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FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains forward-looking statements. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts contained in this Quarterly Report, including statements regarding our future results of operations and financial position, business strategy, prospective products, product approvals, research and development costs, timing and likelihood of success, plans and objectives of management for future operations and future results of anticipated products, are forward-looking statements. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

 

In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential” or “continue” or the negative of these terms or other similar expressions. The forward-looking statements in this Quarterly Report are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this Quarterly Report and are subject to a number of important factors that could cause actual results to differ materially from those in the forward-looking statements, including the risks, uncertainties and assumptions described under the section titled “Risk Factors” in our Registration Statement on Form S-1 filed with the Securities and Exchange Commission on June 9, 2017 and the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report. These forward looking statements are subject to numerous risks, including, without limitation, the following:

 

·

our status as a clinical-stage company with no approved products and no revenue and our lack of profitability;

 

·

our future capital needs and our need to raise additional funds, which may be costly or difficult to obtain and could dilute current stockholders’ ownership interests;

 

·

our dependence on the success of our 160 ppm Nitric Oxide (“NO”) formulation and delivery system, which are in the early stages of clinical development and which may never receive regulatory approval necessary for commercialization;

 

·

our ability to enroll patients in clinical trials, timely and successfully complete those trials and receive necessary regulatory approval

 

·

our ability to benefit from any orphan drug designations we may receive for our 160 ppm NO formulation and delivery system, including  the orphan drug designations granted by the U.S. Food and Drug Administration for the treatment of infections caused by nontuberculous mycobacteria and for adjunctive treatment of cystic fibrosis;

 

·

our dependence on third parties to conduct our clinical trials and to manufacture and supply our product candidates;

 

·

our ability to enforce and protect our intellectual property rights and to comply with our licenses of intellectual property;

 

·

federal, state, and foreign regulatory requirements, including U.S. Food and Drug Administration regulation of our product candidates;

 

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·

our ability to obtain and retain key executives and attract and retain qualified personnel; and

 

·

our ability to successfully manage our growth.

 

You should read this Quarterly Report and the documents that we reference in this Quarterly Report completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.

 

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PART I

FINANCIAL INFORMATION

 

ITEM 1.

Financial Statements.

 

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ITEM 2.

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

 

 

Introduction

 

We are an emerging clinical-stage anti-microbial therapeutic company that is developing a single proprietary 160 parts-per-million (“ppm”) nitric oxide (“NO”) formulation and delivery system to treat certain respiratory infections for which we believe current treatments have limited effectiveness. Our current product candidate may be marketed as a combination drug and associated medical device; in that case, any final product would be composed of two distinct components: our proprietary delivery system and a specific gaseous NO drug, each of which may be subject to separate premarket reviews and approvals or clearance by the U.S. Food and Drug Administration (“FDA”).

We believe our novel system is designed to successfully deliver a high dosage of NO to the lungs that has the potential to eliminate microbial infections, including bacteria, fungi and viruses. Currently there is one FDA approved 20 ppm NO vasodilation treatment for neonates with hypoxic respiratory failure, which, at such a low concentration of NO, is not intended to treat microbial infections. NO is produced naturally by the body for a variety of functions. Specific to our purpose, NO is used by the innate immune system as a defense against invading pathogens at concentrations of approximately 200 ppm. Pre-clinical and clinical trials have demonstrated that exogenous NO, at concentrations of 160 – 200 ppm, can kill bacterial and viral infections. Based on our studies, we believe that 160 ppm is the minimum therapeutic dose to achieve the pulmonary antimicrobial effect of NO.

 

On December 29, 2016, we entered into an Agreement and Plan of Merger (as amended, the “Merger Agreement”) together with Red Maple Ltd. (“Merger Sub”), a wholly owned subsidiary of KokiCare, Inc., a Delaware corporation, and Advanced Inhalation Therapies Ltd. (“AIT Ltd.”).  The Merger Agreement provided for (i) the merger of Merger Sub with and into AIT Ltd. 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 Ltd. into the right to receive shares and other applicable securities of us, with AIT Ltd. surviving as our wholly-owned subsidiary (the “Merger”).  The Israeli Merger became effective on December 29, 2016 and the Merger closed on January 13, 2017. Prior to the Merger, on January 9, 2017, we changed our name from KokiCare, Inc. to AIT Therapeutics, Inc.

 

Immediately prior to the Merger, AIT Ltd. consummated a private placement pursuant to which it issued to investors an aggregate of 1,701,616 of its ordinary shares, together with warrants to purchase an aggregate of 3,403,232 ordinary shares for gross proceeds of approximately $10,200 thousand.  In connection with the Merger, we assumed AIT Ltd.’s obligations under the purchase agreements with respect to such private placement, including the registration rights contained therein. In connection with the closing of the Merger, all outstanding ordinary shares, warrants and options of AIT Ltd. were converted into shares of our common stock, warrants for our common stock and options for our common stock, respectively, at a ratio of 1:1.

 

The Merger is accounted for as a reverse merger and recapitalization. AIT Ltd. is the acquirer for financial reporting purposes, and we are the acquired company. Consequently, the assets and liabilities and the operations that will be reflected in the historical financial statements prior to the Merger will be those of AIT Ltd. and will be recorded at the historical cost basis of AIT Ltd., and the consolidated financial statements after completion of the Merger will include our assets and liabilities and those of our consolidated subsidiaries, including AIT Ltd.

 

 

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, any product candidate. As of September 30, 2017, we had an accumulated deficit of $29,885 thousand. Our financing activities are described below under “Liquidity and Capital Resources.”

 

Unless the context requires otherwise, references in this Quarterly Report to the “Company,” “we,” “us” and “our” refer to AIT Ltd. prior to the Merger and to AIT Therapeutics, Inc. and its consolidated subsidiaries following the Merger.

 

Critical Accounting Policies

 

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

 

See our Annual Report on Form 10-K for the year ended December 31, 2016, filed with the SEC on February 27, 2017, for a discussion of additional critical accounting policies and estimates. Changes in our critical accounting policies as compared to what was previously disclosed in the Form 10-K for the year ended December 31, 2016 are described in this Quarterly Report on Form 10-Q.

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

Three and Nine Month Ended September 30, 2017 Compared to Three and Nine Month Ended September 30, 2016

 

Revenue

 

We have not generated any revenue to date, including for the three and nine month period ended September 30, 2017 and 2016.

 

 

Research and Development Expenses

 

For the three month period ended September 30, 2017 and 2016, we incurred research and development (“R&D”) expenses in the aggregate of $1,193 thousand and $78 thousand, respectively. The increase was primarily due to costs related to clinical trials, subcontractors and consultants.

For the nine month period ended September 30, 2017 and 2016, we incurred R&D expenses in the aggregate of $3,223 thousand and $573 thousand, respectively. The increase was primarily due to an increase in costs of $1,558 thousand related to clinical trials, subcontractors and consultants, purchase of certain intellectual property in the amount of $500 thousand and expenses of $480 thousand related to the warrants.

Our R&D 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 R&D expenses will materially increase because of our current clinical activity, including a Phase II clinical study of our 160 ppm NO formulation and delivery system for the treatment of Nontuberculous Mycobacterium Abscessus in Israel and our Israel-based Phase III clinical study of our 160 ppm NO formulation and delivery system for the treatment of infants with bronchiolitis.

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 month period ended September 30, 2017 and 2016, we incurred general and administrative expenses of $864 thousand and $89 thousand, respectively. The increase of $775 thousand for the three month period ended September 30, 2017 as compared to the 2016 period resulted primarily from the increase of approximately $366 thousand in stock-based compensation expense mainly due to restricted shares to board members and equity grants to employees, an increase of $191 in legal expenses, and an increase of $176 in payroll and other expenses.

 

 

For the nine month period ended September 30, 2017 and 2016, we incurred general and administrative expenses of $5,461 thousand and $523 thousand, respectively. The increase of $4,938 thousand for the nine month period ended September 30, 2017 as compared to the 2016 period resulted primarily from an increase of approximately $3,409 thousand in stock-based compensation expense mainly due to restricted shares to board members and a service provider, an increase in costs of $497 related to legal, accounting and issuance fees in connection with the Merger, and an increase in payroll expenses of $320 due to the hiring of G&A employees.

 

Costs Related to Aborted IPO

 

Costs related to our aborted initial public offering in the three and nine month periods ended September 30, 2016 consisted of direct and incremental costs such as accounting, consulting, legal and printing fees that were incurred in connection with an initial public offering process pursuant to which we had planned to register and quote our common stock on the OTCQB, the over-the-counter trading marketplace for securities of early-stage or developing companies run by the OTC Markets Group, Inc.,  which we did not complete.

 

Financial Expense(Income), Net

 

Financial expense (income), net consists of imputed interest, expenses in respect of the revaluation of warrants to purchase common stock, amortization of the beneficial conversion feature (“BCF”) in respect of our convertible notes, issuance cost related to warrants issued to investors, foreign currency translation adjustments and other financial expenses. For more information, refer to note 10 to our interim consolidated financial statements as of September 30, 2017 located elsewhere in this Quarterly Report.

 

For the three month period ended September 30, 2017 and 2016, we recognized financial expenses, net of $5,092 thousand and financial expenses, net of $319 thousand, respectively. The financial expenses of $5,092 thousand recognized in the third quarter of 2017 primarily resulted from the revaluation of warrants issued to investors in connection with private placements.

 

For the nine month period ended September 30, 2017 and 2016, we incurred financial expenses, net of $7,622 thousand and $990 thousand, respectively. The increase of $6,632 thousand resulted primarily from expenses of $6,059 thousand related to the issuance and revaluation of warrants granted to investors in connection with private placements, an increase of $268 thousand in the amortization of BCF in respect of the conversion of our convertible notes and issuance costs of $457 thousand related to warrants issued to investors in the first quarter of 2017.

 

Cash Flows

 

Nine Month Ended September 30, 2017 Compared to Nine Month Ended September 30, 2016

 

For the nine month ended September 30, 2017 and 2016, net cash used in operations was $5,313 thousand and $415 thousand, respectively. Cash was used primarily for expenses related to the Merger, private placements, payroll, clinical trials conducted in Israel, services from subcontractors and third parties.

 

For the nine month ended September 30, 2017 net cash used in investing activities was $2,403 thousand and for the nine month ended September 30, 2016 net cash provided by investing activities was $3 thousand. The increase resulted primarily from investment of $2,000 thousand in short-term marketable securities, $108 thousand related to purchasing property and equipment and $295 thousand related to our acquisition of AIT Ltd. in the Merger.

 

Net cash provided by financing activities for the nine months ended September 30, 2017 and 2016, was $9,461 thousand and $303 thousand, respectively. The increase resulted primarily from proceeds from the issuance of units, consisting of common stock and warrants for common stock, net of issuance costs, which totaled $9,889 thousand.

 

 

Liquidity and Capital Resources

 

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 September 30, 2017, we have funded our operations principally with $12,662 thousand from the issuance of our equity securities and $3,721 from loans from related parties and convertible promissory notes.

 

 

Immediately prior to the Merger, AIT Ltd. consummated a private placement pursuant to which it issued to investors an aggregate of 1,701,616 of its ordinary shares, together with warrants to purchase an aggregate of 3,403,232 ordinary shares for gross proceeds of approximately $10,210 thousand.  In connection with the Merger, we assumed AIT Ltd.’s obligations under the purchase agreements with respect to such private placement, including the registration rights contained therein. In connection with the closing of the Merger, all outstanding ordinary shares, warrants and options of AIT Ltd. were converted into shares of our common stock, warrants for our common stock and options for our common stock, respectively, at a ratio of 1:1.

 

On March 31, 2017 we consummated a private placement in which we issued and sold an aggregate of 110,494 units, each composed of one share of our common stock and a five-year warrant to purchase two shares of common stock at an exercise price of $6.90 per share. We issued and sold the units to certain investors at a purchase price of $6.00 per unit, for which we received approximately $663 thousand of gross proceeds.

 

 

We have devoted substantially all of our efforts to business planning and research and development. We have incurred a net loss and had negative cash flow from operating activities of $16,312 and $5,313 respectively, for the nine month period ended September 30, 2017, and had an accumulated deficit of $29,885 as of September 30, 2017. As of September 30, 2017, we had $3,757 thousand in cash and cash equivalents and short-term marketable securities. Currently, our only source of liquidity is our current cash on hand. These conditions among others raise substantial doubts about our ability to continue as a going concern. 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 long-term development and commercialization of our product candidate.

 

We will require significant additional financing in the future to fund the continuing clinical development of our 160 ppm NO formulation and delivery system, our operations and commercialization, if we obtain regulatory approval of any product candidate, including our 160 ppm NO formulation and delivery system. We expect that our existing cash and cash equivalents will enable us to fund our operating expenses and capital expenditure requirements through the first quarter of 2018. We have based this estimate on 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 160 ppm NO formulation and 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:

 

·

the progress and costs of our preclinical studies, clinical trials and other research and development activities;

 

·

the scope, prioritization and number of our clinical trials and other research and development programs;

 

·

the costs and timing of obtaining regulatory approval for our product candidate;

 

·

the costs of filing, prosecuting, enforcing and defending patent claims and other intellectual property rights;

 

·

the costs of, and timing for, strengthening our manufacturing agreements for production of sufficient clinical quantities of our product candidate;

 

·

the potential costs of contracting with third parties to provide marketing and distribution services for us or for building such capacities internally;

 

·

the costs of acquiring or undertaking the development and commercialization efforts for additional, future therapeutic applications of our product candidate;

 

·

the magnitude of our general and administrative expenses; and

 

·

any cost that we may incur under current and future in-and out-licensing arrangements relating to our product candidate.

 

Off-Balance Sheet Arrangements

 

As of September 30, 2017, we did not have any off-balance sheet arrangements as defined in the rules and regulations of the Securities and Exchange Commission.

 

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.

 

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 6% of our expenses are denominated in NIS. Changes of 5% and 10% in the USD/NIS exchange rate will increase/decrease our operation expenses by 0.3% and 0.6%, respectively. 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 4.

 

Controls and Procedures

 

Limitations on Effectiveness of 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 Quarterly 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 September 30, 2017.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended September 30, 2017 that have materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II          OTHER INFORMATION

 

 

*	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.

 

		AIT THERAPEUTICS, INC.
		/s/ Steve Lisi
Date: November 1, 2017		Steve Lisi
		Chief Executive Officer
		(Principal Executive Officer)

 

		AIT THERAPEUTICS, INC.
		/s/ Hai Aviv
Date: November 1, 2017		Hai Aviv
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

 

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