Notes to Condensed Consolidated Unaudited Interim Financial Statements as of June 30, 2019

Note 1 - General

The Company was incorporated in Israel as a private company in August 1968, and has been listed for trading on the Tel Aviv Stock Exchange since September 1978. In October 2012, the Company disposed all of its previous operations, and in July 2013, the Company acquired shares of Kitov Pharmaceuticals Ltd. from its shareholders, in exchange for the Company’s shares (hereinafter: “the Acquisition” ).

In January 2018, the Company changed its name to Kitov Pharma Ltd.

Each ADS represents 1 ordinary share with no par value following a reverse split in effect from January 4, 2019 (see Note 6). Each warrant enables the purchase of 1 ADS.

The Company’s address is One Azrieli Center, Round Tower, 132 Menachem Begin Road, Tel Aviv 671101, Israel.

The Company together with TyrNovo are referred to, in these financial statements, as “ the Group ”.

Kitov Pharma Ltd.

Notes to Condensed Consolidated Unaudited Interim Financial Statements as of June 30, 2019

Note 2 - Basis of Preparation

These condensed consolidated interim financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting and do not include all of the information required for full annual financial statements. They should be read in conjunction with the financial statements as at and for the year ended December 31, 2018 (hereinafter - “the Annual Financial Statements”). They do not include all of the information required for a complete set of IFRS financial statements. However, selected explanatory notes are included to explain events and transactions that are significant to an understanding of the changes in the Group’s financial position and performance since the last annual financial statements.

These condensed consolidated interim financial statements were authorized for issue by the Group’s Board of Directors on August 7, 2019.

The preparation of financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

Except as described below and that mentioned in Note 3, the significant judgments made by management in applying the Group’s accounting policies and the principal assumptions used in the estimation of uncertainty were the same as those that applied to the annual financial statements.

Kitov Pharma Ltd.

Notes to Condensed Consolidated Unaudited Interim Financial Statements as of June 30, 2019

The Group’s management regularly reviews significant unobservable inputs and valuation adjustments, including obtaining valuations prepared by third parties and assessing the evidence to support the conclusion that these valuations meet the requirements of IFRS, including the level in the fair value hierarchy in which the valuations should be classified.

Significant valuation issues are reported to the Group Audit Committee.

When measuring the fair value of an asset or a liability, the Group uses market observable data as far as possible. Fair values are categorized into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows:

If the inputs used to measure the fair value of an asset or a liability might be categorized in different levels of the fair value hierarchy, then the fair value measurement is categorized in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement.

Further information about the assumptions made in measuring fair value of share based payments and financial instruments are included in Note 8 and 7, respectively.

Kitov Pharma Ltd.

Notes to Condensed Consolidated Unaudited Interim Financial Statements as of June 30, 2019

Note 3 - Significant Accounting Policies

Except as described below, the accounting policies applied by the Group in these condensed consolidated interim financial statements are the same as those applied by the Group in its Annual Financial Statements.

Presented hereunder is a description of the changes in accounting policies applied in these condensed consolidated interim financial statements and their effect:

IFRS 16, Leases

As from January 1, 2019 (hereinafter: “the date of initial application”) the Group applies International Financial Reporting Standard 16, Leases (hereinafter: “IFRS 16” or “the standard”), which replaced International Accounting Standard 17, Leases (hereinafter: “IAS 17” or “the previous standard”).

The main effect of the standard’s application is reflected in annulment of the existing requirement from lessees to classify leases as operating (off-balance sheet) or finance leases and the presentation of a unified model for lessees to account for all leases similarly to the accounting treatment of finance leases in the previous standard. Until the date of application, the Group classified all of the leases in which it is the lessee as operating leases, since it did not substantially bear all the risks and rewards from the assets.

In accordance with IFRS 16, for agreements in which the Group is the lessee, the Group recognizes a right-of-use asset and a lease liability at the inception of the lease contract for all the leases in which the Group has a right to control identified assets for a specified period of time, other than exceptions specified in the standard. Accordingly, the Group recognizes depreciation and amortization expenses in respect of a right-of-use asset, tests a right-of-use asset for impairment in accordance with IAS 36 and recognizes financing expenses on a lease liability. Therefore, as from the date of initial application, lease payments relating to assets leased under an operating lease, which were presented as part of expenses in the statement of operations, are capitalized to assets and written down as depreciation and amortization expenses.

The Group elected to apply the standard using the cumulative effect method, with an adjustment to the balance of retained earnings as at January 1, 2019 and without a restatement of comparative data. In respect of all the leases, the Group elected to apply the transitional provisions such that on the date of initial application it recognized a liability at the present value of the balance of future lease payments discounted at its incremental borrowing rate at that date calculated according to the average duration of the remaining lease period as from the date of initial application, and concurrently recognized a right-of-use asset at the same amount of the liability, adjusted for any prepaid or accrued lease payments that were recognized as an asset or liability before the date of initial application. Therefore, application of the standard did not have an effect on the Group’s equity at the date of initial application.

Furthermore, as part of the initial application of the standard, the Group has chosen to apply the following expedients:

Kitov Pharma Ltd.

Notes to Condensed Consolidated Unaudited Interim Financial Statements as of June 30, 2019

Note 3 - Significant Accounting Policies (cont’d)  

Impact of the application of IFRS 16 in the reporting period

In measurement of the lease liabilities, the Group discounted lease payments using the nominal incremental borrowing rate at January 1, 2019. The discount rate used to measure the lease liability is 8%.

As a result of applying IFRS 16, in relation to the leases that were classified as operating leases according to IAS 17, the Group recognized right-of-use assets (including investment property) and lease liabilities as at January 1, 2109 in the amount of USD 401 thousand, respectively. As at June 30, 2019 the Group recognized right-of-use assets (including investment property) and lease liabilities in the amount of USD 311 thousand and USD 326 thousand, respectively.

Furthermore, instead of recognizing lease expenses in relation to those leases, during the six month period ended June 30, 2019 the Group recognized additional depreciation expenses in the amount of USD 90 thousand, and additional financing expenses in the amount of USD 14 thousand.

Presented hereunder are the main changes in accounting policies following the application of IFRS 16 as from January 1, 2019:

On the inception date of the lease, the Group determines whether the arrangement is a lease or contains a lease, while examining if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration. In its assessment of whether an arrangement conveys the right to control the use of an identified asset, the Group assesses whether it has the following two rights throughout the lease term:

For lease contracts that contain non-lease components, such as services or maintenance, that are related to a lease component, the Group elected to account for the contract as a single lease component without separating the components.

Kitov Pharma Ltd.

Notes to Condensed Consolidated Unaudited Interim Financial Statements as of June 30, 2019

Note 3 - Significant Accounting Policies ( cont’d)

Contracts that award the Group control over the use of a leased asset for a period of time in exchange for consideration, are accounted for as leases. Upon initial recognition, the Group recognizes a liability at the present value of the balance of future lease payments (these payments do not include certain variable lease payments), and concurrently recognizes a right-of-use asset at the same amount of the lease liability, adjusted for any prepaid or accrued lease payments, plus initial direct costs incurred in respect of the lease.

Since the interest rate implicit in the Group’s leases is not readily determinable, the incremental borrowing rate of the lessee is used. Subsequent to initial recognition, the right-of-use asset is accounted for using the cost model, and depreciated over the shorter of the lease term or useful life of the asset.

The Group has elected to apply the practical expedient by which short-term leases of up to one year and/or leases in which the underlying asset has a low value, are accounted for such that lease payments are recognized in profit or loss on a straight-line basis, over the lease term, without recognizing an asset and/or liability in the statement of financial position.

The lease term is the non-cancellable period of the lease plus periods covered by an extension or termination option if it is reasonably certain that the lessee will or will not exercise the option, respectively.

After lease commencement, a right-of-use asset is measured on a cost basis less accumulated depreciation and accumulated impairment losses and is adjusted for re-measurements of the lease liability. Depreciation is calculated on a straight-line basis over the useful life or contractual lease period, whichever earlier, as follows:

Kitov Pharma Ltd.

Notes to Condensed Consolidated Unaudited Interim Financial Statements as of June 30, 2019

Kitov Pharma Ltd.

Notes to Condensed Consolidated Unaudited Interim Financial Statements as of June 30, 2019

Note 5 - Financial Asset

On March 14, 2019 the Company signed an agreement to acquire 100% of FameWave Ltd, a privately held biopharmaceutical Company with rights to develop CM-24, (“FameWave”) from its shareholders in exchange for USD 10 million worth of its newly issued ADSs with a long term lock-up period, priced at USD 1.23 per ADS, plus 50% warrant coverage based on an exercise price of USD 1.98 per ADS with a 4 year term. In addition, the Company provided a loan to FameWave of USD 2 million that served mainly to pay cCAM BioTherapeutics Ltd., a wholly owned subsidiary of Merck Sharp and Dohme Corp., known as “MSD” in Israel, which discovered CM-24, and to finance budgeted expenses until the closing of the acquisition.

The transaction has been approved by the boards and shareholders of the Company and FameWave and is expected to close during the third quarter of 2019 subject to satisfaction of other customary closing conditions including a tax ruling to FameWave shareholders. All other material closing conditions such as closing of the transaction for the reversion of CM-24 to FameWave by MSD and finalization by FameWave of the joint clinical collaboration agreement with a third party has been achieved. Should the complete transaction not close, the Company will be entitled to repayment of the amounts loaned by the Company out of amounts actually received by FameWave from commercialization transactions of CM-24. If no such commercialization transaction is consummated within 36 months from termination, the Company will be entitled to 20% of FameWave in return for the USD 2 million loan which was previously provided. Furthermore, should the transaction not close due to the failure of FameWave to finalize certain closing conditions to be fulfilled by the current shareholders of FameWave, then the Company will be entitled to 100% of FameWave in return for the USD 2 million loan which was previously provided.

The loan of USD 2 million was accounted for as a financial asset at fair value, see Note 7.

Kitov Pharma Ltd.

Notes to Condensed Consolidated Unaudited Interim Financial Statements as of June 30, 2019

Note 6 - Capital and reserves (Cont’d)

In this registered direct offering, the Company issued 3,428,572 ADSs and, in a concurrent private placement, 2,571,430 non-listed warrants to purchase 2,571,430 ADSs. Each non-listed warrant is exercisable until July 15, 2024 at an exercise price of USD 2.00 per ADS. The warrant holders have the option to exercise cashless, and the warrants were therefore accounted for as a derivative liability. The ADSs issued were recorded in equity in an amount of USD 2,200 thousand, net of issuance expenses. The warrants were recorded as a liability in the amount of USD 3,406. Issuance expenses related to the warrants, in the amount of USD 517 thousand were recorded to finance expense. This derivative instrument is classified as a Level 3 financial instrument, see Note 7.

As at June 30, 2019, the fair value of these warrants amounted to USD 1,587 thousand.

Note 7 - Financial Instruments

Framework for risk management

The Board of Directors has overall responsibility for the establishment and oversight of the Group’s risk management framework.

The Group’s risk management practice was formulated to identify and analyze the risks that the Group faces, to set appropriate limits for the risks and controls, and to monitor the risks and their compliance with the limits. The risk policy and risk management methods are reviewed regularly to reflect changes in market conditions and in the Group’s operations. The Group acts to develop an effective control environment in which all employees understand their roles and commitment.

Credit risk is the risk of financial loss to the Group if a debtor or counterparty to a financial instrument fails to meet its contractual obligations, and arises mainly from the Company’s receivables. The Group restricts exposure to credit risk by investing only in bank deposits. Exposure to credit risk.

The Group held cash and cash equivalents and short-term deposits of USD 7,817 thousand at June 30, 2019 (and at December 31, 2018 – USD 6,684 thousand). These are held with banks, which are rated A2, based on Moody’s Rating Agency ratings. The short-term deposits, mainly in USD, bear fixed interest ranging between 0.02% - 2.97%.

Kitov Pharma Ltd.

Notes to Condensed Consolidated Unaudited Interim Financial Statements as of June 30, 2019

Note 7 - Financial Instruments (Cont’d)

The carrying amount of cash and cash equivalents and short-term deposits approximate their fair value.

Market risk is the risk that changes in market prices, such as foreign currency exchange rates, the CPI, interest rates and the prices of equity instruments, will influence the Group’s results or the value of its holdings in financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimizing returns.

The Group is exposed to currency risk mainly for cash and purchases for research and development expenses that are denominated in dollars and euros. Therefore, the Group is exposed to exchange rate fluctuations in these currencies against the NIS and takes steps to reduce the currency risk by maintaining its liquid resources in accordance with its future needs.

Aside from the issuance of warrants in the amount of USD 3,406 thousands, see Note 6A, the differences between opening and closing balance are due to the changes in fair value.

Kitov Pharma Ltd.

Notes to Condensed Consolidated Unaudited Interim Financial Statements as of June 30, 2019

Note 7 - Financial Instruments (Cont’d)

Details regarding fair value measurement at Level 3 at June 30, 2019:

The carrying amount is a reasonable approximation of fair value, see Note 5.

Note 8 - Share-based payments

During March 2019, the board of directors of the Company approved the grant of 2,871 thousand options to directors, employees and consultants. The options have an exercise price of USD 1.28 – 1.64 per one ordinary share, and will vest during 3 years from the date of grant. The options are exercisable for 7 years from grant date. The fair value of these options as of the grant date was measured at USD 2,398 thousand. Those options that were granted to directors were approved by the shareholders of the Company in April 2019.

In additional, the Company granted 61 thousand options to Tmura, an Israeli charity organization, the options have an exercise price equals USD 6 per ordinary share, and were immediately vested at the date of grant. The fair value of these options as of the grant date was measured at USD 56 thousand.

In additional, the Company granted 240 thousand options to the placement agents (see Note 6A), the options have an exercise price equals USD 2.188 per ordinary share, and 5 years of vesting. The fair value of these options as of the grant date was measured at USD 298 thousand. An amount of USD 170 was recorded to finance expenses and the reminder as issuance expenses.

Kitov Pharma Ltd.

Notes to Condensed Consolidated Unaudited Interim Financial Statements as of June 30, 2019