6-K 1 v329259_6k.htm CURRENT REPORT

 

 

  

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 6-K

 

Report of Foreign Private Issuer

 

Pursuant to Rule 13a-16 or 15d-16

of the Securities Exchange Act of 1934

 

For the month of November, 2012

 

Commission File Number: 000-51310

 

XTL Biopharmaceuticals Ltd.
(Translation of registrant’s name into English)

 

85 Medinat Hayehudim St., Herzliya
Pituach, PO Box 4033,
Herzliya 46140, Israel
(Address of principal executive offices)

 

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.

 

Form 20-F    x          Form 40-F    ¨

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): ¨

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): ¨

 

Indicate by check mark whether by furnishing the information contained in this Form, the registrant is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

 

Yes    ¨            No    x

 

If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82-   N/A  

 

 

 

 
 

 

Incorporation by Reference: This Form 6-K of XTL Biopharmaceuticals Ltd. dated November 26, 2012 is hereby incorporated by reference into the registration statements on Form F-3 (File No. 333-141529, File No. 333-147024 and File No. 333-153055) filed by XTL Biopharmaceuticals Ltd. with the Securities and Exchange Commission on March 23, 2007, October 30, 2007 and August 15, 2008, respectively, and the registration statements on Form S-8 (File No. 333-148085, File No. 333-148754 and File No. 333-154795) filed by XTL Biopharmaceuticals Ltd. with the Securities and Exchange Commission on December 14, 2007, January 18, 2008, and October 28, 2008, respectively.

 

XTL Biopharmaceuticals Ltd. (the “Company”) Presents Its Translated From Hebrew
Interim Financial Statements as of September 30, 2012

 

Attached hereto is an English translation (from Hebrew) of our interim financial statements and additional information as submitted on the Tel Aviv Stock Exchange.

 

The following documents are included:

 

A.Board of Directors' Report as of September 30, 2012.

 

B.Reviewed Condensed Consolidated Financial Statements as of September 30, 2012.

 

C.Separate Financial Information as of September 30, 2012 in accordance with Regulation 38d of the Israeli Securities Regulations (Periodical and Immediate Reports) - 1970.

 

D.Interim Report on the Effectiveness of Internal Control over Financial Reporting and Disclosure as of September 30, 2012, Pursuant to Regulation 38c(a) of the Israeli Securities Authority.

 

E.Condensed Pro Forma Interim Consolidated Financial Statements as of September 30, 2012, in accordance with Regulation 38b of the Israeli Securities Regulations (Periodical and Immediate Reports) – 1970.

 

F.Condensed Pro Forma Interim Consolidated Financial Statements as of June 30, 2012, in accordance with Regulation 38b of the Israeli Securities Regulations (Periodical and Immediate Reports) – 1970.

 

 
 

 

 

XTL BIOPHARMACEUTICALS LTD.

 

DIRECTORS' REPORT ON THE COMPANY'S STATE OF AFFAIRS

 

AS OF SEPTEMBER 30, 2012

 

The board of directors of XTL Biopharmaceuticals Ltd. ("the Company") hereby presents the Company directors' report for the nine and three-month periods ended September 30, 2012.

 

The data presented in this report relate to the Company and its subsidiaries on a consolidated basis ("the Group"), unless explicitly stated otherwise.

 

The directors' report contains, among other, a brief description of the Company's business, its financial position, an analysis of operating results and the effect of events during the reporting period on the data in the consolidated financial statements of the Company as of September 30, 2012 ("the financial statements"). The directors' report was prepared based on the assumption that the reader also has at its disposal the directors' report for the year ended December 31, 2011.

 

1.PART 1 - THE BOARD OF DIRECTORS' EXPLANATIONS FOR THE STATE OF THE CORPORATION'S BUSINESS

 

1.1A brief description of the Company's business

 

The Company was incorporated under the Israeli Companies Law on March 9, 1993. The Company is engaged in the development of therapeutics, among others, for the treatment of unmet medical needs, improvement of existing medical treatment and business development in the medical realm.

 

On July 25, 2012, the Company acquired approximately 50.79% of the issued and outstanding share capital of InterCure Ltd. ("InterCure"), a public company whose shares are traded on the Tel-Aviv Stock Exchange ("TASE") and which is engaged in research, development, marketing and sales of home therapeutic devices for non-medicinal and non-invasive treatment of various diseases such as hypertension, heart failure, sleeplessness and mental stress. For additional details regarding this acquisition, see item 1.2.11 below.

 

A-1
 

 

As of the reporting date, the Company is in the planning and preparation stages for implementing Phase 2 clinical trial of rHuEPO drug designated to treat multiple myeloma cancer patients . As part of these preparations, the Company conducts a research which includes collection of data relating to the level of specific proteins in the blood of a group of patients with multiple myeloma, which will assist in focusing the Phase 2 clinical trial protocol. These collected research data will be integrated in the above Phase 2 clinical trial. The Company expanded this research to additional centers in order to collect data beyond the original research plan and it estimates that the research will conclude towards the end of 2012. With the conclusion of the above research, the Company will start the procedure to apply for an approval to commence Phase 2 clinical trial which the Company estimates is expected to be issued by the end of the first half of 2013.

 

On May 29, 2011, the Company received from the U.S. Food and Drug Administration ("FDA"), a sub-unit of the Health and Human Services ("HHS"), an orphan drug designation for its rHuEPO drug for the treatment of multiple myeloma blood cancer for which it owns a patent through 2019.

 

An "orphan drug" is defined as a drug for treating diseases that affect a relatively small number of people. In the U.S., an "orphan drug" is defined as a disease affecting fewer than 200,000 people a year. To encourage the development of drugs for these diseases, the different regulatory authorities grant benefits and incentives to developers. The main standard benefit of orphan drugs in the U.S. is receiving seven years of marketing exclusivity from the date of receiving marketing approval from the FDA, as far as the FDA gives such approval. Other benefits are local U.S. tax credits for research and development expenses and waiver of FDA filing fees.

 

On November 30, 2011, the Company completed the MinoGuard transaction in the framework of which the Company acquired the activity of MinoGuard Ltd. ("MinoGuard"), which was founded by Mor Research Applications Ltd. ("Mor"), by obtaining an exclusive license to use MinoGuard's entire technology, including the SAM-101 drug, a combined drug for the treatment of mental disorders focusing on schizophrenia disorder, in return for royalties on sales and milestone payments throughout the clinical development process, without making any other payment. This drug is based on a combination of existing anti-psychotic drugs and a recognized medicinal compound (Minocycline).

 

For additional details regarding the MinoGuard agreements, see Note 15a to the consolidated financial statements for 2011.

 

A-2
 

 

As of September 30, 2012, the Company has several subsidiaries as detailed below:

 

a.InterCure, a public company whose shares are traded on the TASE (see more details in item 1.2.11 below).

 

b.Xtepo Ltd. ("Xtepo") - an Israeli privately-held company incorporated in November 2009 which holds a license for the exclusive use of the patent for rHuEPO drug for multiple myeloma (see also Note 1 to the Company's financial statements hereby attached).

 

c.XTL Biopharmaceuticals Inc. ("XTL Inc.") a U.S. company incorporated in 1999 under the laws of the State of Delaware and was engaged in development of therapeutics and business development in the medical realm. XTL Inc. has a wholly-owned subsidiary (a sub-subsidiary of the Company), XTL Development Inc. ("XTL Development"), which was incorporated in 2007 under the laws of the State of Delaware and was engaged in development of therapeutics for the treatment of diabetic neuropathic pain ("Bicifadine"). In March 2010, the Company terminated the agreement with DOV Pharmaceutical Inc., the owner of the Bicifadine patent, and all rights under the agreement were reverted to DOV Pharmaceutical Inc. in coordination with it. As of the date of the approval of the financial statements, XTL Inc. and XTL Development are inactive.

 

After the date of the statement of financial position, on November 21, 2012, the Company purchased approximately 31.35% issued and outstanding share capital of Proteologics Ltd. ("Proteologics"), a public company traded on the Tel-Aviv Stock Exchange, in consideration of approximately NIS 6.5 million (approximately $ 1.7 million), which were paid in cash (see 4.1.2 below).

 

The Company is a public company traded on the TASE whose American Depository Receipts ("ADRs") are quoted on the Pink Sheets (see also item 1.2.9 below).

 

During the period, the Company raised through a private placement and exercise of tradable and non-tradable warrants from March 2012 to the date of the approval of the financial statements total net proceeds of approximately $ 4.25 million (approximately NIS 16.1 million). For additional details, see items 1.2.4, 1.2.14 and 4.1.1 below.

 

1.2Significant events during the period

 

1.2.1On January 29, 2012, 39,000 options which had been granted in 1997 to a service provider expired.

 

1.2.2On February 13, 2012 and based on the decisions of the Company's board of directors ("BOD") and audit committee of February 12, 2012, the Company announced the convening of an annual general meeting of the Company's shareholders whose agenda would be the following proposed resolutions:

 

A-3
 

 

1.2.2.1To reappoint directors - to reappoint, on an individual basis, Messrs. Amit Yonay, Marc Allouche and David Grossman as directors in the Company until the next annual meeting.

 

1.2.2.2To reappoint external directors - to reappoint, on an individual basis, Mrs. Dafna Cohen and Mr. Jaron Diament as external directors in the Company for another (second) term from March 19, 2012.

 

1.2.2.3To approve a contingent bonus award to the Company's CEO - if the Company effects a capital raising round during a period of 36 months from the date of this resolution, the Company will pay the CEO a bonus equal to 1.2% of the above capital raising amount up to a maximal amount of $ 200 thousand.

 

1.2.2.4Subject to the approval of subsection 1.2.2.2 above, the Company will allocate to each of the external directors, at no consideration, 150,000 unregistered options to purchase 150,000 Ordinary shares of the Company of NIS 0.1 par value each (a total of 300,000 options) at an exercise price equal to NIS 0.58633 per option. According to the provisions of IFRS 2, the fair value of all options on the date of approval by the general meeting of the Company using the Black-Scholes model was approximately $ 79 thousand. The maximal option term is 10 years from the grant date. 33% of the options are exercisable immediately after their allocation and the remaining options are exercisable in 24 equal tranches every month from the date of grant over a two-year period.

 

On March 19, 2012, the annual general meeting of the Company's shareholders was convened and the issues discussed above were approved.

 

1.2.3On March 14, 2012, the Company signed a strategic collaboration master agreement with Clalit Health Services - Clalit Research Institute Ltd. ("the Institute") and Mor Research Applications Ltd. ("Mor") according to which the Institute provides the Company the right to receive contents which are based on the Institute's database in connection with technologies that stem from inventions and patents of Clalit Health Services' physicians, in projects whose content shall be agreed upon by the Company, the Institute and Mor in advance and in writing.

 

In consideration for the above, the Company shall pay the Institute the cost basis related to the Institute's activity in the framework of any project plus an additional 10% of the total royalties to which Mor is entitled pursuant to its agreements with the Company in connection with each technology for which rights were granted to the Company.
This agreement may be terminated by giving a written and advance notice of 180 days by any of the parties on condition that all joint active projects have reached their end.

 

A-4
 

 

The Company estimates that access to data through this agreement will enable the Company to evaluate the safety and efficacy data of the technologies under development as well as technologies whose development has not yet commenced.

 

1.2.4On March 18, 2012, the Company's BOD approved a private placement to institutional and private (foreign as well as Israeli) investors for a total of approximately $ 2.4 million (approximately NIS 9.1 million). According to the private placement, the Company allocated 11,560,362 Ordinary shares of the Company of NIS 0.1 par value each, 3,853,454 warrants (series A) and 1,926,727 warrants (series B).

 

Warrants (series A) are each exercisable into one Ordinary share of NIS 0.1 par value from the date of allocation (March 18, 2012) to September 17, 2012 for an exercise increment of NIS 1.046 per share, linked to the U.S. dollar. During the period, 560,000 warrants (series A) were exercised into 560,000 Ordinary shares of the Company of NIS 0.1 par value each for a total amount of approximately $ 155 thousand. On September 17, 2012, the outstanding 3,293,454 warrants (series A) expired. See additional information on the exercise of warrants (series A) in the period in item 1.2.14 below.

 

Warrants (series B) are each exercisable into one Ordinary share of NIS 0.1 par value from the date of allocation (March 18, 2012) to March 17, 2015 for an exercise increment of NIS 1.124 per share, linked to the U.S. dollar.

 

1.2.5On April 12, 2012, the Company's BOD approved the appointment of Dr. Ben-Zion Weiner as an independent director in the Company.

 

1.2.6On April 12, 2012, the Company's BOD approved to allocate 1,810,000 options that are exercisable into 1,810,000 Ordinary shares of the Company of NIS 0.1 par value each for an exercise increment of NIS 0.9 per share and pursuant to the Company's approved option plan as follows: 1,710,000 options to the Deputy CEO and CFO and 100,000 options to employees in the Company. Pursuant to the guidance of IFRS 2, the fair value of all options on the grant date (the date of Company's BOD's resolution), using the Black-Scholes model was approximately $ 399 thousand. The maximal option term is 10 years from the grant date. The options are exercisable in twelve equal tranches every quarter over a three-year period.

 

The value of each option is based on the following assumptions: expected dividend rate of 0%, expected standard deviation of 153.85%, risk-free interest rate of 3.67%-4.22% and expected life of 5 to 6.5 years.

 

A-5
 

 

1.2.7Based on the decision of the Company's BOD of April 12, 2012, the Company's BOD approved the convening of an extraordinary general meeting whose agenda will discuss the allocation of 4,408,000 options to a director in the Company that are exercisable into 4,408,000 Ordinary shares of the Company of NIS 0.1 par value each for an exercise increment of NIS 0.9 per share. Pursuant to the guidance of IFRS 2, the fair value of all options on the date of approval by the Company's extraordinary meeting, using the Black-Scholes model, was approximately $ 1,255 thousand. Also, on the agenda of the extraordinary general meeting is the allocation of 1,500,000 options to the Company's CEO that are exercisable into 1,500,000 Ordinary shares of the Company of NIS 0.1 par value each for an exercise increment of NIS 0.9 per share. Pursuant to the guidance of IFRS 2, the fair value of all options on the date of approval by the Company's extraordinary meeting, using the Black-Scholes model, was approximately $ 427 thousand. The maximal option term is 10 years from the grant date. The options will vest in twelve equal tranches every quarter from the date of grant over a three-year period.

 

On May 29, 2012, the extraordinary general meeting of the Company's shareholders was convened and the allocation of options discussed above was approved.

 

The value of each option is based on the following assumptions: expected dividend rate of 0%, expected standard deviation of 154.09%, risk-free interest rate of 3.90%-4.16% and expected life of 5 to 6.5 years.

 

1.2.8On April 12, 2012, the Company entered into an unbinding letter of intent with Kitov Pharmaceuticals Ltd. ("Kitov") according to which the Company intends to acquire the entire share capital of Kitov in consideration of the allocation of Company shares and milestone payments throughout the development progress of Kitov's products. Kitov researches and develops combination drugs. Kitov's lead drug is ready for a Phase 3 clinical trial and is focused on pain induced by osteoarthritis and treatment of hypertension. On June 18, 2012, the Company's Board approved to enter into a binding agreement according to which the Company will acquire the entire issued and outstanding share capital of Kitov by a reverse triangular merger subject to the fulfillment of certain prerequisites.

 

1.2.9On June 1, 2012, the Company filed an application for relisting its ADRs on the NASDAQ, which is subject to complying with all the required criteria that is examined by the NASDAQ Listing Qualifications Committee, including the criteria of minimum ADR price (according to the different listing criteria). On September 24, 2012, the Company's Board approved to change the number of ADRs such that 20 Ordinary shares of the Company form one ADR, this in order to support the Company's compliance with the NASDAQ's ADR listing requirements. The record date of the change in ADR ratio is October 4, 2012.

 

A-6
 

 

1.2.10On June 10, 2012, the Company was notified by the TASE that effective from June 17, 2012, the Company's securities will be traded on the TA MidCap-50 and on the TA BlueTech-50.

 

1.2.11On June 13, 2012, the Company entered into an agreement in principles with InterCure according to which, subject to carrying out the debt settlement pursuant to Article 350 to the Israeli Companies Law, 1999 ("the settlement") before the transaction in which InterCure will convert its entire debts into Ordinary shares of InterCure based on the distribution mechanism determined with all its debtors (including its employees) is consummated, the Company will acquire the control over InterCure in consideration for investing an aggregate amount of approximately $ 2.7 million, partly in cash and partly by the allocation of Company shares. Also, besides the Company's investment in InterCure, a third party ("Medica Fund") will invest in InterCure an amount of approximately $ 630 thousand.

 

As part of the prerequisites underlying the agreement, InterCure has undertaken to be free of any net debts and/or monetary liabilities on the date of closing of the transaction as well as free of any contingent liabilities, excluding an amount of up to $ 150 thousand in net liabilities.

 

On July 25, 2012, the transaction was completed after all the prerequisites had been met and the Company acquired 16,839,532 Ordinary shares of InterCure with no par value in consideration of a private placement of 7,165,662 Ordinary shares of the Company of NIS 0.1 par value each whose value on the date of signing the agreement measured according to the quoted market price of the Company's shares on the Tel-Aviv Stock Exchange approximated $ 2.2 million, and which represents a value of InterCure of $ 1.75 million before the money, but after all of InterCure's debts are converted as described above ("InterCure's adjusted value"). The fair value of the Company's shares on the date of consummation of the transaction was approximately $ 2,469 thousand.

 

In addition, the Company provided InterCure an amount of approximately $ 150 thousand in cash on the basis of InterCure's adjusted value. After effecting the above allocation, the Company held about 50.79% of the issued and outstanding share capital of InterCure. The investment of Medica Fund on the date of closing on the basis of InterCure's adjusted value amounted to approximately $ 460 thousand.

 

A-7
 

 

Further, the Company and Medica Fund provided InterCure a loan of $ 500 thousand (the Company's share is $ 330 thousand) for a period of up to ten months at an overall interest rate of 15%. The Company and Medica Fund have the right to convert the loan into an additional 11,546,507 shares of InterCure (the Company's share is 7,620,695 shares) which will constitute, upon conversion and assuming full dilution on the date of closing, approximately 24.47% of the issued and outstanding share capital of InterCure (the Company's share in the convertible loan is 16.15% of the issued and outstanding share capital of InterCure). On August 6, 2012, Medica Fund converted the loan it provided InterCure into shares and its stake in InterCure is about 23.69% of the issued and outstanding share capital of InterCure (about 18.61% on a fully diluted basis, as of the date of the loan's conversion).

 

As of the date of the approval of the financial statements, the Company's stake in InterCure is approximately 45.41% of the issued and outstanding share capital of InterCure. However, if the Company converts the loan extended to InterCure into shares, its stake in InterCure will be approximately 54.72%. Assuming that all the options granted to employees and directors in InterCure are exercised, and assuming the above loan is converted, the Company's stake in InterCure will be about 51.51%.

 

After the date of the statement of financial position, InterCure granted 20,185,184 performance contingent options that are exercisable into 20,185,184 Ordinary shares with no par value to Gibuv Ltd. ("Gibuv") (see Note 5m below). If the entire performance contingent options granted to Gibuv are exercised, and assuming the conversion of said loan and the exercise of the entire options granted to directors and employees, the Company's stake in InterCure will be approximately 36.15% of the issued and outstanding share capital of InterCure.

 

1.2.12On September 9, 2012, the boards of directors of both the Company and Kitov approved the terms of the agreement, as amended by the parties following negotiations, as follows:

 

1.2.12.1In return for receiving 100% of Kitov's issued and outstanding share capital, the Company will pay Kitov's shareholders on the date of closing a total of $ 140 thousand and allocate 8,686,733 Ordinary shares of the Company to Kitov's shareholders ("the additional shares"), 241,048 warrants to service providers in Kitov to acquire 241,048 Ordinary shares of the Company of NIS 0.1 par value each that are exercisable over a five-year period from the date of allocation at an exercise price equal to NIS 0.01 per share.

 

A-8
 

 

The Company will also allocate to Kitov's shareholders and service providers ("the offerees") an additional 612,800 warrants ("the additional warrants") that are exercisable into 612,800 Ordinary shares of the Company of NIS 0.1 par value each at an exercise price equal to NIS 0.01 per additional share at the earlier of 18 months after the date of closing or after the Company completes a capital raising in the total of $ 4 million. Alternatively, the additional warrants will be cancelled immediately once the offerees receive an amount of $ 160 thousand from the Company, assuming the Company completes a capital raising in the total of $ 4 million as above. All of the securities allocated to the offerees on the date of closing, assuming that all the warrants allocated to the offerees, including the additional warrants, are exercised, will represent approximately 3.99% of the Company's issued and outstanding share capital (approximately 3.59% on a fully diluted basis).

 

1.2.12.2After completing the acquisition agreement and subject to the fulfillment of the milestones contingent on the progress in developing Kitov's drugs as stipulated in the acquisition agreement, the Company will pay the offerees up to seven additional payments which might collectively amount to up to $ 61 million ("the milestone payments"). The Company has an exclusive right to convert any of the milestone payments by allocating up to 91,828,110 shares of the Company (assuming all the milestones are met), which will represent up to about 27.76% of the Company's issued and outstanding share capital after the allocation (about 25.70% on a fully diluted basis) and along with the securities issued on the date of closing will represent about 30.65% of the Company's issued and outstanding share capital (about 28.37% on a fully diluted basis).

 

1.2.12.3According to the acquisition agreement, the Company has undertaken to carry out a development plan for one of the drugs developed by Kitov. According to this undertaking, the Company will invest up to $ 1.5 million in financing the Phase 3 clinical trial which will begin at the later of three months from the date of consummation of the agreement or six months from the date of signing the acquisition agreement and the clinical trial is expected to last 18 months from commencement.

 

1.2.12.4Approving the consolidation of the Company's share capital at a 1:10 ratio such that each 10 Ordinary shares of NIS 0.1 par value are consolidated into one share of NIS 1.0 par value.

 

1.2.12.5Appointing Dr. Paul Waymack and Mr. Simcha Rock as directors in the Company until the next annual meeting.

 

A-9
 

 

1.2.12.6Approving the Company's engagement in a service agreement with Dr. Paul Waymack for appointing the latter as the Chairman of the Company's Board and as the director in charge of the clinical and regulatory development of all of the Company's products in return for monthly management fees of $ 9,166, as well as an annual grant at a maximum amount of $ 30 thousand, subject to the approval of the Company's Board.

 

The acquisition agreement will be completed provided that certain prerequisites are met, including obtaining the approval of the shareholders' meeting for the acquisition agreement, which is scheduled to convene on November 28, 2012, obtaining a pre-ruling from the Israeli tax authorities in accordance with Article 104h to the Income Tax Ordinance (Revised), 1961 so that the sale of Kitov's shares and the allocation of the Company's securities to Kitov are not viewed as a taxable event on the date of closing of the transaction. As of the date of singing the financial statements, no pre-ruling has been obtained from the Israeli tax authorities and the shareholders' meeting has yet to convene.

 

It should be noted that the Company's shares issued in the transaction will be mostly restricted for a voluntary restriction period and/or by virtue of the provisions of the Israeli Securities Law, 1968 for a period of between six months and two years from the date of allocation.

 

In order to examine the transaction and convening the extraordinary shareholders meeting, the Company performed a valuation of Kitov's intellectual property as of September 30, 2012 with the assistance of external valuer (BDO Ziv Haft - Consulting and Management Ltd.), which was attached to the Shareholders meeting announcement, determining the fair value of Kitov's intellectual property.

 

1.2.13On August 22, 2012, Presidio Pharmaceuticals Inc. ("Presidio") requested to terminate its engagement with the Company in effect from August 24, 2012. Following a notification of the termination of the agreement, Presidio's entire DOS technology (including all the patents held by Presidio) will be restored to the Company within 90 days from the date of said notification in accordance with the provisions of the agreement. Presidio is a U.S. biotechnological corporation which received an exclusive global sublicense from the Company in March 2008 (updated in August 2008) for the clinical development, regulation and commercialization of the DOS technology (consisting of products designed to treat Hepatitis C) according to which the Company has certain DOS milestone based rights (see also Note 15a to the consolidated financial statements for 2011).

 

It is the Company's intention to assess the renewal of the activity in the Hepatitis C area and/or locate strategic partners for the continued development and marketing of drugs for Hepatitis C virus on the basis of Presidio's reverted DOS technology.

 

A-10
 

 

1.2.14During the period, holders of the Company's warrants exercised 5,858,806 warrants (series 2) into 5,858,806 Ordinary shares of NIS 0.1 par value each for an average exercise increment of NIS 1.06 per share for a total consideration of approximately $ 1.8 million (approximately NIS 6.8 million) as well as 560,000 warrants (series A) into 560,000 Ordinary shares of NIS 0.1 par value each for an average exercise increment of NIS 1.09 per share. On September 17, 2012, according to the terms of the private placement from March 2012, 3,293,454 warrants (series A) of the Company expired. See item 4.1.1 below regarding the exercise of warrants after the date of the statement of financial position.

 

1.2.15InterCure

 

1.2.15.1On July 25, 2012, the CEO of a subsidiary (InterCure) was allocated 1,484,551 options which are exercisable into 1,484,551 Ordinary shares of InterCure with no par value for an exercise increment of NIS 0.54 per option, based on the quoted market price of InterCure's share as determined in the debt settlement reached with InterCure. According to the provisions of IFRS 2, the fair value of all the options on the date of grant using the Black-Scholes model was approximately $ 132 thousand. In addition, InterCure's Deputy CEO and CFO was allocated 1,000,000 options which are exercisable into 1,000,000 Ordinary shares of InterCure with no par value for an exercise increment of NIS 0.54 per option, based on the quoted market price of InterCure's share as determined in the debt settlement reached with InterCure. According to the provisions of IFRS 2, the fair value of all the options on the date of grant using the Black-Scholes model was approximately $ 88 thousand. The maximal term of the options granted to the Deputy CEO and CFO is 10 years from the grant date. The options are exercisable in twelve equal tranches every quarter from the grant date over a three-year period. The value of each option is based on the following assumptions: expected dividend rate of 0%, expected standard deviation of 90.76%, risk-free interest rate of 3.39%-3.68% and expected life of 5 to 6.5 years.

 

1.2.15.2On September 3, 2012, in the context of an extraordinary meeting of InterCure's shareholders, each of the four directors in InterCure was allocated 75,000 options which are exercisable into 300,000 Ordinary shares of InterCure with no par value for an exercise increment of NIS 0.54 per option. According to the provisions of IFRS 2, the fair value of all the options on the date of the approval of the extraordinary meeting of InterCure's shareholders using the Black-Scholes model was approximately $ 26 thousand. The options are exercisable in twelve equal tranches every quarter from the date of grant over a three-year period.

 

A-11
 

 

The value of each option is based on the following assumptions: expected dividend rate of 0%, expected standard deviation of 87.27%, risk-free interest rate of 3.06%-3.53% and expected life of 5 to 6.5 years.

 

1.2.15.3On September 24, 2012, InterCure entered into a strategic service agreement with Gibuv Ltd. ("Gibuv"), a private company wholly owned by Messrs. Shay Ben-Itzhak and Avner Yassur, for a period of three years for the provision of online marketing and sale services of InterCure's products. The shareholders in Gibuv, Messrs. Shay Ben-Itzhak and Avner Yassur, are known entrepreneurs in the online sales and marketing industry who have also played an active role in marketing and managing companies such as 888 and Empire Online and were Mr. Noam Lanir's co-partners in H.N.P.K. Limited Partnership (the controlling shareholder in Babylon Ltd., a public company). The terms of the agreement are as follows:

 

1.2.15.3.1Gibuv's annual sales targets:

 

According to the strategic agreement, certain sales targets were determined, calculated as total sales of the product's online marketing activity in the six months preceding the end of each calendar quarter (as defined below) multiplied by 2. The calculation of these sales targets also includes sales made by and/or to third parties with which the engagement is performed by Gibuv. A calendar quarter is defined as an accounting quarter based on InterCure's financial statements. The calculation will be performed near the date of the publication of the interim financial statements (it should be noted that the first examination of the sales targets will be done on a non-recurring basis at the end of two calendar quarters from the date of signing the agreement, namely at the end of the second quarter of 2013, and the other examinations will be done every calendar quarter as discussed above).

 

Based on its compliance with said sales targets, Gibuv will be allocated up to 20,185,184 non-tradable options which are exercisable into InterCure shares for a (dividend adjusted) exercise price of NIS 0.54 per option. Provided that all options are exercised by Gibuv and the exercise price of each option is actually paid, the total proceeds which InterCure stands to receive amount to approximately NIS 10,900,000.

 

A-12
 

 

It should be noted that Gibuv will be entitled to exercise the options under a cashless exercise mechanism in which the minimum exercise price required by the provisions of the TASE's articles of association will be paid. Following is a table describing the total warrants according to annual sales targets:

 

Number of warrants   Sales targets (in U.S. $)
6,055,555   4,000,000
4,037,037   5,000,000
4,037,037   15,000,000
6,055,555   30,000,000
20,185,184    

 

The allocation of the warrants and the options of the strategic agreement regarding said allocation (including the PUT and CALL options discussed below) were approved in the general meeting of October 28, 2012.

The fair value of all performance contingent options on the date of the approval by the extraordinary meeting of InterCure's shareholders, Pursuant to the guidance of IFRS 2, using the Monte-Carlo model was approximately $ 2,169 thousand. The maximal option term is 5 years from the grant date.

The value of each option is based on the following assumptions: expected dividend of 0%, expected standard deviation of 93.6%, risk-free interest rate of 2.1%-3.14% and expected life of 5 years.

 

1.2.15.3.2The consideration for the services:

 

According to the provisions of the strategic agreement, during the period of the strategic agreement, InterCure will pay Gibuv a total of $ 40,000 a month, plus VAT, in return for online marketing of InterCure's products ("consideration") as follows:

 

-The first four months of the strategic agreement period will serve as a grace period during which no consideration will be paid.

 

A-13
 

 

-In respect of the services supplied in the last four months of the first year of the strategic agreement (namely from the ninth month from the beginning of the strategic agreement period until the end of the twelfth moth), the consideration will be paid subject to the fulfillment of an average monthly contribution (revenues from online sales less cost of online advertising and cost of sales of products in the online channels, "average monthly contribution") from online marketing of at least $ 50,000.

 

-Starting from the end of the first year of the strategic agreement period until the end of the strategic agreement period, the consideration for the services will be paid subject to the fulfillment of an average monthly contribution from online marketing of at least $ 140 thousand.

 

1.2.15.3.3Online advertising budget:

 

InterCure will provide monthly online advertising budgets of at least $ 130 thousand in favor of the online sales activity performed by Gibuv, provided that effective from January 2013, the monthly contribution is not less than the total budget discussed above (for example, a monthly advertising budget of $ 100 thousand will yield a contribution of at least $ 100 thousand). In addition, in the first 12 months of the strategic agreement period, InterCure will provide Gibuv a budget of $ 50 thousand in favor of reviewing new advertising channels and methods, provided that InterCure's quarterly expense incurred for the purpose of this activity does not exceed $ 15 thousand.

 

1.2.15.3.4Purchase of software:

 

According to the strategic agreement, InterCure will purchase from a third party the rights to use the Affiliate software program ("the program") which will be used by Gibuv in providing the services, including a right for upgrades and technical support throughout the strategic agreement period, all for a monthly fee of $ 153 thousand, half of which will be paid once the strategic agreement period begins and the other half three months later.

 

A-14
 

 

Moreover, during the strategic agreement period, Gibuv will provide the services to InterCure based on InterCure's needs using a media management program which, whereby if the strategic agreement is terminated, Inter Cure will be entitled to purchase the rights to use the media management program, including upgrades and tech support, for a period of three years for a price reflecting a 40% discount on the market price of the media management program on the date of purchase. InterCure will also reimburse Gibuv for the expenses relating to the customization of the media management program in a total of $ 25,000, plus VAT, subject to achieving a sales target arising from the online marketing activity of $ 5 million, whereby if this target is achieved before March 2014, the expenses will be reimbursed in March 2014.

 

1.2.15.3.5PUT option:

 

Upon the signing of the strategic agreement, Gibuv's shareholders will be conferred a non-transferrable PUT option to sell Gibuv's entire share capital to InterCure, in effect after 18 months have elapsed from the beginning of the strategic agreement period ("the PUT option").

 

In consideration of the acquisition of Gibuv, InterCure will pay Gibuv's shareholders the value of Gibuv's business activity, calculated as Gibuv's EBITDA in the last 12 months preceding the date of the PUT option exercise, multiplied by 3 (which will not exceed an amount of $ 110 thousand) ("the value of the supplier's activity") with the addition of the intrinsic economic value of the warrants (calculated as the average closing price of InterCure's share on the TASE in the 30 trading days which precede the relevant notification date, less the exercise price of the warrants on the relevant notification date) (the value of the supplier's activity and the intrinsic economic value collectively - "Gibuv's value").

 

A-15
 

 

The consideration from the exercise of the PUT option will be paid in cash or by the allocation of InterCure shares, at InterCure's exclusive discretion. If InterCure chooses to allocate its shares as consideration, the quoted market price of each share shall be determined based on the average quoted market price of InterCure's shares on the TASE in the 30 trading days which preceded the date of notification of the exercise of the PUT option.

 

1.2.15.3.6CALL option:

 

On the date of signing the strategic agreement, InterCure will be granted a non-transferrable CALL option to purchase Gibuv's entire share capital by InterCure ("the CALL option"). The CALL option will come into effect at the end of one year from the beginning of the strategic agreement period and will remain in effect throughout the strategic agreement period, subject to the following terms:

 

In return for the acquisition of Gibuv, InterCure will allocate to its shareholders warrants in a number that completes a total of 20,185,184 warrants at an exercise price identical to the exercise price detailed above. Alternative, at its exclusive discretion, InterCure will pay the consideration in cash in an amount equivalent to Gibuv's value, as defined above. The CALL option will become effective within 30 days from the date of providing said notification according to the date on which all the various calculations regarding the consideration are made, as described above.

 

On October 4, 2012, InterCure convened an extraordinary general meeting of the shareholders in order to approve the strategic service agreement with Gibuv as described above.

 

On October 28, 2012, InterCure's general meeting approved the engagement in the strategic service agreement with Gibuv, including the allocation of warrants and the items of the strategic agreement dealing with the allocation.

 

A-16
 

 

1.3The financial position, operating results, liquidity and financing resources

 

The Company has recurring losses and no revenues from operations at this stage (except the subsidiary, InterCure, which was initially consolidated in these financial statements following a transaction which was completed in July 2012, see also Note 4 below) and it is dependent on external financing sources. During the period, the Company raised through a private placement and exercise of tradable and non-tradable warrants from March 2012 to the date of the approval of the financial statements total net proceeds of approximately $ 4.25 million (for additional details, see items 1.2.4, 1.2.14 and 4.1.1). After the date of the statement of financial position, on November 21, 2012, the Company purchased approximately 31.35% issued and outstanding share capital of Proteologics, in consideration of approximately NIS 6.5 million (approximately $ 1.7 million), which were paid in cash. In the opinion of the Company's management and based on its business plans, the balances of cash and cash equivalents with the balances of short-term deposits, after the above transaction, will enable the Company to fund its activities through at least into 2014. However, the actual amount of cash the Company will need to fund its operations is subject to many factors, including, but not limited to, the timing, design and execution of the clinical trials of its existing drug candidates, any future projects which may be in-licensed or any other business development activities. For example, changing circumstances and/or acquisition of new technologies may cause the Company to consume capital significantly faster than the management's current anticipation and the Company may need to spend more money than currently expected because of, among others, circumstances beyond its control.

 

The Company will incur additional losses during the year from research and development activities, examination of additional technologies and from current operation which will be reflected in negative cash flows from operating activities. Accordingly, in order to complete the clinical trials to bring a product to market, the Company will be required to raise additional cash in the future through the issuance of securities. However, if the Company is not able to raise additional capital at acceptable terms, the Company may be required to exercise tradable securities held by it or reduce operations or sell or out-license to third parties some or all of its technologies.

 

A-17
 

 

1.3.1The financial position

 

Balance sheet highlights (U.S. dollars in thousands)

 

   September 30, 2012   December 31, 2011 
Line item  Amount   % of total
balance
sheet
   Amount   % of total
balance
sheet
 
   $000       $000     
                 
Total balance sheet   10,597    100%   4,073    100%
Equity attributable to equity holders of the Company   7,119    67%   3,444    85%
Non-controlling interests   2,175    21%   -    0%
Current assets   5,661    53%   1,584    39%
Property, plant and equipment   77    1%   32    1%
Intangible assets   4,807    45%   2,457    60%
Other investments   52    0%   -    0%
Current liabilities   1,290    12%   629    15%
Non-current liabilities   13    0%   -    0%

 

Equity

 

The Company's equity as of September 30, 2012 (including non-controlling interests) was approximately $ 9,294 thousand. Equity attributable to equity holders of the parent company as of September 30, 2012, was approximately $ 7,119, an increase of approximately $ 3,675 thousand from December 31, 2011, representing about 67% of total balance sheet compared to 85% of total balance sheet as of December 31, 2011. The increase in equity is a result of the capital raising which the Company effected under a private placement from March 2012 and exercise of warrants (series 2) and warrants (series A) by holders of warrants during the period for total net proceeds of approximately $ 4.2 million (see items 1.2.4 and 1.2.14 above), the recognition of a gain from a bargain purchase (in connection with the acquisition of InterCure) and less the loss for the period and transactions with non-controlling interests.

 

Total non-controlling interests as of September 30, 2012 amounted to approximately $ 2,175 thousand, representing the stake of the other shareholders in InterCure. As of September 30, 2012, the Company holds about 45.41% of InterCure's issued and outstanding share capital (about 54.72% assuming that the Company chooses to exercise the convertible loan discussed in item 1.2.11 above).

 

A-18
 

 

Assets

 

Total current assets as of September 30, 2012 amount to approximately $ 5,661 thousand, an increase of approximately $ 4,077 thousand, compared to approximately $ 1,584 thousand as of December 31, 2011. The change is primarily a result of the increase in the Group's balance of cash and short-term deposits which as of September 30, 2012 was approximately $ 5,294 thousand, an increase of approximately $ 3,799 thousand, compared to the baalnce of cash and short-term deposits of approximately $ 1,495 thousand as of December 31, 2011. The increase is explained by the cash received in the capital raising through the private placement and exercise of warrants (series 2) and warrants (series A), as above, and from the first-time consolidation of InterCure's financial statements less negative cash flows from operating activities in the reporting period. The balance of cash and short-term deposits as of September 30, 2012 excluding InterCure's financial data amounted to $ 4,263 thousand, an increase of approximately $ 2,768 thousand compared to the balance as of December 31, 2011, mainly due to the cash received in the private placement and the exercise of the warrants, as above, less negative cash flows from operating activities in the reporting period and the cash invested in InterCure in the transaction consummated on July 25, 2012.

 

The balance of trade receivables in the statement of financial position as of September 30, 2012 totaled approximately $ 66 thousand arising from the trade receivables of InterCure whose financial statements were consolidated for the first time in this quarter ended September 30, 2012.

 

The balance of other accounts receivable in the statement of financial position as of September 30, 2012 totaled approximately $ 128 thousand (approximately $ 61 thousand excluding InterCure), compared to approximately $ 68 thousand as of December 31, 2011 - with no material change. The balance mainly consists of Government authorities and prepaid expenses.

 

Property, plant and equipment as of September 30, 2012 totaled approximately $ 77 thousand (approximately $ 31 thousand excluding InterCure), compared to approximately $ 32 thousand as of December 31, 2011 - with no material change. Property, plant and equipment in InterCure mainly consist of office furniture and equipment and design molds for the InterCure's instruments.

 

A-19
 

 

The balance of intangible assets as of September 30, 2012 was approximately $ 4,807 thousand compared to approximately $ 2,457 thousand as of December 31, 2011. The change arises from intangible assets identified in the InterCure acquisition transaction as part of the external appraiser's (BDO Ziv Haft) purchase price allocation ("PPA") of InterCure's assets consisting of technology totaling approximately $ 1,909 thousand and brand name totaling approximately $ 488 thousand. These assets are amortized using the straight-line method over a period of nine and ten tears, respectively whose balance as of September 30, 2012 was approximately $ 1,871 thousand and $ 479 thousand, respectively (see the valuation of assets attached to the Company's financial statements). The balance of $ 2,457 thousand of December 31, 2011 mainly consists of the rHuEPO license acquired in the Bio-Gal transaction of August 3, 2010, a balance which has not changed through September 30, 2012.

 

The balance of other investments as of September 30, 2012 amounts to approximately $ 52 thousand and originates from costs incurred in the period in connection with the Kitov acquisition transaction. There were no other investments as of December 31, 2011.

 

Current liabilities

 

The balance of current liabilities as of September 30, 2012 totaled approximately $ 1,290 thousand (approximately $ 759 thousand excluding InterCure), compared to approximately $ 629 thousand as of December 31, 2011. The increase is primarily a result of the growth in the line item of service providers, among others, legal and consulting services in connection with the InterCure transaction, application for relisting the ADRs on the NASDAQ, costs incurred in the Kitov acquisition transaction and an increase in the liability for a bonus to employees in respect of the capital draising during the period as discussed above. InterCure's current liabilities mainly consist of service providers in the advertising field, sales personnel, professional service providers, employees, provisions for returns and current liabilities to Government authorities.

 

A-20
 

 

1.3.2Analysis of operating results

 

Condensed statements of income (U.S. dollars in thousands)

 

   Nine months ended
September 30,
   Three months ended 
September 30,
   Year ended
December 31,
 
   2012   2011   2012   2011   2011 
   $000 
                     
Revenues   343    -    343    -    - 
Cost of sales   156    -    156    -    - 
                          
Gross profit   187    -    187    -    - 
Research and development expenses   81    127    38    39    158 
Selling and marketing expenses   211    -    211    -    - 
General and administrative expenses   1,873    814    898    272    1,078 
Other gains, net   795    -    795    -    12 
                          
Operating loss   (1,183)   (941)   (165)   (311)   (1,224)
Finance income (expenses), net   (11)   22    15    (26)   17 
                          
Total comprehensive loss for the period   (1,194)   (919)   (150)   (337)   (1,207)
                          
Attributable to:                         
Equity holders of the Company   (1,094)   (919)   (50)   (337)   (1,207)
Non-controlling interests   (100)   -    (100)   -    - 
                          
    (1,194)   (919)   (150)   (337)   (1,207)

 

Revenues

 

Sales in the nine and three-month periods ended September 30, 2012 totaled approximately $ 343 thousand. These sales originate from the subsidiary InterCure whose financial statements were consolidated for the first time in these financial statements.

 

The distribution of InterCure sales in the U.S. and in Canada from the date of consummation of the transaction (July 25, 2012) through September 30, 2012 totaled approximately $ 270 thousand and the sales in Britain from the date of consummation of the transaction through September 30, 2012 totaled approximately $ 71 thousand.

 

A-21
 

 

Gross profit

 

Gross profit in the nine and three-month periods ended September 30, 2012 totaled approximately $ 187 thousand and $ 262 thousand, respectively, without the amortization of excess cost in the transaction, representing a gross profit of about 55% and 76%, respectively.

 

The gross profit wholly originates from the subsidiary InterCure whose average gross profit over the periods ranges between 74% and 78%. The gross profit is affected by the proportion between direct/online sales with a relatively high gross profit margin and sales through distributors with lower gross profit margins. The gross profit after the deduction of excess cost (attributable to technology and to inventories identified in the transaction whose amortization amounted to approximately $ 75 thousand) reached about 55%. The gross profit in the period, excluding the amortization of excess cost as above, is about 76%.

 

Research and development expenses

 

Research and development expenses in the nine and three-month periods ended September 30, 2012 totaled approximately $ 81 thousand and $ 38 thousand, respectively, compared to approximately $ 127 thousand and $ 39 thousand, respectively, in the corresponding periods of last year. Research and development expenses comprise mainly expenses involving the preparations for carrying out the development plan for rHuEPO drug Phase 2 clinical trial designed to treat cancer patients with multiple myeloma, comprising, among others, research relating to the level of proteins in the blood of patients with multiple myeloma, medical regulation, clinical insurance and other medical consulting costs. The decrease in expenses compared to the corresponding periods of last year is primarily attributable to completing the amortization of the exclusive right to examine medical technology in the field of the immune system at the end of 2011. Research and development expenses attributable to InterCure from the date of consummation of the acquisition transaction through September 30, 2012 totaled approximately $ 6 thousand.

 

Selling and marketing expenses

 

Selling and marketing expenses in the nine and three-month periods ended September 30, 2012 totaled approximately $ 211 thousand. Selling and marketing expenses wholly derived from InterCure whose financial statements were consolidated for the first time in these financial statements immediately upon consummation of the transaction on July 25, 2012.

 

A-22
 

 

Selling and marketing expenses include advertising expenses of approximately $ 125 thousand (mainly direct/online advertising expenses) compared to gross profit of $ 262 thousand (excluding amortization of excess cost), representing an average contribution of about 110% (gross profit less direct/online advertising costs divided by direct/online advertising expenses).

 

General and administrative expenses

 

General and administrative expenses in the nine and three-month periods ended September 30, 2012 totaled approximately $ 1,873 thousand and $ 898 thousand, respectively, compared to approximately $ 814 thousand and $ 272 thousand, respectively, in the corresponding periods of last year. The increase is principally explained by the increase in the line item of share-based payment to directors and employees in respect of which the expenses are recorded using the Black & Scholes model and the graded vesting method, expenses in respect of service providers, among others legal, professional and technological consulting services in connection with the InterCure transaction and application for relisting the ADRs on the NASDAQ and expenses relating to bonuses to employees in connection with raising capital during the period, as specified above. In addition, general and administrative expenses attributable to InterCure from the date of consummation of the transaction through September 30, 2012 totaled approximately $ 132 thousand and comprise mainly salaries, professional services, rent, insurance and share-based payment expenses to directors and employees.

 

Other gains, net

 

Other gains in the nine and three-month periods ended September 30, 2012 totaled approximately $ 795 thousand. These gains originate from a gain from a bargain purchase in connection with the InterCure acquisition transaction. In the corresponding periods of last year, the Company did not derive any other gains.

 

Finance income (expenses) (net)

 

Finance income (expenses), net in the nine and three-month periods ended September 30, 2012 totaled approximately $ (11) thousand and $ 15 thousand, respectively, compared to finance income (expenses), net in the amount of approximately $ 22 thousand and $ (26) thousand, respectively, in the corresponding periods of last year. The increase in finance expenses is mainly due to exchange rate differences deriving from the appreciation of the dollar in relation to the NIS on the net balance of monetary NIS-assets less interest income on short-term bank deposits.

 

A-23
 

 

Taxes on income

 

The Group had no tax expenses (income) in the nine and three-month periods ended September 30, 2012 and in the corresponding periods of last year.

 

Loss for the period

 

The comprehensive loss attributable to equity holders of the Company in the nine and three-month periods ended September 30, 2012 totaled approximately $ 1,094 thousand and $ 50 thousand, respectively, compared to a loss of approximately $ 919 thousand and $ 337 thousand, respectively, in the corresponding periods of last year. The increase in loss is principally explained by the increase in expenses for share-based payment to directors and employees recorded using the Black & Scholes model and the graded vesting method, increased expenses relating to service providers, among others, legal, professional and technological consulting services in connection with the InterCure transaction and application for relisting the ADRs on the NASDAQ, an increase relating to a bonus to employees in respect of the capital raising during the period as discussed above against recording a gain from a bargain purchase in connection with the InterCure acquisition transaction. InterCure's comprehensive loss attributable to equity holders of the company totaled approximately $ 87 thousand (including amortization of excess cost of $ 39 thousand).

 

Basic and diluted loss per share in the nine and three-month periods ended September 30, 2012 amounted to approximately $ 0.005 and $ 0.000, respectively, compared to approximately $ 0.005 and $ 0.002, respectively, in the corresponding periods of last year. In the nine months ended September 30, 2012, there was no material change in the basic and diluted loss per share compared to the corresponding period of last year, despite the increase in comprehensive loss attributable to equity holders of the Company due to the increase in the weighted number of shares used in the computation of loss per share which embedded the number of shares issued under the private placement from March 2012 and the exercise of warrants during the period on average over the period since their issuance.

 

Cash flows

 

Cash flows used in operating activities in the nine and three-month periods ended September 30, 2012 totaled approximately $ 1,098 thousand and $ 471 thousand, respectively, compared to cash flows used in operating activities of approximately $ 1,035 thousand and $ 292 thousand, respectively, in the corresponding periods of last year, an increase of approximately $ 63 thousand and $ 179 thousand, respectively.

 

A-24
 

 

The contribution of InterCure, whose financial statements were consolidated for the first time in these financial statements, to cash flows used in operating activities amounted to approximately $ 181 thousand, arising mainly from repayment of outstanding trade payables following the debt settlement in InterCure. Cash flows used by the Group in operating activities excluding InterCure in the nine and three-month periods ended September 30, 2012 totaled approximately $ 917 thousand and $ 290 thousand, respectively. The decrease is mainly a result of the payments made in the corresponding periods of last year to suppliers and service providers in respect of current and former debts close to the date of the public issuance of March 2011.

 

Cash flows provided by (used in) investing activities in the in the nine and three-month periods ended September 30, 2012 totaled approximately $ (480) thousand and $ 160 thousand, respectively compared to approximately $ (1,576) thousand and $ 253 thousand, respectively, in the corresponding periods of last year. The decrease in cash flows used in investing activities in the nine months ended September 30, 2012 arises mainly from cash received from the consolidation of InterCure's accounts in the financial statements and from the fact that the Company had placed less cash in short-term bank deposits for periods that exceed three months.

 

Cash flows provided by (used in) financing activities in the in the nine and three-month periods ended September 30, 2012 totaled approximately $ 4,201 thousand and $ 395 thousand, respectively from raising capital under the private placement from March 2012 and the exercise of warrants (series 2) and warrants (series A) during the period. In the corresponding periods of last year, cash flows provided by (used in) financing activities totaled $ 1,744 thousand and $ (7) thousand from raising capital under the public prospectus from March 2011 as above less issuance expenses paid during the period.

 

1.3.3Financing resources

 

The Group's revenues from operations currently derive solely from the subsidiary InterCure. The Group finances its R&D activity by raising capital, by using its own capital and by obtaining current credit from suppliers and service providers. As of September 30, 2012, the Group's balance of cash and cash equivalents and short-term deposits amounted to approximately $ 5,315 thousand (approximately $ 4,284 thousand excluding the cash in InterCure). During the period, trough a private placement (from March 2012) and exercise of warrants (series 2) and warrants (series A), the Company raised a total net amount of approximately $ 4.2 million (see items 1.2.4 and 1.2.14 above). Also, from the date of the statement of financial position through the date of the approval of the financial statements, 192,157 warrants (series 2) were exercised into 192,157 Ordinary shares of the Company of NIS 0.1 par value each for a total amount of approximately $ 53 thousand.

 

A-25
 

 

2.PART 2 - EXPOSURE TO MARKET RISKS AND THEIR MANAGEMENT

 

2.1Exposure to market risks and their management

 

a.The person responsible for managing market risks in the Group in conformity with the BOD's risk management policy is Mr. Ronen Twito, the Company's Deputy CEO and CFO.

 

b.Description of the market risks to which the Group is exposed - the Group's business activities expose it to a variety of market risks including the changes in the exchange rates of the NIS in relation to the dollar (the Group's functional currency).

 

c.The Group's market risk management policy - on March 29, 2012, the Company's BOD determined that the Company's management is authorized to act to hold NIS at the required amount for the repayment of NIS-denominated liabilities from time to time and as timely suitable for a consecutive period of nine to twelve months each time. The board of directors of InterCure has decided to invest the majority of the cash balances in InterCure in short-term dollar deposits and the remaining cash in NIS deposits.

 

d.Supervision of risk management policy - the Group identifies and assesses the principal risks facing it. The financial risk management is performed by the Group subject to the policy approved by the Company's BOD.

 

2.1.1Exchange rate risk

 

The majority of the Group's revenues and expenses are denominated in dollars and some in British Pounds against which the Group holds its available liquid resources in or linked to dollars. Nevertheless, some of the expenses are denominated in NIS, which creates exposure to the changes in the exchange rate of the NIS in relation to the dollar. The Group acts to minimize the currency risk by holding its liquid resources in NIS based on the BOD's decision.

 

As a hedge against economic exposure, which does not significantly contradict the accounting exposure, the Company holds substantially all of its current assets in or linked to dollar.

 

A-26
 

 

2.1.2Risks arising from changes in the economic environment and the global financial crisis

 

In recent years, the world has experienced several events both in the political-security realm and in the economic realm which have shaken the international markets in general and the Israeli market in particular. The noteworthy of these events in the political-security realm are the violent protests in Israel's neighboring countries which in part have led to dramatic changes in regimes as well as escalated global tension against Iran in the backdrop of its nuclear program.

 

As for the continuing global economic crisis, during the last 18 months, the European economic condition has deteriorated, as reflected, among others, by international rating agencies lowering the credit rating of several countries in the Eurozone including France, Spain, Italy, Ireland, Greece, Portugal, Belgium, Cyprus and Slovenia. These instances of credit downgrading have led to the resignation of prime ministers in part of these countries because they were asked to enact extensive budget cuts.

 

Also, during 2011, one of the rating companies lowered the credit rating of the U.S.

 

The Group's management estimates that since the Group's investment policy is to invest only in bank deposits in currencies that are used for its current needs (the dollar, which is the Group's functional currency and the NIS - based on its needs and the BOD's decision), it is not directly exposed to changes in the market prices of quoted securities. Also, since the Group is in development stages and has no revenues from operations at this stage (excluding InterCure) and its expense budget relies on several suppliers and service providers, the events described above have relatively low impact on its results, compared to companies that sell their products. Nevertheless, since the Group funds its operations mainly from its own capital, as above, the events described above can have a significant effect on the Group's ability to raise funds in the future in order to finance its plans and activity which may require the Company to limit its activity, sell or sublicense some or all of its technologies to third parties in order to support its operations (see Note 1b to the financial statements).

 

As for InterCure, the financial crisis in the U.S. and in Europe, its principal markets, continues to have an adverse impact on InterCure. The general developments and turmoil in the markets, and particularly the economic slowdown and the decrease in consumer spending and in the Consumer Confidence Index are liable to adversely affect InterCure's business results, liquidity, asset value, business position, financial covenants, ability to distribute dividends and its ability to raise any capital needed for operations or the financial terms of such raising.

 

A-27
 

 

2.2Report of linkage bases

 

Linkage basis of balance sheet items as of September 30, 2012

 

   U.S.$   NIS   Other
currencies
   Non-
monetary
   Total 
   $000 
Assets:                         
                          
Cash and cash equivalents   1,635    1,071    1    -    2,707 
Short-term deposits   2,009    578    -    -    2,587 
Trade receivables   23    -    43    -    66 
Other accounts receivable   74    30    -    24    128 
Restricted deposits   -    21    -    -    21 
Inventories   -    -    -    152    152 
                          
    3,741    1,700    44    176    5,661 
Liabilities:                         
                          
Trade payables   362    72    9    -    443 
Other accounts payable   504    343    -    -    847 
Employee benefit liabilities   -    13    -    -    13 
                          
    866    428    9    -    1,303 
                          
Monetary assets less monetary liabilities   2,875    1,272    35    176    4,358 

 

Linkage basis of balance sheet items as of September 30, 2011

 

   U.S.$   NIS   Other
currencies
   Non-
monetary
   Total 
   $000 
Assets:                         
                          
Cash and cash equivalents   44    155    1    -    200 
Short-term deposits   1,208    382    -    -    1,590 
Accounts receivable   -    35    -    14    49 
Restricted deposits   -    21    -    -    21 
                          
    1,252    593    1    14    1,860 
Liabilities:                         
                          
Trade payables   110    8    -    -    118 
Other accounts payable   310    215    -    -    525 
                          
    420    223    -    -    643 
                          
Monetary assets less monetary liabilities   832    370    1    14    1,217 

 

A-28
 

 

2.3Sensitivity analysis

 

Reporting on the exposure to financial risks

 

Sensitivity to changes in the exchange rate of the dollar in relation to the NIS

 

   Gain (loss) from 
changes
       Gain (loss) from 
changes
 
   + 10%   + 5%   30.9.2012   - 5%   - 10% 
   $000 
                     
Cash and cash equivalents   107    54    1,071    (54)   (107)
Short-term deposits   58    29    578    (29)   (58)
Accounts receivable   3    2    30    (2)   (3)
Short-term restricted deposits   2    1    21    (1)   (2)
Trade payables   (7)   (4)   (72)   4    7 
Other accounts payable   (34)   (17)   (343)   17    34 
Employee benefit liabilities   (1)   (1)   (13)   1    1 
                          
Exposure in the linkage balance sheet   128    64    1,272    (64)   (128)

 

3.PART 3 - CORPORATE GOVERNANCE ASPECTS

 

3.1Policy of making donations

 

As of the reporting date, the Company did not determine the policy on making donations and during the reporting period the Company did not make any donations.

 

3.2The Company's internal auditor

 

There was no material modification to the data pertaining to the Company's internal auditor as it was shown in the Company's periodic report for the year ended December 31, 2011. It should be noted that on August 22, 2012, the internal auditor filed an internal audit report to the Company's audit committee and BOD regarding interested party transactions, decisions and reports. On August 26, 2012 and August 30, 2012, the Company's audit committee and BOD respectively held a discussion of the internal audit report and approved its findings.

 

A-29
 

 

3.3The Company's BOD

 

3.3.1In the reporting period, 17 meetings of the BOD were held, 6 meetings of the committee that examines the financial statements/the audit committee, 2 meetings of the compensation committee and one meeting of the nominations committee.

 

3.3.2There was no material modification to the data pertaining to directors with accounting and financial qualifications as it was shown in the Company's periodic report for the year ended December 31, 2011.

 

3.3.3The Company did not adopt in its articles of association a provision regarding the tenure of independent directors.

 

3.3.4On April 12, 2012, Dr. Ben-Zion Weiner was nominated as an independent director in the Company. For additional information, see item 1.2.5 above.

 

3.4The Company's auditor

 

There was no material modification to the data pertaining to the Company's auditor as it was shown in the Company's periodic report for the year ended December 31, 2011.

 

3.5Disclosure of the financial statements approval process

 

The Company's BOD transferred the overall responsibility for the financial statements to the members of the audit committee as the committee that examines the financial statements. Below are the names and details of the members of the committee that examines the financial statements:

 

Chairman of the committee - Jaron Diament, external director, expert in accounting and financing.

 

Dafna Cohen - external director, expert in accounting and financing.

 

Marc Allouche - director, expert in accounting and financing.

 

As for details of their qualifications, education, experience and knowledge, see chapter D Regulation 26 to the Company's periodic report for 2011.

 

A-30
 

 

After being nominated, the committee's members gave the Company a declaration pursuant to the provisions of article 3 to the Israeli Companies Regulations (Directives and Conditions for Approving Financial Statements), 2010 as to having accounting and financing qualifications in accordance with the Israeli Companies Regulations (Conditions and Tests of Directors with Accounting and Financial Qualifications and Directors with Professional Qualifications), 2005.

 

Several days before the meeting of the committee, the Company's draft consolidated financial statements, draft directors' report, draft report on separate financial information and draft report on the effectiveness of internal control over financial reporting and disclosure are delivered to the members of the committee.

 

The meeting of the committee that examines the financial statements which was held on November 22, 2012 was also attended, besides the members of the committee, by the Company's CEO, Mr. David Grossman, the Deputy CEO and CFO, Mr. Ronen Twito, the Company's legal advisors, Attorney Ronen Kantor and Attorney Ron Soulema and a representative of the Company's auditors (Kesselman & Kesselman (PwC Israel), CPAs), CPA Ido Heller and CPA Haim Frenkel.

 

At the meeting of the committee in which the financial statements are discussed, the CEO and Deputy CEO and CFO review in a detailed manner the key points of the financial statements, the Company's financial results, financial position and cash flows. This presentation comprises an analysis and details of the composition of and movement in material items and a comparison is made to previous periods.

 

In the meeting, a discussion is held in the issue of estimates and judgments made in connection with the preparation of the financial statements as well as valuations used in the preparation of the financial statements and internal controls over financial reporting. In the framework of the discussion, the auditors gave their reference to the review process and to the data in the financial statements. Also, the Company's CEO and Deputy CEO and CFO review significant transactions that were carried out and any changes that occurred in the Company during the reporting period compared to corresponding periods presented. In this framework, a discussion is held during which the members of the committee raise questions regarding the financial statements.

 

In the framework of the discussion, the committee forms its recommendation to the BOD, among others, about the estimates and judgments made in connection with the financial statements, internal controls over financial reporting, overall financial statements disclosures and appropriateness, accounting policies adopted and the accounting treatment applied to the Company's material issues, valuations and impairment losses of assets, including the assumptions and estimates used to support the data in the financial statements.

 

A-31
 

 

The committee that examines the financial statements transferred its recommendations to approve the financial statements to the BOD's members. The members of the Company's BOD believe that the recommendations of the committee that examines the financial statements have been transferred reasonably enough before the discussion, considering the scope and complexity of the recommendations. The Company's BOD stated that a minimum two-day difference between the meeting of the committee in the issue of the Company's financial statements as of September 30, 2012 and the meeting of the Company's BOD in the issue of their approval would be considered a reasonable amount of time.

 

On November 25, 2012, after it was made clear that the financial statements properly reflect the financial position of the Company and its operating results, the Company's BOD approved the financial statements of the Company as of September 30, 2012 in the presence of the directors: Amit Yonay (Chairman of the Board), Dafna Cohen, Jaron Diament, Marc Allouche and David Grossman.

 

4.PART 4 - THE CORPORATION'S FINANCIAL REPORTING

 

4.1Significant events after the reporting date

 

4.1.1After the date of the statement of financial position through the date of approval of the financial statements, holders of the Company's warrants exercised 192,157 warrants (series 2) into 192,157 Ordinary shares of NIS 0.1 par value each for an average exercise increment of NIS 1.06 per option. The total consideration received from the exercise of warrants (series 2) and warrants (series A) amounted to approximately $ 53 thousand (approximately NIS 203 thousand).

 

4.1.2 On November 21, 2012, in an off-market transaction, the Company purchased from Teva Pharmaceutical Industries Ltd. ("Teva") 4,620,356 Ordinary shares of NIS 1.0 par value each of Proteologics, representing Teva's entire stake in Proteologics and approximately 31.35% of Proteologics' issued and outstanding share capital, in consideration of approximately NIS 6.5 million (approximately $ 1.7 million).

 

Proteologics is a public company whose shares are traded on the TASE, engaged in the discovery and development of drugs comprised of various components of the UBIQUITIN system discovered by Dr. Avram Hershko and Dr. Aaron Ciechanover, both 2004 Nobel Prize laureates in Chemistry.

 

In view of the above purchase, on the same date, the Company contacted Proteologics in a letter demanding that the board of directors of Proteologics exercise its authority and order the appointment of Messrs. Efri Argaman and David Grossman as directors in Proteologics as well as requiring Proteologics to refrain from adopting any decision or executing any transaction which is not in the ordinary course of business until the Company's demand for appointing the directors, as stated above, is met.

 

A-32
 

 

4.2Critical accounting estimates

 

There was no material modification to the critical accounting estimates as it was shown in the Company's periodic report for the year ended December 31, 2011.

 

November 25, 2012        
Date   Amit Yonay, Chairman of the Board   David Grossman, CEO and Director

 

A-33
 

 

XTL BIOPHARMACEUTICALS LTD.

 

INTERIM FINANCIAL INFORMATION

 

AS OF SEPTEMBER 30, 2012

 

UNAUDITED

 

INDEX

 

  Page
   
Auditors' Review Report 2
   
Condensed Consolidated Financial Statements - in U.S. dollars:  
   
Condensed Consolidated Statements of Financial Position 3
   
Condensed Consolidated Statements of Comprehensive Loss 4
   
Condensed Consolidated Statements of Changes in Equity 5 - 7
   
Condensed Consolidated Statements of Cash Flows 8 - 10
   
Notes to Condensed Consolidated Financial Statements 11 - 27

 

 - - - - - - - - - - - -

 

 
 

 

 

 

Auditors' review Report to the shareholders of XTL Biopharmaceuticals Ltd.

 

Introduction

 

We have reviewed the accompanying financial information of XTL Biopharmaceuticals Ltd (hereafter - the company) and its subsidiaries, which includes the condensed consolidated statement of financial position as of September 30, 2012 and the related condensed consolidated statement of comprehensive loss, changes in shareholders' equity, and cash flows for the nine and three month periods then ended. The Board of Directors and management are responsible for the preparation and fair presentation of this interim financial information in accordance with IAS 34 "Interim Financial Reporting", and they are also responsible to draw up interim financial information based on Chapter D to the Israel Securities Regulations (Periodic and Immediate Reports), 1970. Our responsibility is to express a conclusion on this interim financial information based on our review.

 

We did not review the condensed interim financial information of a consolidated company, which its assets included in consolidation constitute approximately 12.86% of total consolidated assets as of  September 30, 2012, and whose revenues included in consolidation are 100% of total consolidated revenues for the nine and three month periods then ended. The condensed interim financial information of this company was reviewed by other independent auditors, whose review report have been presented to us, and our conclusion, insofar as it relates to financial information for this company, is based on review report of the other auditors.

 

Scope of Review

 

We conducted our review in accordance with Israeli Review Standard No. 1, issued by the Israeli Institute of Certified Public Accountants, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity." A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in Israel and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

 

Conclusion

 

Based on our review and the report of other auditors, nothing has come to our attention that causes us to believe that the accompanying interim financial information is not prepared, in all material respects, in accordance with IAS 34.

 

In addition to what is said in the previous paragraph, based on our review and the report of other auditors, nothing has come to our attention that causes us to believe that the accompanying interim financial information does not comply, in all material respects, with the disclosure provisions of Chapter D of the Israel Securities Regulations (Periodic and Immediate Reports), 1970.

 

Tel-Aviv, Israel Kesselman & Kesselman
November 25, 2012 Certified Public Accountants (Isr.)
  A member firm of PricewaterhouseCoopers International Limited

 

Kesselman & Kesselman, Trade Tower, 25 Hamered Street, Tel-Aviv 68125, Israel, P.O Box 452 Tel-Aviv 61003 Telephone: +972 -3- 7954555, Fax:+972 -3- 7954556, www.pwc.co.il

 

B-2
 

 

XTL BIOPHARMACEUTICALS LTD.

 

Condensed Consolidated Statements of Financial Position  

 

 

   September 30,   December 31, 
   2012   2011   2011 
   Unaudited   Audited 
   U.S. dollars in thousands 
ASSETS               
                
CURRENT ASSETS:               
Cash and cash equivalents   2,707    200    123 
Short-term deposits   2,587    1,590    1,372 
Trade receivables   66    -    - 
Other accounts receivable   128    49    68 
Restricted deposits   21    21    21 
Inventories   152    -    - 
                
    5,661    1,860    1,584 
NON-CURRENT ASSETS:               
Property, plant and equipment   77    36    32 
Intangible assets   4,807    2,468    2,457 
Other investments   52    -    - 
                
    4,936    2,504    2,489 
                
Total assets   10,597    4,364    4,073 
                
LIABILITIES AND EQUITY               
                
CURRENT LIABILITIES:               
Trade payables   443    118    88 
Other accounts payable   847    525    541 
                
    1,290    643    629 
NON-CURRENT LIABILITIES:               
Employee benefit liabilities   13    -    - 
                
EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT COMPANY:               
Ordinary share capital   5,989    5,335    5,335 
Share premium and warrants   147,401    141,385    141,385 
Accumulated deficit   (143,598)   (142,999)   (143,276)
Treasury shares   (2,469)   -    - 
Reserve from transactions with non-controlling interests   (204)   -    - 
                
    7,119    3,721    3,444 
Non-controlling interests   2,175    -    - 
                
Total equity   9,294    3,721    3,444 
                
Total liabilities and equity   10,597    4,364    4,073 

  

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

 

         
Amit Yonay   David Grossman   Ronen Twito
Chairman of the Board   Director and CEO   Deputy CEO and CFO

 

Date of approval of the financial statements by the Company's Board: November 25, 2012

 

B-3
 

 

XTL BIOPHARMACEUTICALS LTD.

 

Condensed Consolidated Statements of Comprehensive Loss

 

 

   Nine months ended
September 30,
   Three months ended
September 30,
   Year ended
December 31,
 
   2012   2011   2012   2011   2011 
   Unaudited   Audited 
   U.S. dollars in thousands (except per share data) 
                     
Revenues from sales   343    -    343    -    - 
Cost of sales   156    -    156    -    - 
                          
Gross profit   187    -    187    -    - 
                          
Research and development expenses   (81)   (127)   (38)   (39)   (158)
Selling and marketing expenses   (211)   -    (211)   -    - 
General and administrative expenses   (1,873)   (814)   (898)   (272)   (1,078)
Other gains, net   795    -    795    -    12 
                          
Operating loss   (1,183)   (941)   (165)   (311)   (1,224)
                          
Finance income   31    27    15    (25)   24 
Finance expenses   (42)   (5)   -    (1)   (7)
                          
Finance income (expenses), net   (11)   22    15    (26)   17 
                          
Total comprehensive loss for the period   (1,194)   (919)   (150)   (337)   (1,207)
                          
Loss for the period attributable to:                         
Equity holders of the parent company   (1,094)   (919)   (50)   (337)   (1,207)
Non-controlling interests   (100)   -    (100)   -    - 
                          
    (1,194)   (919)   (150)   (337)   (1,207)
                          
Basic and diluted loss per share (in U.S. dollars)   (0.005)   (0.005)   (*)   (0.002)   (0.006)

 

*) Represents less than $ 0.001.

 

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

 

B-4
 

 

XTL BIOPHARMACEUTICALS LTD.

 

Condensed Consolidated Statements of Changes in Equity

 

 

   Attributable to equity holders of the Company         
   Share
capital
   Share
premium
and
warrants
   Accumulated
deficit
   Treasury
shares
   Transactions
with non-
controlling
interests
   Total   Non-
controlling
interests
   Total
equity
 
   U.S. dollars in thousands 
                                 
Balance at January 1, 2012 (audited)   5,335    141,385    (143,276)   -    -    3,444    -    3,444 
                                         
Comprehensive loss for the period   -    -    (1,094)   -    -    (1,094)   (100)   (1,194)
Share-based payment to employees and others   -    -    772    -    -    772    45    817 
Issue of shares in business combination   176    2,293    -    (2,469)   -    -    1,858    1,858 
Issue of shares and warrants   309    2,109    -    -    -    2,418    -    2,418 
Conversion of convertible loan into subsidiary's equity   -    -    -    -    (204)   (204)   372    168 
Exercise of warrants   169    1,614    -    -    -    1,783    -    1,783 
                                         
Balance at September 30, 2012 (unaudited)   5,989    147,401    (143,598)   (2,469)   (204)   7,119    2,175    9,294 

 

   Attributable to equity holders of the Company         
   Share
capital
   Share
premium
and
warrants
   Accumulated
deficit
   Treasury
shares
   Transactions
with non-
controlling
interests
   Total   Non-
controlling
interests
   Total
equity
 
   U.S. dollars in thousands 
                                 
Balance at January 1, 2011 (audited)   4,993    139,983    (142,142)   -    -    2,834    -    2,834 
                                         
Comprehensive loss for the period   -    -    (919)   -    -    (919)   -    (919)
Share-based payment to employees and others   -    -    62    -    -    62    -    62 
Issue of shares and warrants   342    1,399    -    -    -    1,741    -    1,741 
Exercise of warrants   (*)   3    -    -    -    3    -    3 
                                         
Balance at September 30, 2011 (unaudited)   5,335    141,385    (142,999)   -    -    3,721    -    3,721 

 

*) Represents less than $ 1 thousand.

 

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

 

B-5
 

 

XTL BIOPHARMACEUTICALS LTD.

 

Condensed Consolidated Statements of Changes in Equity

 

 

   Attributable to equity holders of the Company         
   Share
capital
   Share
premium
and
warrants
   Accumulated
deficit
   Treasury
shares
   Transactions
with non-
controlling
interests
   Total   Non-
controlling
interests
   Total
equity
 
   U.S. dollars in thousands 
                                 
Balance at July 1, 2012 (unaudited)   5,777    144,749    (144,020)   -    -    6,506    -    6,506 
                                         
Comprehensive loss for the period   -    -    (50)   -    -    (50)   (100)   (150)
Share-based payment to employees and others   -    -    472    -    -    472    45    517 
Issue of shares in business combination   176    2,293    -    (2,469)   -    -    1,858    1,858 
Conversion of convertible loan into subsidiary's equity   -    -    -    -    (204)   (204)   372    168 
Exercise of warrants   36    359    -    -    -    395    -    395 
                                         
Balance at September 30, 2012 (unaudited)   5,989    147,401    (143,598)   (2,469)   (204)   7,119    2,175    9,294 

 

   Attributable to equity holders of the Company         
   Share
capital
   Share
premium
and
warrants
   Accumulated
deficit
   Treasury
shares
   Transactions
with non-
controlling
interests
   Total   Non-
controlling
interests
   Total
equity
 
   U.S. dollars in thousands 
                                 
Balance at July 1, 2011 (unaudited)   5,335    141,382    (142,679)   -    -    4,038    -    4,038 
                                         
Comprehensive loss for the period   -    -    (337)   -    -    (337)   -    (337)
Share-based payment to employees and others   -    -    17    -    -    17    -    17 
Exercise of warrants   (*)   3    -    -    -    3    -    3 
                                         
Balance at September 30, 2011 (unaudited)   5,335    141,385    (142,999)   -    -    3,721    -    3,721 

 

*) Represents less than $ 1 thousand.

 

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

 

B-6
 

 

XTL BIOPHARMACEUTICALS LTD.

 

Condensed Consolidated Statements of Changes in Equity

 

 

   Attributable to equity holders of the Company         
   Share
capital
   Share
premium
and
warrants
   Accumulated
deficit
   Treasury
shares
   Transactions
with non-
controlling
interests
   Total   Non-
controlling
interests
   Total
equity
 
   U.S. dollars in thousands 
                                 
Balance at January 1, 2011 (audited)   4,993    139,983    (142,142)   -    -    2,834    -    2,834 
                                         
Comprehensive loss for the period   -    -    (1,207)   -    -    (1,207)   -    (1,207)
Issue of shares and warrants   342    1,399    -    -    -    1,741    -    1,741 
Share-based payment to employees and others   -    -    73    -    -    73    -    73 
Exercise of warrants   (*)   3    -    -    -    3    -    3 
                                         
Balance at December 31, 2011 (audited)   5,335    141,385    (143,276)   -    -    3,444    -    3,444 

 

*) Represents less than $ 1 thousand.

 

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

 

B-7
 

 

XTL BIOPHARMACEUTICALS LTD.

 

Condensed Consolidated Statements of Cash Flows

 

 

   Nine months ended
September 30,
   Three months ended
September 30,
   Year ended
December 31,
 
   2012   2011   2012   2011   2011 
   Unaudited   Audited 
   U.S. dollars in thousands 
Cash flows from operating activities:                         
                          
Comprehensive loss for the period   (1,194)   (919)   (150)   (337)   (1,207)
Adjustments to reconcile loss to net cash used in operating activities (a)   96    (116)   (321)   45    (105)
                          
Net cash used in operating activities   (1,098)   (1,035)   (471)   (292)   (1,312)
                          
Cash flows from investing activities:                         
                          
Acquisition of subsidiary less cash received (d)   733    -    733    -    - 
Decrease in restricted deposit   -    25    -    -    25 
Decrease (increase) in short-term bank deposits   (1,178)   (1,587)   (561)   253    (1,377)
Purchase of property, plant and equipment   (2)   (11)   (1)   -    (12)
Convertible loan granted to subsidiary   -    -    22    -    - 
Other investments   (33)   (3)   (33)   -    (8)
                          
Net cash provided by (used in) investing activities   (480)   (1,576)   160    253    (1,372)
                          
Cash flows from financing activities:                         
                          
Proceeds from issue of shares and warrants   2,418    1,741    -    (10)   1,741 
Proceeds from exercise of warrants   1,783    3    395    3    3 
                          
Net cash provided by (used in) financing activities   4,201    1,744    395    (7)   1,744 
                          
Increase (decrease) in cash and cash equivalents   2,623    (867)   84    (46)   (940)
                          
Gains (losses) from exchange differences on cash   (39)   1    (3)   (10)   (3)
                          
Cash and cash equivalents at the beginning of the period   123    1,066    2,626    256    1,066 
                          
Cash and cash equivalents at the end of the period   2,707    200    2,707    200    123 

 

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

 

B-8
 

 

XTL BIOPHARMACEUTICALS LTD.

 

Condensed Consolidated Statements of Cash Flows

 

 

      Nine months ended
September 30,
   Three months ended
September 30,
   Year ended
December 31,
 
      2012   2011   2012   2011   2011  
      Unaudited   Audited  
      U.S. dollars in thousands  
(a)  Adjustments to reconcile loss to net cash used in operating activities:                      
                          
   Income and expenses not involving cash flows:                      
                          
   Depreciation and amortization   55    76    53    25   94  
   Loss from disposal of property, plant and equipment   -    -    -    -   3  
   Share-based payment transactions to employees and others   817    62    517    17   73  
   Finance expenses on short-term deposits   (36)   (3)   (22)   28   5  
   Gain from bargain purchase   (795)   -    (795)   -   -  
   Change in employee benefit liabilities   2    -    2    -   -  
   Exchange differences on operating activities   39    (1)   3    10   3  
                              
       82    134    (242)   80   178  
   Changes in operating asset and liability items:                          
                              
   Decrease in trade receivables   13    -    13    -   -  
   Decrease in other accounts receivable   2    61    21    10   42  
   Decrease in inventories   33    -    33    -   -  
   Decrease in trade payables   (28)   (79)   (79)   (15)  (109 )
   Decrease in other accounts payable   (6)   (232)   (67)   (30)  (216 )
                              
       14    (250)   (79)   (35)  (283 )
                              
       96    (116)   (321)   45   (105 )
                              
(b)  Additional information on cash flows from operating activities:                          
                              
   Interest received   29    5    7    3   11  
                              
(c)  Non-cash activities:                          
                              
   Deferred charges in connection with the acquisition of Kitov in the line item "other investments"   19    -    19    -   -  
                              
   Issue of treasury shares to subsidiary   2,469    -    2,469    -   -  
                              
   Conversion of convertible loan into subsidiary's equity   168    -    168    -   -  

 

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

 

B-9
 

 

XTL BIOPHARMACEUTICALS LTD.

 

Condensed Consolidated Statements of Cash Flows

 

 

      Nine months ended
September 30,
   Three months ended
September 30,
   Year ended
December 31,
 
      2012   2011   2012   2011   2011  
      Unaudited   Audited  
      U.S. dollars in thousands  
(d)  Acquisition of initially consolidated subsidiary:                         
                              
   Working capital (excluding cash and cash equivalents)   517    -    517    -   -  
   Property, plant and equipment   (51)   -    (51)   -   -  
   Intangible assets   (2,397)   -    (2,397)   -   -  
   Gain from bargain purchase   795    -    795    -   -  
   Non-current liabilities   11    -    11    -   -  
   Non-controlling interests   1,858    -    1,858    -   -  
                              
       733    -    733    -   -  

 

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

 

B-10
 

 

XTL BIOPHARMACEUTICALS LTD.

 

Notes to Condensed Consolidated Financial Statements as of September 30, 2012 (Unaudited)

 

 

NOTE 1:-GENERAL

 

a.A general description of the Company and its activity:

 

XTL Biopharmaceuticals Ltd. ("the Company") is engaged in the development of therapeutics, among others, for the treatment of unmet medical needs, improvement of existing medical treatment and business development in the medical realm. The Company was incorporated under the Israeli Companies Law on March 9, 1993. The registered office of the Company is located at Medinat Hayehudim 85 Street, Herzliya 46766. The Company owns 100% of Xtepo Ltd. ("Xtepo") and owns 100% of a U.S. company, XTL Biopharmaceuticals Inc. ("XTL Inc."), which was incorporated in 1999 under the laws of the State of Delaware.

 

On July 25, 2012, the Company completed the acquisition of approximately 50.79% of the issued and outstanding share capital of InterCure Ltd. ("InterCure") a public company whose shares are traded on the Tel-Aviv Stock Exchange and which researches, develops, markets and sells home therapeutic devices for non-medicinal and non-invasive treatment of various diseases such as hypertension, heart failure, sleeplessness and mental stress. For additional details regarding the acquisition of InterCure, see Note 4 below.

 

As of the reporting date, the Company is in the planning and preparation stages for implementing Phase 2 clinical trial of rHuEPO drug designated to treat multiple myeloma cancer patients . As part of these preparations, the Company conducts a research which includes collection of data relating to the level of specific proteins in the blood of a group of patients with multiple myeloma, which will assist in focusing the Phase 2 clinical trial protocol. These collected research data will be integrated in the above Phase 2 clinical trial. The Company expanded this research to additional centers in order to collect data beyond the original research plan and it estimates that the research will conclude towards the end of 2012. With the conclusion of the above research, the Company will start the procedure to apply for an approval to commence Phase 2 clinical trial which the Company estimates is expected to be issued by the end of the first half of 2013.

 

On May 29, 2011, the Company has received from the U.S. Food and Drug Administration (FDA), a sub-unit of the Health and Human Services (HHS), an orphan drug designation for its rHuEPO drug for the treatment of multiple myeloma blood cancer for which it owns a patent through 2019.

 

An "orphan drug" is defined as a drug for treating diseases that affect a relatively small number of people. In the U.S., an "orphan drug" is defined as a disease affecting fewer than 200,000 people a year. To encourage the development of drugs for these diseases, the different regulatory authorities grant benefits and incentives to developers. The main standard benefit of orphan drugs in the U.S. is receiving seven years marketing exclusivity from the date of marketing approval by the FDA, as far as the FDA gives such approval. Other benefits are local U.S. tax credits for research and development expenses and waiver of FDA filing fees.

 

B-11
 

 

XTL BIOPHARMACEUTICALS LTD.

 

Notes to Condensed Consolidated Financial Statements as of September 30, 2012 (Unaudited)

 

 

NOTE 1:-GENERAL (Cont.)

 

On November 30, 2011, the Company completed the MinoGuard transaction in the framework of which the Company acquired the activity of MinoGuard Ltd. ("MinoGuard"), which was founded by Mor Research Applications Ltd. ("Mor"), by an exclusive license to use MinoGuard's entire technology, including the SAM-101 drug, a combined drug for the treatment of mental disorders focusing on schizophrenia disorder in return for royalties on sales and milestone payments throughout the clinical development process, without making any other payment. This drug is based on a combination of existing anti-psychotic drugs and a recognized medicinal compound (Minocycline).

 

For additional details regarding the MinoGuard agreement, see Note 15a to the consolidated financial statements for 2011.

 

The Company's subsidiaries as of September 30, 2012 are as follows:

 

InterCure - a public company whose shares are traded on the on the Tel-Aviv Stock Exchange (for additional details, see Note 4 below).

 

Xtepo - an Israeli privately-held company incorporated in November 2009 and which holds a license for the exclusive use of the patent for rHuEPO drug for multiple myeloma.

 

XTL Inc. was engaged in development of therapeutics and business development in the medical realm. XTL Inc. has a wholly-owned subsidiary, XTL Development Inc. ("XTL Development"), which was incorporated in 2007 under the laws of the State of Delaware and was engaged in development of therapeutics for the treatment of diabetic neuropathic pain ("Bicifadine") until November 18, 2008, when the Company announced that the Phase 2b clinical trial of Bicifadine failed to meet its endpoints and, as a result, the development of the drug was ceased.

 

As of the date of the approval of the financial statements, the companies XTL Inc. and XTL Development are inactive.

 

After the date of the statement of financial position, on November 21, 2012, the Company purchased approximately 31.35% issued and outstanding share capital of Proteologics Ltd. ("Proteologics"), a public company traded on the Tel-Aviv Stock Exchange, in consideration of approximately NIS 6.5 million (approximately $ 1.7 million), which were paid in cash (see note 7b below).

 

The Company is a public company traded on the Tel-Aviv Stock Exchange and its American Depository Receipts (ADRs) are quoted on the Pink Sheets (see also Note 5h).

 

The interim financial information is reviewed but not audited.

 

B-12
 

 

XTL BIOPHARMACEUTICALS LTD.

 

Notes to Condensed Consolidated Financial Statements as of September 30, 2012 (Unaudited)

 

 

NOTE 1:-GENERAL (Cont.)

 

b.The Company has recurring losses and no revenues from operations at this stage (except the subsidiary, InterCure, which was initially consolidated in these financial statements following a transaction which was completed in July 2012, see also Note 4 below) and it is dependent on external financing sources. During the period, the Company raised through a private placement and exercise of tradable and non-tradable warrants from March 2012 to the date of the approval of the financial statements total net proceeds of approximately $ 4.25 million (for additional details, see Notes 5 and 7 below). After the date of the statement of financial position, on November 21, 2012, the Company purchased approximately 31.35% issued and outstanding share capital of Proteologics, in consideration of approximately NIS 6.5 million (approximately $ 1.7 million), which were paid in cash. In the opinion of the Company's management and based on its business plans, the balances of cash and cash equivalents with the balances of short-term deposits, after the above transaction, will enable the Company to fund its activities through at least into 2014. However, the actual amount of cash the Company will need to fund its operations is subject to many factors, including, but not limited to, the timing, design and execution of the clinical trials of its existing drug candidates, any future projects which may be in-licensed or any other business development activities. For example, changing circumstances and/or acquisition of new technologies may cause the Company to consume capital significantly faster than the management's current anticipation and the Company may need to spend more money than currently expected because of, among others, circumstances beyond its control.

 

The Company will incur additional losses during the year from research and development activities, examination of additional technologies and from current operation which will be reflected in negative cash flows from operating activities. Accordingly, in order to complete the clinical trials to bring a product to market, the Company will be required to raise additional cash in the future through the issuance of securities. However, if the Company is not able to raise additional capital at acceptable terms, the Company may be required to exercise tradable securities held by it or reduce operations or sell or out-license to third parties some or all of its technologies.

 

NOTE 2:-BASIS OF PREPARATION OF THE CONDENSED FINANCIAL STATEMENTS

 

a.The condensed consolidated financial information of the Group as of September 30, 2012 and for the interim periods of nine and three months then ended ("interim financial information") has been prepared in accordance with IAS 34, "Interim Financial Reporting" ("IAS 34") and includes the additional disclosure requirements in accordance with Chapter D to the Israeli Securities Regulations (Periodic and Immediate Reports), 1970. This interim financial information does not contain all the information and disclosures that are required in the framework of the annual financial statements. This interim financial information should be read in conjunction with the annual financial statements for 2011 and the accompanying notes which have been prepared in accordance with International Financial Reporting Standards ("IFRS") and included the additional disclosure requirements in accordance with the Israeli Securities Regulations (Annual Financial Statements), 2010.

 

B-13
 

 

XTL BIOPHARMACEUTICALS LTD.

 

Notes to Condensed Consolidated Financial Statements as of September 30, 2012 (Unaudited)

 

 

NOTE 2:-BASIS OF PREPARATION OF THE CONDENSED FINANCIAL STATEMENTS (Cont.)

 

b.Estimates - the preparation of the interim financial statements requires the Group's management to make judgments and to use accounting estimates and assumptions that have an effect on the application of the Group's accounting policies and on the reported amounts of assets, liabilities and expenses. Actual results could differ from those estimates.

 

In the preparation of these condensed consolidated interim financial statements, the significant judgment exercised by management in applying the Group's accounting policies and the uncertainties involved in the key sources of the estimates were identical to those in the consolidated annual financial statements for the year ended December 31, 2011.

 

NOTE 3:-SIGNIFICANT ACCOUNTING POLICIES

 

The Group's significant accounting policies and methods of computation adopted in the preparation of the interim financial information are consistent with those followed in the preparation of the annual financial statements for 2011, except for standards, amendments or interpretations to existing standards that became effective and that are mandatory for the accounting periods beginning January 1, 2012, however, their initial adoption had no material effect on the Group's interim financial information (as well as on the comparative figures).

 

NOTE 4:-BUSINESS COMBINATION

 

On June 13, 2012, the Company entered into an agreement in principles with InterCure according to which, subject to carrying out the debt settlement pursuant to Article 350 to the Israeli Companies Law, 1999 ("the settlement") before the transaction in which InterCure will convert its entire debts into Ordinary shares of InterCure based on the distribution mechanism determined with all its debtors (including its employees) is consummated, the Company will acquire the control over InterCure in consideration for investing an aggregate amount of approximately $ 2.7 million, partly in cash and partly by the allocation of Company shares. Also, besides the Company's investment in InterCure, a third party ("Medica Fund") will invest in InterCure an amount of approximately $ 630 thousand.

 

As part of the prerequisites underlying the agreement, InterCure has undertaken to be free of any net debts and/or monetary liabilities on the date of closing of the transaction as well as free of any contingent liabilities, excluding an amount of up to $ 150 thousand in net liabilities.

 

On July 25, 2012, the transaction was completed after all the prerequisites had been met and the Company acquired 16,839,532 Ordinary shares of InterCure with no par value in consideration of a private placement of 7,165,662 Ordinary shares of the Company of NIS 0.1 par value each whose value on the date of signing the agreement measured according to the quoted market price of the Company's shares on the Tel-Aviv Stock Exchange approximated $ 2.2 million, and which represents a value of InterCure of $ 1.75 million before the money, but after all of InterCure's debts are converted as described above ("InterCure's adjusted value"). The fair value of the Company's shares on the date of consummation of the transaction was approximately $ 2,469 thousand.

 

B-14
 

 

XTL BIOPHARMACEUTICALS LTD.

 

Notes to Condensed Consolidated Financial Statements as of September 30, 2012 (Unaudited)

 

 

NOTE 4:-BUSINESS COMBINATION (Cont.)

 

In addition, the Company provided InterCure an amount of approximately $ 150 thousand in cash on the basis of InterCure's adjusted value. After effecting the above allocation, the Company held about 50.79% of the issued and outstanding share capital of InterCure. The investment of Medica Fund on the date of closing on the basis of InterCure's adjusted value amounted to approximately $ 460 thousand.

 

Further, the Company and Medica Fund provided InterCure a loan of $ 500 thousand (the Company's share is $ 330 thousand) for a period of up to ten months at an overall interest rate of 15%. The Company and Medica Fund have the right to convert the loan into an additional 11,546,507 shares of InterCure (the Company's share is 7,620,695 shares) which will constitute, upon conversion and assuming full dilution on the date of closing, approximately 24.47% of the issued and outstanding share capital of InterCure (the Company's share in the convertible loan is 16.15% of the issued and outstanding share capital of InterCure). On August 6, 2012, Medica Fund converted the loan it provided InterCure into shares and its stake in InterCure is about 23.69% of the issued and outstanding share capital of InterCure (about 18.61% on a fully diluted basis, as of the date of the loan's conversion).

 

As of the date of the approval of the financial statements, the Company's stake in InterCure is approximately 45.41% of the issued and outstanding share capital of InterCure. However, if the Company converts the loan extended to InterCure into shares, its stake in InterCure will be approximately 54.72%. Assuming that all the options granted to employees and directors in InterCure are exercised, and assuming the above loan is converted, the Company's stake in InterCure will be about 51.51%.

 

After the date of the statement of financial position, InterCure granted 20,185,184 performance contingent options that are exercisable into 20,185,184 Ordinary shares with no par value to Gibuv Ltd. ("Gibuv") (see Note 5m below). If the entire performance contingent options granted to Gibuv are exercised, and assuming the conversion of said loan and the exercise of the entire options granted to directors and employees, the Company's stake in InterCure will be approximately 36.15% of the issued and outstanding share capital of InterCure.

 

B-15
 

 

XTL BIOPHARMACEUTICALS LTD.

 

Notes to Condensed Consolidated Financial Statements as of September 30, 2012 (Unaudited)

 

 

NOTE 4:-BUSINESS COMBINATION (Cont.)

 

The table below summarizes the consideration paid for the Company's stake in InterCure, the amounts recognized in the consolidated financial statements for the assets acquired and liabilities assumed and the fair value on the date when the non-controlling interest were acquired.

 

   U.S. dollars
in thousands
 
Consideration:     
      
Cash  *)479 
Fair value of Company's shares issued in the acquisition  **)2,469 
      
Total consideration paid   2,948 
      
Amounts recognized for identifiable assets acquired and liabilities assumed:     
      
Current assets (including convertible loan of $ 330 thousand that the Company provided InterCure)   1,538 
Treasury shares   2,469 
Property, plant and equipment   51 
Intangible assets  ***)2,397 
Current liabilities   (843)
Employee benefit liabilities   (11)
      
Total identifiable net assets   5,601 
Non-controlling interests at fair value   (1,858)
Gain from bargain purchase   (795)
      
    2,948 

 

*) Includes $ 330 thousand that the Company gave as a convertible loan, as above.

 

**)Fair value on the date of closing, i.e. July 25, 2012 (see below).

 

***)Includes technology of $ 1,909 thousand and brand name of $ 488 thousand that are depreciated on a straight-line basis over a period of 9 and 10 years, respectively.

 

The fair value of the Company's Ordinary shares which were issued as part of the consideration in the transaction to acquire InterCure was measured on the basis of the quoted share price in an active market (the Tel-Aviv Stock Exchange) as of the date of closing, after weighting the fact that shares granted to InterCure are restricted for periods between 0.5 - 1.25 years, by virtue of the provisions of the Israeli Securities Law, 1968 and the Israeli Securities Regulations (Details with regard to Sections 15A to 15C of the Law), 2000.

 

B-16
 

 

XTL BIOPHARMACEUTICALS LTD.
 
Notes to Condensed Consolidated Financial Statements as of September 30, 2012 (Unaudited)

 

NOTE 4:-BUSINESS COMBINATION (Cont.)

 

The Group elected to measure non-controlling interests at fair value as of the date of business combination. The fair value of non-controlling interests was measured by quoting the price for InterCure share on July 26, 2012, the first trading day on the Tel-Aviv Stock Exchange after the date of closing plus the equity component of the loan Medica Fund provided InterCure.

 

Additional revenues included in the consolidated statement of comprehensive loss from the date of acquisition as a result of consolidating InterCure's results totaled approximately $ 343 thousand for the nine and three months periods ended September 30, 2012. Further, as a result of consolidating InterCure's results, the loss increased by $ 187 thousand (approximately $ 103 thousand if eliminating the deduction of excess of cost upon acquisition) for the nine and three months periods ended September 30, 2012.

 

If InterCure had been consolidated on January 1, 2012, the consolidated statement of comprehensive loss would have included revenues of $ 1,672 thousand and $ 468 thousand and increase in profit of $ 11,739 thousand and $ 12,728 thousand for the nine and three months periods ended September 30, 2012, respectively (unaudited) (including gain from debt settlement of $ 12,404 thousand in each of the nine and three months periods ended September 30, 2012).

 

Transaction costs of approximately $ 30 thousand were recognized in the Company's statement of comprehensive loss for the nine and three months periods ended September 30, 2012

 

NOTE 5:-SIGNIFICANT EVENTS DURING THE PERIOD

 

a.On January 29, 2012, 39,000 options which had been granted in 1997 to a service provider expired.

 

b.On March 14, 2012, the Company signed a strategic collaboration framework agreement with Clalit Health Services - Clalit Research Institute Ltd. ("the Institute") and Mor Research Applications Ltd. according to which the Institute provides the Company with the right to receive contents which are based on the Institute's database in connection with technologies that stem from inventions and patents of Clalit Health Services' physicians, in projects whose content shall be agreed upon by the Company, the Institute and Mor in advance and in writing.

 

In consideration for the above, the Company shall pay the Institute the cost basis related to the Institute's activity in the framework of any project plus an additional 10% of the total royalties Mor is entitled pursuant to its agreements with the Company in connection with each technology where rights were granted to the Company.

 

This agreement may be terminated by giving a written and advance notice of 180 days by any of the parties on condition that all joint active projects have reached their end.

 

B-17
 

  

XTL BIOPHARMACEUTICALS LTD.
 
Notes to Condensed Consolidated Financial Statements as of September 30, 2012 (Unaudited)

 

NOTE 5:-SIGNIFICANT EVENTS DURING THE PERIOD (Cont.)

 

c.On March 18, 2012, the Company's Board approved a private placement to institutional and private investors (foreign as well as Israeli) for the total of approximately $ 2.4 million (approximately NIS 9.1 million), net of issuance expenses of approximately $ 19 thousand. According to the private placement, the Company allocated 11,560,362 Ordinary shares of the Company of NIS 0.1 par value each, 3,853,454 warrants (series A) and 1,926,727 warrants (series B).

 

Warrants (series A) are exercisable into one Ordinary share of NIS 0.1 par value from the date of allocation (March 18, 2012) to September 17, 2012 at an exercise price equal to NIS 1.046 per share, linked to the U.S. dollar. During the period, 560,000 warrants (series A) were exercised into 560,000 Ordinary shares of the Company of NIS 0.1 par value each for the total consideration of $ 155 thousand. On September 17, 2012, the outstanding 3,293,454 warrants (series A) expired. See additional information on the exercise of warrants (series A) during the period in 5n.

 

Warrants (series B) are exercisable into one Ordinary share of NIS 0.1 par value from the date of allocation (March 18, 2012) to March 17, 2015 at an exercise price equal to NIS 1.124 per share, linked to the U.S. dollar.

 

d.On March 19, 2012, the annual meeting of shareholders allocated 300,000 options to external directors in the Company that are exercisable into 300,000 Ordinary shares of NIS 0.1 par value each at an exercise price equal to NIS 0.58633 per share. Pursuant to the guidance of IFRS 2, the fair value of all options on the date of approval by the general meeting, using the Black-Scholes model was approximately $ 79 thousand. The maximal option term is 10 years from the grant date. 33% of the options are exercisable immediately after their allocation and the remaining options are exercisable in 24 tranches every month over a two-year period.

 

The value of each option is based on the following assumptions: expected dividend of 0%, expected standard deviation of 153%, risk-free interest rate of 4.08% and expected life of 6 years.

 

e.On April 12, 2012, in the Board's meeting, Dr. Ben-Zion Weiner appointment as an independent director in the Company was approved.

 

f.On April 12, 2012, the Company's Board approved to allocate 1,810,000 options that are exercisable into 1,810,000 Ordinary shares of the Company of NIS 0.1 par value each at an exercise price equal to NIS 0.9 per share as follows: 1,710,000 options to the deputy CEO and CFO and 100,000 options to employees in the Company. Pursuant to the guidance of IFRS 2, the fair value of all options on the grant date (the date of Company's Board resolution), using the Black-Scholes model was approximately $ 399 thousand. The maximal option term is 10 years from the grant date. The options are exercisable in twelve equal tranches every quarter over a three-year period.

 

The value of each option is based on the following assumptions: expected dividend of 0%, expected standard deviation of 153.85%, risk-free interest rate of 3.67%-4.22% and expected life of 5 to 6.5 years.

 

B-18
 

 

XTL BIOPHARMACEUTICALS LTD.
 
Notes to Condensed Consolidated Financial Statements as of September 30, 2012 (Unaudited)

 

NOTE 5:-SIGNIFICANT EVENTS DURING THE PERIOD (Cont.)

 

g.On May 29, 2012, in an extraordinary meeting of the shareholders, 4,408,000 options were allocated to a director in the Company that are exercisable into 4,408,000 Ordinary shares of the Company of NIS 0.1 par value each at an exercise price equal to NIS 0.9 per share. Pursuant to the guidance of IFRS 2, the fair value of all options on the date of approval by the Company's extraordinary meeting, using the Black-Scholes model was approximately $ 1,255 thousand. Also 1,500,000 options were allocated to the Company's CEO that are exercisable into 1,500,000 Ordinary shares of the Company of NIS 0.1 par value each at an exercise price equal to NIS 0.9 per share. Pursuant to the guidance of IFRS 2, the fair value of all options on the date of approval by the Company's extraordinary meeting, using the Black-Scholes model was approximately $ 427 thousand. The maximal option term is 10 years from the grant date. The options are exercisable in twelve equal tranches every quarter over a three-year period.

 

The value of each option is based on the following assumptions: expected dividend of 0%, expected standard deviation of 154.09%, risk-free interest rate of 3.90%-4.16% and expected life of 5 to 6.5 years.

 

h.On June 1, 2012, the Company has filed an application for relisting its ADRs on the NASDAQ Stock Exchange, which is subject to complying with all the required criteria that is examined by the NASDAQ Listing Qualifications Committee, including the criteria of minimum ADR price (according to the different listing criteria). On September 24, 2012, the Company's Board approved to change the number of ADRs such that 20 Ordinary shares of the Company form one ADR, this in order to support the Company's compliance with the NASDAQ's ADR listing requirements. The record date of the change in ADR ratio is October 4, 2012.

 

i.On April 12, 2012, the Company entered into an unbinding letter of intent with Kitov Pharmaceuticals Ltd. ("Kitov") according to which the Company intends to acquire the entire share capital of Kitov in consideration of the allocation of Company shares and milestone payments throughout the development progress of Kitov's products. Kitov researches and develops combination drugs. Kitov's lead drug is ready for a Phase 3 clinical trial and is focused on pain induced by osteoarthritis and treatment of hypertension. On June 18, 2012, the Company's Board approved to enter into a binding agreement according to which the Company will acquire the entire issued and outstanding share capital of Kitov by a reverse triangular merger subject to the fulfillment of certain prerequisites.

 

On September 9, 2012, the boards of directors of both the Company and Kitov approved the terms of the agreement, as amended by the parties following negotiations, as follows:

 

1.In return for receiving 100% of Kitov's issued and outstanding share capital, the Company will pay Kitov's shareholders on the date of closing a total of $ 140 thousand and allocate 8,686,733 Ordinary shares of the Company to Kitov's shareholders ("the additional shares"), 241,048 warrants to service providers in Kitov to acquire 241,048 Ordinary shares of the Company of NIS 0.1 par value each that are exercisable over a five-year period from the date of allocation at an exercise price equal to NIS 0.01 per share.

 

B-19
 

 

XTL BIOPHARMACEUTICALS LTD.
 
Notes to Condensed Consolidated Financial Statements as of September 30, 2012 (Unaudited)

 

NOTE 5:-SIGNIFICANT EVENTS DURING THE PERIOD (Cont.)

 

The Company will also allocate to Kitov's shareholders and service providers ("the offerees") an additional 612,800 warrants ("the additional warrants") that are exercisable into 612,800 Ordinary shares of the Company of NIS 0.1 par value each at an exercise price equal to NIS 0.01 per additional share at the earlier of 18 months after the date of closing or after the Company completes a capital raising in the total of $ 4 million. Alternatively, the additional warrants will be cancelled immediately once the offerees receive an amount of $ 160 thousand from the Company, assuming the Company completes a capital raising in the total of $ 4 million as above. All of the securities allocated to the offerees on the date of closing, assuming that all the warrants allocated to the offerees, including the additional warrants, are exercised, will represent approximately 3.99% of the Company's issued and outstanding share capital (approximately 3.59% on a fully diluted basis).

 

2.After completing the acquisition agreement and subject to the fulfillment of the milestones contingent on the progress in developing Kitov's drugs as stipulated in the acquisition agreement, the Company will pay the offerees up to seven additional payments which might collectively amount to up to $ 61 million ("the milestone payments"). The Company has an exclusive right to convert any of the milestone payments by allocating up to 91,828,110 shares of the Company (assuming all the milestones are met), which will represent up to about 27.76% of the Company's issued and outstanding share capital after the allocation (about 25.70% on a fully diluted basis) and along with the securities issued on the date of closing will represent about 30.65% of the Company's issued and outstanding share capital (about 28.37% on a fully diluted basis).

 

3.According to the acquisition agreement, the Company has undertaken to carry out a development plan for one of the drugs developed by Kitov. According to this undertaking, the Company will invest up to $ 1.5 million in financing the Phase 3 clinical trial which will begin at the later of three months from the date of consummation of the agreement or six months from the date of signing the acquisition agreement and the clinical trial is expected to last 18 months from commencement.

 

4.Approving the consolidation of the Company's share capital at a 1:10 ratio such that each 10 Ordinary shares of NIS 0.1 par value are consolidated into one share of NIS 1.0 par value.

 

5.Appointing Dr. Paul Waymack and Mr. Simcha Rock as directors in the Company until the next annual meeting.

 

6.Approving the Company's engagement in a service agreement with Dr. Paul Waymack for appointing the latter as the Chairman of the Company's Board and as the director in charge of the clinical and regulatory development of all of the Company's products in return for monthly management fees of $ 9,166, as well as an annual grant at a maximum amount of $ 30 thousand, subject to the approval of the Company's Board.

 

B-20
 

 

XTL BIOPHARMACEUTICALS LTD.
 
Notes to Condensed Consolidated Financial Statements as of September 30, 2012 (Unaudited)

 

NOTE 5:-SIGNIFICANT EVENTS DURING THE PERIOD (Cont.)

 

The acquisition agreement will be completed provided that certain prerequisites are met, including obtaining the approval of the shareholders' meeting for the acquisition agreement, which is scheduled to convene on November 28, 2012, obtaining a pre-ruling from the Israeli Tax Authorities in accordance with Article 104H to the Income Tax Ordinance (New Version), 1961 so that the sale of Kitov's shares and the allocation of the Company's securities to Kitov are not viewed as a taxable event on the date of closing of the transaction.
It should be noted that the Company's shares issued in the transaction will be mostly restricted for a voluntary restriction period and/or by virtue of the provisions of the Israeli Securities Law, 1968 for a period of between six months and two years from the date of allocation.

 

In order to examine the transaction and convening the extraordinary shareholders meeting, the Company performed a valuation of Kitov's intellectual property as of September 30, 2012 with the assistance of external valuer (BDO Ziv Haft - Consulting and Management Ltd.), which was attached to the Shareholders meeting announcement, determining the fair value of Kitov's intellectual property.

 

j.On July 25, 2012, the CEO of a subsidiary (InterCure) was allocated 1,484,551 options that are exercisable into 1,484,551 Ordinary shares of InterCure with no par value at an exercise price equal to NIS 0.54 per share, based on the quoted market price of InterCure's share as determined in the debt settlement reached with InterCure. Pursuant to the guidance of IFRS 2, the fair value of all options on the grant date using the Black-Scholes model was approximately $ 132 thousand. In addition, InterCure's Deputy CEO, Finance was allocated 1,000,000 options that are exercisable into 1,000,000 Ordinary shares of InterCure with no par value at an exercise price equal to NIS 0.54 per share, based on the quoted market price of InterCure's share as determined in the debt settlement reached with InterCure. Pursuant to the guidance of IFRS 2, the fair value of all options on the grant date using the Black-Scholes model was approximately $ 88 thousand. The maximal term of the options granted to the CEO and Deputy CEO and CFO is 10 years from the grant date. The options are exercisable in twelve equal tranches every quarter from the grant date over a three-year period.

 

The value of each option is based on the following assumptions: expected dividend rate of 0%, expected standard deviation of 90.76%, risk-free interest rate of 3.39%-3.68% and expected life of 5 to 6.5 years.

 

k.On August 22, 2012, Presidio Pharmaceuticals Inc. ("Presidio") requested to terminate its engagement with the Company effective as of August 24, 2012. Following a notice of the termination of the agreement, Presidio's entire DOS technology (including all the patents maintained by Presidio) will be revert back to the Company within 90 days from the date of said notice in accordance with the provisions of the agreement. Presidio is a U.S. biotechnological company, which received an exclusive global sublicense for the clinical development, regulation and commercialization of the Company's DOS technology from March 2008 (updated in August 2008) (which includes products for the treatment of Hepatitis C virus) according to which the Company has certain milestone rights in the development of the DOS program (see also Note 15a to the consolidated financial statements for 2011).

 

It is the Company's intention to assess the renewal of the activity in the Hepatitis C area and/or locate strategic partners for the continued development and marketing of drugs for Hepatitis C virus on the basis of Presidio's reverted DOS technology.

 

B-21
 

 

XTL BIOPHARMACEUTICALS LTD.
 
Notes to Condensed Consolidated Financial Statements as of September 30, 2012 (Unaudited)

 

NOTE 5:-SIGNIFICANT EVENTS DURING THE PERIOD (Cont.)

 

l.On September 3, 2012, in the context of an extraordinary meeting of InterCure's shareholders, each of the four directors in InterCure was allocated 75,000 options that are exercisable into 300,000 Ordinary shares of InterCure with no par value at an exercise price equal to NIS 0.54 per share. Pursuant to the guidance of IFRS 2, the fair value of all options on the date of the approval by the extraordinary meeting of InterCure's shareholders, using the Black-Scholes model was approximately $ 26 thousand. The maximal option term is 10 years from the grant date. The options are exercisable in twelve equal tranches every quarter from the date of grant over a three-year period.

 

The value of each option is based on the following assumptions: expected dividend rate of 0%, expected standard deviation of 87.27%, risk-free interest rate of 3.06%-3.53% and expected life of 5 to 6.5 years.

 

m.On September 24, 2012, a subsidiary (InterCure) entered into a strategic service agreement with Gibuv Ltd. ("Gibuv") for a period of three years for the provision of online marketing and sale services of InterCure's products. The key terms of the agreement are as follows:

 

1.Gibuv's annual sales targets:

 

According to the strategic agreement, certain sales targets were determined, calculated as total sales of the product's online marketing activity in the six months preceding the end of each calendar quarter (as defined below) multiplied by 2. The calculation of these sales targets also includes sales made by and/or to third parties with which the engagement is performed by Gibuv. A calendar quarter is defined as an accounting quarter based on InterCure's financial statements. The calculation will be performed near the date of the publication of the quarterly financial statements (it should be noted that the first examination of the sales targets will be done on a one-time-only basis at the end of two calendar quarters from the date of signing the agreement, namely at the end of the second quarter of 2013, and the other examinations will be done every calendar quarter as discussed above).

 

Based on its compliance with said sales targets, Gibuv will be allocated up to 20,185,184 non-tradable options that are exercisable into InterCure shares for a (dividend adjusted) exercise price equal to NIS 0.54 per share. Provided that all options are exercised by Gibuv and the exercise price of each option is actually paid, the total proceeds which InterCure stands to receive amount to approximately NIS 10,900,000. It should be noted that Gibuv will be entitled to exercise the options under a cashless exercise mechanism in which the minimum exercise price required by the provisions of the Tel-Aviv Stock Exchange articles of association will be paid.

 

B-22
 

 

XTL BIOPHARMACEUTICALS LTD.
 
Notes to Condensed Consolidated Financial Statements as of September 30, 2012 (Unaudited)

 

NOTE 5:-SIGNIFICANT EVENTS DURING THE PERIOD (Cont.)

 

Following is a table describing the total options according to annual sales targets:

 

Number of options   Sales targets
(U.S. dollars
in thousands)
 
      
 6,055,555    4,000,000 
 4,037,037    5,000,000 
 4,037,037    15,000,000 
 6,055,555    30,000,000 
        
 20,185,184      

 

The allocation of the options and the items of the strategic agreement regarding said allocation (including the PUT and CALL options discussed below) were approved in the general meeting of October 28, 2012.

The fair value of all performance contingent options on the date of the approval by the extraordinary meeting of InterCure's shareholders, Pursuant to the guidance of IFRS 2, using the Monte-Carlo model was approximately $ 2,169 thousand. The maximal option term is 5 years from the grant date.

The value of each option is based on the following assumptions: expected dividend of 0%, expected standard deviation of 93.6%, risk-free interest rate of 2.1%-3.14% and expected life of 5 years.

 

2.The consideration for the services:

 

According to the provisions of the strategic agreement, during the period of the strategic agreement, InterCure will pay Gibuv a total of $ 40,000 a month, plus VAT, in return for online marketing of InterCure's products ("Consideration") as follows:

 

a)The first four months of the strategic agreement period will serve as a grace period during which no consideration will be paid.

 

b)In respect of the services supplied in the last four months of the first year of the strategic agreement (namely from the ninth month from the beginning of the strategic agreement period until the end of the twelfth moth), the consideration will be paid subject to the fulfillment of an average monthly contribution (revenues from online sales less cost of online advertising and cost of sales of products in the online channels, "average monthly contribution") from online marketing of at least $ 50,000.

 

c)Starting from the end of the first year of the strategic agreement period until the end of the strategic agreement period, the consideration for the services will be paid subject to the fulfillment of an average monthly contribution from online marketing of at least $ 140 thousand.

 

B-23
 

 

XTL BIOPHARMACEUTICALS LTD.
 
Notes to Condensed Consolidated Financial Statements as of September 30, 2012 (Unaudited)

 

NOTE 5:-SIGNIFICANT EVENTS DURING THE PERIOD (Cont.)

 

3.Online advertising budget:

 

InterCure will provide monthly online advertising budgets of at least $ 130 thousand in favor of the online sales activity performed by Gibuv, provided that effective from January 2013, the monthly contribution is not less than the total budget discussed above (for example, a monthly advertising budget of $ 100 thousand will yield a contribution of at least $ 100 thousand). In addition, in the first 12 months of the strategic agreement period, InterCure will provide Gibuv a budget of $ 50 thousand in favor of reviewing new advertising channels and methods, provided that InterCure's quarterly expense incurred for the purpose of this activity does not exceed $ 15 thousand.

 

4.Purchase of software:

 

According to the strategic agreement, InterCure will purchase from a third party the rights to use the Affiliate software program ("the program") which will be used by Gibuv in providing the services, including a right for upgrades and technical support throughout the strategic agreement period, all for a monthly fee of $ 153 thousand, half of which will be paid once the strategic agreement period begins and the other half three months later. Moreover, during the strategic agreement period, Gibuv will provide the services to InterCure based on InterCure's needs using a media management program which, whereby if the strategic agreement is terminated, Inter Cure will be entitled to purchase the rights to use the media management program, including upgrades and tech support, for a period of three years for a price reflecting a 40% discount on the market price of the media management program on the date of purchase. InterCure will also reimburse Gibuv for the expenses relating to the customization of the media management program in a total of $ 25,000, plus VAT, subject to achieving a sales target arising from the online marketing activity of $ 5 million, whereby if this target is achieved before March 2014, the expenses will be reimbursed in March 2014.

 

5.PUT option:

 

Upon the signing of the strategic agreement, Gibuv's shareholders will be conferred a non-transferrable PUT option to sell Gibuv's entire share capital to InterCure, in effect after 18 months have elapsed from the beginning of the strategic agreement period ("the PUT option").

 

In consideration of the acquisition of Gibuv, InterCure will pay Gibuv's shareholders the value of Gibuv's business activity, calculated as Gibuv's EBITDA (income before taxes on income, depreciation and amortization) in the last 12 months preceding the date of the PUT option exercise, multiplied by 3 (which will not exceed an amount of $ 110 thousand) ("the value of the supplier's activity") with the addition of the intrinsic economic value of the option (calculated as the average closing price of InterCure's share on the Tel-Aviv Stock Exchange in the 30 trading days which precede the relevant notice date, less the exercise price of the option on the relevant notice date) (the value of the supplier's activity and the intrinsic economic value collectively - "Gibuv's value").

 

B-24
 

 

XTL BIOPHARMACEUTICALS LTD.
 
Notes to Condensed Consolidated Financial Statements as of September 30, 2012 (Unaudited)

 

NOTE 5:-SIGNIFICANT EVENTS DURING THE PERIOD (Cont.)

 

The consideration from the exercise of the PUT option will be paid in cash or by the allocation of InterCure shares, at InterCure's exclusive discretion. If InterCure chooses to allocate its shares as consideration, the quoted market price of each share shall be determined based on the average quoted market price of InterCure's shares on the Tel-Aviv Stock Exchange in the 30 trading days which preceded the date of notice of the exercise of the PUT option.

 

6.CALL option:

 

On the date of signing the strategic agreement, InterCure will be granted a non-transferrable CALL option to purchase Gibuv's entire share capital by InterCure ("the CALL option"). The CALL option will come into effect at the end of one year from the beginning of the strategic agreement period and will remain in effect throughout the strategic agreement period, subject to the following terms:

 

In return for the acquisition of Gibuv, InterCure will allocate to its shareholders options in a number that completes a total of 20,185,184 options at an exercise price identical to the exercise price detailed above. Alternative, at its exclusive discretion, InterCure will pay the consideration in cash in an amount equivalent to Gibuv's value, as defined above. The CALL option will become effective within 30 days from the date of providing said notice according to the date on which all the various calculations regarding the consideration are made, as described above.

 

On October 4, 2012, InterCure convened an extraordinary general meeting of the shareholders in order to approve the strategic service agreement with Gibuv as described above.

 

On October 28, 2012, InterCure's general meeting approved the engagement in the strategic service agreement with Gibuv, including the allocation of options and the items of the strategic agreement dealing with the allocation.

 

n.During the period, holders of the Company's warrants exercised 5,858,806 warrants (series 2) into 5,858,806 Ordinary shares of NIS 0.1 par value each at an average exercise price equal to NIS 1.06 per share for the total consideration of approximately $ 1.8 million (approximately NIS 6.8 million) as well as 560,000 warrants (series A) into 560,000 Ordinary shares of NIS 0.1 par value each at an average exercise price equal to NIS 1.09 per share. On September 17, 2012, according to the terms of the private placement from March 2012, 3,293,454 warrants (series A) of the Company expired. See additional information on the exercise of warrants after the date of the statement of financial position in Note 7.

 

B-25
 

 

XTL BIOPHARMACEUTICALS LTD.
 
Notes to Condensed Consolidated Financial Statements as of September 30, 2012 (Unaudited)

 

NOTE 6:-SEGMENT REPORTING

 

The Group's management has determined the business segments based on reports that are reviewed by the chief operating decision maker to make strategic decisions.

 

Through July 25, 2012, the Company operated in one business segment - drug development. Since that date, with InterCure acquisition, the chief operating decision maker reviews the business activity both from the aspect of the nature of activity and from the geographical aspect. As to the nature of activity, he examines the results of the drug development activity and the results of the medical devices activity. Geographically, he examines the sale performances of medical devices in the U.S., Britain and other countries.

 

a.Below is segment reporting data for the nine and three months periods ended September 30, 2012:

 

   Medical devices   Drug
development
   Adjustments   Total 
   U.S.   Britain   Other
countries
             
   U.S. dollars in thousands 
Nine months ended September 30, 2012 (unaudited):                              
                               
Revenues:                              
Revenues from external entities   270    71    2    -    -    343 
Inter-segment revenues   -    -    257    -    (257)   - 
                               
Total revenues   270    71    259    -    (257)   343 
                               
Segment results   (44)   (14)   -    (297)   -    (355)
                               
Three months ended September 30, 2012 (unaudited):                              
                               
Revenues:                              
Revenues from external entities   270    71    2    -    -    343 
Inter-segment revenues   -    -    257    -    (257)   - 
                               
Total revenues   270    71    259    -    (257)   343 
                               
Segment results   (44)   (14)   -    (100)   -    (158)

 

B-26
 

 

XTL BIOPHARMACEUTICALS LTD.
 
Notes to Condensed Consolidated Financial Statements as of September 30, 2012 (Unaudited)

 

NOTE 6:-SEGMENT REPORTING (Cont.)

 

b.Reconciliation between segment results and comprehensive loss:

 

   Nine months
ended
September 30,
   Three months
ended
September 30,
 
   2012   2012 
   Unaudited 
   U.S. dollars in thousands 
         
Total results of reportable segments   (355)   (158)
           
Unallocated research and development expenses   (9)   (7)
           
Unallocated general and administrative expenses   (1,614)   (795)
           
Other gains, net   795    795 
           
Finance income (expenses)   (11)   15 
           
Comprehensive loss for the period   (1,194)   (150)

 

NOTE 7:-EVENTS AFTER THE REPORTING PERIOD

 

a.From the date of the statement of financial position through the date of the approval of the financial statements, holders of the Company's warrants exercised 192,157 warrants (series 2) into 192,157 Ordinary shares of NIS 0.1 par value each at an average exercise price equal to NIS 1.06 per share. The total consideration received from the exercise of warrants (series 2) amounted approximately $ 53 thousand (approximately NIS 203 thousand).

 

b.On November 21, 2012, in an off-market transaction, the Company purchased from Teva Pharmaceutical Industries Ltd. ("Teva") 4,620,356 Ordinary shares of NIS 1.0 par value each of Proteologics, representing Teva's entire stake in Proteologics and approximately 31.35% of Proteologics' issued and outstanding share capital, in consideration of approximately NIS 6.5 million (approximately $ 1.7 million).

 

Proteologics is a public company whose shares are traded on the Tel-Aviv Stock Exchange, engaged in the discovery and development of drugs comprised of various components of the UBIQUITIN system discovered by Dr. Avram Hershko and Dr. Aaron Ciechanover, both 2004 Nobel Prize laureates in Chemistry for the discovery of the UBIQUITIN system.

 

- - - - - - - - - - - -

 

B-27
 

 

 

 

XTL Biopharmaceuticals Ltd.

Purchase Price Allocation - InterCure Ltd.

July 25, 2012

 

B-28
 

 

   

BDO Ziv Haft

Amot Bituach House Building B, 48

Menachem Begin Road, Tel Aviv

66180

Israel

www.bdo.co.il

  

XTL Biopharmaceuticals Ltd.

 

Re: A Purchase Price Allocation of InterCure Ltd.

 

In accordance with XTL Biopharmaceuticals Ltd's request (Hereinafter: "XTL" or the "Purchaser") BDO Ziv Haft Consulting & Management Ltd. (Hereinafter: "BDO") has performed an investigation and valuation of the net assets of InterCure Interactive Therapeutic Devices Ltd. (Hereinafter: "InterCure" or the "Company") acquired by XTL, as of July 25th, 2012 (Hereinafter: the "Valuation Date").

 

We confirm XTL and InterCure to publish the PPA in their financial statement.

 

The valuation is based upon data and information delivered to us by the Company and its management (Hereinafter: the "Management").

 

Among data and information used are:

 

vThe Company's audited financial reports, as of December 31, of the years 2008-2011;

 

vThe Company's unaudited financial statements as of July 25, 2012;

 

vThe acquisition Details;

 

vOther information provided by Management, written or oral;

 

vDiscussions with Management;

 

vPublicly available information (articles, websites) regarding the industry. While making this PPA, BDO used the data and information supplied by the Company without examining its correctness and completeness. The data and information received from the Company were assumed correct, and any reliance thereof is neither confirmation nor verification of their validity. BDO and its employees are not responsible for the completeness or accuracy of the aforementioned data, or for any inaccuracy, error, omission or any other fault caused by using the aforementioned data.

 

The valuation of the Company's assets involves assumptions, estimates and forecasts, yet supposed to reasonably assess the economic value based on the available information at the time of the evaluation. Any change in the different variables or supplemental information may affect the outcomes of the evaluation, and consequently the conclusions of the analysis.

 

This Purchase Price Allocation report contains forward-looking statements, with respect to the Company, its financial condition and projected results of its operations. These forward-looking statements are subject to risks and uncertainties, including, but not limited to, changes in general economic conditions, failure to forecast the market trends, and specific risks associated with the nature of target markets and unanticipated events or circumstances. Changes in economic conditions and market trends might significantly affect the valuation.

 

Section 1: The Acquisition |

XTL Biopharmaceuticals Ltd. | Purchase price allocation - InterCure

 

 

B-29
 

 

Details regarding the valuation specialist

 

BDO was founded by the partners of BDO Certified Public Accountants. BDO is part of the international BDO network, provides a full range of business services required for national and international businesses in any sector. BDO has vast experience in the following fields: business valuations, financial and tax due diligence, goodwill and intangible assets valuations, financial analyses, business plans, project finance PFI/PPP advisory, M&A, investment banking and more.

 

Your exclusive remedy and BDO’s sole liability to you, for any cause whatsoever will be limited to the fees paid to BDO under this Agreement. The foregoing limitation will apply regardless of the form of action, whether contract or tort, including without limitation, negligence, except that such limitation shall not apply in the case of gross negligence, revenue, data, use of other commercial injury, or any special, incidental, indirect or consequential damages, suffered by XTL or any third party, whether or not BDO has been advised of the possibility of such loss, injury, damages or third party claim, under any cause of action arising out of or relating to this Agreement.

 

You acknowledge that XTL is solely responsible for the payment of all fees, expenses, indemnification or other amounts due under or in connection with this engagement. XTL shall indemnify, defend, hold harmless, and release BDO from and against any and all claims, lawsuits, judgments, proceedings, damages, costs, and expenses (including court costs and reasonable attorney’s fees) in any manner relating to, arising out or associated with this engagement or any of the services provided by BDO under this Agreement, except that such indemnity shall not apply in the case of gross negligence or willful misconduct by BDO.

 

BDO reserves the right to update the evaluation in light of new information, which was not introduced prior to this analysis.

 

We would be delighted to be of any assistance.

 

Respectfully submitted,

/s/ BDO Ziv Haft

BDO Ziv Haft

 

Consulting & Management Ltd.

 

Section 1: The Acquisition |

XTL Biopharmaceuticals Ltd. | Purchase price allocation - InterCure

 

 

B-30
 

 

Results

 

According to the assumptions detailed in this report, we have arrived to the conclusion that some of the acquired intangible assets were needed to revaluate to reflect market value.

 

The following table provides details regarding these assets (thousands $):

 

000'$  Note   Book Value   Fair value   Change   % of Purchase Price   Life Span (Years)
Current Assets                            
Cash and Cash Equivalents  1    1,211    1,211    -    24.4%   
Short-Term Restricted Deposits  1    1    1    -    0.0%   
Account Receivables  2    79    79    -    1.6%   
Other Receivables  2    62    62    -    1.2%   
Inventory  3    123    185    62    3.7%   
Total Current Assets        1,476    1,538    62    30.9%   
Long Term Assets                            
Fixed Assets  4    51    51    -         
Investment In XTL  5    2,469    2,469              
Total Long-Term Assets        2,520    2,520    -    50.7%   
Total Assets        3,996    4,058    62    81.6%   
                             
Short-Term Liabilities                            
Account Payables  6    383    383    -    7.7%   
Other Payables  6    293    293    -    5.9%   
Employees Benefits Liabilities  6    11    11              
Total Short-Term Liabilities        687    687    -    13.8%   
                             
Convertible Bonds to Compoany's Shares        493    -    -    0.0%   
Total Liabilities        1,180    687    -         
Intangible Assets                            
Technology  7         1,909         38.4%  9 Years
Brand Name  7         488         9.8%  10 Years
Total Intangible Assets             2,397    -         
Goodwill  8         (795)        -16.0%   
Purchase Price  9         4,973              

 

Source: The Company's financial reports + BDO analysis.

 

Notes

 

The balance sheet data, as of the Valuation Date is based on the Company's unaudited financial data, as of June 30 according to XTL's management that there were no material changes between June 30 and the Valuation Date.

 

1.Cash and Cash Equivalents - The Cash and Cash Equivalents, as of the Valuation Date includes the cash payment that XTL and Medica paid, according to the purchase agreement. For more details see section 1 - The Acquisition - The Purchase Price).

 

2.Account and Other Receivables - According to the Company, the account receivable, as of the Valuation Date, is attributed to short-term operating amounts, which are received by the costumers during the current business and expected to be charged during the current year. Therefore, there is no difference between the book value and the fair value of this balance and no adjustments had been made.
   
3.Inventory - According to the Company, the inventory balance consists of raw materials inventory in the amount of approximately $24 thousands and of finished goods inventory in the amount of approximately $99 thousands. According to IFRS3R, we re-calculated the value of the finished goods inventory and adjustments had been made, (See Appendix E).

 

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B-31
 

 

Notes

 

4.Fixed Assets - The Company's fixed assets, as presented in its financial report are presented in their fair value. Therefore, no adjustments had been made.

 

5.Investment in XTL - According to the transaction, Intercure was allocated XTL'S ordinary shares. Therefore, we created a new balance section which presents the fair value of Intercure's investment in XTL. (For more details see section 1 - The Acquisition).

 

6.Account and Other Payables - According to the Company, the account payable, as of the Valuation Date, is attributed to short-term operating amounts, which are paid during the current business, at the current year. Therefore, there is no difference between the book value and the fair value of this balance and no adjustments had been made.

 

7.Intangible Assets - For more details see section 7 - Valuation of Intangible Asset.

 

8.The goodwill value is the difference between the purchase price and the fair value of the tangible and intangible assets.

 

9.The purchase price received by XTL's management and includes the cash and cash equivalents which were paid by XTL and the fair value of the minority's holding.

 

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B-32
 

 

Contents  
   
The Acquisition 7
   
Company Overview 13
   
Financial Statement 22
   
The Purchaser 25
   
Market Overview 33
   
Methodology 38
   
Valuation of Intangible Assets 47
   
Results 58
   
Appendix 61

 

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Section 1

The Acquisition

 

Section 1: The Acquisition |

XTL Biopharmaceuticals Ltd. | Purchase price allocation - InterCure

 

 

B-34
 

 

The Acquisition

 

The Acquisition

 

On June 13, 2012, XTL engaged in an agreement according to which it will acquire the control over InterCure, a public company traded on the Tel-Aviv Stock Exchange (Hereinafter: "TASE") that develops and markets home medical devices for treating hypertension and stress in consideration for investing an aggregate amount of $3.2 million into InterCure (partly in cash and partly by the allocation of XTL shares), together with Medica Venture Partners (Hereinafter: the "Medica Fund") mainly based on the principles and terms specified below (Hereinafter: the “Agreement”):

 

·Effective from the date of signing the Agreement, InterCure will act to complete a debt settlement pursuant to Section 350 to the Israeli Companies Law, 1999 (Hereinafter: the “Settlement” and the “Companies Law”, respectively), prior to the closing of the transaction, according to which InterCure will convert its entire debts into ordinary shares of InterCure based on a distribution agreed upon by InterCure and its creditors.

 

InterCure has undertaken to be free of any net debts and/or monetary liabilities on the date of closing of the transaction as well as free of any contingent liabilities, excluding an amount of up to $150,000 in net liabilities. Medica Fund has undertaken to provide InterCure a loan of $100,000 on the same date (Hereinafter: the “Medica Loan”) such that on the date of closing of the transaction between XTL and InterCure, InterCure’s total outstanding net debts will not exceed $50,000. The Medica Loan will have preference over all of InterCure’s outstanding loans and the loan will be converted into share capital of InterCure upon XTL’s investment according to InterCure’s Adjusted Value, as hereby defined. The parties also agreed that the consummation of the transaction will be subject to obtaining the TASE’s approval that InterCure’s shares have been returned to trade on the main market on TASE.

 

·InterCure will be allocated ordinary shares of XTL and/or will receive a cash investment in an aggregate amount of $2,200,000, at XTL’s sole discretion, based on the quoted market price of XTL’s share on the date of signing the Agreement and according to a $1,750,000 pre-money valuation of InterCure (but after all of InterCure’s debts are converted as discussed in section 1 above) (Hereinafter: "InterCure’s Adjusted Value"). In addition, XTL and Medica Fund will provide InterCure an amount of at least $1,050,000 ($500,000 and $550,000, respectively), in cash and/or by way of an agreement for providing management and operation services in consideration for the allocation of InterCure shares to XTL and Medica Fund. All the amounts provided in cash according to this section, excluding the agreement for providing management and operation services mentioned above, will be invested according to InterCure’s Adjusted Value. The parties also agreed that the date of closing shall not be later than September 30, 2012 and that in case the transaction is not closed by that date, XTL will have the right to cancel it.

 

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B-35
 

 

The Acquisition

 

The Acquisition

 

·At any given time from the date of closing, XTL will have the right to purchase the shares it allocated according to section 2 above at their market value and in any event, at a price per share that is not lower than the share’s quoted market price on the date of signing the Agreement.

 

·After the investment is completed, XTL will incorporate InterCure’s entire operations activity or bear the related costs, subject to the agreement for providing management and operation services discussed above, including all the employees required to perform this activity, at XTL’s sole discretion (Hereinafter: the “Transfer of the Operation Activity”).

 

·Upon the transfer of the operation activity, XTL and InterCure will enter into an agreement whereby XTL will grant InterCure management and operation services in connection with InterCure’s employees (Hereinafter: the “Management and Operation Service Agreement”) for the following consideration:

 

InterCure will grant XTL and Medica Fund warrants to purchase shares which will represent 25% of InterCure’s share capital after the investment is completed and which will be exercisable into shares of InterCure by XTL and Medica Fund at no additional consideration (Hereinafter: “Warrant B”). Warrant B will be exercisable subject to the fulfilment of the following conditions on a cumulative basis:

 

üXTL and Medica Fund will bear the direct expenses relating to the management and operation services in the amount of $500,000 ($330,000 and $170,000, respectively). At the date of closing the transaction, Medica Fund will transfer its whole part in cash to InterCure and XTL will transfer $30,000 of its part to InterCure in cash;

 

üThe operation activity performed by XTL will be transferred back to InterCure.

 

If XTL and Medica Fund do not exercise Warrant B after meeting the above conditions, XTL and Medica Fund will be entitled to receive a current fee for the management and operation service agreement in the amount of the cost of the actual services plus a fixed 15% margin of such cost.

 

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B-36
 

 

The Acquisition

 

The Acquisition

 

·The consummation of the transaction is contingent on the fulfilment of the following prerequisites:

 

üThe approval of InterCure’s holders of debentures (series A and B), the holders of private debentures and remaining creditors of InterCure.

 

üThe approval of InterCure’s audit committee and board of directors, the approval of the meetings of the holders of InterCure’s each securities’ and of its creditors in the context of the arrangement and the court’s approval of said arrangement.

 

üObtaining all the required approvals of the relevant authorities such as the Israeli Tax Authority, the Israel Securities Authority, TASE etc.

 

In addition, it should be noted that the Agreement contains understandings in relation to InterCure’s chief executive officer post the completion of the transaction and directives in relation to indemnification is certain cases as detailed in the Agreement.

 

In addition to the above-mentioned, the parties agreed that at the date of signing the Agreement, XTL shall make a loan in a total framework amount of $120,000 for the benefit of InterCure (Hereinafter: the "Loan Framework"). The Loan that will actually be received will have seniority over all of InterCure’s outstanding loans, including all the debentures holders. The status of the loan will be defined as “liquidation costs status”. Upon the closing of the transaction, the actually received loan shall become to be part of the consideration XTL is required to pay. In case the transaction will not be completed due to reasons that are unrelated to XTL, the actually received loan shall be repaid by InterCure, plus 7% annual interest.

 

According to the transaction, approximately 7 million XTL's shares (which have a different trade block periods) were issued to Intercure by XTL and approximately $149 thousand paid in cash.

 

In addition, XTL paid $330 thousand for a convertible loan which may be converted to 7.6 million Intercure's shares. However, economically we considered these two transactions, as a single transaction.

 

In order to measure XTL's shares' fair value; we have multiplied XTL's allocated number of shares by XTL's price per share, taking into account the block trade discount rate.

 

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B-37
 

 

The Acquisition

 

The Acquisition

 

The block trade discount rate was calculated by using the "Ghaidarov" model, according to block trade time periods, received by the Company's management.

 

The following table presents the block trade discount rate for each one of the block trade periods1:

 

          Ghaidarov Discount  
Standard Deviation   82.12%  sigma  v^2   0.12 
Block Trade Period   0.50   T (Years)  v   0.34 
Dividend Yield   0%  q  d   13.50%

source: BDO analysis

 

          Ghaidarov Discount  
Standard Deviation   75.72%  sigma  v^2   0.15 
Block Trade Period   0.75   T (Years)  v   0.39 
Dividend Yield   0%  q  d   15.28%

Source: BDO analysis

 

          Ghaidarov Discount  
Standard Deviation   70.54%  sigma  v^2   0.17 
Block Trade Period   1.00   T (Years)  v   0.42 
Dividend Yield   0%  q  d   16.47%

Source: BDO analysis

 

          Ghaidarov Discount  
Standard Deviation   70.22%  sigma  v^2   0.22 
Block Trade Period   1.25   T (Years)  v   0.47 
Dividend Yield   0%  q  d   18.39%

Source: BDO analysis

 

The following table presents XTL's share market share price, as of July 25th, 2012:

 

XTL's Share price As Of 25/07/12 1.6510

 

Source: tase.co.il.

 

 

 1 The Volatility which used in the Ghaidarov model was based on the historical share price of XTL

 

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B-38
 

 

The Acquisition

 

The Acquisition

 

The following table presents the share price calculation based on XTL's share price, as of July 25th, 2012:

 

Share Price  Block Trade Period  Number of Shares   Total (In NIS) 
1.4281  0.50   2,286,347    3,265,213 
1.3987  0.75   2,286,347    3,197,914 
1.3791  1.00   2,286,347    3,153,063 
1.3474  1.25   306,621    413,150 
XTL's Total Blockes Sheres Value (NIS)           10,029,339 
XTL's Total Blockes Sheres Value (USD)           2,469,064 

 

Source: BDO analysis.

 

Bargain Purchases

 

However, due to the fact that Intercure was listed in the TASE maintenance list and was in a proceeding of a debt restructuring, The acquirer (XTL) made a bargain purchase, by purchasing Intercure's business combination Net assets in a discounted purchase price.

 

Section 1: The Acquisition |

XTL Biopharmaceuticals Ltd. | Purchase price allocation - InterCure

 

 

B-39
 

Section 2

Company Overview

 

Section 2: Company Overview |

XTL Biopharmaceuticals Ltd. | Purchase price allocation - InterCure

 

  

B-40
 

 

Company Overview

 

General Description

 

InterCure was incorporated in Israel on November 20, 1994, as a private company named Ben-Gavish Ltd., and on June 8, 1997 changed its name to its current name. On July 26, 2007 the Company listed for trading and became a public company.

 

On February 11, 2000 the Company established a subsidiary called InterCure Inc., Which is a private company registered in Delaware USA in a privet ownership (Hereinafter: "InterCure Inc.").

 

On May 12, 2008 Intercure established, in a full ownership, InterCure Limited UK (Hereinafter: "Intercure UK "), a private company registered in the UK. At this point, InterCure UK is not active and markets its product through InterCure Ltd.

 

Moreover, as for today Intercure is listed in the TASE maintenance list, therefore, we didn’t take into account the company's market value as for the valuation date.

 

The Company operates as a medical device company and manufactures and sells personal therapeutic devices. The Company’s products include RESPeRATE, a non-drug and non-invasive hypertension treatment device.

 

The following chart presents the Group's holding structure:

 



Source: The Company's financial reports.

 

The Technology

 

The cardiovascular and neurological effects of breathing exercises have been known for centuries. In fact, unaided slow breathing is a key element of relaxation techniques such as meditation and yoga but is generally considered unproven and impractical for treating chronic diseases such as hypertension and/or heart failure. InterCure’s broadly patented Device Guided Breathing technology ingeniously takes advantage of the human body’s natural tendency to follow external rhythms and has broadly patented an interactive “feed forward” concept. The technology composes rhythmic guiding tones, in real time, while measuring the user’s individual respiration pattern. By dynamically manipulating and recalculating these personalized tones it guides users into a Therapeutic Zone, subliminally, with almost no conscious effort on the user’s part leading to unprecedented efficacy, ease of use and compliance.

 

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B-41
 

 

Company Overview

 

The Technology

 

InterCure has designated sleeplessness and heart failure as its next two target disease states. InterCure’s heart failure product successfully met or exceeded primary endpoints in three phase 2a clinical studies and the results elicited great excitement in the heart failure community.

 

Products

 

The Company has a single product family named RESPeRATE. The RESPeRATE Harness the natural power of breathing to lower blood pressure.

 

High blood pressure is generally caused by your blood vessels tightening up and narrowing, this then causes your heart to pump harder. RESPeRATE's unique breathing exercise relaxes constricted blood vessels to reduce high blood pressure in the following way:

 

·When you use RESPeRATE, you put on headphones and attach a sensor around your chest.

 

 

RESPeRATE's breathing sensor automatically analyzes your individual breathing pattern and creates a personalized melody composed of two distinct inhale and exhale guiding tones.

 

·You simply listen to the melody through the headphones, and your body's natural tendency to follow external rhythms will enable you to easily synchronize your breathing to the tones.

 

 

·By gradually prolonging the exhalation tone to slow your breathing, RESPeRATE leads you to the therapeutic zone of less than 10 breaths per minute.

 

·Within a few minutes, the muscles surrounding the small blood vessels in your body relax, blood flows more freely, and your blood pressure is significantly reduced.

 

The Company manufactures and markets the product in the following versions:

 

·RESPeRATE (Discontinued) - The basic version of the device.

 

·RESPeRATE Duo (Discontinued) - A version that allows two users to keep their practice data in two individual computer memory devices.

 

·RESPeRATE Ultra - A smaller version device and larger screen than the basic version includes the ability to guide new users how to effectively use the device.

 

 

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Company's Overview

 

Products

 

·RESPeRATE Ultra Duo - An Ultra version that allows two users to keep their practice data in two individual computer memory devices.

 

·RESPeRATE Ultra Deluxe - Version of the device, with a convenient lit display, for use in the dark (bedroom environment).

 

·RESPeRATE Rx - A version of the Ultra device, which is sold under a doctor's prescription in the UK market.

 

In addition, the Company provides the following products/services:

 

·Accessories such as carry case and speakers.

 

·Warranty - In Europe 24 months, and in the rest of the world 12 months.

 

·Free support and coaching program in the U.S via email and call center.

 

·Other accessories.

 

Clinical Proofs

 

RESPeRATE is the only non-drug therapy that has been Proven in over 10 Clinical Studies to lower Blood Pressure.

 

Those Clinical studies included five randomized controlled studies one controlled and four open-label studies.

 

·The studies compared those who used RESPeRATE for 15 minutes a day for 8 weeks to a "control" group, using a walkman with relaxing music, a home blood pressure monitor or both.

 

 

·There were a total of 507 participants with an average age of 58.

 

·78% of the participants already take blood pressure medications, of whom a third take 3 or more medications.

 

·Average initial office blood pressure of 150/90 mmHg despite other therapies, diet, exercise and/or medications.

 

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B-43
 

 

Company Overview

 

Product Efficacy

 

·RESPeRATE users with uncontrolled blood pressure experienced a significant decrease in office blood pressure by up to 36 points systolic and 20 points diastolic (top 10% reductions) with average reduction of 14/8 mmHg points.

 

·The control treatment reduction was 9/4 mmHg, significantly less than with RESPeRATE.

 

·The results were similar across genders and medication status.

 

·The drop in office BP was directly related to the duration of slow breathing. Those who used RESPeRATE more achieved better reductions.

 

·A clinically significant sustained reduction in blood pressure typically occurred in 3 to 4 weeks.

 

·Larger reductions in office blood pressure occurred in older individuals and those with higher baseline blood pressures, whether taking antihypertensive medication or not.

 

·Home blood pressure measurements (for up to 6 months of use) and 24 hours ambulatory blood pressure monitoring have verified an all-day, lasting blood pressure lowering effect.

 

 

RESPeRATE lowers high blood pressure by up to 36 points systolic and 20 points diastolic (top 10% reductions), as shown in seven separate clinical trials with average reductions of 14/8 points.

 

Costumers

 

The Company's products are sold mostly to private patients through the company's web-site (http://www.resperate.com) and to various online resellers, such as drugstore.com, Costco.ca (the online Canadian business of Costco Warehouse Club), as well as some retail pharmacies. The Company also offers dispensing programs to physicians and health care professionals.

 

Distributors & Resellers

 

Most of the Company's sales are to private customers. However, the Company sells a limited number of devices to limited number of distributors and resellers who have been proven as valuable contributors. Distributors and resellers may purchase a quantity of a few dozen or few hundred units in a single order.

 

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B-44
 

 

Company Overview

 

Distributors & Resellers

 

An exceptional distribution channel is for the RESPeRATE Rx product which is provided against a doctor's prescription to pharmacies through wholesalers.

 

The following chart presents the Company's market share, by geographic areas, as of December 31, 2011(%):

 

 

Source: The Company's financial reports, as of December 2011.

 

Marketing and Distribution

 

Following are the Company's business strategies and business plans:

 

·Focusing on the first target market - high blood pressure;

 

·Seeking for a positive profitability and growth, by increasing the investment in the online advertising;

 

·Leveraging UK's National Health Service decision to fully reimburse RESPeRATE receiving;

 

·Establishing the support in the device treatment technology, in the medical market, in order to accelerate acceptance of RESPeRATE and geographically expend it’s reimbursement.

 

The Company's main marketing efforts concentrate on the U.S. and the U.K which are the main markets in terms of the Company's sales.

 

The Company's sales in the U.S. market are mostly made by InterCure Inc.

 

In 2011, there were over 1.5 million new visitors on the Company's web-site. In addition, the Company sent approximately 8 million e-mails to customers who registered on the web-site out of which approximately 11 thousand reached to doctors.

 

Competing Products

 

Up to date, for the best knowledge of the Company, RESPeRATE is the only Non-invasive medical device cleared by the FDA for the treatment of hypertension.

 

However, it is possible that similar technologies will be developed in the near future. It should be noted, that the Company's technology is protected by several patents, which limit development of competing technologies.

 

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B-45
 

 

Company Overview

 

Competing Products

 

During the third quarter of 2010, the Company discovered that "Lloyds Pharmacy" - the British pharmacy chain, which used to distribute the Company's devices, has been developed in partnership with Harvard Medical Ltd., a new device which claims a non-invasive treatment for high blood pressure, in a lower cost than the Company's devices.

 

According to the Company's consultants the competing device does not lead the patient's breathing interactively, during exercise (the patented method proven by the Company to be effective in lowering blood pressure). However, according to the Company's consultants, the competing product includes the same elements as the Company's products, and therefore a copyright violation is possible.

 

To the best knowledge of the Company, since the first quarter of 2011, the competing device is being sold under the private label "Lloyds Pharmacy" and under the brand name of Kinetics, the manufacturing company.

 

At this stage the Company is unable to estimate whether and how the competing device will affect the Company's sales at the UK.

 

Additionally, there are few indirect competing products for the Company's device:

 

·  Hypertension drugs;

 

·  Invasive hypertension treatment devices and techniques including:

 

üBaroreflex Activation Therapy - An implanted pacemaker, developed by CVRx Inc. The pacemaker affects the blood pressure control system (baroreflex) through the nervous system. The product price is expected to reach $20,000 thousands, not including the surgery itself, and suitable for resistant hypertensive. The first product of this company received CE approval and is under clinical trials for FDA.

 

üRenal Sympathetic Nerve Abelation - A special technique that is being promoted by the "Medtronics" and based on catheter designed to reduce the stimulation of neural activity. The product price is expected to reach over $20,000 thousands and suitable for resistant hypertensive. The product is under clinical trials stage.

 

üRelaxation Products Including - Biofeedback of heartbeat variability methods, which are exempted from regulatory approval. The leading product includes: StressEraser ($129 per piece) for one unit (which has gone bankrupt but can still be obtained) and Heartmath’s FreezFramer & emWave ($150-200 per piece).

 

üMobile applications content and educational material which claim to lower blood pressure ($0.99 and higher).

 

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XTL Biopharmaceuticals Ltd. | Purchase price allocation - InterCure

 

 

B-46
 

 

Company Overview

 

Patents

 

The Company has many patents in various countries, as described below:

 

The validity of the first patent - "Device and method for effecting rhythmic body activity" (Hereinafter: the "First Patent"), expired on May 30, 2009 in the U.S. and on May 31, 2008 in Israel and protected, among others, the technology and device itself. The rest of the Company's patents are expected to expire in 2013 or later, the latest of the priority date or international apply.

 

The Company estimates that the expiry of the first patent didn't and will not harm the device's intellectual property scope protection, as a result of it being protected by the following patents:

 

·The third and fourth patents - Expired on 2016;

 

·Patent number 10 - Expired on 2023;

 

·Patent number 6 - This patent describes accurately the product sensor, and will expire in 2020.

 

·Patent number 7 - This patent describes the principles of sounds which guide the patient breath beat, and will expire on 2020.

 

The following table summarizes information and data about the Company's patents:

 

Key Issued/Pending Patents   Countries Issued   # of Countries Filed
Stress detecting device and        
method for monitoring breathing        
    U.S., Israel, Japan  
Systems and methods for   U.S., Israel, Canada,    
modification of biorhythmic   U.K. and 11 other    
activity   countries   19 
Interventive diagnostic for        
improving health   U.S., Israel   8 (1,2,3)
Apparatus and method for        
beneficial modification of   India, Singapore,    
biorhythmic activity   Japan, Australia, NZ   12 (1,2,4)
Generalized metronome for        
modification of biorhythmic        
activity   India, China, HK   10 (1,2,4)
Apparatus and method for        
breathing pattern determination   Singapore   11 
         
1.Including PCT.        
2.Including EU.        
3.Including German utility        
patents.        
4.Including divisional patents.        

 

Source: The Company's presentation as of April, 2012.

 

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B-47
 

 

Company Overview

 

Trademarks

 

On November 7, 2011 the Company contacted with "Yazmonit" Ltd. (a company controlled by Dr. Benjamin Gavish, a past director and the Company's party of Interest, hereinafter: "Yazmonit") in a contract to grant Yazmonit an exclusive, worldwide, transferable and sub-licensable license (such as patents, trademarks, technology) for all applications in connection with InterCure intellectual property excluding (i) the treatment of hypertension, in any form; and (ii) stand-alone products, regardless of the application. In consideration of the license Yazmonit paid a total of $25,000 and provided a credit line of $72,000.

 

The following table presents the group's trademarks:

 

Trade Mark   International Classification   State
RESPeRATE   10   Israel
INTERCURE   10   U.S
RESPERATE   10,42   U.S
INTERCURE   10,42   EU
RESPERATE   10   EU
RESPERATE   10   Korea
RESPERATE   10   China
RESPERATE   10   Japan

 

Source: The Company's financial reports, as of December, 2011.

 

Over the years, the Company invested tens of millions of dollars in advertising the brand name "RESPeRATE". It is also the brand name used in multiple clinical publications, tens books on the subject (i.e. Mayo Clinic on High Blood Pressure). Therefore, according to the Company, this brand has a high importance to the Company's operations and sales.

 

URL Addresses

 

The Company has many URL addresses among them: www.resperate.com, using wide variety of extensions, including the main countries where the Company operates.

 

Employees

 

The Company, together with its subsidiaries, employs 13 employees, including the service providers and an experienced management team.

 

The CEO manages both the Company and its subsidiaries.

 

The following table presents the Company's employees divided by its different departments, as of the years 2010 and 2011:

 

Field  December 31, 2010   December 31, 2011   July 25, 2012 
Sales and Marketing   7    6    2 
Management and Administration   4    4    7 
Research and Development   3    3    1 
Total