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Artemis Therapeutics, Inc.

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Artemis Therapeutics, Inc.

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(*) Represents an amount lower than 1,000 USD

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On August 23, 2016, the Predecessor Company consummated an agreement and plan of merger (the “Merger Agreement”) with Artemis Pharma Inc. (formerly, Artemis Therapeutics Inc.), a Delaware corporation (“Artemis”). Pursuant to the terms of the Merger Agreement, in exchange for the outstanding shares of Artemis, the Company issued to Artemis shareholders a total of 460,000 shares (as adjusted to reflect the reverse stock split) of the Predecessor Company's common stock and series B convertible preferred stock convertible into 3,426,384 shares (as adjusted to reflect the reverse stock split) (the “Merger”). All series B preferred shares were converted to common shares prior to December 31, 2016. Immediately following the consummation of the Merger Agreement, Artemis stockholders owned approximately 82% of the Company’s common stock, on a fully diluted basis. Following the issuance and sale of the Company’s Series A Preferred Stock and common stock to an investor, ownership was reduced, after which Artemis stockholders owned approximately 70% of the Company’s common stock, on a fully diluted basis. (Refer to note 7).

As a result of the Merger, Artemis became a wholly owned subsidiary of the Company. Artemis’ fiscal year end is December 31.

 

 

 NOTE 1 -   GENERAL (cont.)

 

The Merger between the Predecessor Company and Artemis was accounted for as a reverse recapitalization and, as a result of the Merger, the Predecessor Company ceased to be a shell company. As the shareholders of Artemis received the largest ownership interest in the Predecessor Company, Artemis was determined to be the "accounting acquirer" in the reverse acquisition. As a result, the historical financial statements of the Predecessor Company were replaced with the historical financial statements of Artemis. Following the Merger, the Predecessor Company and its subsidiary, Artemis, are collectively referred to as the "Company".

 

Artemis was incorporated in the State of Delaware on April 19, 2016. Artemis is engaged in the development of agents for the prevention and treatment of severe and potentially life-threatening infectious diseases. Artemis’s lead product candidate, Artemisone, is a clinical-stage synthetic artemisinin derivative with antiviral and antiparasitic properties. Artemis expects to advance Artemisone initially as an antiviral agent to address unmet clinical needs in the growing population of immunocompromised patients infected with human cytomegalovirus (HCMV), and other related clinical indications.

On May 31, 2016, Artemis entered into a license agreement with Hadasit Medical Research Services & Development Ltd. (“Hadasit”), and Hong Kong University of Science and Technology R and D Corporation Limited (“RDC”), pursuant to which Artemis acquired a worldwide, royalty-bearing license to make any and all use of certain patents and know-how owned by the Hadasit and RDC relating to Artemisone. Artemis will rely primarily on the license agreement with respect to the development of Artemisone, its lead product candidate.

 

A.	Unaudited Interim Financial Statements

 

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B.	Significant Accounting Policies

C.	Recent Accounting Standards:

In January 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-01, “Financial Instruments – Overall (Suptopic 825-10) Recognition and Measurement of Financial Assets and Liabilities” (“ASU 2016-01”). The amendments in ASU 2016-01 affect any entity that holds financial assets or owes financial liabilities. The guidance is effective for fiscal years beginning after December 15, 2017. The standard had no impact on the financial statements at transition date.

In May 2017, the FASB issued ASU No. 2017-09, “Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting,” which clarifies when a change to terms or conditions of a share-based payment award must be accounted for as a modification. The new guidance requires modification accounting if the vesting condition, fair value or the award classification is not the same both before and after a change to the terms and conditions of the award. The new guidance is effective on a prospective basis beginning on January 1, 2018 and early adoption is permitted. The standard had no impact on the financial statements at transition date.

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Artemis Therapeutics, Inc.

Notes to the Interim Condensed Consolidated Financial Statements

(USD in thousands)

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In March 2018, the FASB issued ASU No. 2018-05, Income Taxes (Topic 740). The amendments add various Securities and Exchange Commission (“SEC) paragraphs pursuant to the issuance of SEC Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“Act”) (“SAB 118”). The SEC issued SAB 118 to address concerns about reporting entities’ ability to timely comply with the accounting requirements to recognize all of the effects of the Act in the period of enactment. SAB 118 allows disclosure that timely determination of some or all of the income tax effects from the Act are incomplete by the due date of the financial statements and if possible to provide a reasonable estimate. The Company has provided a reasonable estimate in the notes to the consolidated financial statements.

In addition, Artemis agreed to certain development milestones, including the completion of Chemistry, Manufacturing and Controls (CMC) development and manufacturing for Phase I by the fourth quarter of 2017, completion of a Phase I study by the fourth quarter of 2019, completion of Phase IIa by the fourth quarter of 2022, and the first regulatory submission by the fourth quarter of 2027. Additionally, Artemis agreed to certain investment milestones, including the requirement to obtain financing of not less than $700,000 within seven months of the closing of the Merger on August 23, 2016 (such time, the “Effective Time”), $1 million within 12 months of the Effective Time and $2 million within 24 months of the Effective Time.  In the event that Artemis fails to meet development or investment milestones as set forth in the License Agreement, Hadasit has the right to terminate the License Agreement. Artemis has regular communication with representatives from Hadasit and, to date, the Company has received no notices from Hadasit or RDC about its development progress or the investment milestones and no indication that Hadasit or RDC intend to terminate the License Agreement for non-compliance. To date, the Company has not met the development and financing milestones set forth in the License Agreement. The Company has had discussions with Hadasit relating to amending the development and financial milestones set forth in the License Agreement but there are no guarantees that the Company will be successful in amending the License Agreement.

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Artemis Therapeutics, Inc.

Notes to the Interim Condensed Consolidated Financial Statements

(USD in thousands)

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A.	Tax rates applicable to the income

In December 2016, legislation to amend the corporate income tax law was published. The legislation determined a decrease of the corporate income tax law as of January 1, 2017 to 24% (1% decrease) and as of January 1, 2018 to 23% (additional 1% decrease).

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Artemis Therapeutics, Inc.

Notes to the Interim Condensed Consolidated Financial Statements

(USD in thousands)

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B.	Deferred income taxes

 

C.	Tax loss carry-forwards

 

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In connection with historical financings, the Company issued warrants to purchase common stock to investors. The below table lists these warrants and their material terms.

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A.	Stockholders Rights:

 

Shares of common stock confer upon their holders the right to receive notice to participate and vote in general meetings of shareholders of the Company, the right to receive dividends, if declared, and the right to receive a distribution of any surplus of assets upon liquidation of the Company.

 

The Series  A convertible preferred shares confer upon their holders the right to receive dividends when paid to holders of common stock of the Company on an as-converted basis, and the right to receive a distribution of any surplus of assets upon liquidation of the Company before any distribution or payment shall be made to the holders of any common stock.

 

In December 2016, all Series B convertible preferred shares were converted into shares of common stock.

 

The Series C convertible preferred  shares confer upon their holders the right to receive dividends when paid to holders of common stock of the Company on an as-converted basis. The shares of Series C convertible preferred stock have the right to receive a distribution of any surplus of assets upon liquidation of the Company before any distribution or payment shall be made to the holders of any other securities.

 

B.	Issuance of Shares:

 

 

In August 2016, immediately upon consummation of the Merger, the Company issued 68,321 shares of the Company’s common stock, as well as 453 shares of the Company’s newly designated Series A Convertible Preferred Stock convertible into 658,498 shares of common stock, to an investor for an aggregate purchase price of $481,000 (net of issuance expenses). These shares have anti-dilution protection for a period of twenty four months. The anti-dilution protection has not been triggered through the date of these financial statements. In addition, the investor within a 24-month period may purchase up to an additional 100% of its preferred A shares at 120% of the per share purchase price paid in August 2016.   This additional purchase option was recorded in equity.

 

In October 2017, the Company issued 300,000 shares of the Company’s common stock, warrants to purchase 275,000 shares of common stock, as well as 250 shares newly designated Series C Convertible Preferred Stock to investors for an aggregate purchase price of $550,000 less issuance expenses. Each share of Series C Convertible Preferred Stock is convertible into 1,000 shares of common stock, subject to adjustments in the event of future financing at a price of less than the conversion price. Preferred shares confer upon their holders the right to receive dividends when paid to holders of common stock of the Company on an as-converted basis. The holders of shares of Series C Convertible Preferred Stock have the right to receive a distribution of any surplus of assets upon liquidation of the Company before any distribution or payment shall be made to the holders of any other securities.

 

 

The warrants to purchase 275,000 shares of common stock contain a full ratchet anti-dilution price protection so that, in most situations upon the issuance of any common stock or securities convertible into common stock at a price below the then-existing exercise price of the outstanding warrants, the warrant exercise price will be reset to the lower common stock sales price.

 

As such anti-dilution price protection does not meet the specific conditions for equity classification the Company is required to classify the fair value of these warrants as a liability, with changes in fair value to be recorded as finance income (loss). The estimated fair value of our warrant liability at the date of issuance was approximately $319. The Company recorded finance income of $89 at March 31, 2018 and a finance expense of $109 at December 31, 2017 in respect of the change in the fair value of these warrants.

 

The Company uses the Black-Scholes valuation model to estimate fair value of these warrants. In using this model, the Company makes certain assumptions about risk-free interest rates, dividend yields, volatility, expected term of the warrants and other assumptions. Risk-free interest rates are derived from the yield on U.S. Treasury debt securities. Dividend yields are based on our historical dividend payments, which have been zero to date. Volatility is estimated from the historical volatility of our common stock as traded on NASDAQ. The expected term of the warrants is based on the time to expiration of the warrants from the date of measurement.

 

In accordance with ASC-820-10-50-2(g), the Company has performed a sensitivity analysis of the derivative warrant liabilities of the Company which are classified as level 2 financial instruments. The Company recalculated the value of warrants by applying a +/- 5% changes to the input variables in the Black-Scholes model that vary over time, namely, the volatility and the stock price.  A 5.0% decrease or increase in volatility would not cause a material change in the value of the warrants. A 5.0% decrease or increase in the stock price would not have materially changed the value of the warrants; the value of the warrants is not strongly correlated with small changes in interest rates.

 

C.	Reverse Stock Split:

 

On December 16, 2016, the Company effected a one-for-fifty (1:50) reverse stock split of its issued and outstanding shares of common stock. Share data included in these financial statements is retroactively adjusted as if the reverse stock split had occurred at the beginning of the earliest period presented.

 

D.	Options issued to employees and consultants:

 

On August 22, 2016, the Company granted 126,730 stock options to consultants. Each stock option is exercisable into a share of the Company’s common stock of and expires no later than 10 years from the date of grant.

 

One third of the options vested on the grant date, and one third of the options vest upon the first and second anniversaries of the grant date, with the option becoming fully vested on August 22, 2018. As a result, the Company recognized compensation expenses in the amount of $22, included in Research and Development Expenses. 35,202 of these options were exercised in July 2017.

 

 

 

Upon termination of the CEO’s employment agreement any of the then unvested options, that were granted on August 1, 2017 shall expire immediately. All vested options may be exercised for a period of 90 days from the termination of the agreement. These options  are subject to a 48 month vesting period whereby 5,055 options were vested on September 1, 2017 and 5,055 options become vested on the first day of each following month assuming the employment agreement has not been terminated.

 

The options granted to the CEO on March 15, 2018 vested on the grant date and the options granted to the CFO will vest over a 48 month period beginning February 1, 2018. These options will expire on March 15, 2028.

 

NOTE 7 -    STOCK CAPITAL (Cont.)

 

A summary of the Company's option activity and related information is as follows:

 

 

The aggregate intrinsic value in the table above represents the total intrinsic value (the difference between the fair market value of the Company’s common stock on March 31, 2018, and the exercise price, multiplied by the number of in-the-money stock options on those dates) that would have been received by the stock option holders had all stock option holders exercised their stock options on those dates.

 

The stock options outstanding as of March 31, 2018, have been separated into exercise price, as follows: