ORAMED PHARMACEUTICALS INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the audited consolidated financial statements and the related notes included elsewhere herein and in our audited consolidated financial statements. In addition to our audited 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 currently a pharmaceutical company engaged in the research and development of innovative pharmaceutical solutions with a technology platform that allows for the oral delivery of therapeutic proteins.
Through our research and development efforts, we have developed an oral dosage form intended to withstand the harsh environment of the stomach and effectively deliver active biological insulin or other proteins. The excipients in the formulation are not intended to modify the proteins chemically or biologically, and the dosage form is designed to be safe to ingest. We plan to continue to conduct clinical trials to show the effectiveness of our technology. OnJanuary 11, 2023 , we announced that the ORA-D-013-1 Phase 3 trial did not meet its primary and secondary endpoints. As a result, we have initiated a comprehensive analysis of the data to understand if there is a path forward for our oral insulin candidate. Concurrently, we are examining our existing pipeline and have commenced an evaluation process of potential strategic opportunities, with the goal of enhancing value for our stockholders. Impact of COVID-19 We do not expect any material impact on our development timeline and our liquidity due to COVID-19. However, we experienced approximately six months of delays in clinical trials due to slow-downs of recruitment for trials generally. On the other hand, Oravax continues to develop its oral vaccine, the demand for which may be reduced if COVID-19 continues to abate. We continue to assess the effect on our operations by monitoring the status of COVID-19. 27 Results of Operations
The table and discussion that follows includes a comparison of our results of operations and liquidity and capital resources for the year endedDecember 31, 2022 and the year endedDecember 31, 2021 and the four month periods endedDecember 31, 2021 and 2020. For a comparison of our results of operations and financial condition for the fiscal years endedAugust 31, 2021 and 2020, see "Item 7. 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 endedAugust 31, 2021 , filed with theSEC onNovember 24, 2021 . For information regarding the change in the Company's fiscal year from the period beginning onSeptember 1 and ending onAugust 31 to the period beginning onJanuary 1 and ending onDecember 31 , see note 1 to our audited consolidated financial statements. Four months Four months Year ended ended ended Year ended December 31, December 31, December 31, August 31, 2022 2021 2021 2020 2021 (Unaudited) (Unaudited) (dollar amounts in thousands, except share and per share data) Revenues$ 2,703 $ 2,703 $ 904 $ 904$ 2,703 Cost of revenues - - - - - Research and development expenses 27,639 23,203 9,037 6,889 20,989
Sales and marketing expenses 1,851 898 898 - - General and administrative expenses 13,811 7,591 3,295 1,576 5,937 Financial income (expense), net 2,934 1,068 71 237 1,234 Loss before taxes on income 37,664 27,921
12,255 7,324 22,989 Taxes on income 100 - - - - Net loss for the period$ 37,764 $ 27,921 $ 12,255 $ 7,324 $ 22,989 Net loss attributable to Company's stockholders 36,561 26,583 11,668 7,324 22,238 Net loss attributable to non-controlling interest 1,203 1,338 587 - 751 Net loss for the period$ 37,764 $ 27,921 $ 12,255 $ 7,324 $ 22,989 Basic and diluted loss per share of common stock$ 0.94 $ 0.81 $ 0.31 $ 0.30 $ 0.78 Weighted average shares of common stock outstanding used in computing basic and diluted loss per share of common stock 38,997,649 32,641,288 37,113,137 24,394,010 28,469,068 Revenues
Revenues consist of proceeds related to the HTIT License Agreement that are
recognized on a cumulative basis when it is probable that a significant reversal
in the amount of cumulative revenue recognized will not occur, through the
expected product submission date by HTIT of
Revenues for the years ended
Revenues for the four month periods ended
Cost of Revenues Cost of revenues consists of royalties related to the HTIT License Agreement that will be paid over the term of the HTIT License Agreement in accordance with revenue recognition accounting and the Law for the Encouragement ofIndustrial Research , Development and Technological Innovation, 1984, as amended, including any regulations or tracks promulgated thereunder, or the R&D Law.
There was no cost of revenues for the years ended
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 trials.
28
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 year ended December 31, 2022 increased
by 19% to $27,639,000 , compared to $23,203,000 for the year ended December 31,
2021 . The increase was mainly due to an increase in expenses related to our
Phase 3 clinical trials and to stock-based compensation expenses. Stock-based
compensation expenses for the year ended December 31, 2022 , were $3,176,000 ,
compared to $1,598,000 for the year ended December 31, 2021 . The increase was
mainly due to new grants in 2022.
Research and development expenses for the four month period ended December 31,
2021 increased by 31% to $9,037,000 , compared to $6,889,000 for the four month
period ended December 31, 2020 . The increase was mainly due to an increase in
expenses related to our Phase 3 and NASH clinical trials in addition to expenses
related to in process research and development costs related to Oravax.
Stock-based compensation expenses for the four month period ended December 31,
2021 , were $649,000 , compared to $171,000 for the four month period ended
December 31, 2020 . The increase was mainly due to equity awards granted to a
consultant and to new grants awarded in 2021.
Following the results of the ORA-D-013-1 Phase 3 trial, which did not meet its
primary and secondary endpoints, we terminated both ORA-D-013-1 and ORA-D-013-2
Phase 3 clinical trials. In parallel, we have initiated a comprehensive analysis
of the data to understand if there is a path forward for our oral insulin
candidate. We are examining our existing pipeline and have commenced an
evaluation process of potential strategic opportunities, with the goal of
enhancing value for our stockholders.
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.
FromAugust 2009 toMarch 2014 , our subsidiaryOramed Ltd. was awarded five government grants amounting to a total net amount ofNIS 8 million (approximately$2,194,000 during such period) from the IIA. We used these funds to support further research and development and clinical trials of our oral insulin capsule and oral GLP-1 analog candidate during the period fromFebruary 2009 toDecember 2014 . The five grants are subject to repayment according to the terms determined by the IIA and applicable law. In the years endedDecember 31, 2022 and 2021, the four month periods endedDecember 31, 2021 and 2020 and the year endedAugust 31, 2021 , we did not recognize any research and development grants. As ofDecember 31, 2022 , we had incurred liabilities to pay royalties to theIsrael Innovation Authority of theIsraeli Ministry of Economy and Industry of$133,000 . 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 inIsrael . However, when applying for a grant, the applicant may declare that part of the manufacturing will be performed outside ofIsrael 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 ofIsrael 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 ofIsrael 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 ofIsrael . In any case of transfer of manufacturing out ofIsrael , 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 ofIsrael . 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 ofIsrael in exchange for the import of different manufacturing intoIsrael 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 inIsrael 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 outsideIsrael 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. 29
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. Sales and Marketing Expenses
Sales and marketing expenses include the salaries and related expenses of our commercial functions, consulting costs and other general costs.
Sales and marketing expenses for the year endedDecember 31, 2022 increased by 106% to$1,851,000 , compared to$898,000 for the year endedDecember 31, 2021 . The increase was mainly due to stock-based compensation expenses, salary related expenses and consulting expenses, mainly resulting from hiring our Chief Commercial Officer. Stock-based compensation expenses for the year endedDecember 31, 2022 were$1,172,000 , compared to$579,000 for the year endedDecember 31, 2021 . The increase was mainly due to equity awards granted to
an employee during 2022. Sales and marketing expenses for the four month period endedDecember 31, 2021 were$898,000 , compared to no expenses for the four month period endedDecember 31, 2020 . The increase was mainly due to stock-based compensation expenses, salary related expenses and consulting expenses. Stock-based compensation costs for the four month period endedDecember 31, 2021 were$579,000 , compared to no stock-based compensation expenses during the four month period endedDecember 31, 2020 . The increase was mainly due to equity awards granted to an employee during 2021.
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 year endedDecember 31, 2022 increased by 82% to$13,811,000 , compared to$7,591,000 for the year endedDecember 31, 2021 . The increase was mainly due to higher stock-based compensation costs, an increase in legal expenses and higher salary expenses due to the recruitment of new employees in the year endedDecember 31, 2022 , partially offset by lower bonuses in the year endedDecember 31, 2022 . Stock-based compensation expenses for the year endedDecember 31, 2022 were$7,160,000 , compared to$2,368,000 for the year endedDecember 31, 2021 . The increase was mainly due to equity awards granted to employees during 2022. General and administrative expenses for the four month period endedDecember 31, 2021 increased by 109% to$3,295,000 , compared to$1,576,000 for the four month period endedDecember 31, 2020 . The increase was mainly due to an increase in stock-based compensation expenses and professional fees as well as public relations and investor relations expenses. Stock-based compensation costs for the four month period endedDecember 31, 2021 were$1,034,000 , compared to$242,000 during the four month period endedDecember 31, 2020 . The increase was mainly due to equity awards granted to employees during the four month period endedDecember 31, 2021 and to new award grants during 2021. 30
Financial Income (Expense), Net
Net financial income was$2,934,000 for the year endedDecember 31, 2022 , compared to net financial income of$1,068,000 for the year endedDecember 31, 2021 . The increase is mainly due to interest from short and long-term bank deposits, partially offset by loss from revaluation of the shares we hold in Entera and DNA. Net financial income was$71,000 for the four month period endedDecember 31, 2021 , compared to$237,000 for the four month period endedDecember 31, 2020 . The decrease is mainly due to a decrease in fair value of the ordinary shares of Entera.
Basic and Diluted Loss Per Share of Common Stock
Basic and diluted loss per share of common stock for the year endedDecember 31, 2022 increased by 16% to$0.94 , compared to$0.81 for the year endedDecember 31, 2021 . The increase in loss was mainly due to the higher net loss in the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 . Basic and diluted loss per share of common stock for the four month period endedDecember 31, 2021 increased by 3% to$0.31 , compared to$0.30 for the four month period endedDecember 31, 2020 . The increase in loss per share was due to a higher net loss and a higher number of weighted average shares of common stock in the four month period endedDecember 31, 2021 compared to the four month period endedDecember 31, 2020 .
Weighted Average Shares of Common Stock Outstanding
Weighted average shares of common stock outstanding for the year endedDecember 31, 2022 were 38,997,649, compared to 32,641,288 for the year endedDecember 31, 2021 . The increase was mainly due to shares issued in connection with our controlled equity offering and registered direct offering. Weighted average shares of common stock outstanding for the four month period endedDecember 31, 2021 were 37,113,137, compared to 24,394,010 for the four month period endedDecember 31, 2020 . The increase was mainly due to shares issued in connection with our controlled equity offering and registered direct offering.
Liquidity and Capital Resources
From our inception throughDecember 31, 2022 , we have incurred losses in an aggregate amount of$163,081,000 . During that period and throughDecember 31, 2022 , 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$252,946,000 , net of transaction costs. During that period, we also received cash consideration of$28,001,000 from the exercise of warrants and options. We expect to seek additional financing through similar sources in the future, as needed. As ofDecember 31, 2022 , we had$40,464,000 of available cash,$111,513,000 of short-term bank deposits,$3,743,000 of marketable securities and$2,700,000 of long-term investments. From inception throughDecember 31, 2022 , we have not generated significant revenues from our operations. Management continues to evaluate various financing alternatives for funding new strategic activities, 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 activities and the corresponding level of expenditures for at least the next 12 months, although no assurance can be given that we will not need additional funds prior to such time. If there are increases in our operating expenses, we may need to seek additional financing during the next 12 months. Successful completion of our development programs and our transition to normal operations is dependent upon obtaining necessary regulatory approvals from the FDA prior to selling our products withinthe United States , obtaining foreign regulatory approvals to sell our products internationally, or entering into licensing agreements with third parties. There can be no assurance that we will receive regulatory approval of any of our product candidates, and a substantial amount of time may pass before we achieve a level of revenues adequate to support our operations, if at all. We also expect to incur substantial expenditures in connection with the regulatory approval process for each of our product candidates during their respective developmental periods. Obtaining marketing approval will be directly dependent on our ability to implement the necessary regulatory steps required to obtain marketing approval inthe United States and in other countries. We may also need additional funds to realize the decisions made as part of our strategic review process. We cannot predict the outcome of these activities. 31
As ofDecember 31, 2022 , our total current assets were$157,109,000 and our total current liabilities were$5,746,000 . OnDecember 31, 2022 , we had a working capital surplus of$151,363,000 and an accumulated loss of$163,081,000 . As ofDecember 31, 2021 , our total current assets were$147,937,000 and our total current liabilities were$7,368,000 . OnDecember 31, 2021 , we had a working capital surplus of$140,569,000 and an accumulated loss of$126,520,000 . The increase in working capital surplus fromDecember 31, 2021 toDecember 31, 2022 was mainly due to an increase in cash and cash equivalents. During the year endedDecember 31, 2022 , cash and cash equivalents decreased to$40,464,000 from$77,245,000 as ofAugust 31, 2021 . The decrease was mainly due to the reasons described below. Operating activities used cash of$27,918,000 in the year endedDecember 31, 2022 , compared to$21,181,000 used in the year endedAugust 31, 2021 . Cash used in operating activities consisted mainly of net loss resulting from research and development, general and administrative and sales and marketing expenses. Investing activities provided cash of$30,211,000 in the year endedDecember 31, 2022 , compared to cash used by investing activities of$23,764,000 in the year endedAugust 31, 2021 . Cash provided in investing activities is mainly due to proceeds from short-term investments, partially offset by the acquisition of short-term investments. Financing activities provided cash of$10,779,000 in the year endedDecember 31, 2022 , compared to$102,892,000 in the year endedAugust 31, 2021 . Cash provided by financing activities consisted mainly of proceeds from our issuance of common stock and proceeds from exercise of warrants and options. Our primary financing activities since the beginning of the year endedDecember 31, 2022 were as follows:
? During the year ended
71,607 options were exercised, resulting in the issuance of 38,651 shares of
common stock. Out of these exercised options, 10,750 options were exercised
for cash and 60,857 via a cashless method. The cash consideration received for
the exercise of options and warrants was
ended
were exercised for cash, resulting in the issuance of 91,966 shares of common
stock. The cash consideration received for the exercise of options and
warrants was
? On
or the Cantor Equity Distribution Agreement, with
agent, pursuant to which we may issue and sell shares of our common stock
having an aggregate offering price of up to
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
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 Cantor Equity
Sales Agreement. As of
and 1,971,447 shares, respectively, were issued under the Cantor Equity
Distribution Agreement for aggregate net proceeds of $23,823,000 and
$26,253,000 , respectively.
During the four month period ended December 31, 2021 , cash and cash equivalents
decreased to $27,456,000 from the $77,245,000 reported as of August 31, 2021 ,
which is due to the reasons described below.
32
Operating activities used cash of $11,122,000 in the four month period ended
December 31, 2021 , compared to $8,263,000 used in the four month period ended
December 31, 2020 . Cash used in operating activities primarily consisted of
research and development, sales and marketing and general and administrative
expenses, as well as changes in deferred revenue due to the HTIT License
Agreement, partially offset by changes in accounts payable and accrued expenses
and stock-based compensation.
Investing activities used cash of $99,248,000 in the four month period ended
December 31, 2021 , compared to cash used in investing activities of $2,405,000
in the four month period ended December 31, 2020 . Cash used in investing
activities in the four month period ended December 31, 2021 consisted primarily
of the purchase of short-term deposits. Cash used in investing activities in the
four month period ended December 31, 2020 consisted primarily of the purchase of
short-term deposits, offset by the proceeds from bonds held to maturity.
Financing activities provided cash of $60,572,000 in the four month period ended
December 31, 2021 , compared to $13,001,000 provided in the four month period
ended December 31, 2020 . Cash provided by financing activities consisted
primarily of proceeds from the issuance of our common stock.
On November 3, 2021 , we entered into a securities purchase agreement with
several institutional and accredited investors, or the Purchasers, pursuant to
which we agreed to sell, in a registered direct offering, or the Offering, an
aggregate of 2,000,000 shares of our common stock to the Purchasers for an
offering price of $25.00 per share. The closing of the sale of the shares
occurred on November 5, 2021 . The net proceeds to us from the Offering, after
deducting the placement agent's fees and expenses and the Company's Offering
expenses, were approximately $46,375,000 .
Trend Information
Following the results of the Phase 3 trials for our oral insulin capsule
candidate, ORMD-0801, we have initiated a comprehensive analysis of the data to
understand if there is a path forward for our oral insulin candidate.
Concurrently, we are examining our existing pipeline and have commenced an
evaluation process of potential strategic opportunities, with the goal of
enhancing value for our stockholders. At this time, we cannot foresee how these
strategic decisions will impact our financial results and operations in 2023.
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. As of December 31, 2022 , we had expected obligations
with respect to an aggregate of approximately $21 million of clinical research
obligations over the next three years.
Following the results of the Phase 3 trials for our oral insulin capsule candidate, ORMD-0801 and the current strategic review initiated by the Company, our obligations may change significantly.
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 withU.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. 33 Valuation of RSUs, 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 orMonte 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 toSeptember 1, 2018 ) given our continuing involvement through the expected product submission by HTIT inJune 2023 , amounts received relating to the HTIT 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 by HTIT inJune 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. OnNovember 13, 2022 , we entered into a distribution license agreement with Medicox, or the Medicox License Agreement. The Medicox License Agreement grants Medicox an exclusive license to apply for regulatory approval and distribute ORMD-0801 in theRepublic of Korea . 34
Under ASC 606, we identified Medicox as a customer and the Medicox License Agreement as a contract with a customer.
We identified a performance obligation in the Medicox License Agreement to stand-ready and provide Medicox with support in its commercialization efforts in theRepublic of Korea . This performance obligation includes a non-distinct distribution license for ORMD-0801, which we view a predominant item in the combined performance obligation. We concluded that the license is not distinct, as no party other than us is capable of providing related services to Medicox, and both the license and related services are necessary for the customer to obtain a regulatory approval in theRepublic of Korea . In addition, the agreement covers the terms of future manufacturing services, that are contingent on the completion and success of the commercialization efforts.
The Medicox License Agreement contains a fixed consideration of
Our obligation to stand-ready and support Medicox will be recognized on a
straight-line basis over the period we expect to provide support to Medicox. As
of
If Medicox proceeds with the regulatory approval process in theRepublic of Korea , we expect most of the revenue to be recognized in 2024, going forward. We note that our Phase 3 trial did not meet its primary and secondary endpoints. If Medicox chooses to terminate the agreement as a result of the outcome of the Phase 3 trials, we will accelerate revenue recognition and recognize it in 2023.
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