its liquidity due to the worldwide spread of the COVID-19 virus. However, the Company is
continuing to assess the effect on its operation by monitoring the spread of COVID-19 and the actions implemented by the governments
to combat the virus throughout the world.
b. Loss
per common share Basic
and diluted net loss per common share are computed by dividing the net loss for the period by the weighted average number of shares
of common stock outstanding for each period. Outstanding stock options, warrants and restricted stock units ("RSUs")
have been excluded from the calculation of the diluted loss per share because all such securities are anti-dilutive for all periods
presented. The weighted average number of common stock options, warrants and RSUs excluded from the calculation of diluted net
loss was 4,940,900 and 4,386,209 for the nine month periods ended May 31, 2020 and May 31, 2019, respectively, and 5,194,275 and
4,568,811 for the three month periods ended May 31, 2020 and May 31, 2019, respectively.
c. Revenue
recognition The
License Agreement and the SPA were considered a single arrangement with multiple deliverables. The Company allocated the total
consideration of $49,500 between the License Agreement and the SPA according to their fair value, as follows: $10,617 was allocated
to the issuance of common stock (less issuance expenses of $23), based on the quoted price of the Company's shares on the closing
date of the SPA on December 28, 2015, and $38,883 was allocated to the License Agreement. Under
Accounting Standards Codification ("ASC") 605 (which was the authoritative revenue recognition guidance applied for
all periods prior to September 1, 2018) given the Company's continuing involvement through the expected product submission in
June 2023, amounts received relating to the License Agreement were recognized over the period from which the Company was 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. On
September 1, 2018, the Company adopted Accounting Standards Update ("ASU") 2014-09 "Revenue from Contracts with
Customers (Topic 606)" ("ASC 606"), using the modified retrospective method of adoption. Under this method,
the Company applied ASC 606 to the License Agreement at the adoption date and was required to make an adjustment to the September
1, 2018 opening accumulated deficit balance and all prior periods continue to be presented under ASC 605. The most significant
impact from adopting ASC 606 was the impact of the timing of recognition of revenue associated with the milestone payment. Under
ASC 605 (which was the authoritative revenue recognition guidance applied for all periods prior to September 1, 2018) given the
Company's continuing involvement through the expected product submission in June 2023, amounts received relating to the License
Agreement were recognized over the period from which the Company was 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, the Company
is 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. This method results
in the recognition of revenue earlier than under ASC 605 and the resulting impact was recorded as a reduction of the opening balance
of accumulated deficit at September 1, 2018 as further described below. Under
ASC 606, the Company identified a single performance obligation in the agreement and determined that the license and services
are not distinct as the license and services are highly dependent on each other. In other words, HTIT cannot benefit from the
license without the related services, and vice versa. 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. The
potential future royalty consideration is also considered a form of variable consideration under ASC 606 as it is based on a percentage
of potential future sales of the Company's products. However, the Company applies the sales-based royalty exception and accordingly
will recognize the sales-based royalty amounts when the related sale has occurred. To date, the Company has not recognized any
royalty-related revenue. Amounts
that were allocated to the License Agreement as of May 31, 2020 aggregated $22,382, all of which were received through the balance
sheet date. Through May 31, 2020, the Company has recognized revenue associated with this agreement in the aggregate amount of
$12,051 (of which $681 was recognized in the quarter ended May 31, 2020), and deferred the remaining amount of $10,331 which is
presented as deferred revenues on the condensed consolidated balance sheet.
d. Financial
instruments In
January 2016, the Financial Accounting Standards Board ("FASB") issued guidance which updates certain aspects of recognition,
measurement, presentation and disclosure of financial assets and financial liabilities ("ASU 2016-01"). The guidance
requires entities to recognize changes in fair value in net income rather than in accumulated other comprehensive income. The
Company adopted the provisions of this update in the first quarter of fiscal year 2019. Following the adoption, as of September
1, 2018, the Company classified the available for sale securities to financial assets measured in fair value through profit or
loss and no longer presents comprehensive income.
e. Condensed
Consolidated Financial Statements Preparation The
condensed consolidated financial statements included herein have been prepared in accordance with United States generally accepted
accounting principles ("U.S. GAAP") and, except as described in note 1f, on the same basis as the audited consolidated
financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2019
(the "2019 Form 10-K"). These condensed consolidated financial statements reflect all adjustments that are of a normal
recurring nature and that are considered necessary for a fair statement of the results of the periods presented. Certain information
and disclosures normally included in annual consolidated financial statements have been omitted in this interim period report
pursuant to the rules and regulations of the Securities and Exchange Commission. Because the condensed consolidated interim financial
statements do not include all of the information and disclosures required by U.S. GAAP for annual financial statements, they should
be read in conjunction with the audited consolidated financial statements and notes included in the 2019 Form 10-K. The results
for interim periods are not necessarily indicative of a full fiscal year's results.
f. Recently
adopted standards In
February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)", which supersedes the existing guidance for lease
accounting, Leases (Topic 840). The new standard requires a lessee to record assets and liabilities on its balance sheet for all
leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting
the pattern of expense recognition in the lessee's income statement. The Company adopted this standard as of September 1,
2019 on a modified retrospective basis and will not restate comparative periods. The Company elected the package of practical
expedients permitted under the transition guidance within the new standard which, among other things, allows the Company to carryforward
the historical lease classification. The Company made an accounting policy election to keep leases with an initial term of 12
months or less off of its balance sheet. The Company recognized those lease payments in its statements of operations on a straight-line
basis over the lease period. As
of the adoption date, the Company recognized an operating lease asset and liability of $113 and $113, respectively, as of September
1, 2019 on its balance sheet. |
