| NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| b. | Principles of consolidation: |
The consolidated financial statements include the accounts of the Company and Inc. Inter-company balances and transactions including profits from inter-company sales not yet realized have been eliminated upon consolidation.
| c. | Financial statements in U.S. dollars in thousands: |
The majority of the Company's operations are currently conducted in Israel while a significant part of the Company's expenses and financing activities are denominated and determined in U.S. dollars. The Company's management believes that the U.S. dollar is the currency of the primary economic environment in which the Company operates and expects to continue to operate in the foreseeable future. Thus, the functional and reporting currency of the Company is the U.S. dollar.
The Company's transactions and balances denominated in U.S. dollars are presented at their original amounts. Non-dollar transactions and balances have been re-measured to U.S. dollars in accordance with the Accounting Standards Board (ASC) 830, "Foreign Currency Matters". All transaction gains and losses from re-measurement of monetary balance sheet items denominated in non-dollar currencies are reflected in the statements of comprehensive loss as financial income or expenses, as appropriate.
Cash equivalents are short-term highly liquid investments that are readily convertible to cash with original maturities of three months or less at acquisition.
| | e. | Restricted bank deposits: |
Restricted bank deposits are pledged in favor of a bank which provides to the Company guarantees with respect to office lease agreements.
| f. | Long-term lease deposits: |
Long-term deposits include long-term deposits for leasing office under operating leases, presented at their cost.
ADVANCED INHALATION THERAPIES (AIT) LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share data
| NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| g. | Property and equipment, net: |
Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets at the following rates:
| | | % |
| | | |
| Computers and electronic equipment | | 33 |
| Office furniture and equipment | | 7-15 |
| Clinical and medical equipment | | 15 |
| Leasehold improvements | | Over the shorter of the lease term or useful economic life |
| h. | Impairment for long-lived assets: |
The Company's long-lived assets are reviewed for impairment in accordance with ASC 360, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. During the years ended December 31, 2015 and 2014, no impairment losses have been identified.
The Company's liability for severance pay is pursuant to Section 14 of the Severance Compensation Act, 1963 ("Section 14"), all the employees are included under this section, and are entitled only to monthly deposits, at a rate of 8.33% of their monthly salary, made in the employee's name with insurance companies. Payments in accordance with Section 14 release the Company from any future severance payments in respect of those employees. The fund is made available to the employee at the time the employer-employee relationship is terminated, regardless of cause of termination. The severance pay liabilities and deposits under section 14 are not reflected in the balance sheet as the severance pay risks have been irrevocably transferred to the severance funds.
The Company accounts for income taxes in accordance with ASC 740, "Income Taxes". This topic prescribes the use of the liability method whereby deferred tax assets and liability account balances are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company provides full valuation allowance, to reduce deferred tax assets to the amount that is more likely than not to be realized.
ADVANCED INHALATION THERAPIES (AIT) LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share data
| NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
The Company implements a two-step approach to recognize and measure uncertain tax positions. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% (cumulative basis) likely to be realized upon ultimate settlement. As of December 31, 2014, the Company has not recorded a liability for uncertain tax positions. As of December 31, 2015, the Company has recorded a liability for uncertain tax position in connection to implementation of cost plus method for certain services that have been provided by Inc. to the Company.
| k. | Concentrations of credit risk: |
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash, cash equivalents and restricted bank deposits. Cash, cash equivalents and restricted bank deposits are invested in major banks in Israel and U.S. Management believes that the financial institutions that hold the Company's investments are financially sound and, accordingly, minimal credit risk exists with respect to these investments.
The Company has no off-balance-sheet concentration of credit risk such as foreign exchange contracts, option contracts or other foreign hedging arrangements.
| l. | Legal and other contingencies: |
The Company accounts for its contingent liabilities in accordance with ASC 450. 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. As of December 31, 2015 and 2014, the Company is not a party to any litigation that could have a material adverse effect on the Company's business, financial position, results of operations or cash flows.
| m. | Research and development expenses: |
Research and development expenses are charged to the statement of comprehensive loss as incurred.
ADVANCED INHALATION THERAPIES (AIT) LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share data
| NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| n. | Fair value of financial instruments: |
ASC 820, "Fair Value Measurements and Disclosures" ("ASC 820"), defines fair value as the price that would be received to sell an asset or paid to transfer a liability (i.e., the "exit price") in an orderly transaction between market participants at the measurement date.
In determining fair value, the Company uses various valuation approaches. ASC 820 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company's assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.
The hierarchy is broken down into three levels based on the inputs as follows:
| Level 1 | - | Valuations based on quoted prices in active markets for identical assets that the Company has the ability to access. |
| | | |
| Level 2 | - | Valuations based on one or more quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly. |
| | | |
| Level 3 | - | Valuations based on inputs that are unobservable and significant to the overall fair value measurement. |
The availability of observable inputs can vary from investment to investment and is affected by a wide variety of factors, including, for example, the type of investment, the liquidity of markets and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment and the investments are categorized as Level 3.
Warrants to purchase Convertible Preferred A Shares are classified within level 3 as the valuation inputs are unobservable and significant to the overall financial instrument (see also Note 7).
The carrying amounts of cash and cash equivalents, restricted bank deposits, trade payables, and other accounts payable approximate their fair value due to the short-term maturities of such instruments
ADVANCED INHALATION THERAPIES (AIT) LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share data
| NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| o. | Basic and diluted net loss per share: |
The Company applies the two class method as required by ASC No. 260-10, "Earnings Per Share" ("ASC No. 260-10") which requires the income or loss per share for each class of shares (Ordinary and Preferred Shares) to be calculated assuming 100% of the Company's earnings are distributed as dividends to each class of shares based on their contractual rights. No dividends were declared or paid during the reported years.
According to the provisions of ASC No. 260-10, the Company's Convertible Preferred A Shares are not participating securities in losses and, therefore, are not included in the computation of net loss per share.
Basic net loss per share is computed based on the weighted average number of Ordinary Shares outstanding during each year. Diluted net loss per share is computed based on the weighted average number of Ordinary Shares outstanding during each year plus dilutive potential equivalent Ordinary shares considered outstanding during the year, in accordance with ASC 260.
For the years ended December 31, 2015 and 2014, all outstanding Convertible Preferred A Shares, stock options, restricted share units and warrants have been excluded from the calculation of the diluted net loss per share as all such securities are anti-dilutive for all years presented.
| p. | Warrants to purchase Convertible Preferred A Shares: |
The Company accounts for freestanding warrants to purchase shares of its Convertible Preferred A Shares held by investors as a liability on its balance sheet at fair value according to the provisions of ASC 480, "Distinguishing Liabilities from Equity", as the underlying Convertible Preferred A Shares are contingently redeemable upon a deemed liquidation event and, therefore, may obligate the Company to transfer assets in the future. The warrants are subject to re-measurement to fair value at each balance sheet date and any change in fair value is recognized as a component of financial income (expense), net, on the statements of comprehensive loss (see also Note 7). The Company continues to adjust the liability for changes in fair value until the earlier of the exercise or expiration of the warrants, the completion of deemed liquidation event or the conversion of Convertible Preferred A Shares into Ordinary Shares.
| q. | Stock-based compensation: |
The Company accounts for stock-based compensation in accordance with ASC 718, "Compensation Stock Compensation", ("ASC 718"), which requires companies to estimate the fair value of equity based payment awards on the date of grant using an option pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite or derived service period in the Company's consolidated statement of comprehensive loss.
ADVANCED INHALATION THERAPIES (AIT) LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share data
| NOTE 2: - | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
The Company recognizes compensation expense for the value of its awards granted based on the accelerated method over the requisite or derived service period of each of the awards, net of estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
The Company estimates the fair value of stock options granted using the Black-Scholes-Merton option-pricing model which requires a number of assumptions, of which the most significant are the fair market value of the underlying Ordinary Shares, expected stock price volatility and the expected option term. Expected volatility was calculated based upon historical volatilities of similar entities in the related sector index. The expected option term represents the period that the Company's stock options are expected to be outstanding and is determined based on the simplified method until sufficient historical exercise data will support using expected life assumptions. The risk-free interest rate is based on the yield from U.S. treasury bonds with an equivalent term. The expected dividend yield assumption is based on the Company's historical experience and expectation of no future dividend payouts. The Company has historically not paid cash dividends and has no foreseeable plans to pay cash dividends in the future.
The fair value of Ordinary Shares underlying the options was determined by the Company's management with the assistance of an independent valuation firm. Because there has been no public market for the Ordinary Shares, the Company's management has determined fair value of the Ordinary Shares at the time of grant by considering a number of objective and subjective factors including data from other comparable companies, operating and financial performance, the lack of liquidity of capital stock and general and industry specific economic outlook, amongst other factors. The fair value of the underlying Ordinary Shares shall be determined by management until such time as the Ordinary Shares are listed on an established stock exchange, national market system or other quotation system. For the years ended December 31, 2015 and 2014, the valuations were performed using the Hybrid Method by combining the Option Pricing Method, expected IPO method and a discounted cash flow model to determine the fair value of the Company's Ordinary Shares.
The fair value for options granted in 2015 and 2014 to employees and directors of the Company is estimated at the date of grant using a Black-Scholes-Merton Options pricing model with the following weighted average assumptions:
| | | 2015 | | | 2014 | |
| | | | | | | |
| Dividend yield | | | 0 | % | | | 0 | % |
| Expected volatility | | | 88.9 | % | | | 93.1 | % |
| Risk-free interest | | | 2.1%-3.5 | % | | | 1.04-1.84 | % |
| Expected life (years) | | | 5.5-6.25 | | | | 5.3-6 | |
The Company applies ASC 505-50, "Equity-Based Payments to Non-Employees" ("ASC 505") with respect to options and warrants issued to non-employees which requires the use of option valuation models to measure the fair value of the options and warrants at the measurement date.
ADVANCED INHALATION THERAPIES (AIT) LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share data
| NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| r. | Impact of recently issued accounting standards: |
| 1. | In April 2015, the FASB Issued ASU 2015-03, "Interest-Imputation of Interest". ASU 2015-03 reduces the complexity of disclosing debt issuance costs and debt discount and premium on the balance sheet by requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The effective date of ASU 2015-03 is for interim and annual reporting periods beginning after December 15, 2016. Early adoption is permitted. The new guidance will be applied retrospectively to each prior period presented. The ASU 205-03 has been early adopted by the Company. |
| 2. | In February 2016, the FASB issued ASU 2016-02 - Leases (ASC 842), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The ASU is expected to impact the Company's consolidated financial statements as we have certain operating lease arrangements. ASC 842 supersedes the previous leases standard, ASC 840 Leases. The standard is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company is currently in the process of evaluating the impact of the adoption of this standard on its consolidated financial statements. |
| 3. | On March 30, 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting which affect all entities that issue share-based payment awards to their employees and involve multiple aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. The Company is currently evaluating the impact of the guidance on its consolidated financial statements. |
ADVANCED INHALATION THERAPIES (AIT) LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share data
| NOTE 3:- | OTHER ACCOUNTS RECEIVABLE |
| | | December 31, | |
| | | 2015 | | | 2014 | |
| | | | | | | |
| Prepaid expenses | | $ | 5 | | | $ | 17 | |
| Governments authorities | | | 6 | | | | 29 | |
| | | | | | | | | |
| | | $ | 11 | | | $ | 46 | |
NOTE 4:- PROPERTY AND EQUIPMENT, NET
| | | December 31, | |
| | | 2015 | | | 2014 | |
| Cost: | | | | | | |
| Computers and electronic equipment | | $ | 23 | | | $ | 19 | |
| Office furniture and equipment | | | 10 | | | | 10 | |
| Clinical and medical equipment | | | 119 | | | | 117 | |
| Leasehold improvement | | | 3 | | | | 2 | |
| | | | | | | | | |
| | | | 155 | | | | 148 | |
| Accumulated depreciation: | | | | | | | | |
| Computers and electronic equipment | | | 12 | | | | 4 | |
| Office furniture and equipment | | | 1 | | | | 1 | |
| Clinical and medical equipment | | | 49 | | | | 31 | |
| Leasehold improvement | | | *) - | | | | *) - | |
| | | | | | | | | |
| | | | 62 | | | | 36 | |
| | | | | | | | | |
| Depreciated cost | | $ | 93 | | | $ | 112 | |
| *) | Represents an amount lower than 1$. |
Depreciation expenses for the years ended December 31, 2015 and 2014 were $26 and $20, respectively.
| NOTE 5:- | OTHER ACCOUNTS PAYABLE |
| | | December 31, | |
| | | 2015 | | | 2014 | |
| | | | | | | |
| Employees and payroll accruals | | $ | 64 | | | $ | 59 | |
| Income tax | | | 127 | | | | - | |
| Accrued expenses | | | 525 | | | | 285 | |
| | | | | | | | | |
| | | $ | 716 | | | $ | 344 | |
ADVANCED INHALATION THERAPIES (AIT) LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share data
| NOTE 6:- | CONVERTIBLE NOTES |
Starting December 2013 and until December 31, 2015, the Company entered into Convertible Notes Agreements ("Agreement") and received an aggregate amount of $3,158 ("Convertible Notes"), $586 out of which from related parties (see also Note 11e). Such Convertible Notes bear an interest rate of 8% per annum compounded annually and are convertible, with accrued interest, to the most senior shares of the Company. The maturity date of the Convertible Notes, unless converted earlier, is the earlier to occur of (i) December 12, 2017 or (ii) an event of default as defined in the Agreement. The conversion price was set to (i) $2.457 upon voluntary conversion, and (ii) the lowest of 66.6% of the price of the most senior shares of the Company or a price per share of $5.46 calculated in accordance with the valuation of the Company being $13,333 ("Discounted Conversion Price") upon mandatory conversion in case of a "triggering event" as defined in the Agreement.
According to the Agreement, upon a triggering event caused by a financing round of at least $2,000, the holders of the Convertible Notes will have the right to participate in the next equity round, and shall have the right to purchase an amount of the most senior class of shares to be issued to the investors in such equity round, at a discounted conversion price ("Participation Rights"). In the event of an initial public offering of the Company at the offering price reflecting a pre-money valuation of at least $20,000 ("Qualified IPO"), the Participation Rights will automatically expire and the holder will instead be granted options to purchase Ordinary Shares of the Company, for an aggregate price of the principal amount invested via Convertible Notes. The exercise price of the option will be equal to the Discounted Conversion Price. The options will remain exercisable until the earlier of two years from a Qualified IPO and an acquisition of the Company.
With respect to the aforesaid Convertible Notes, the Company applies ASC 470, "Debt with Conversion and Other Options" ("ASC 470"), pursuant to which the Company recognizes and measures the Beneficial Conversion Feature ("BCF") in the Convertible Notes at the commitment date by allocating a portion of the proceeds equal to the intrinsic value of the feature to additional paid-in-capital. The intrinsic value of the feature is calculated on the commitment date using the effective conversion price. The discount resulting from the BCF is amortized over the life of the Convertible Notes through financial expenses unless mandatorily converted earlier.
The Convertible Notes balance consists of the following:
| | | December 31, | |
| | | 2015 | | | 2014 | |
| | | | | | | |
| Opening balance | | $ | 568 | | | $ | 13 | |
| Receipt of Convertible Notes | | | 1,277 | | | | 1,830 | |
| BCF in respect of Convertible Notes | | | (1,239 | ) | | | (1,651 | ) |
| Amortization of BCF | | | 759 | | | | 290 | |
| Capitalization of debts issuance costs | | | (38 | ) | | | - | |
| Amortization of debts issuance costs | | | 9 | | | | - | |
| Imputed interest | | | 216 | | | | 86 | |
| | | | | | | | | |
| | | $ | 1,552 | | | $ | 568 | |
ADVANCED INHALATION THERAPIES (AIT) LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share data
| NOTE 6:- | CONVERTIBLE NOTES (Cont.) |
Subsequent to December 31, 2015, the Company received additional proceeds amounted to $184 from issuance of Convertible Notes at the same terms as the aforesaid Convertible Notes. The related BCF of these additional Convertible Notes amounted to $180 (see also Note 14g).
| NOTE 7:- | WARRANTS TO PURCHASE CONVERTIBLE PREFERRED A SHARES |
As part of financing rounds that were occurred in November 2012 and August 2013, the Company has issued 203,508 and 16,281 warrants to purchase Convertible Preferred A Shares, respectively. The warrants are exercisable to Convertible Preferred A Shares on a 1:1 basis with an exercise price per share of $2.457.
In April 2014, following to financing rounds as mentioned above, the Company committed to issue 8,140 warrants to purchase up to 8,140 of the Company's Convertible Preferred A Shares to consultant in respect to services provided as part of the financing rounds.
The Company has allocated the gross proceeds in each financing round to the warrants based on their fair value at the issuance date and the residual amount was allocated to the Convertible Preferred A Shares. The Company has allocated the related direct and incremental issuance costs in each financing round to the warrants and the Convertible Preferred A shares issued based on the relative fair value at the issuance date.
In accordance with ASC 480 "Distinguishing Liabilities from Equity", the warrants to purchase Convertible Preferred A Shares are classified as a liability and re-measured to fair value at each reporting date. The changes in the fair value are recorded as an expense or income in the statements of comprehensive loss.
In January and August 2015, the warrants were exercised to 219,789 Convertible Preferred A Shares for a total consideration of $540. In addition, 8,140 warrants were exercised to 8,140 Convertible Preferred A Shares with no exercise price.
In estimating the warrants' fair value, the Company used the following assumptions:
| | | December 31, | |
| | | 2015 | | | 2014 | |
| | | | | | | |
| Risk‑free interest rate(1) | | | 1.49 | % | | | 0.62 | % |
| Expected volatility(2) | | | 88.9 | % | | | 93.1 | % |
| Expected life (in years)(3) | | | 1.95 | | | | 1.00 | |
| Expected dividend yield(4) | | | 0 | % | | | 0 | % |
| Fair value: | | | | | | | | |
| Warrants | | $ | 0.44-0.77 | | | $ | 0.36-1.23 | |
| (1) | Risk free interest rate based on yield rates of non-index linked U.S. Federal Reserve treasury bonds. |
ADVANCED INHALATION THERAPIES (AIT) LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share data
| NOTE 7:- | WARRANTS TO PURCHASE CONVERTIBLE PREFERRED A SHARES (Cont.) |
| (2) | Expected volatility was calculated based on actual historical share price movements of companies in the same industry over a term that is equivalent to the expected term of the option. |
| (3) | Expected life was based on the contractual term of the warrants. |
| (4) | Expected dividend yield was based on the fact that the Company has not paid dividends to its shareholders in the past and does not expect to pay dividends to its shareholders in the future. |
The following tabular presentation reflects the components of the liability associated with such warrants to purchase Convertible Preferred A Shares as of December 31, 2015:
| | | Fair value of Warrants to purchase Convertible Preferred A Shares | |
| | | | |
| Balance at January 1, 2014 | | $ | 588 | |
| Fair value of warrants issued to finder fee (see also Note 10c1) | | | 78 | |
| Revaluation of warrants' fair value | | | 2,055 | |
| | | | | |
| Balance at December 31, 2014 | | | 2,721 | |
| Revaluation of warrants' fair value upon conversion | | | 152 | |
| Conversion of warrants into Convertible Preferred A Shares (see also Notes 10c2 and 10c3) | | | (2,873 | ) |
| | | | | |
| Balance at December 31, 2015 | | $ | - | |
| a. | Tax rates applicable to the Company: |
| 1. | Taxable income of the Company is subject to the Israeli corporate tax at the rates of 26.5% in 2014 and 2015. |
| 2. | On January 5, 2016, the Israeli Parliament officially published the Law for the Amendment of the Israeli Tax Ordinance (Amendment 216), that reduces the standard corporate income tax rate from 26.5% to 25%. |
ADVANCED INHALATION THERAPIES (AIT) LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share data
| NOTE 8:- | TAXES ON INCOME (Cont.) |
| b. | Non-Israeli subsidiary, AIT Inc.: |
AIT Inc. is subject to U.S. income taxes. The tax rates are compounded from a progressive federal tax of 35% in addition to a state and local taxes.
| c. | Income taxes on non-Israeli subsidiaries: |
Non-Israeli subsidiaries are taxed according to the tax laws in their respective country of residence. Neither Israeli income taxes, foreign withholding taxes nor deferred income taxes were provided in relation to undistributed earnings of the Company's foreign subsidiaries. This is because the Company has the intent and ability to reinvest these earnings indefinitely in the foreign subsidiaries and therefore those earnings are continually redeployed in those jurisdictions.
| | d. | Net operating losses carry forward: |
Advanced Inhalation Therapies (AIT) Ltd. has accumulated losses for tax purposes as of December 31, 2015 in the amount of approximately $4,142 which may be carried forward and offset against taxable income in the future for an indefinite period.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets are as follows:
| | | December 31, | |
| | | 2015 | | | 2014 | |
| Deferred tax assets: | | | | | | |
| Operating loss carry forward | | $ | 1,098 | | | $ | 747 | |
| Reserves and allowances | | | 8 | | | | 6 | |
| Research and development | | | 318 | | | | 254 | |
| | | | | | | | | |
| Net deferred tax asset before valuation allowance | | | 1,424 | | | | 1,007 | |
| Valuation allowance | | | (1,424 | ) | | | (1,007 | ) |
| | | | | | | | | |
| Net deferred tax asset | | $ | - | | | $ | - | |
In assessing the realization of deferred tax assets, management considers whether it is more likely than not that all or some portion of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences are deductible and net operating losses are utilized. Based on consideration of these factors, the Company recorded a full valuation allowance at December 31, 2015 and 2014.
ADVANCED INHALATION THERAPIES (AIT) LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share data
| NOTE 8:- | TAXES ON INCOME (Cont.) |
| f. | Taxes on income for the year ended December 31, 2015 are comprised from taxes incurred as a result of the implementation of the cost plus service agreement between the Company and Inc. |
| g. | Loss (income) before taxes on income consists of the following: |
| | | December 31, | |
| | | 2015 | | | 2014 | |
| | | | | | | |
| Domestic | | $ | 3,453 | | | $ | 4,622 | |
| Foreign | | | (98 | ) | | | - | |
| | | | | | | | | |
| | | $ | 3,355 | | | $ | 4,622 | |
| h. | The main reconciling item between the statutory tax rate of the Company and the effective tax rate is the recognition of valuation allowances in respect to deferred taxes relating to accumulated net operating losses carried forward due to the uncertainty of the realization of such deferred taxes. |
| i. | Accounting for uncertainty in income taxes: |
A reconciliation of the beginning and ending amount of unrecognized tax benefits related to uncertain tax positions is as follows:
| | | Year ended December 31, | |
| | | 2015 | | | 2014 | |
| | | | | | | |
| Balance at beginning of year | | $ | - | | | $ | - | |
| Additions for current year's tax position | | | 127 | | | | - | |
| | | | | | | | | |
| Balance at the end of year | | $ | 127 | | | $ | - | |
The Company does not expect a reversal of unrecognized tax benefits in the next 12 months.
The Company and Inc. file income tax returns in Israel and U.S, respectively. As of December 31, 2015, the tax returns of the Company and Inc. are open to examination by the tax authorities from inception through 2015.
ADVANCED INHALATION THERAPIES (AIT) LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share data
NOTE 9:- CONTINGENT LIABILITIES AND COMMITMENTS
| a. | The Company is engaged in an operating lease agreement for its office facilities. Future minimum non-cancelable rental payments under the operating lease are $14 for the year ending December 31, 2016. Rent expenses for the years ended December 31, 2015 and 2014 amounted to $18 and $22, respectively. |
| b. | On October 22, 2013, the Company entered into certain patent license agreement with a third party pursuant to which the Company paid to the third party a non-refundable upfront fee amounted to $150 and is obligated to pay the third party 5% royalties of the licensed product revenues, but at least $50 per annum at the royalty period. As of December 31, 2015, the Company did not record any revenues and therefore no royalties were paid or accrued. |
| c. | On April 8, 2014, the Company signed a finder fee agreement pursuant to which among others the Company will grant to the finder fee of 6% of the Company's conversion shares to be actually issued to certain lenders upon actual conversion of the lender's Convertible Notes as described in Note 6. |
| d. | On March 4, 2015, the Company entered into an agreement with certain gas supplier pursuant to which the supplier will receive exclusivity on the US market in exchange for gas supply for clinical studies for Bronchiolitis. |
| e. | On August 3, 2015 ("Effective Date"), the Company entered into agreement with certain individual to serve as the Company's chairman of the Board of Directors pursuant to which, among others, the Company will pay as compensation and benefits upon consummation of Initial Public Offering ("IPO") (i) an annual retainer of $75 to be paid on equal installments and (ii) 492,624 restricted shares of the Company with vesting schedule of 50% if such shares to be vested after 6 month anniversary of the completion of an IPO and the remaining 50% of such shares after 18 month anniversary of the completion of an IPO. Upon closing change of control transaction, as defined in the agreement, the unvested options shall be accelerated and vested immediately. |
The agreement shall commence as of the Effective Date and shall continue for a period of three years, subject to earlier termination as defined in the agreement.
| f. | In August 2015, the Company entered into an Option Agreement ("Agreement") with a third party whereby the Company acquired for $25 the Option to purchase certain intellectual property assets and rights ("Option"). According to the Agreement, the Option is exercisable for a period of six months starting August 2015 (which was extended in 2016 for a period which is ended January 2017). Upon exercise of the Option, the Company will be obligated to pay an exercise price of $500 and will be required to make certain one-time development and sales milestone payments to the third party starting from the date when the Company will receive regulatory approval for the commercial sale of its first product candidate. |
ADVANCED INHALATION THERAPIES (AIT) LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share data
NOTE 9:- CONTINGENT LIABILITIES AND COMMITMENTS (Cont.)
In addition, the Company has issued to the third party a warrant to purchase up to such amount of Ordinary Shares of the Company in such number equal to $1,000 divided by 80% of the price per share of each Ordinary Share of the Company determined for the purposes of the Company's IPO. The warrant shall be exercisable, in whole or in part, until the seventh anniversary as of the date of grant of the warrant.
| g. | The Company entered into employment agreements with certain employees and service agreements with certain vendors pursuant to which the Company will pay a one-time payment in the event the Company succeeds in achieving and consummating an IPO and/or financing round. As of December 31, 2015, the Company's contingent commitment in such regard amounted to approximately $318. |
| NOTE 10:- | SHAREHOLDERS' DEFICIENCY |
The Ordinary Shares confer upon their holders the right to participate and vote in general shareholders meetings of the Company and to share in the distribution of dividends, if any, declared by the Company, and rights to receive a distribution of assets upon liquidation.
| 2. | Convertible Preferred A Shares: |
The Convertible Preferred A Shares confer on the holders thereof all rights accruing to holders of Ordinary Shares in the Company and, in addition, bear the following rights (and such other rights set forth in the Company's AOA):
Voting - Every holder of Convertible Preferred A Shares shall have one vote for each Ordinary Share into which the Convertible Preferred A Shares held by him of record could be converted, on every resolution, without regard to whether the vote thereon is conducted by a show of hands, by written ballot or by any other means. The holders of each class of Convertible Preferred A Shares shall vote separately on all matters that by law or under the Articles of Association are subject to a class vote.
Conversion - Each Preferred A Share shall be convertible, without payment of additional consideration, by the holder thereof into Ordinary Shares at the option of the holder thereof, at any time after the date on which such Preferred A Share was issued by the Company. In addition, all Convertible Preferred A Shares are mandatorily convertible into Ordinary Shares simultaneously with the occurrence of the first to occur of (A) the consummation of an IPO of the Company’s Ordinary Shares, reflecting a pre-money valuation of the Company of no less than $20,000 and netting to the Company proceeds of no less than $5,000; or (B) the holders of the majority of the issued and outstanding Convertible Preferred A Shares elect to convert their Convertible Preferred A Shares into Ordinary Shares.
ADVANCED INHALATION THERAPIES (AIT) LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share data
| NOTE 10:- | SHAREHOLDERS' DEFICIENCY (Cont.) |
Dividend Preference - When, as, and if a dividend is declared and distributed, the holders of the Convertible Preferred A Shares shall be entitled to receive, prior to any distribution of dividends to the holders of Ordinary Shares, a dividend, up to the cumulative aggregate amount, with respect to all dividends distributed, of the Preferred A Preference Amount (as defined below). After the dividend preferences of the Convertible Preferred A Shares have been paid in full, the Convertible Preferred A Shares will participate pro-rata with the Ordinary Shares in the receipt of any additional dividends on an as-converted basis.
Liquidation Preference- In the event of any liquidation (including a deemed-liquidation event), each holder of Convertible Preferred A Shares, then outstanding, shall be entitled to be paid out of the assets available for distribution to the shareholders, whether capital, surplus, earnings, securities or assets of any kind (the "Liquidation Assets"), prior and in preference to any distribution, declaration or setting apart for payment of any amount made in respect of any other shareholder an amount per share equal to the original issue price plus 8% per annum, plus any accrued but unpaid dividends thereon, but minus any dividends previously declared and paid for such share ("Preferred A Preference Amount").
| b. | On October 28, 2016, the Company's Board of Directors and the shareholders approved a reverse share split of all outstanding Ordinary Shares of the Company, by way of issuance and distribution of bonus shares without a change in nominal value of the Company's outstanding shares at a ratio of approximately 8.03 for 1. |
For accounting purposes, all Ordinary Shares, warrants to purchase Ordinary Shares and Convertible Preferred A Shares, options to purchase Ordinary Shares and loss per share amounts have been adjusted to give retroactive effect to this reverse share split for all periods presented in these consolidated financial statements. Any fractional shares resulting from the reverse share split will be rounded up to the nearest whole share.
| c. | Issuances of Convertible Preferred A Shares: |
| 1. | In April 2014, as a part of the second installment to the Share Purchase Agreement ("SPA") dated November 2012, the Company issued 76,316 Convertible Preferred A Shares at a price per share of $2,457 for a total consideration of $187. In addition, the Company issued to consultant in respect to services provided as part of the SPA (i) 2,442 Convertible Preferred A Shares at par value on the issuance date (fair value of approximately $38 based on the Preferred A Share value as of the issuance date), and (ii) warrants to purchase up to 8,140 of the Company's Convertible Preferred A Shares (fair value of approximately $78 based on the Preferred A Share Warrants value as of the issuance date). |
| 2. | In January 2015, one of the Company's shareholders exercised 101,754 warrants to 101,754 Convertible Preferred A Shares for a total consideration of $250 which reflects an exercise price of $2.457. Consequently, the Company issued additional 4,070 Convertible Preferred A Shares at par value on the issuance date to consultant in respect to exercise of 4,070 warrants. |
ADVANCED INHALATION THERAPIES (AIT) LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share data
| NOTE 10:- | SHAREHOLDERS' DEFICIENCY (Cont.) |
| 3. | In August, 2015, the Company's shareholders exercised 118,035 warrants to 118,035 Convertible Preferred A Shares for a total consideration of $290 which reflects an exercise price of $2.457. Consequently, the Company issued additional 4,070 Convertible Preferred A Shares at par value on the issuance date to consultant in respect to exercise of 4,070 warrants. |
In addition, the Company decided to grant to the aforementioned shareholders additional 5,902 warrants to purchase Convertible Preferred A Shares at par value with no exercise price which have been converted into 5,902 Convertible Preferred A Shares. Consequently, the Company issued additional 204 Convertible Preferred A Shares at par value to consultant in such respect.
| d. | During the year ended December 31, 2015, the Company incurred direct and incremental costs related to the IPO, including among others, accounting, consulting, legal and printing fees of $352, which were capitalized as a non-current asset. As of December 31, 2015, $146 out of the aforementioned amount was paid. |
| e. | Stock options granted to employees: |
In September and December 2013, the Company 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 Company reserved for grants of options up to 466,676 of the Company's Ordinary Shares. 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. As of December 31, 2015, 192,263 options and RSU's were still available for future grants under 2013 Plan.
A summary of the Company's options activity for employees and directors under the Company's 2013 Plan is as follows:
| | | | Year ended December 31, 2015 | |
| | | | Number of options | | | | Weighted average exercise price | | | | Weighted average remaining contractual life | |
| | | | | | | | | | | | | |
| Options outstanding at beginning of year | | | 68,859 | | | $ | 1.20 | | | | 8.84 | |
| Granted | | | 90,688 | | | | 5.46 | | | | 9.67 | |
| Forfeited | | | (12,941 | ) | | | 5.46 | | | | 8.36 | |
| | | | | | | | | | | | | |
| Options outstanding at end of year | | | 146,606 | | | | 3.38 | | | | 8.92 | |
| | | | | | | | | | | | | |
| Options vested and expected to be vested | | | 146,606 | | | | 3.38 | | | | 8.92 | |
| | | | | | | | | | | | | |
| Options exercisable at end of year | | | | | | $ | 0.73 | | | | 7.91 | |
ADVANCED INHALATION THERAPIES (AIT) LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except share data
| NOTE 10:- | SHAREHOLDERS' DEFICIENCY (Cont.) |
As of December 31, 2015, the aggregated intrinsic value of outstanding and exercisable options is $242 and $201, respectively. The aggregate intrinsic value represents the total intrinsic value (the difference between the deemed fair value of the Company's Ordinary Shares on the last day of fiscal 2015 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 December 31, 2015. This amount is impacted by the changes in the fair market value of the Company's shares.
f. Stock options granted to non-employees:
The Company granted options to certain non-employees under the Company's 2013 Plan and accounted for these options in accordance with ASC 505-50.
The outstanding options granted to the Company's non-employees are as follows:
| Grant date | | Number of options | | | Exercise price | | Expiration date |
September 8, 2013 | | | 17,080 | | | $ | 4.01 | | September 8, 2023 |
September 8, 2013 | | | 2,340 | | | $ | * ) - | | September 8, 2023 |
December 29, 2013 | | | 3,511 | | | $ | 4.01 | | December 29, 2023 |
April 8, 2014 | | | 9,158 | | | $ | * ) - | | April 8, 2024 |
July 24, 2014 | | | 2,492 | | | $ | 5.46 | | July 24, 2024 |
March 1, 2015 | | | 57,779 | | | $ | 5.46 | | March 1, 2025 |
October 20, 2015 | | | 12,456 | | | $ | * ) - | | October 20, 2025 |
December 1, 2015 | | | 11,210 | | | $ | 5.46 | | December 1, 2025 |
| | | | | | | | | | |
| | | | 116,026 | | | | | | |
| *) | Represents an amount lower than $1. |
| g. | Stock-based compensation expenses: |
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:
| | | Year ended December 31, | |
| | | 2015 | | | 2014 | |
| | | | | | | |
| Research and development expenses | | $ | 331 | | | $ | 185 | |
| General and administrative expenses | | | 98 | | | | 56 | |
| | | | | | | | | |
| | | $ | 429 | | | $ | 241 | |
As of December 31, 2015, the total unrecognized estimated compensation cost related to non-vested stock options granted to employees, directors and non-employees prior to that date was $452, which is expected to be recognized over a weighted average period of approximately 4 years.
