Beyond Air, Inc. - Quarter Report: 2018 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2018

OR

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to                    

Commission file number: 000-55759

AIT Therapeutics, Inc.

(Exact name of registrant as specified in its charter)

+516.665.8200

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of August 14, 2018, there were 8,406,657 shares of common stock, par value $0.0001 per share (“Common Stock”), outstanding.

AIT THERAPEUTICS, INC.
INDEX TO FORM 10-Q FILING
FOR THE PERIOD ENDED JUNE 30, 2018

Table of Contents

PART I FINANCIAL INFORMATION

ITEM 1. Financial Statements.

INTERM CONSOLIDATED FINANCIAL STATEMENTS

AS OF JUNE 30, 2018

U.S. DOLLARS IN THOUSANDS

INDEX

AIT THERAPEUTICS, INC. AND ITS SUBSDIARIES

CONSOLIDATED BALANCE SHEETS

U.S. dollars in thousands, except share and per share data

The accompanying notes are an integral part of the consolidated financial statements.

AIT THERAPEUTICS, INC. AND ITS SUBSDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

U.S. dollars in thousands, except share and per share data

The accompanying notes are an integral part of the consolidated financial statements.

AIT THERAPEUTICS, INC. AND ITS SUBSDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIENCY)

U.S. dollars in thousands, except share and per share data

*)       Represents an amount lower than $1.

The accompanying notes are an integral part of the consolidated financial statements.

AIT THERAPEUTICS, INC. AND ITS SUBSDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

U.S. dollars in thousands

The accompanying notes are an integral part of the consolidated financial statements.

AIT THERAPEUTICS, INC.

U.S DOLLARS IN THOUSANDS (except shares and per share amounts)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018

(Unaudited)

NOTE 1:- GENERAL

Advanced Inhalation Therapies (AIT) Ltd. (“AIT”) was incorporated in Israel on May 1, 2011 and commenced its operations in May 2012. In December 2016, through a merger transaction, AIT became a wholly-owned subsidiary of the Company.

The Company is an emerging medical device company that is developing a Nitric Oxide (NO) delivery system that generates NO from ambient air. The system can generate up to 400 parts per million (ppm) of NO for delivery to a patient’s lung. The system can deliver continuously or for a fixed amount of time and can titrate dose on demand or maintain a constant dose. Hence the system can be used to treat patients on a ventilator requiring NO, those with chronic lung disease or acute severe lung infections via delivery through a breathing mask.

On August 29, 2014, AIT established a wholly-owned subsidiary, Advanced Inhalation Therapies (AIT) Inc. (“Inc.”), a Delaware corporation.

On December 29, 2016, KokiCare Inc. entered into an Agreement and Plan of Merger (as subsequently amended, the “Merger Agreement”), together with Red Maple Ltd., a wholly owned subsidiary of KokiCare Inc., (“Merger Sub”), and AIT. The Merger Agreement provided for (i) the merger of Merger Sub with and into AIT pursuant to the laws of the State of Israel (the “Israeli Merger”), and (ii) the conversion of the ordinary shares and other outstanding securities of AIT into the right to receive shares and other applicable securities of AITT, with AIT surviving as a wholly owned subsidiary of AITT (the “Merger”). The Israeli Merger became effective on December 29, 2016 and the Merger closed on January 13, 2017 (the “Closing”).

Prior to consummation of the Merger:

AIT THERAPEUTICS, INC.

U.S DOLLARS IN THOUSANDS (except shares and per share amounts)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018

(Unaudited)

NOTE 1:- GENERAL (Cont.)

In connection with the Closing of the Merger, all outstanding ordinary shares, warrants and options of AIT were converted into the rights to receive shares of AITT’s Common Stock, warrants for AITT’s Common Stock and stock options for AITT’s Common Stock, respectively, at a ratio of 1:1.

The Merger was accounted for as a reverse recapitalization which is outside the scope of ASC 805, “Business Combinations”. Under reverse capitalization accounting, AIT is considered the acquirer for accounting and financial reporting purposes and acquired the assets and assumed the liabilities of the Company. Assets acquired and liabilities assumed are reported at their historical amounts. Consequently, the consolidated financial statements of the Company reflect the operations of the acquirer for accounting purposes together with a deemed issuance of shares, equivalent to the shares held by the former stockholders of the legal acquirer and a recapitalization of the equity of the accounting acquirer. These consolidated financial statements include the accounts of the Company since the effective date of the reverse capitalization and the accounts of AIT since inception.

The consolidated financial statements do not include any adjustments with respect to the carrying amounts of assets and liabilities and their classification that might be necessary should the Company be unable to continue as a going concern. The Company management and the Board of Directors believe that the Company’s existing financial resources are adequate to satisfy its expected liquidity requirements through the end of June 2019.

On May 10, 2018, the Company’s board of directors approved a change in the Company’s fiscal year end from December 31 to March 31. The change in the Company’s fiscal year end resulted in a three month transition period that began on January 1, 2018 and ended on March 31, 2018.

AIT THERAPEUTICS, INC.

U.S DOLLARS IN THOUSANDS (except shares and per share amounts)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018

(Unaudited)

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES

The Company accounts for its contingent liabilities in accordance with ASC 450 “Contingencies”. A provision is recorded when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. With respect to legal matters, provisions are reviewed and adjusted to reflect the impact of negotiations, estimated settlements, legal rulings, advice of legal counsel and other information and events pertaining to a particular matter.

The Company accounted for warrants to purchase shares of its Common Stock held by investors which include down round protective provisions as a liability according to the provisions of ASC 815-40, “Derivatives and Hedging Contracts in Entity’s Own Equity” (“ASC 815”). The Company measures the warrants at fair value by using the Black-Scholes model in each reporting period until they are exercised or expired, with changes in the fair values being recognized in the Company’s statement of comprehensive loss as financial expense (income), net.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (ASU 2016-02), which generally requires companies to recognize operating and financing lease liabilities and corresponding right-of-use assets on the balance sheet. This update is effective for annual periods beginning after December 15, 2019, and interim periods within those annual periods. Early adoption is permitted. The Company is evaluating the effect that this guidance will have on its consolidated financial statements and related disclosures.

AIT THERAPEUTICS, INC.

U.S DOLLARS IN THOUSANDS (except shares and per share amounts)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018

(Unaudited)

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (cont.)

In November 2016, the FASB issued Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (ASU 2016-18), which requires companies to include amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The Company adopted the standard commencing January 1, 2018. The impact of the adoption was immaterial to the consolidated financial statements.

NOTE 3:- UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

The accompanying unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ending March 31, 2019.

NOTE 4:- FAIR VALUE MEASUREMENT

ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”), defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions and risk of nonperformance.

ASC 820 also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. ASC 820 establishes three levels of inputs that may be used to measure fair value.

AIT THERAPEUTICS, INC.

U.S DOLLARS IN THOUSANDS (except shares and per share amounts)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018

(Unaudited)

NOTE 4:- FAIR VALUE MEASUREMENT (cont.)

The Company accounted for the warrants issued to investors which included, among others, down round protective provisions as a non-current liability according to provisions of ASC 815. The Company will measure the warrants at fair value in each reporting period until they are exercised or expired, with changes in the fair value being recognized in the Company’s statement of comprehensive loss as financial income or expense, as appropriate. Under ASC 820, the warrants are classified as Level 3.

Under ASC 820, the marketable securities invested in mutual funds are classified as Level 2.

The Company used the following assumptions to estimate the fair value of the warrants:

The changes in Level 3 liabilities associated with the warrants that were issued to investors are measured at fair value on a recurring basis. The following tabular presentation reflects the components of the liability associated with such warrants as of June 30, 2018:

AIT THERAPEUTICS, INC.

U.S DOLLARS IN THOUSANDS (except shares and per share amounts)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018

(Unaudited)

NOTE 4:- FAIR VALUE MEASUREMENT (cont.)

As of June 30, 2018, none of the warrants granted have been exercised.

The fair value of the warrants was estimated using the Black-Scholes method. The significant unobservable inputs are the expected term and volatility.

Upon close of the February 2018 offering, the exercise price of all Existing Warrants detailed above was adjusted pursuant to the terms and conditions of those warrants, resulting in the adjustment of the exercise price to $4.25 from $6.90. Such adjustment is included in the revaluation of the warrants and described above.

In addition, the Company’s financial instruments also include cash and cash equivalents, restricted cash, other accounts receivable, trade payables and other accounts payables. As of June 30, 2018, the fair value of these financial instruments was not materially different from their carrying values due to the short-term maturities of such instruments.

NOTE 5:- CONTINGENT LIABILITIES AND COMMITMENTS

AIT THERAPEUTICS, INC.

U.S DOLLARS IN THOUSANDS (except shares and per share amounts)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018

(Unaudited)

NOTE 5:- CONTINGENT LIABILITIES AND COMMITMENTS (cont.)

According to the Agreement, the Company agreed to pay NitricGen a total of $2,000 in several future payments depending on achieving certain milestones, as defined in the Agreement, and to pay NitricGen royalties on sales of the Delivery System. In addition, the Company agreed to grant NitricGen warrants to purchase 100,000 shares of AITT common stock at an exercise price of $6.90 per share.

On March 1, 2018 the Company paid NitricGen $200 for achieving the first millstone as defined in the Agreement, which was recorded as research and development expenses in the three months period ended March 31, 2018

Given the early stage of the litigation, it is not possible to determine or assess the probability of any particular outcome.

NOTE 6:- STOCKHOLDERS’ EQUITY (DEFICIENCY)

The Common Stock confers upon the holders the right to receive notice to participate and vote in general meetings of the Company, and the right to receive dividends, if declared, and to participate in the distribution of the surplus assets and funds of the Company in the event of liquidation, dissolution or winding up of the Company.

On February 16, 2018, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with several purchasers (the “Purchasers”).

Pursuant to the Purchase Agreement, the Company agreed to sell to the Purchasers (the “Offering”) warrants to purchase 4,599,604 shares of its common stock, par value $0.0001 per share (the “Common Stock”) at a purchase price of $0.01 per underlying warrant share. The warrants are comprised of an aggregate of (i) 2,299,802 Tranche A Warrants (the “Tranche A Warrants”) to purchase one share of Common Stock (the “Tranche A Warrant Shares”) at an exercise price of $4.25 per Tranche A Warrant Share, exercisable within three days from the issue date of the Warrants and (ii) an equal number of Tranche B Warrants (the “Tranche B Warrants” and, together with the Tranche A Warrants, the “Warrants”) to purchase one share of Common Stock at an exercise price of $4.25 per Tranche B Warrant Share, exercisable within three years from the issue date of the Warrants.

AIT THERAPEUTICS, INC.

U.S DOLLARS IN THOUSANDS (except shares and per share amounts)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018

(Unaudited)

NOTE 6:- STOCKHOLDERS’ EQUITY (DEFICIENCY) (Cont.)

The closing of the Offering occurred on February 16, 2018 (the “Closing”) and was subject to the satisfaction of specified customary closing conditions. Immediately following the Closing, each Purchaser exercised the full amount of their Tranche A Warrants resulting in gross proceeds to the Company from the sale of the Warrants to the Investors, together with the exercise price of the Tranche A Warrants, of $9,820.

In September and December 2013, AIT authorized through its 2013 Incentive Option Plan (the “2013 Plan”), the grant of options and Restricted Share Units (“RSU’s”) to officers, directors, advisors, management and other key employees. The options granted have generally between 2 to 4 years vesting terms and expire 10 years after the grant date. Certain options will be accelerated upon fulfillment of certain conditions. The Company assumed the 2013 plan upon consummation of the Merger.

The total amount of Common stock reserved for issuance under the Share Plans is 466,676. As of June 30, 2018, 98,704 options were available for future grants.

A summary of the Company’s options activity for employees and directors is as follows:

As of June 30, 2018, the aggregated intrinsic value of outstanding and exercisable options was $0. The aggregate intrinsic value represents the total intrinsic value (the difference between the deemed fair value of the Common Stock on the last day of June 30, 2018 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on June 30, 2018. This amount is impacted by the changes in the fair market value of the Company’s shares of Common Stock.

AIT THERAPEUTICS, INC.

U.S DOLLARS IN THOUSANDS (except shares and per share amounts)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018

(Unaudited)

NOTE 6:- STOCKHOLDERS’ EQUITY (DEFICIENCY) (Cont.)

The Company has granted options to certain non-employees under the 2013 Plan and accounted for these options in accordance with ASC 505-50.

The outstanding options granted to non-employees are as follows:

*)       Represents an amount lower than $1.

The stock-based compensation expense recognized in the consolidated financial statements for services received from employees, directors and non-employees is shown in the following table:

On February 13, 2018, the Company’s Board of Directors approved the issuance of warrants with an exercise price of $4.25 per share. Along with the aforementioned issuance, the Board of Directors of the Company decided that all stock option grants to employees or consultants made in the year 2017 would continue to be priced equivalently to that of said investors, as adjusted, to an exercise price of $4.25 per share.

The Company accounted for such benefit pursuant to ASC 718 as a modification. Accordingly, additional compensation of $59 was calculated as the fair value of the modified award in excess of the fair value of the original award measured immediately before its terms have been modified based on current circumstances and should be recognize as an expense over the remaining vesting period.

AIT THERAPEUTICS, INC.

U.S DOLLARS IN THOUSANDS (except shares and per share amounts)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018

(Unaudited)

NOTE 6:- STOCKHOLDERS’ EQUITY (DEFICIENCY) (Cont.)

As of June 30, 2018, the total unrecognized estimated compensation cost related to non-vested stock options granted to employees, directors and non-employees is $91.

On August 31, 2015, AIT’s Board of Directors approved a grant of 11,781 RSUs to one member of the Board of Directors with a vesting schedule of three years from September 3, 2015. During 2017, 7,854 RSUs were forfeited due to the board member’s termination.

This agreement has a three-year term, subject to earlier termination as defined in the agreement.

During the three months ended March 31, 2017, the one-time bonus was paid and the Company issued 364,286 RSs. For the three month period ended June 30, 2018 and 2017, the Company recorded expenses in the amount of $0 and $418 in respect of this grant, respectively.

AIT THERAPEUTICS, INC.

U.S DOLLARS IN THOUSANDS (except shares and per share amounts)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018

(Unaudited)

NOTE 6:- STOCKHOLDERS’ EQUITY (DEFICIENCY) (Cont.)

On January 13, 2017, AIT accounted for the warrants granted and held by third party pursuant to ASC 505-50 and measured the warrants at fair value according to the Black-Scholes model was approximately $480. Such amount was fully recognized during the three months period ended March 31, 2017 based on the vesting schedule of the warrants. The value of the warrant is based on the following assumptions: share price of $3.98, exercise price of $4.8, expected dividend rate of 0%, expected standard deviation of 75.23%, risk-free interest rates of 2.20% and expected life until exercise of 7 years.

In respect to the issuance of warrants on May 10, 2018, the Company accounted for the Third-Party Warrant pursuant to ASC 505-50 and measured the warrants at fair value according to the Black-Scholes model for a fair value of approximately $56. Such amount was fully recognized during the three-month period ended June 30, 2018 based on the vesting schedule of the warrant. The value of the Third-Party Warrant was based on the following assumptions: share price of $2.96, exercise price of $4.80, expected dividend rate of 0%, expected standard deviation of 84.54%, risk-free interest rates of 2.87% and expected life until exercise of 5.68 years.

AIT THERAPEUTICS, INC.

U.S DOLLARS IN THOUSANDS (except shares and per share amounts)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018

(Unaudited)

NOTE 7:- RELATED PARTIES BALANCES AND TRANSACTIONS

Balances with related parties:

Related parties’ expenses:

*) Represents an amount lower than $1.

NOTE 8:- FINANCIAL EXPENSES, NET

AIT THERAPEUTICS, INC.

U.S DOLLARS IN THOUSANDS (except shares and per share amounts)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018

(Unaudited)

NOTE 9:- BASIC AND DILUTED NET EARNINGS (LOSS) PER SHARE

The following table sets forth the computation of the Company’s basic and diluted net loss per share of Common stock:

For the three months period ended June 30, 2018 and 2017, all outstanding options and warrants have been excluded from the calculation of the diluted net loss per share since their effect was anti-dilutive.

NOTE 10:- SUBSEQUENT EVENTS

On August 1, 2018, the Company’s board of directors elected to increase the employee stock option pool associated with corporation’s 2013 Share option Plan from 466,676 shares to 1,500,000 shares.

On August 10, 2018, the Company entered in to a common stock purchase agreement with Lincoln Park Capital (LPC) Fund, LLC of up to $20,000, subject to certain conditions. The term of the line is 3 years, and the Company paid a fee of $500.  The Company, at its discretion may require LPC to purchase 117,000 of common stock at $4.50 per share within 30 days of the date of the agreement or prior to the submission of an S-1 registration statement, whichever is shorter.  All subsequent LPC purchases will be after an effective S-1 registration statement is in place, and at prevailing market prices subject to certain discounts. 

On August 13, 2018, the Company’s board of directors granted 927,000 nonqualified stock options to the elected officers, certain key employees, consultants, advisors and directors of this corporation under the corporation’s 2013 Share option Plan. The options have an exercise price of $4.25 per share and vest according to their board approved vesting schedule.

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements.” Forward-looking statements include statements about our expectations, beliefs or intentions regarding our product offerings, business, financial condition, results of operations, strategies or prospects. You can identify such forward-looking statements by the words “expects,” “intends,” “plans,” “projects,” “believes,” “estimates,” “likely,” “goal,” “assumes,” “targets” and similar expressions and/or the use of future tense or conditional constructions (such as “will,” “may,” “could,” “should” and the like) and by the fact that these statements do not relate strictly to historical or current matters. Rather, forward-looking statements relate to anticipated or expected events, activities, trends or results as of the date such statements are made. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties that could cause our actual results to differ materially from any future results expressed or implied by the forward-looking statements. Many factors could cause our actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These forward-looking statements are only predictions and reflect our views as of the date they are made with respect to future events and financial performance. We undertake no obligation to update, and we do not have a policy of updating or revising, these forward-looking statements, except as required by applicable law. Please see Item 1A “Risk Factors” contained in our most recently filed Annual Report on Form 10-KT, as updated by our subsequently filed Quarterly Reports on Forms 10-Q, for important factors that could cause actual results to differ materially from those in the forward-looking statements.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction

We are an emerging medical device company developing a nitric oxide (NO) generator and delivery system, or the AIT NO Generator and Delivery System (the “System”), that is capable of generating NO from ambient air. The System can generate up to 400 parts per million (ppm) for delivery to a patient’s lung. The System can deliver NO either continuously or for a fixed amount of time and has the ability to either titrate dose on demand or maintain a constant dose. We believe that there is a high unmet medical need for patients suffering from certain severe lung infections for which our system can be used. Our current product candidates will be subject to premarket reviews and approvals by the FDA, as well as similar regulatory agencies in other countries or regions. If approved, our System will be marketed as a medical device in the U.S.

In contrast to approved NO delivery systems, our novel is designed to deliver not only low concentrations of NO, but also high concentrations of NO to the lungs, which we believe has the potential to eliminate microbial infections, including bacteria, fungi and viruses. Current FDA approved NO delivery systems are approved for persistent pulmonary hypertension of the newborn, or PPHN, which requires a NO concentration of 20 ppm and is not intended to treat microbial infections. The body produces NO naturally as an innate immunity mechanism. Based on our clinical studies, we believe that 160 ppm is the minimum therapeutic dose to achieve the desired pulmonary antimicrobial effect of NO. To date, the FDA, nor any other major regulatory agency in other countries or regions, has not approved any NO formulation and/or delivery system for the delivery of 160 ppm or higher to the lungs.

Our first proposed indication is for PPHN in the United States. Our System differs from current approved NO delivery systems in the US and globally in that our System does not require hazardous cylinders containing nitrogen and nitric oxide gases. Our System generates NO from ambient air. We believe this is a major transformative change that will benefit patients, caregivers and hospitals. We anticipate our 510(k) submission to the FDA to take place in the fiscal fourth quarter of 2019.

We were incorporated in Delaware on April 24, 2015 under the name “KokiCare, Inc.” and operated as a healthcare software company prior to the Merger (as defined below). Concurrent with the closing of the Merger, we abandoned our pre-Merger business plan in the healthcare software industry and we are now solely pursuing our business in the medical device industry.

To date, we have not generated revenue from the sale of any product, and we do not expect to generate revenue unless and until we obtain marketing approval of, and commercialize, our product candidates. As of June 30, 2018, we had an accumulated deficit of $33.6 million. Our financing activities are described below under “Liquidity and Capital Resources.”

Critical Accounting Policies

We describe our significant accounting policies more fully in Note 2 to our interim consolidated financial statements for the three months ended June 30, 2018 contained in this Quarterly Report on Form 10-Q. We believe that the accounting policies below are critical in order to fully understand and evaluate our financial condition and results of operations.

We prepare our interim consolidated financial statements in accordance with accounting principles generally accepted in the United States (U.S. GAAP).

The preparation of the interim consolidated financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions. Our management believes that the estimates, judgments and assumptions used are reasonable based upon information available at the time they are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the dates of the interim consolidated financial statements, and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates.

Recent Accounting Pronouncements

Information with respect to Recent Accounting Pronouncements may be found in Note 2 to the interim consolidated financial statements contained in this Quarterly Report on Form 10-Q.

Results of Operations

Comparison of the Three months Ended June 30, 2018 Compared to Three months Ended June 30, 2017

The following table discloses the breakdown of research and development expenses for the three months ended June 30, 2018 and 2017.

For the three months ended June 30, 2018 and 2017, we incurred research and development expenses in the aggregate of $1,063 thousand and $591 thousand, respectively. The increase was primarily due to an increase in costs of $258 thousand related to clinical trials, subcontractors, consultants, manufacturing of our delivery system by a third-party contract manufacturer and $214 thousand for increase in warrants, patent, stock-based compensation, and other expenses.

Our research and development expense is highly dependent on the execution of clinical trials and therefore is expected to fluctuate significantly from period to period. We expect that our research and development expenses will reduce as our clinical activity will decrease in anticipation of our regulatory filing, which we expect to be partially offset by costs related to the development of our delivery system and increased manufacturing activity.

General and Administrative Expenses

General and administrative expenses consist primarily of payroll expenses, stock-based compensation expense, costs related to the Merger and recapitalization, professional service fees for accounting and legal advisors, facilities, travel expenses and other general and administrative expenses.

We expect our general and administrative expenses, such as accounting and legal fees, to increase in connection with our operations as a U.S. public company, and we expect increases in the number of our executive, accounting and administrative personnel due to our anticipated growth.

For the three months ended June 30, 2018 and 2017, we incurred general and administrative expenses of $693 thousand and $2,476 thousand, respectively. The decrease of $1,783 thousand for the three months ended June 30, 2018 as compared to the three months ended June 30, 2017 resulted primarily from a decrease of approximately $1,813 thousand in stock-based compensation expense mainly due to restricted shares issued to board members and a service provider in the three months ended June 30, 2017, and a decrease of $242 thousand for legal services. The decrease was offset by an increase in compensation expenses of $280 thousand as a result of new agreements signed by the Company's managers.

Operating loss

Our operating loss for the three months ended June 30, 2018 was $1,756 thousand, as compared to an operating loss of $3,067 thousand for the three months ended June 30, 2017 a decrease of $1,311 thousand.

Financial Expense, Net

Financial expense, net consists of expenses in respect of the revaluation of warrants to purchase common stock, issuance cost related to warrants issued to investors, foreign currency translation adjustments and other financial expenses. For more information, refer to note 8 to our consolidated financial statements as of June 30, 2018 contained herein.

For the three months ended June 30, 2018 we incurred financial expenses, net of $1,245 thousand and for the three months ended June 30, 2017 we incurred financial income, net of $187 thousand. The increase in financial expenses resulted primarily from expenses of $1,277 thousand for the three months ended June 30, 2018 related to the revaluation of warrants granted to investors in connection with private placements, as compared to income $151 thousand for the three months ended June 30, 2017.

Net Loss

As a result of the foregoing, our net loss for the three months ended June 30, 2018, was $3,001 thousand, as compared net loss for the three months ended June 30, 2017 was $2,880 thousand, an increase of $122 thousand.

Cash Flows

For the Three months period Ended June 30, 2018 Compared to Three months period Ended June 30, 2017.

Operating Activities

For the three months ended June 30, 2018 and 2017, net cash used in operations was $2,304 thousand and $1,701 thousand, respectively. Cash was used primarily for expenses related to payroll, clinical trials conducted in Israel, services from subcontractors and third parties.

Investing Activities

For the three months ended June 30, 2018 net cash provided by investing activities was $1,967 thousand and for the three months ended June 30, 2017 net cash used in investing activities was $46 thousand. The decrease resulted primarily from redemption of marketable securities of $2,000 thousand.

Financing Activities

Net cash used in financing activities for the three months ended June 30, 2018 and 2017, was $0 thousand and $205 thousand, respectively.

Liquidity and Capital Resources

Overview

We have incurred losses and generated negative cash flows from operations since inception. To date, we have not generated any revenue from the sale of products, and we do not expect to generate revenue from sale of our products in the next several years. Since our inception through June 30, 2018, we have funded our operations principally through the issuance of our equity securities, loans from related parties and convertible promissory notes.

Future Funding Requirements

We have devoted substantially all of our efforts to business planning and research and development. We have incurred a net loss of $3,001 thousand and had negative cash flow from operations of $2,304 thousand, for the three month ended June 30, 2018, and had an accumulated deficit of $33,570 thousand as of June 30, 2018. As of June 30, 2018, we had $6,744 thousand in cash, cash equivalents, restricted cash and short-term marketable securities. Currently, our only source of liquidity is our current cash on hand. Our ability to continue to operate is dependent upon raising additional funds to finance our activities, and we do not currently have any commitments for future additional funding. There are no assurances that we will be successful in obtaining an adequate level of financing for the development and commercialization of our product candidates. These conditions among others raise substantial doubts about the Company’s ability to continue as a going concern. The Company’s ability to continue to operate is dependent upon raising additional funds to finance its activities. There are no assurances, however, that the Company will be successful in obtaining an adequate level of financing needed for the long-term development and commercialization of its products

The consolidated financial statements do not include any adjustments with respect to the carrying amounts of assets and liabilities and their classification that might be necessary should the Company be unable to continue as a going concern. The Company management and the Board of Directors believe that the Company’s existing financial resources are adequate to satisfy its expected liquidity requirements through the end of June 2019.

We have based this assumptions that may prove to be wrong, and we may use our available capital resources sooner than we currently expect. Because of the numerous risks and uncertainties associated with the development of our NO delivery system, we are unable to estimate the amounts of increased capital outlays and operating expenses associated with completing the research and development of our product candidate.

Our future capital requirements will depend on many factors, including:

Off-Balance Sheet Arrangements

As of June 30, 2018, we did not have any off-balance sheet arrangements as defined in the rules and regulations of the Securities and Exchange Commission.

Foreign Currency Exchange Risk

Our results of operations and cash flow are subject to fluctuations due to changes in foreign currency exchange rates. Certain of our expenses are denominated in New Israeli Shekels (“NIS”). Our results of operations and cash flow are, therefore, subject to fluctuations due to changes in foreign currency exchange rates and may be adversely affected in the future due to changes in foreign exchange rates. Approximately 12% of our expenses are denominated in NIS. We do not hedge our foreign currency exchange risk. In the future, we may enter into formal currency hedging transactions to decrease the risk of financial exposure from fluctuations in the exchange rates of our principal operating currencies. These measures, however, may not adequately protect us from significant changes in such fluctuations.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risks in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of foreign currency exchange rates.

ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated, as of the end of the period covered by this Report on Form 10-Q, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2018.

Management’s Transition Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act.

Our management conducted an assessment of the effectiveness of our internal control over financial reporting based on the criteria set forth in “Internal Control - Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Based on this assessment, our management concluded that, as of June 30, 2018, our internal control over financial reporting was effective.

Attestation Report of the Registered Public Accounting Firm

This Transition Report does not include an attestation report of our registered public accounting firm due to an exemption established by the JOBS Act for “emerging growth companies.”

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II OTHER INFORMATION

Item 1. Legal Proceedings 

On March 16, 2018, Empery Asset Master, Ltd., Empery Tax Efficient, LP and Empery Tax Efficient II, LP (together, “Empery”), and each a holder of certain of our warrants issued January 13, 2017 (the “January 2017 Warrants”), filed a complaint in the Supreme Court of the State of New York, (the “Empery Suit”), relating to the notice of adjustment of both the exercise price of, and the number of warrant shares issuable under, Empery’s January 2017 Warrants. We were notified of the Empery Suit on April 26, 2018. The Empery Suit alleges that, as a result of certain circumstances of our offering of additional warrants, which closed on February 16, 2018, the January 2017 Warrants issued to Empery provide for adjustments to both the exercise price of the warrants and the number of warrant shares issuable upon such exercise. Empery seeks money damages and declaratory relief under theories of breach of contract or contract reformation predicated on mutual mistake.

We intend to vigorously defend against the Empery Suit and believe that it is unlikely that the ultimate resolution of the matter will have a material adverse effect on our financial condition, results of operations or near-term liquidity. However, we do expect to incur legal expenses as we pursue a vigorous defense against this claim. Given the early stage of the litigation, it is too early to determine or assess the probability of any particular outcome.

Item 1A. Risk Factors

Not applicable.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

Not applicable. 

ITEM 6. Exhibits.

*        Filed herewith.

**        Furnished herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

EXHIBIT INDEX

*        Filed herewith.

**        Furnished herewith.