UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 20-F





(Mark One)

 ̈REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934



OR

xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December
31, 2016



OR

 ̈TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



OR

 ̈SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period
from ____________to ___________.



Commission file number:000-36000



XTL BIOPHARMACEUTICALS LTD.

(Exact name of registrant as specified
in its charter)



Israel

(Jurisdiction of incorporation or organization)



5 HaCharoshet St.

Raanana 43656, Israel



(Address of principal executive offices)



Josh Levine

Chief Executive Officer

5 HaCharoshet St.

Raanana 4365603, Israel

Tel: +972-9-955-7080

Fax: +972-9-951-9708



(Name, Telephone, E-mail and/or Facsimile
number and Address of Company Contact Person)



Securities registered or to be registered
pursuant to Section 12(b) of the Act:



|American Depositary Shares, each
        representing
        one hundred Ordinary Shares, par
        value NIS 0.1 | The Nasdaq Capital Market                  
|-------------------------------------------------------------------------------------------------------------------- | -------------------------------------------
|(Title of Class)                                                                                                     | (Name of each exchange on which registered)



Securities registered or to be registered
pursuant to Section 12(g) of the Act: None.



Securities for which there is a reporting
obligation pursuant to Section 15(d) of the Act: None.



Indicate the number of outstanding
shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.



[__] American Depositary Shares            [__] Ordinary Shares



Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.



Yes  ̈    No x



If this report is an annual or transition
report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.



Yes  ̈    No x



Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.



Yes x    No  ̈



Indicate by check
mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files.)



Yes  ̈    No  ̈



Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act). (Check one):



Large accelerated filer  ̈        Accelerated
filer  ̈        Non-accelerated filer x



Indicate by check mark which basis
of accounting the registrant has used to prepare the financial statements included in this filing:



 ̈US GAAP     x International Financial Reporting Standards
as issued     ̈ Other

by the International Accounting Standards
Board



If “Other” has been check
in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.



Item 17  ̈   
Item 18  ̈



Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).



Yes  ̈    No x











XTL BIOPHARMACEUTICALS LTD.

ANNUAL REPORT ON FORM 20-F



TABLE OF CONTENTS



|                                                               |                                                                              | Page
|-------------------------------------------------------------- | ---------------------------------------------------------------------------- | ----
|                                                               |                                                                              |     
|SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS | 3                                                                           
|                                                               |                                                                              |     
|                                                               | PART I                                                                       | 4   
|ITEM 1                                                         | Identity of Directors, Senior Management and Advisers                        | 4   
|ITEM 2                                                         | Offer Statistics and Expected Timetable                                      | 4   
|ITEM 3                                                         | Key Information                                                              | 4   
|ITEM 4                                                         | Information on the Company                                                   | 25  
|ITEM 4A                                                        | Unresolved Staff Comments                                                    | 41  
|ITEM 5                                                         | Operating and Financial Review and Prospects                                 | 41  
|ITEM 6                                                         | Directors, Senior Management and Employees                                   | 51  
|ITEM 7                                                         | Major Shareholders and Related Party Transactions                            | 63  
|ITEM 8                                                         | Financial Information                                                        | 65  
|ITEM 9                                                         | The Offer and Listing                                                        | 66  
|ITEM 10                                                        | Additional Information                                                       | 67  
|ITEM 11                                                        | Quantitative and Qualitative Disclosures About Market Risk                   | 91  
|ITEM 12                                                        | Description of Securities other than Equity Securities                       | 92  
|                                                               |                                                                              |     
|                                                               | PART II                                                                      | 92  
|ITEM 13                                                        | Defaults, Dividend Arrearages and Delinquencies                              | 92  
|ITEM 14                                                        | Material Modifications to the Rights of Security Holders and Use of Proceeds | 92  
|ITEM 15                                                        | Controls and Procedures                                                      | 92  
|ITEM 16                                                        | Reserved                                                                     | 92  
|ITEM 16A                                                       | Audit Committee Financial Expert                                             | 92  
|ITEM 16B                                                       | Code of Ethics                                                               | 93  
|ITEM 16C                                                       | Principal Accountant Fees And Services                                       | 93  
|ITEM 16D                                                       | Exemptions From The Listing Standards For Audit Committees                   | 93  
|ITEM 16E                                                       | Purchases Of Equity Securities By The Issuer And Affiliated Purchasers       | 93  
|ITEM 16G                                                       | Corporate Governance                                                         | 94  
|                                                               |                                                                              |     
|                                                               | PART III                                                                     | 94  
|ITEM 17                                                        | Consolidated Financial Statements                                            | 94  
|ITEM 18                                                        | Consolidated Financial Statements                                            | 94  
|ITEM 19                                                        | Exhibits                                                                     | 131 
|                                                               |                                                                              |     
|SIGNATURES                                                     |                                                                              | 133 



2







SPECIAL CAUTIONARY NOTICE REGARDING
FORWARD-LOOKING STATEMENTS



Certain matters discussed
in this report, including matters discussed under the caption “Item 5. Operating and Financial Review and Prospects,”
may constitute forward-looking statements for purposes of the Securities Act of 1933, as amended, or the Securities Act, and the
Securities Exchange Act of 1934, as amended, or the Exchange Act, and involve known and unknown risks, uncertainties and other
factors that may cause our actual results, performance or achievements to be materially different from the future results, performance
or achievements expressed or implied by such forward-looking statements. In some instances, you can identify these forward-looking
statements by words such as “anticipates,” “believes,” “estimates,” “expects,”
“intends,” “may,” “plan,” “potential,” “will,” “should,”
“would,” or similar expressions, including their negatives. These forward-looking statements include, without limitation,
statements relating to our expectations and beliefs regarding:



| | · | fluctuations
                                         in the market price of our securities;
| | - | --------------------------------------------------------------------------------------------



| | · | the
                                         possibility that our securities could be delisted from Nasdaq or the Tel-Aviv Stock Exchange
                                         (“TASE”);
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | potential
                                         dilution to the holders of our securities as a result of future issuances of our securities;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------



| | · | fluctuations
                                         in our results of operations;
| | - | -----------------------------------------------------------------------------------



| | · | the
                                         accuracy of our financial forecasts in our drug development activity and the uncertainty
                                         regarding the adequacy of our liquidity to pursue our complete business objectives;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | the
                                         timing and cost of the in-licensing, partnering and acquisition of new product opportunities;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------



| | · | the
                                         timing of expenses associated with product development and manufacturing of the proprietary
                                         drug candidates that we have acquired - hCDR1 for the treatment of Lupus, rHuEPO for
                                         the treatment of Multiple Myeloma and those that may be in-licensed, partnered or acquired;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | the
                                         costs involved in prosecuting and enforcing patent claims and other intellectual property
                                         rights; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | other
                                         risks and uncertainties described in this report.
| | - | ------------------------------------------------------------------------------------------------



Our actual results
may differ materially from the results anticipated in these forward-looking statements due to a variety of factors, including,
without limitation, those discussed under “Item 3. Key Information-Risk Factors,” “Item 4. Information on the
Company,” “Item 5. Operating and Financial Review and Prospects,” and elsewhere in this report, as well as factors
which may be identified from time to time in our other filings with the Securities and Exchange Commission, or the SEC, or in
the documents where such forward-looking statements appear. All written or oral forward-looking statements attributable to us
are expressly qualified in their entirety by these cautionary statements.



Forward-looking statements
contained in this report reflect our views and assumptions only as of the date this report is filed. Therefore, you should not
place undue reliance on any forward-looking statement as a prediction of future results. Forward-looking statements made in this
report and the documents incorporated by reference are made as of the date of the respective documents, and we undertake no obligation
to update them in light of new information or future results. Except as required by law, we assume no responsibility for updating
any forward-looking statements.



3







PART I



Unless the context
requires otherwise, references in this report to “XTL,” the “Company,” “we,” “us”
and “our” refer to XTL Biopharmaceuticals Ltd, an Israeli company and our consolidated subsidiary. We have prepared
our consolidated financial statements in United States, or US, dollars and in accordance with International Financial Reporting
Standards, or IFRS. All references herein to “dollars” or “$” are to US dollars, and all references to
“Shekels” or “NIS” are to New Israeli Shekels.



ITEM 1. IDENTITY OF DIRECTORS, SENIOR
MANAGEMENT AND ADVISERS



Not applicable



ITEM 2. OFFER STATISTICS AND EXPECTED
TIMETABLE



Not applicable



ITEM 3. KEY INFORMATION



A.
Selected Financial Data



The tables below present
selected financial data for the fiscal years ended and as of December 31, 2016, 2015, 2014, 2013 and 2012. We have derived the
selected financial data for the fiscal years ended December 31, 2016, 2015 and 2014, and as of December 31, 2016 and 2015, from
our audited consolidated financial statements, included elsewhere in this report and prepared in accordance with International
Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board (“IASB”)
We have derived the selected financial data for the fiscal years ended December 31, 2013 and 2012, and as of December 31, 2014,
2013 and 2012, from our audited consolidated financial statements not included in this report. You should read the selected financial
data in conjunction with “Item 5. Operating and Financial Review and Prospects,” “Item 8. Financial Information”
and “Item 18. Consolidated Financial Statements.”



4







Consolidated Statements of Comprehensive
Loss:



|                                                                                   |  | Year ended December 31,                                     |            
|---------------------------------------------------------------------------------- |  | ----------------------------------------------------------- | -----------
|                                                                                   |  | 2016                                                        |            
|                                                                                   |  | U.S Dollars in thousands (except for per share information) |            
|                                                                                   |  |                                                             |            
|Research and development expenses                                                  |  |                                                             | (443       
|General and administrative expenses                                                |  |                                                             | (1,270     
|Impairment of intangible assets                                                    |  |                                                             | (848       
|Other gains, net                                                                   |  |                                                             | -          
|                                                                                   |  |                                                             |            
|Operating loss                                                                     |  |                                                             | (2,561     
|                                                                                   |  |                                                             |            
|Finance income                                                                     |  |                                                             | 23         
|Finance expenses                                                                   |  |                                                             | (7         
|                                                                                   |  |                                                             |            
|Financial income (expenses), net                                                   |  |                                                             | 16         
|                                                                                   |  |                                                             |            
|Earnings (losses) from investment in associate                                     |  |                                                             | -          
|                                                                                   |  |                                                             |            
|Total loss from continuing operations                                              |  |                                                             | (2,545     
|                                                                                   |  |                                                             |            
|Other comprehensive income (loss):                                                 |  |                                                             |            
|Items that might be classified to profit or loss:                                  |  |                                                             |            
|Foreign currency translation adjustments                                           |  |                                                             | -          
|Reclassification of foreign currency translation adjustments to Other gains, net   |  |                                                             | -          
|Changes in the fair value of available-for-sale financial assets                   |  |                                                             | 163        
|Realized gain from sale available-for-sale financial assets                        |  |                                                             | -          
|Total other comprehensive income                                                   |  |                                                             | 163        
|                                                                                   |  |                                                             |            
|Total comprehensive loss from continuing operations                                |  |                                                             | (2,382     
|                                                                                   |  |                                                             |            
|Total loss from discontinued operations                                            |  |                                                             | -          
|                                                                                   |  |                                                             |            
|Total comprehensive loss for the year                                              |  |                                                             | (2,382     
|                                                                                   |  |                                                             |            
|Loss for the year attributable to:                                                 |  |                                                             |            
|Equity holders of the Company                                                      |  |                                                             | (2,545     
|Non-controlling interests                                                          |  |                                                             | -          
|                                                                                   |  |                                                             |            
|                                                                                   |  |                                                             | (2,545     
|                                                                                   |  |                                                             |            
|Total comprehensive loss for the year attributable to:                             |  |                                                             |            
|Equity holders of the Company                                                      |  |                                                             | (2,382     
|Non-controlling interests                                                          |  |                                                             | -          
|                                                                                   |  |                                                             |            
|                                                                                   |  |                                                             | (2,382     
|                                                                                   |  |                                                             |            
|Basic and diluted loss from continuing and discontinued operations (in US dollars) |  |                                                             |            
|From continuing operations                                                         |  |                                                             | (0.009     
|From discontinued operations                                                       |  |                                                             | -          
|Basic and diluted loss per share (in US dollars)                                   |  |                                                             | (0.009     
|                                                                                   |  |                                                             |            
|Weighted average number of issued ordinary shares                                  |  |                                                             | 274,035,533



*) – less than one thousand.



5







Consolidated Statements of Financial Position Data:



|                                         |  | As of December 31,       |      
|---------------------------------------- |  | ------------------------ | -----
|                                         |  | 2016                     |      
|                                         |  | U.S Dollars in thousands |      
|                                         |  |                          |      
|Cash, cash equivalents and bank deposits |  |                          | 2,019
|Working capital*                         |  |                          | 2,424
|Total assets                             |  |                          | 3,017
|Long term liabilities                    |  |                          | -    
|Total shareholders’ equity               |  |                          | 2,687
|Non-controlling interests                |  |                          | -    



Working capital is calculated
as current assets less liabilities.



B. Capitalization And Indebtedness



Not applicable.



C. Reasons For Offer And Use Of Proceeds



Not applicable.



D. Risk Factors



Before you invest
in our ordinary shares or American Depositary Shares, you should understand the high degree of risk involved. You should carefully
consider the risks described below and other information in this report, including our consolidated financial statements and related
notes included elsewhere in this report, before you decide to purchase our ordinary shares or American Depositary Shares ("ADSs").
If any of the following risks actually occur, our business, financial condition and operating results could be adversely affected.
As a result, the trading price of our ordinary shares or ADSs could decline and you could lose part or all of your investment.



Risks Related to Our Financial
Position and Capital Requirements



We have incurred substantial operating
losses since our inception. We expect to continue to incur losses in the future in our drug development activity and may never
become profitable.



You should consider
our prospects in light of the risks and difficulties frequently encountered by development stage companies. We have incurred operating
losses since our inception and expect to continue to incur operating losses for the foreseeable future. We have not yet commercialized
any of our drug candidates or technologies and cannot be sure we will ever be able to do so. Even if we commercialize one or more
of our drug candidates or technologies, we may not become profitable. Our ability to achieve profitability depends on a number
of factors, including our ability to complete our development efforts, consummate out-licensing agreements, obtain regulatory
approval for our drug candidates and technologies and successfully commercialize them.



6







We expect to continue
to incur losses for the foreseeable future, and these losses will likely increase as we:



| | ● | initiate
                                         and manage pre-clinical development and clinical trials for our current and new product
                                         candidates;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | ● | seek
                                         regulatory approvals for our product candidates;
| | - | ----------------------------------------------------------------------------------------------



| | ● | implement
                                         internal systems and infrastructures;
| | - | ----------------------------------------------------------------------------------------



| | ● | seek
                                         to license additional technologies to develop;
| | - | --------------------------------------------------------------------------------------------



| | ● | hire
                                         management and other personnel; and
| | - | ---------------------------------------------------------------------------------



| | ● | progress
                                         product candidates towards commercialization.
| | - | -----------------------------------------------------------------------------------------------



If our product candidates
fail in clinical trials or do not gain regulatory clearance or approval, or if our product candidates do not achieve market acceptance,
we may never become profitable. Even if we do achieve profitability, we may not be able to sustain or increase profitability on
a quarterly or annual basis. Our inability to achieve and then maintain profitability would negatively affect our business, financial
condition, results of operations and cash flows. Moreover, our prospects must be considered in light of the risks and uncertainties
encountered by an early-stage company and in highly regulated and competitive markets, such as the biopharmaceutical market, where
regulatory approval and market acceptance of our products are uncertain. There can be no assurance that our efforts will ultimately
be successful or result in revenues or profits.



We will require substantial
additional financing to achieve our goals, and a failure to obtain this necessary capital when needed could force us to delay,
limit, reduce or terminate our product development or commercialization efforts.



As December 31, 2016,
we had approximately $2,019 thousand in cash, cash equivalents and bank deposits, working capital of approximately $2,424 thousand
and an accumulated deficit of approximately $154,904 thousand. We have incurred continuing losses and depend on outside financing
resources to continue our activities. Based on existing business plans, we estimate that our outstanding cash and cash equivalent
balances will allow us to finance our activities for an additional period of at least 12 months from the date of this Report.
In order to perform clinical trials aimed at developing our product until obtaining its marketing approval, we will need to raise
additional financing by issuing securities. Should we fail to raise additional capital under terms acceptable to us, we will be
required to reduce our development activities or sell or grant a sublicense to third parties to use all or part of our technologies.



We have expended and
believe that we will continue to expend significant operating and capital expenditures for the foreseeable future developing our
product candidates. These expenditures will include, but are not limited to, costs associated with research and development, manufacturing,
conducting preclinical experiments and clinical trials, contracting with contract manufacturing organizations and contract research
organizations, hiring additional management and other personnel and obtaining regulatory approvals, as well as commercializing
any products approved for sale. Because the outcome of our planned and anticipated clinical trials is highly uncertain, we cannot
reasonably estimate the actual amounts necessary to successfully complete the development and commercialization of our product
candidates and any other future product. In addition, other unanticipated costs may arise. As a result of these and other factors
currently unknown to us, we will require additional funds, through public or private equity or debt financings or other sources,
such as strategic partnerships and alliances and licensing arrangements. In addition, we may seek additional capital due to favorable
market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating
plans. A failure to fund these activities may harm our growth strategy, competitive position, quality compliance and financial
condition.



7







Our future capital
requirements depend on many factors, including:



| | · | the
                                         number and characteristics of products we develop;
| | - | -----------------------------------------------------------------------------------------------



| | · | the
                                         scope, progress, results and costs of researching and developing our product candidates
                                         and conducting preclinical and clinical trials;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | the
                                         timing of, and the costs involved in, obtaining regulatory approvals;
| | - | ------------------------------------------------------------------------------------------------------------------



| | · | the
                                         cost of commercialization activities if any are approved for sale, including marketing,
                                         sales and distribution costs;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | the
                                         cost of manufacturing any product candidate we successfully commercialize;
| | - | -----------------------------------------------------------------------------------------------------------------------



| | · | our
                                         ability to establish and maintain strategic partnerships, licensing, supply or other
                                         arrangements and the financial terms of such agreements;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | the
                                         costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing
                                         patent claims, including litigation costs and the outcome of such litigation;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | hCDR1
                                         patent expiration in 2024 and failure to obtain patent term extension, expand patent
                                         protection or obtain data exclusivity in the U.S. and Europe;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | the
                                         costs of in-licensing further patents and technologies.
| | - | ----------------------------------------------------------------------------------------------------



| | · | the
                                         cost of development of in-licensed technologies
| | - | --------------------------------------------------------------------------------------------



| | · | the
                                         timing, receipt and amount of sales of, or royalties on, any future products;
| | - | --------------------------------------------------------------------------------------------------------------------------



| | · | the
                                         expenses needed to attract and retain skilled personnel; and
| | - | ---------------------------------------------------------------------------------------------------------



| | · | any
                                         product liability or other lawsuits related to existing and/or any future products.
| | - | --------------------------------------------------------------------------------------------------------------------------------



Additional funds may
not be available when we need them, on terms that are acceptable to us, or at all. If adequate funds are not available to us on
a timely basis, we may be required to delay, limit, reduce or terminate preclinical studies, clinical trials or other research
and development activities for our product candidates or delay, limit, reduce or terminate our establishment of sales and marketing
capabilities or other activities that may be necessary to commercialize our product candidates or any future products.



Raising additional capital may cause
dilution to our existing stockholders, restrict our operations or require us to relinquish rights to our technologies or product
candidates.



We may seek additional
capital through a combination of private and public equity offerings, debt financings, strategic partnerships and alliances and
licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities,
the ownership interests of existing shareholders will be diluted, and the terms may include liquidation or other preferences that
adversely affect shareholder rights. Debt financing, if available, may involve agreements that include covenants limiting or restricting
our ability to take certain actions, such as incurring debt, making capital expenditures or declaring dividends. If we raise additional
funds through strategic partnerships and alliances and licensing arrangements with third parties, we may have to relinquish valuable
rights to our technologies or product candidates, or grant licenses on terms that are not favorable to us. If we are unable to
raise additional funds through equity or debt financing when needed, we may be required to delay, limit, reduce or terminate our
product development or commercialization efforts or grant rights to develop and market product candidates that we would otherwise
prefer to develop and market ourselves.



8







Risks Related to our Drug Development
Business



We have not yet commercialized any
products or technologies, and we may never become profitable.



We have not yet commercialized
any products or technologies, and we may never be able to do so. We do not know when or if we will complete any of our product
development efforts, obtain regulatory approval for any product candidates incorporating our technologies or successfully commercialize
any approved products. Even if we are successful in developing products that are approved for marketing, we will not be successful
unless these products gain market acceptance for appropriate indications at favorable reimbursement rates. The degree of market
acceptance of these products will depend on a number of factors, including:



| | ● | the
                                         timing of regulatory approvals in the countries, and for the uses, we seek;
| | - | ------------------------------------------------------------------------------------------------------------------------



| | ● | the
                                         competitive environment;
| | - | ---------------------------------------------------------------------



| | ● | the
                                         establishment and demonstration in the medical community of the safety and clinical efficacy
                                         of our products and their potential advantages over existing therapeutic products;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | ● | our
                                         ability to enter into strategic agreements with pharmaceutical and biotechnology companies
                                         with strong marketing and sales capabilities;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | ● | the
                                         adequacy and success of distribution, sales and marketing efforts; and
| | - | -------------------------------------------------------------------------------------------------------------------



| | ● | the
                                         pricing and reimbursement policies of government and third-party payors, such as insurance
                                         companies, health maintenance organizations and other plan administrators.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Physicians, patients,
third-party payors or the medical community in general may be unwilling to accept, utilize or recommend, and in the case of third-party
payors, cover any of our products or products incorporating our technologies. As a result, we are unable to predict the extent
of future losses or the time required to achieve profitability, if at all. Even if we successfully develop one or more products
that incorporate our technologies, we may not become profitable.



If we are unable to successfully
complete our clinical trial programs for our drug candidates, or if such clinical trials take longer to complete than we project,
our ability to execute our current business strategy will be adversely affected.



Whether or not and
how quickly we complete clinical trials depends in part upon the rate at which we are able to engage clinical trial sites and,
thereafter, the rate of enrollment of patients, and the rate at which we are able to collect, clean, lock and analyze the clinical
trial database. Patient enrollment is a function of many factors, including the size of the patient population, the proximity
of patients to clinical sites, the eligibility criteria for the study, the existence of competitive clinical trials, and whether
existing or new drugs are approved for the indication we are studying. We are aware that other companies are planning clinical
trials that will seek to enroll patients with the same diseases and stages as we are studying. If we experience delays in identifying
and contracting with sites and/or in patient enrollment in our clinical trial programs, we may incur additional costs and delays
in our development programs, and may not be able to complete our clinical trials on a cost-effective or timely basis.



9







We have limited experience in conducting
and managing clinical trials necessary to obtain regulatory approvals. If our drug candidates and technologies do not receive
the necessary regulatory approvals, we will be unable to commercialize our products.



We have not received,
and may never receive, regulatory approval for commercial sale for hCDR1. We currently do not have any drug candidates pending
approval with the Food and Drug Administration, or FDA or with regulatory authorities of other countries. We will need to conduct
significant additional research and human testing before we can apply for product approval with the FDA or with regulatory authorities
of other countries. In order to obtain FDA approval to market a new drug product, we or our potential partners must demonstrate
proof of safety and efficacy in humans. To meet these requirements, we and/or our potential partners will have to conduct “adequate
and well-controlled” clinical trials.



Clinical development
is a long, expensive and uncertain process. Clinical trials are very difficult to design and implement, in part because they are
subject to rigorous regulatory requirements. Satisfaction of regulatory requirements typically depends on the nature, complexity
and novelty of the product and requires the expenditure of substantial resources. The commencement and rate of completion of clinical
trials may be delayed by many factors, including:



| | · | obtaining
                                         regulatory approvals to commence a clinical trial;
| | - | -----------------------------------------------------------------------------------------------------



| | · | reaching
                                         agreement on acceptable terms with prospective CROs, and trial sites, the terms of which
                                         can be subject to extensive negotiation and may vary significantly among different CROs
                                         and trial sites;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | slower
                                         than expected rates of patient recruitment due to narrow screening requirements and competing
                                         clinical studies;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | the
                                         inability of patients to meet protocol requirements imposed by the FDA or other regulatory
                                         authorities;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | the
                                         need or desire to modify our manufacturing process;
| | - | ------------------------------------------------------------------------------------------------



| | · | delays,
                                         suspension, or termination of the clinical trials due to the institutional review board
                                         responsible for overseeing the study at a particular study site; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | governmental
                                         or regulatory delays or “clinical holds” requiring suspension or termination
                                         of the trials.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Following the completion
of a clinical trial, regulators may not interpret data obtained from pre-clinical and clinical tests of our drug candidates and
technologies the same way that we do, which could delay, limit or prevent our receipt of regulatory approval. In addition, the
designs of any clinical trials may not be reviewed or approved by the FDA prior to their commencement, and consequently the FDA
could determine that the parameters of any studies are insufficient to demonstrate proof of safety and efficacy in humans. Failure
to approve a completed study could also result from several other factors, including unforeseen safety issues, the determination
of dosing, low rates of patient recruitment, the inability to monitor patients adequately during or after treatment, the inability
or unwillingness of medical investigators to follow our clinical protocols, and the lack of effectiveness of the trials.



Additionally, the
regulators could determine that the studies indicate the drugs may have serious side effects. In the U.S., this is called a black
box warning, which is a type of warning that appears on the package insert for prescription drugs indicating that they may cause
serious adverse effects. A black box warning means that medical studies indicate that the drug carries a significant risk of serious
or even life-threatening adverse effects.



10







If the clinical trials
fail to satisfy the criteria required, the FDA and/or other regulatory agencies/authorities may request additional information,
including additional clinical data, before approval of marketing a product. Negative or inconclusive results or medical events
during a clinical trial could also cause us to delay or terminate our development efforts. If we experience delays in the testing
or approval process, or if we need to perform more or larger clinical trials than originally planned, our financial results and
the commercial prospects for our drug candidates and technologies may be materially impaired.



Clinical trials have
a high risk of failure. A number of companies in the pharmaceutical industry, including biotechnology companies, have suffered
significant setbacks in clinical trials, even after achieving promising results in earlier trials. It may take us many years to
complete the testing of our drug candidates and technologies, and failure can occur at any stage of this process.



Even if regulatory
approval is obtained, our products and their manufacture will be subject to continual review, and there can be no assurance that
such approval will not be subsequently withdrawn or restricted. Changes in applicable legislation or regulatory policies, or discovery
of problems with the products or their manufacture, may result in the imposition of regulatory restrictions, including withdrawal
of the product from the market, or result in increased costs to us.



If third parties on which we will
have to rely for clinical trials do not perform as contractually required or as we expect, we may not be able to obtain regulatory
approval for or commercialize our products.



We will have to depend
on independent clinical investigators, and other third-party service providers to conduct the clinical trials of our drug candidates
and technologies. We also may, from time to time, engage a clinical research organization for the execution of our clinical trials.
We will rely heavily on these parties for successful execution of our clinical trials, but we will not control many aspects of
their activities. Nonetheless, we are responsible for confirming that each of our clinical trials is conducted in accordance with
the general investigational plan and protocol. Our reliance on these third parties that we do not control does not relieve us
of our responsibility to comply with the regulations and standards of the FDA and/or other foreign regulatory agencies/authorities
relating to good clinical practices. Third parties may not complete activities on schedule or may not conduct our clinical trials
in accordance with regulatory requirements or the applicable trial’s plans and protocols. The failure of these third parties
to carry out their obligations could delay or prevent the development, approval and commercialization of our products, or could
result in enforcement action against us.



Our international clinical trials
may be delayed or otherwise adversely impacted by social, political and economic factors affecting the particular foreign country.



We may conduct clinical
trials in different geographical locations. Our ability to successfully initiate, enroll and complete a clinical trial in any
of these countries, or in any future foreign country in which we may initiate a clinical trial, are subject to numerous risks
unique to conducting business in foreign countries, including:



| | · | difficulty
                                         in establishing or managing relationships with clinical research organizations and physicians;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------



| | · | different
                                         standards for the conduct of clinical trials and/or health care reimbursement;
| | - | ---------------------------------------------------------------------------------------------------------------------------------



| | · | our
                                         inability to locate qualified local consultants, physicians, and partners;
| | - | -----------------------------------------------------------------------------------------------------------------------



| | · | the
                                         potential burden of complying with a variety of foreign laws, medical standards and regulatory
                                         requirements, including the regulation of pharmaceutical products and treatment; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | general
                                         geopolitical risks, such as political and economic instability, and changes in diplomatic
                                         and trade relations.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



11







Any disruption to
our international clinical trial program could significantly delay our product development efforts.



If the clinical data related to
our drug candidates and technologies do not confirm positive early clinical data or preclinical data, our corporate strategy and
financial results will be adversely impacted.



Our drug candidates
and technologies are in clinical stages. Specifically, our product candidate, hCDR1 is planned for and/or ready for advanced clinical
studies. In order for our candidates to proceed to later stage clinical testing or marketing approval, they must show positive
clinical results.



Preliminary results
of pre-clinical, clinical observations or clinical tests do not necessarily predict the final results, and promising results in
pre-clinical, clinical observations or early clinical testing might not be obtained in later clinical trials. Drug candidates
in the later stages of clinical development may fail to show the desired safety and efficacy traits despite having progressed
through initial clinical testing. Any negative results from future tests may prevent us from proceeding to later stage clinical
testing or marketing approval, which would materially impact our corporate strategy, and our financial results may be adversely
impacted.



If we do not establish or maintain
drug development and marketing arrangements with third parties, we may be unable to commercialize our drug candidates and technologies
into products.



We do not possess
all of the capabilities to fully commercialize our drug candidates and technologies on our own. From time to time, we may need
to contract with third parties to:



| | · | assist
                                         us in developing, testing and obtaining regulatory approval for some of our compounds
                                         and technologies;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | manufacture
                                         our drug candidates; and
| | - | -----------------------------------------------------------------------------



| | · | market
                                         and distribute our products.
| | - | ----------------------------------------------------------------------------



We can provide no
assurance that we will be able to successfully enter into agreements with such third-parties on terms that are acceptable to us.
If we are unable to successfully contract with third parties for these services when needed, or if existing arrangements for these
services are terminated, whether or not through our actions, or if such third parties do not fully perform under these arrangements,
we may have to delay, scale back or end one or more of our drug development programs or seek to develop or commercialize our drug
candidates and technologies independently, which could result in delays. Further, such failure could result in the termination
of license rights to one or more of our drug candidates and technologies. Moreover, if these development or marketing agreements
take the form of a partnership or strategic alliance, such arrangements may provide our collaborators with significant discretion
in determining the efforts and resources that they will apply to the development and commercialization of our products. Accordingly,
to the extent that we rely on third parties to research, develop or commercialize our products, we may be unable to control whether
such products will be scientifically or commercially successful.



Even if we or our collaborative/strategic
partners or potential collaborative/strategic partners receive approval to market our drug candidates, if our products fail to
achieve market acceptance, we will never record meaningful revenues.



Even if our products
are approved for sale, they may not be commercially successful in the marketplace. Market acceptance of our product candidates
will depend on a number of factors, including:



| | · | perceptions
                                         by members of the health care community, including physicians, of the safety and efficacy
                                         of our products;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | the
                                         rates of adoption of our products by medical practitioners and the target populations
                                         for our products;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



12







| | · | the
                                         potential advantages that our products offer over existing treatment methods or other
                                         products that may be developed;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | the
                                         cost-effectiveness of our products relative to competing products including potential
                                         generic competition;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | the
                                         availability of government or third-party pay or reimbursement for our products;
| | - | -----------------------------------------------------------------------------------------------------------------------------



| | · | the
                                         side effects of our products which may lead to unfavorable publicity concerning our products
                                         or similar products; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | the
                                         effectiveness of our and/or our partners’ sales, marketing and distribution efforts.
| | - | ---------------------------------------------------------------------------------------------------------------------------------



Specifically, hCDR1,
if successfully developed and commercially launched for the treatment of systemic lupus erythematosus, or SLE, and Sjogren’s
syndrome, or SS, on the one hand, will compete with both currently marketed and new products marketed by other companies. Health
care providers may not accept or utilize any of our product candidates. Physicians and other prescribers may not be inclined to
prescribe our products unless our products bring clear and demonstrable advantages over other products currently marketed for
the same indications. Because we expect sales of our products to generate substantially all of our revenues in the long-term,
the failure of our products to find market acceptance would harm our business and could require us to seek additional financing
or other sources of revenue.



If the third parties upon whom we
rely to manufacture our products do not successfully manufacture our products, our business will be harmed.



We do not currently
have the ability to manufacture the compounds that we need to conduct our clinical trials and, therefore, rely upon, and intend
to continue to rely upon, certain manufacturers to produce and supply our drug candidates for use in clinical trials and for future
sales. In order to commercialize our products, such products will need to be manufactured in commercial quantities while adhering
to all regulatory and other local requirements, all at an acceptable cost. We may not be able to enter into future third-party
contract manufacturing agreements on acceptable terms, if at all.



If our contract
manufacturers or other third parties fail to deliver our product candidates for clinical use on a timely basis, with sufficient
quality, and at commercially reasonable prices, and we fail to find replacement manufacturers or sources, we may be required to
delay or suspend clinical trials or otherwise discontinue development and production of our drug candidates.



Our contract manufacturers
will be required to produce our clinical drug candidates under strict compliance with current Good Manufacturing Practices, or
cGMP, in order to meet acceptable regulatory standards for our clinical trials. If such standards change, the ability of contract
manufacturers to produce our drug candidates on the schedule we require for our clinical trials may be affected. In addition,
contract manufacturers may not perform their obligations under their agreements with us or may discontinue their business before
the time required by us to successfully produce and market our drug candidates. Any difficulties or delays in our contractors’
manufacturing and supply of drug candidates could increase our costs, cause us to lose revenue or make us postpone or cancel clinical
trials.



In addition, our
contract manufacturers will be subject to ongoing periodic, unannounced inspections by the FDA and corresponding foreign or local
governmental agencies to ensure strict compliance with, among other things, cGMP, in addition to other governmental regulations
and corresponding foreign standards. We will not have control over, other than by contract, third-party manufacturers’ compliance
with these regulations and standards. No assurance can be given that our third-party manufacturers will comply with these regulations
or other regulatory requirements now or in the future.



13







In the event that
we are unable to obtain or retain third-party manufacturers, we will not be able to commercialize our products as planned. If
third-party manufacturers fail to deliver the required quantities of our products on a timely basis and at commercially reasonable
prices, our ability to develop and deliver products on a timely and competitive basis may be adversely impacted and our business,
financial condition or results of operations will be materially harmed.



If our competitors develop and market
products that are less expensive, more effective or safer than our products, our revenues and results may be harmed and our commercial
opportunities may be reduced or eliminated.



The pharmaceutical
industry is highly competitive. Our commercial opportunities may be reduced or eliminated if our competitors develop and market
products that are less expensive, more effective or safer than our products. Other companies have drug candidates in various stages
of pre-clinical or clinical development to treat diseases for which we are also seeking to discover and develop drug candidates.
Some of these potential competing drugs are already commercialized or are further advanced in development than our drug candidates
and may be commercialized earlier. Even if we are successful in developing safe, effective drugs, our products may not compete
successfully with products produced by our competitors, who may be able to market their drugs more effectively.



Our competitors include
pharmaceutical companies and biotechnology companies, as well as universities and public and private research institutions. In
addition, companies that are active in different but related fields present substantial competition for us. Many of our competitors
have significantly greater capital resources, larger research and development staffs and facilities and greater experience in
drug development, regulation, manufacturing and marketing than we do. These organizations also compete with us to recruit qualified
personnel, attract partners for joint ventures or other collaborations, and license technologies that are competitive with ours.
As a result, our competitors may be able to more easily develop products that could render our technologies or our drug candidates
obsolete or noncompetitive. Development of new drugs, medical technologies and competitive medical devices may damage the demand
for our products without any certainty that we will successfully and effectively contend with those competitors.



If we lose our key personnel or
are unable to attract and retain additional personnel, our business could be harmed.



As of March 30, 2017,
we have 2 full-time employees, including our officers, and 5 part-time service providers. To successfully develop our drug candidates
and technologies, we must be able to attract and retain highly skilled personnel, including consultants and employees. The retention
of their services cannot be guaranteed. Our failure to retain and/or recruit such professionals might impair our performance and
materially affect our technological and product development capabilities and our product marketing ability.



Any acquisitions or in-licensing
transactions we make may dilute your equity or require a significant amount of our available cash and may not be scientifically
or commercially successful.



As part of our business
strategy, we may effect acquisitions or in-licensing transactions to obtain additional businesses, products, technologies, capabilities
and personnel. If we complete one or more such transactions in which the consideration includes our ordinary shares or other securities,
your equity may be significantly diluted. If we complete one or more such transactions in which the consideration includes cash,
we may be required to use a substantial portion of our available cash.



Acquisitions and in-licensing
transactions also involve a number of operational risks, including:



| | · | difficulty
                                         and expense of assimilating the operations, technology or personnel of the business;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------



| | · | our
                                         inability to attract and retain management, key personnel and other employees necessary
                                         to conduct the business;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



14







| | · | our
                                         inability to maintain relationships with key third parties, such as alliance partners,
                                         associated with the business;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | exposure
                                         to legal claims for activities of the business prior to the acquisition;
| | - | --------------------------------------------------------------------------------------------------------------------------



| | · | the
                                         diversion of our management’s attention from our other drug development businesses;
                                         and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | the
                                         potential impairment of goodwill and write-off of in-process research and development
                                         costs, adversely affecting our reported results of operations.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In addition, the basis
for completing the acquisition or in-licensing could prove to be unsuccessful as the drugs or processes involved could fail to
be scientifically or commercially viable. We may also be required to pay third parties substantial transaction fees, in the form
of cash or ordinary shares, in connection with such transactions.



If any of these risks
occur, it could have an adverse effect on both the business we acquire or in-license and our existing operations.



We face product liability risks
and may not be able to obtain adequate insurance.



The use of our drug
candidates and technologies in clinical trials, and the sale of any approved products, exposes us to liability claims. If we cannot
successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to cease clinical
trials of our drug candidates and technologies or limit commercialization of any approved products.



We believe that we
will be able to obtain sufficient product liability insurance coverage for our planned clinical trials. We intend to expand our
insurance coverage to include the commercial sale of any approved products if marketing approval is obtained; however, insurance
coverage is becoming increasingly expensive. We may not be able to maintain insurance coverage at a reasonable cost. We may not
be able to obtain additional insurance coverage that will be adequate to cover product liability risks that may arise. Regardless
of merit or eventual outcome, product liability claims may result in:



| | · | decreased
                                         demand for a product;
| | - | ------------------------------------------------------------------------



| | · | damage
                                         to our reputation;
| | - | ------------------------------------------------------------------



| | · | inability
                                         to continue to develop a drug candidate or technology;
| | - | ---------------------------------------------------------------------------------------------------------



| | · | withdrawal
                                         of clinical trial volunteers; and
| | - | -------------------------------------------------------------------------------------



| | · | loss
                                         of revenues.
| | - | ----------------------------------------------------------



Consequently, a product
liability claim or product recall may result in material losses.



Risks Related to Our Intellectual Property



Because all of our proprietary drug
candidates and technologies are licensed to us by third parties, termination of these license agreements could prevent us from
developing our drug candidates.



We do not own any
of our drug candidates and technologies. We have licensed the rights, patent or otherwise, to our drug candidates from third parties.
We have licensed hCDR1 from Yeda Research and Development Company Ltd., or Yeda. We licensed a use patent for the use of rHuEPO
from Yeda and Mor Research Applications Ltd., or Mor which we acquired from Bio-Gal Limited, or Bio-Gal.



15







These license agreements
require us to meet development or financing milestones and impose development and commercialization due diligence requirements
on us. In addition, under these agreements, we must pay royalties on sales of products resulting from licensed drugs and technologies
and pay the patent filing, prosecution and maintenance costs related to the licenses. While we have the right to defend patent
rights related to our licensed drug candidates and technologies, we are not obligated to do so. In the event that we decide to
defend our licensed patent rights, we will be obligated to cover all of the expenses associated with that effort. If we do not
meet our obligations in a timely manner, or if we otherwise breach the terms of our agreements, our licensors could terminate
the agreements, and we would lose the rights to our drug candidates and technologies. From time to time, in the ordinary course
of business, we may have disagreements with our licensors or collaborators regarding the terms of our agreements or ownership
of proprietary rights, which could lead to delays in the research, development, collaboration and commercialization of our drug
candidates, or could require or result in litigation or arbitration, which could be time-consuming and expensive.



If we are unable to adequately protect
our intellectual property, third parties may be able to use our technology, which could adversely affect our ability to compete
in the market.



Our commercial success
will depend in part on our ability and the ability of our licensors to obtain and maintain patent protection on our drug products
and technologies and successfully defend these patents and technologies against third-party challenges. As part of our business
strategy, our policy is to actively file patent applications in the U.S. and internationally to cover methods of use, new chemical
compounds, pharmaceutical compositions and dosing of the compounds and composition and improvements in each of these. Because
of the extensive time required for development, testing and regulatory review of a potential product, it is possible that before
we commercialize any of our products, any related patent may expire or remain in force for only a short period following commercialization,
thus reducing any advantage of the patent.



The patent positions
of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal and factual questions. No consistent
policy regarding the breadth of claims allowed in biotechnology patents has emerged to date. Accordingly, the patents we use may
not be sufficiently broad to prevent others from practicing our technologies or from developing competing products. Furthermore,
others may independently develop similar or alternative technologies or design around our patented technologies. The patents we
use may be challenged or invalidated or may fail to provide us with any competitive advantage.



Generally, patent
applications in the U.S. are maintained in secrecy for a period of at least 18 months. Since publication of discoveries in the
scientific or patent literature often lag behind actual discoveries, we are not certain that we were the first to make the inventions
covered by each of our pending patent applications or that we were the first to file those patent applications. We cannot predict
the breadth of claims allowed in biotechnology and pharmaceutical patents, or their enforceability. Third parties or competitors
may challenge or circumvent our patents or patent applications, if issued. If our competitors prepare and file patent applications
in the U.S. that claim compounds or technology also claimed by us, we may be required to challenge competing patent rights, which
could result in substantial cost, even if the eventual outcome is favorable to us. While we have the right to defend patent rights
related to the licensed drug candidates and technologies, we are not obligated to do so. In the event that we decide to defend
our licensed patent rights, we will be obligated to cover all of the expenses associated with that effort.



We also rely on trade
secrets to protect technology where we believe patent protection is not appropriate or obtainable. Trade secrets are difficult
to protect. While we require our employees, collaborators and consultants to enter into confidentiality agreements, this may not
be sufficient to protect our trade secrets or other proprietary information adequately. In addition, we share ownership and publication
rights to data relating to some of our drug candidates and technologies with our research collaborators and scientific advisors.
If we cannot maintain the confidentiality of this information, our ability to protect our proprietary information will be at risk.





16







Litigation or third-party claims
of intellectual property infringement could require us to spend substantial time, money and other resources defending such claims
and adversely affect our ability to develop and commercialize our products.



Third parties may
assert that we are using their proprietary technology without authorization. In addition, third parties may have or obtain patents
in the future and claim that our products infringe their patents. If we are required to defend against patent suits brought by
third parties, or if we sue third parties to protect our patent rights, we may be required to pay substantial litigation costs,
and our management’s attention may be diverted from operating our business. In addition, any legal action against our licensors
or us that seeks damages or an injunction of our commercial activities relating to the affected products could subject us to monetary
liability and require our licensors or us to obtain a license to continue to use the affected technologies. We cannot predict
whether our licensors or we would prevail in any of these types of actions or that any required license would be made available
on commercially acceptable terms, if at all. In addition, any legal action against us that seeks damages or an injunction relating
to the affected activities could subject us to monetary liability and/or require us to discontinue the affected technologies or
obtain a license to continue use thereof.



In addition, there
can be no assurance that our patents or patent applications or those licensed to us will not become involved in opposition or
revocation proceedings instituted by third parties. If such proceedings were initiated against one or more of our patents, or
those licensed to us, the defense of such rights could involve substantial costs and the outcome could not be predicted.



Competitors or potential
competitors may have filed applications for, may have been granted patents for, or may obtain additional patents and proprietary
rights that may relate to compounds or technologies competitive with ours. If patents are granted to other parties that contain
claims having a scope that is interpreted to cover any of our products (including the manufacture thereof), there can be no assurance
that we will be able to obtain licenses to such patents at reasonable cost, if at all, or be able to develop or obtain alternative
technology.



Risks Related to our ADSs



We will need additional capital
in the future. If additional capital is not available, we may not be able to continue to operate our business pursuant to our
business plan or we may have to discontinue our operations entirely.



Our net cash used
in operating activities for the year ended December 31, 2016 was $ 1,732 thousand. If we continue to use cash at this rate we
will need significant additional financing, which we may seek to raise through, among other things, public and private equity
offerings and debt financing. Any equity financings will likely be dilutive to existing stockholders, and any debt financings
will likely involve covenants restricting our business activities. Additional financing may not be available on acceptable terms,
or at all.



The ADSs are traded in small volumes,
limiting ability to sell ADSs that represent ordinary shares at a desirable price, if at all.



The trading volume
of the ADSs has historically been low. Even if the trading volume of the ADSs increases, we can give no assurance that it will
be maintained or will result in a desirable stock price. As a result of this low trading volume, it may be difficult to identify
buyers to whom shareholders can sell ADSs in desirable volume and shareholders may be unable to sell your ADSs at an established
market price, at a price that is favorable, or at all. A low volume market also limits shareholders’ ability to sell large
blocks of the ADSs at a desirable or stable price at any one time. Shareholders should be prepared to own the ADSs indefinitely.



Our stock price can be volatile,
which increases the risk of litigation and may result in a significant decline in the value of your investment.



The trading price
of the ADSs representing our ordinary shares is likely to be highly volatile and subject to wide fluctuations in price in response
to various factors, many of which are beyond our control. These factors include:



| | · | developments
                                         concerning our drug candidates;
| | - | -------------------------------------------------------------------------------------



17







| | · | announcements
                                         of technological innovations by us or our competitors;
| | - | -------------------------------------------------------------------------------------------------------------



| | · | introductions
                                         or announcements of new products by us or our competitors;
| | - | -----------------------------------------------------------------------------------------------------------------



| | · | developments
                                         in the markets of the field of activities and changes in customer attributes;
| | - | -----------------------------------------------------------------------------------------------------------------------------------



| | · | announcements
                                         by us of significant acquisitions, in/out license transactions, strategic partnerships,
                                         joint ventures or capital commitments;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | changes
                                         in financial estimates by securities analysts;
| | - | -----------------------------------------------------------------------------------------------



| | · | actual
                                         or anticipated variations in interim operating results and near-term working capital
                                         as well as failure to raise required funds for the continued development and operations
                                         of the company;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | expiration
                                         or termination of licenses, patents, research contracts or other collaboration agreements;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------



| | · | conditions
                                         or trends in the regulatory climate and the biotechnology and pharmaceutical industries;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------



| | · | failure
                                         to obtain orphan drug designation status for the relevant drug candidates in the relevant
                                         regions;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | increase
                                         in costs and lengthy timing of the clinical trials according to regulatory requirements;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------



| | · | failure
                                         to increase awareness of our products;
| | - | ---------------------------------------------------------------------------------------



| | · | changes
                                         in reimbursement policy by governments or insurers in markets we operate or may operate
                                         in the future;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | any
                                         changes in the regulatory environment relating to our drug candidates;
| | - | -------------------------------------------------------------------------------------------------------------------



| | · | changes
                                         in the market valuations of similar companies; and
| | - | ---------------------------------------------------------------------------------------------------



| | · | additions
                                         or departures of key personnel.
| | - | ----------------------------------------------------------------------------------



In addition, equity
markets in general, and the market for biotechnology and life sciences companies in particular, have experienced extreme price
and volume fluctuations that have often been unrelated or disproportionate to the operating performance of companies traded in
those markets. These broad market and industry factors may materially affect the market price of the ADSs, regardless of our development
and operating performance. In the past, following periods of volatility in the market price of a company’s securities, securities
class-action litigation has often been instituted against that company. Such litigation, if instituted against us, could cause
us to incur substantial costs to defend such claims and divert management’s attention and resources even if we prevail in
the litigation, all of which could seriously harm our business.



Future issuances or sales of the
ADSs could depress the market for the ADSs.



Future issuances of
a substantial number of the ADSs, or the perception by the market that those issuances could occur, could cause the market price
of our ordinary shares or ADSs to decline or could make it more difficult for us to raise funds through the sale of equity in
the future. Also, if we make one or more significant acquisitions in which the consideration includes ordinary shares or other
securities, your portion of shareholders’ equity in us may be significantly diluted.



18







Concentration of ownership of our
ordinary shares among our principal stockholders may prevent new investors from influencing significant corporate decisions.



There are two shareholders
(Mr. Alexander Rabinovitch, and Mr. David Bassa), who each beneficially hold more than 5% of our outstanding ordinary shares (approximately
26% cumulative, as of March 30, 2017). As a result, these persons, either acting alone or together, may have the ability to significantly
influence the outcome of all matters submitted to our shareholders for approval, including the election and removal of directors
and any merger, consolidation or sale of all or substantially all of our assets. In addition, such persons, acting alone or together,
may have the ability to effectively control our management and affairs. Accordingly, this concentration of ownership may depress
the market price of our ordinary shares or ADSs.



Notwithstanding the
aforesaid, in connection with Section 239 of the Israeli Companies Law that focuses on the number of votes required to appoint
external directors, and in connection with Section 121(c) of the Israeli Companies Law that focuses on the number of votes required
to authorize the Chairman of the Board in a company to act also as the Chief Executive Officer of such company, we will deem these
three shareholders as controlling shareholders, for as long as such individuals are interested parties. In addition, any contractual
arrangement as detailed in Section 270 (4) of the Israeli Companies Law with any of these three shareholders and/or their relatives
will be presented for approval in accordance with the provisions of Section 275 of the Israeli Companies Law. In all of these
situations, we will consider any of these three parties, who are not part of the transaction presented for approval, as individual
interested parties in such transaction so that their vote will not be included in the quorum comprising a majority (50%) of the
votes who are not interested parties in such transaction.



Our ordinary shares and ADSs trade
on two different markets, and this may result in price variations and regulatory compliance issues.



ADSs representing
our ordinary shares are listed for trading on the Nasdaq Capital Market, or Nasdaq, and our ordinary shares are traded on the
TASE. Trading in our securities on these markets is made in different currencies and at different times, including as a result
of different time zones, different trading days and different public holidays in the U.S. and Israel. Consequently, the effective
trading prices of our securities on these two markets may differ. Any decrease in the trading price of our securities on one of
these markets could cause a decrease in the trading price of our securities on the other market.



Holders of our ordinary shares or
ADSs who are U.S. citizens or residents may be required to pay additional income taxes.



There is a risk that
we will be classified as a passive foreign investment company, or PFIC, for certain tax years. If we are classified as a PFIC,
a U.S. holder of our ordinary shares or ADSs representing our ordinary shares will be subject to special federal income tax rules
that determine the amount of federal income tax imposed on income derived with respect to the PFIC shares. We will be a PFIC if
either 75% or more of our gross income in a tax year is passive income or the average percentage of our assets (by value) that
produce or are held for the production of passive income in a tax year is at least 50%. The risk that we will be classified as
a PFIC arises because cash balances, even if held as working capital, are considered to be assets that produce passive income.
Therefore, any determination of PFIC status will depend upon the sources of our income and the relative values of passive and
non-passive assets, including goodwill. A determination as to a corporation’s status as a PFIC must be made annually. We
believe we may be a PFIC during 2015 and although we have not determined whether we will be a PFIC in 2016, or in any subsequent
year, our operating results for any such years may cause us to be a PFIC. Although we may not be a PFIC in any one year, the PFIC
taint remains with respect to those years in which we were or are a PFIC and the special PFIC taxation regime will continue to
apply.



In view of the complexity
of the issues regarding our treatment as a PFIC, U.S. shareholders are urged to consult their own tax advisors for guidance as
to our status as a PFIC.



19







As a foreign private issuer, we
are permitted to follow certain home country corporate governance practices instead of applicable SEC and Nasdaq requirements,
which may result in less protection than is accorded to investors under rules applicable to domestic issuers.



As a foreign private
issuer, we will be permitted to follow certain home country corporate governance practices instead of those otherwise required
under Nasdaq for domestic issuers. For instance, we may follow home country practice in Israel with regard to, among other things,
composition and function of the audit committee and other committees of our Board of Directors and certain general corporate governance
matters. In addition, in certain instances we will follow our home country law, instead of the Nasdaq, which requires that we
obtain shareholder approval for certain dilutive events, such as an issuance that will result in a change of control of the company,
certain transactions other than a public offering involving issuances of a 20% or more interest in the company and certain acquisitions
of the stock or assets of another company. We comply with the director independence requirements of the Nasdaq, including the
requirement that a majority of the Board of Directors be independent. Following our home country governance practices as opposed
to the requirements that would otherwise apply to a United States company listed on Nasdaq may provide less protection than is
accorded to investors under Nasdaq applicable to domestic issuers.



In addition, as a
foreign private issuer, we are exempt from the rules and regulations under the U.S. Securities Exchange Act of 1934, as amended,
or the Exchange Act, related to the furnishing and content of proxy statements, and our officers, directors and principal shareholders
are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition,
we are not required under the Exchange Act to file annual, quarterly and current reports and financial statements with the SEC
as frequently or as promptly as domestic companies whose securities are registered under the Exchange Act.



ADS holders are not shareholders
and do not have shareholder rights.



The Bank of New York
Mellon, as depositary, executes and delivers the ADSs on our behalf. Each ADS is a certificate evidencing a specific number of
ADSs. The ADS holders will not be treated as shareholders and do not have the rights of shareholders. The depositary will be the
holder of the shares underlying the ADSs. Holders of the ADSs will have ADS holder rights. A deposit agreement among us, the depositary
and the ADS holders, and the beneficial owners of ADSs, sets out ADS holder rights as well as the rights and obligations of the
depositary. New York law governs the deposit agreement and the ADSs. Our shareholders have shareholder rights prescribed by Israeli
law. Israeli law and our Articles of Association, or Articles, govern such shareholder rights. The ADS holders do not have the
same voting rights as our shareholders. Shareholders are entitled to our notices of general meetings and to attend and vote at
our general meetings of shareholders. At a general meeting, every shareholder present (in person or by proxy, attorney or representative)
and entitled to vote has one vote on a show of hands. Every shareholder present (in person or by proxy, attorney or representative)
and entitled to vote has one vote per fully paid ordinary share on a poll. This is subject to any other rights or restrictions
which may be attached to any shares. The ADS holders may instruct the depositary to vote the ordinary shares underlying their
ADSs, but only if we ask the depositary to ask for their instructions. If we do not ask the depositary to ask for their instructions,
the ADS holders are not entitled to receive our notices of general meeting or instruct the depositary how to vote. The ADS holders
will not be entitled to attend and vote at a general meeting unless they withdraw the ordinary shares from the depository. However,
the ADS holders may not know about the meeting far enough in advance to withdraw the ordinary shares. If we ask for the ADS holders’
instructions, the depositary will notify the ADS holders of the upcoming vote and arrange to deliver our voting materials and
form of notice to them. The depositary will try, as far as is practical, subject to the provisions of the deposit agreement, to
vote the shares as the ADS holders instruct. The depositary will not vote or attempt to exercise the right to vote other than
in accordance with the instructions of the ADS holders. We cannot assure the ADS holders that they will receive the voting materials
in time to ensure that they can instruct the depositary to vote their shares. In addition, there may be other circumstances in
which the ADS holders may not be able to exercise voting rights.



20







The ADS holders do
not have the same rights to receive dividends or other distributions as our shareholders. Subject to any special rights or restrictions
attached to a share, the directors may determine that a dividend will be payable on a share and fix the amount, the time for payment
and the method for payment (although we have never declared or paid any cash dividends on our ordinary stock and we do not anticipate
paying any cash dividends in the foreseeable future). Dividends and other distributions payable to our shareholders with respect
to our ordinary shares generally will be payable directly to them. Any dividends or distributions payable with respect to ordinary
shares will be paid to the depositary, which has agreed to pay to the ADS holders the cash dividends or other distributions it
or the custodian receives on shares or other deposited securities, after deducting its fees and expenses. The ADS holders will
receive these distributions in proportion to the number of shares their ADSs represent. In addition, there may be certain circumstances
in which the depositary may not pay to the ADS holders amounts distributed by us as a dividend or distribution.



There are circumstances where it
may be unlawful or impractical to make distributions to the holders of the ADSs.



The deposit agreement
with the depositary allows the depositary to distribute foreign currency only to those ADS holders to whom it is possible to do
so. If a distribution is payable by us in New Israeli Shekels, the depositary will hold the foreign currency it cannot convert
for the account of the ADS holders who have not been paid. It will not invest the foreign currency and it will not be liable for
any interest. If the exchange rates fluctuate during a time when the depositary cannot convert the foreign currency, the ADS holders
may lose some of the value of the distribution.



The depositary is
not responsible if it decides that it is unlawful or impractical to make a distribution available to any ADS holders. This means
that the ADS holders may not receive the distributions we make on our shares or any value for them if it is illegal or impractical
for the depository to make such distributions available to them.



Shareholders’ percentage ownership
in us may be diluted by future issuances of share capital, which could reduce their influence over matters on which shareholders
vote.



Issuances of additional
shares would reduce shareholders’ influence over matters on which our shareholders vote.



We may fail to remain in compliance
with the continued listing standards of the Nasdaq Capital Market and a delisting of ourADSs could make it more
difficult for investors to sell their shares



Our ADSs were approved
for listing on Nasdaq in July 2013 where they continue to be listed. The listing standards of the Nasdaq provide that a company,
in order to qualify for continued listing, must maintain a minimum share price of $1.00 and satisfy standards relative to minimum
shareholders’ equity, minimum market value of publicly held shares and various additional requirements.



On November 8, 2016,
Nasdaq informed the Company that it had failed to maintain a minimum bid price of $1 per share for more than 30 consecutive business
days. On February 28, 2017, the Company received notification from Nasdaq that it had regained compliance with this requirement.
However, there is no guarantee that we will be able to maintain compliance with the minimum share price requirement or other applicable
requirements.



If we fail to comply
with Nasdaq’s continued listing standards, we may be delisted and our ADSs will trade, if at all, only on the over-the-counter
market, such as the OTC Bulletin Board or OTCQX market, and then only if one or more registered broker-dealer market makers comply
with quotation requirements.  In addition, delisting of our ADSs could depress the price of our ADSs, substantially
limit liquidity of our ADSs and materially adversely affect our ability to raise capital on terms acceptable to us, or at all.



21







Finally, delisting
of our ADSs would likely result in our ADSs becoming a “penny stock” under the Securities Exchange Act.  The
principal result or effect of being designated a “penny stock” is that securities broker-dealers cannot recommend
the shares but must trade it on an unsolicited basis. Penny stock rules require a broker-dealer, prior to a transaction in a penny
stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document prepared by the SEC, which specifies
information about penny stocks and the nature and significance of risks of the penny stock market. A broker-dealer must also provide
the customer with bid and offer quotations for the penny stock, the compensation of the broker-dealer and sales person in the
transaction, and monthly account statements indicating the market value of each penny stock held in the customer’s account.
In addition, the penny stock rules require that, prior to a transaction in a penny stock not otherwise exempt from those rules;
the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and
receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing
the trading activity in the secondary market for shares that become subject to those penny stock rules. Under such circumstances,
shareholders may find it more difficult to sell, or to obtain accurate quotations, for our ADSs, and our ADSs would become substantially
less attractive to certain purchasers such as financial institutions, hedge funds and other similar investors.



Risks Relating to Operations in Israel



Conditions in the Middle East and
in Israel may harm our operations.



Our head executive
office, our research and development facilities, as well as some of our planned clinical sites are or will be located in Israel.
Our officers and most of our directors are residents of Israel. Accordingly, political, economic and military conditions in Israel
and the surrounding region may directly affect our business and operations. Since the establishment of the State of Israel in
1948, a number of armed conflicts have taken place between Israel and its neighboring countries. Any hostilities involving Israel
or the interruption or curtailment of trade between Israel and its trading partners could adversely affect our operations and
results of operations. In recent years, the hostilities involved missile strikes against civilian targets in various parts of
Israel, including areas in which our employees and some of our consultants are located, and negatively affected business conditions
in Israel. Our offices, located in Raanana, Israel, are within the range of the missiles and rockets that have been fired sporadically
at Israeli cities and towns from Gaza and South Lebanon since 2006, with escalations in violence during which there were a substantially
larger number of rocket and missile attacks aimed at Israel. In addition, since February 2011, Egypt has experienced political
turbulence and an increase in terrorist activity in the Sinai Peninsula. Such political turbulence and violence may damage peaceful
and diplomatic relations between Israel and Egypt, and could affect the region as a whole. Similar civil unrest and political
turbulence has occurred in other countries in the region, including Syria, Lebanon and Jordan which share common borders with
Israel, and is affecting the political stability of those countries. This instability and any outside intervention may lead to
deterioration of the political and economic relationships that exist between the State of Israel and some of these countries,
and may have the potential for causing additional conflicts in the region. In addition, Iran has threatened to attack Israel and
is widely believed to be developing nuclear weapons. Iran is also believed to have a strong influence among extremist groups in
the region, such as Hamas in Gaza, Hezbollah in Lebanon, and various rebel militia groups in Syria. Additionally, a violent jihadist
group named Islamic State of Iraq and Levant (IS or ISIL or ISIS) is involved in hostilities in Iraq, Syria and other countries
and has been growing in influence. Although ISIL’s activities have not directly affected the political and economic conditions
in Israel, ISIL’s stated purpose is to take control of the Middle East, including Israel. Since September 2015, there has
been an increase in terrorist attacks on Israeli civilians including shootings, stabbings and car rammings which has impacted
the general feeling of personal safety in the country. These situations may potentially escalate in the future to more violent
events which may affect Israel and us. Any armed conflicts, terrorist activities or political instability in the region could
adversely affect business conditions, could harm our results of operations and could make it more difficult for us to raise capital.
Parties with whom we do business may decline to travel to Israel during periods of heightened unrest or tension, forcing us to
make alternative arrangements when necessary in order to meet our business partners face to face. In addition, the political and
security situation in Israel may result in parties with whom we have agreements involving performance in Israel claiming that
they are not obligated to perform their commitments under those agreements pursuant to force majeure provisions in such agreements.
Further, in the past, the State of Israel and Israeli companies have been subjected to economic boycotts. Several countries still
restrict business with the State of Israel and with Israeli companies. These restrictive laws and policies may have an adverse
impact on our operating results, financial condition or the expansion of our business.



22







Our commercial insurance
does not cover losses that may occur as a result of events associated with the security situation in the Middle East. Although
the Israeli government currently covers the reinstatement value of direct damages that are caused by terrorist attacks or acts
of war, we cannot assure you that this government coverage will be maintained. Any losses or damages incurred by us could have
a material adverse effect on our business. Any armed conflicts or political instability in the region would likely negatively
affect business conditions and could harm our results of operations.



Further, the State
of Israel and Israeli companies have been subjected to an economic boycott. Several countries still restrict business with the
State of Israel and with Israeli companies. These restrictive laws and policies may have an adverse impact on our operating results,
financial condition or the expansion of our business.



Our results of operations may be
adversely affected by inflation and foreign currency fluctuations.



We hold most of our
cash, cash equivalents and bank deposits in U.S. dollars. As we are located in Israel, a significant portion of our expenses are
in New Israeli Shekels, or NIS, mainly due to payment to Israeli employees and suppliers. As a result, we could be exposed to
the risk that the U.S. dollar will be devalued against the NIS or other currencies, and consequentially our financial results
could be harmed. To protect against currency fluctuations we may decide to hold a significant portion of our cash, cash equivalents,
bank deposits and marketable securities in NIS, as well as to enter into currency hedging transactions. These measures, however,
may not adequately protect us from the adverse effects of inflation in Israel. In addition, we are exposed to the risk that the
rate of inflation in Israel will exceed the rate of devaluation of the New Israeli Shekel in relation to the U.S. dollar or that
the timing of any devaluation may lag behind inflation in Israel.



Provisions of Israeli law may delay,
prevent or otherwise impede a merger with, or an acquisition of, our company, which could prevent a change of control, even when
the terms of such a transaction are favorable to us and our shareholders.



Israeli corporate
law regulates mergers, requires tender offers for acquisitions of shares above specified thresholds, requires special approvals
for transactions involving directors, officers or significant shareholders and regulates other matters that may be relevant to
these types of transactions. For example, a merger may not be consummated unless at least 50 days have passed from the date that
a merger proposal was filed by each merging company with the Israel Registrar of Companies and at least 30 days from the date
that the shareholders of both merging companies approved the merger. In addition, the holder of a majority of each class of securities
of the target company must approve a merger. Moreover, a full tender offer can only be completed if the acquirer receives at least
95% of the issued share capital (provided that a majority of the offerees that do not have a personal interest in such tender
offer shall have approved the tender offer, except that if the total votes to reject the tender offer represent less than 2% of
the company’s issued and outstanding share capital, in the aggregate, approval by a majority of the offerees that do not
have a personal interest in such tender offer is not required to complete the tender offer), and the shareholders, including those
who indicated their acceptance of the tender offer, may, at any time within six months following the completion of the tender
offer, petition the court to alter the consideration for the acquisition (unless the acquirer stipulated in the tender offer that
a shareholder that accepts the offer may not seek appraisal rights).



Furthermore, Israeli
tax considerations may make potential transactions unappealing to us or to those of our shareholders whose country of residence
does not have a tax treaty with Israel exempting such shareholders from Israeli tax. For example, Israeli tax law does not recognize
tax-free share exchanges to the same extent as U.S. tax law. With respect to mergers, Israeli tax law allows for tax deferral
in certain circumstances but makes the deferral contingent on the fulfillment of numerous conditions, including a holding period
of two years from the date of the transaction during which sales and dispositions of shares of the participating companies are
restricted. Moreover, with respect to certain share swap transactions, the tax deferral is limited in time, and when such time
expires, the tax becomes payable even if no actual disposition of the shares has occurred.



These and other similar
provisions could delay, prevent or impede an acquisition of us or our merger with another company, even if such an acquisition
or merger would be beneficial to us or to our shareholders.



23







It may be difficult to enforce a
U.S. judgment against us, our officers or our directors or to assert U.S. securities law claims in Israel.



Service of process
upon us, since we are incorporated in Israel, and upon our directors and officers, who reside outside the U.S., may be difficult
to obtain within the U.S. In addition, because substantially all of our assets and most of our directors and officers are located
outside the U.S., any judgment obtained in the U.S. against us or any of our directors and officers may not be collectible within
the U.S. There is a doubt as to the enforceability of civil liabilities under the Securities Act or the Exchange Act pursuant
to original actions instituted in Israel. Subject to particular time limitations and provided certain conditions are met, executory
judgments of a U.S. court for monetary damages in civil matters may be enforced by an Israeli court.



Under applicable U.S. and Israeli
law, we may not be able to enforce covenants not to compete and therefore may be unable to prevent our competitors from benefiting
from the expertise of some of our former employees. In addition, employees may be entitled to seek compensation for their inventions
irrespective of their agreements with us, which in turn could impact our future profitability.



We generally enter
into non-competition agreements with our employees and key consultants. These agreements prohibit our employees and key consultants,
if they cease working for us, from competing directly with us or working for our competitors or clients for a limited period of
time. We may be unable to enforce these agreements under the laws of the jurisdictions in which our employees work and it may
be difficult for us to restrict our competitors from benefitting from the expertise our former employees or consultants developed
while working for us. For example, Israeli courts have required employers seeking to enforce non-compete undertakings of a former
employee to demonstrate that the competitive activities of the former employee will harm one of a limited number of material interests
of the employer which have been recognized by the courts, such as the secrecy of a company’s confidential commercial information
or the protection of its intellectual property. If we cannot demonstrate that such interests will be harmed, we may be unable
to prevent our competitors from benefiting from the expertise of our former employees or consultants and our ability to remain
competitive may be diminished.



In addition, Chapter
8 to the Israeli Patents Law, 5727-1967, or the Patents Law, deals with inventions made in the course of an employee’s service
and during his or her term of employment, whether or not the invention is patentable, or service inventions. Section 134 of the
Patents Law, sets forth that if there is no agreement which explicitly determines whether the employee is entitled to compensation
for the service inventions and the extent and terms of such compensation, such determination will be made by the Compensation
and Rewards Committee, a statutory committee of the Israeli Patents Office. As a result, it is unclear if, and to what extent,
our research and development employees may be able to claim compensation with respect to our future revenue. As a result, we may
receive less revenue from future products if such claims are successful, which in turn could impact our future profitability.



Your rights and responsibilities
as a shareholder will be governed by Israeli law which may differ in some respects from the rights and responsibilities of shareholders
of U.S. companies.



We are incorporated
under Israeli law. The rights and responsibilities of the holders of our ordinary shares and ADSs are governed by our Articles
of Association and Israeli law. These rights and responsibilities differ in some respects from the rights and responsibilities
of shareholders in typical U.S.-based corporations. In particular, a shareholder of an Israeli company has a duty to act in good
faith toward the company and other shareholders and to refrain from abusing its power in the company, including, among other things,
in voting at the general meeting of shareholders on matters such as amendments to a company’s articles of association, increases
in a company’s authorized share capital, mergers and acquisitions and interested party transactions requiring shareholder
approval. In addition, a shareholder who knows that it possesses the power to determine the outcome of a shareholder vote or to
appoint or prevent the appointment of a director or executive officer in the company has a duty of fairness toward the company.
There is limited case law available to assist us in understanding the implications of these provisions that govern shareholders’
actions. These provisions may be interpreted to impose additional obligations and liabilities on holders of our ordinary shares
and ADSs that are not typically imposed on shareholders of U.S. corporations.



24







ITEM 4. INFORMATION ON THE COMPANY



A. History and Development of XTL



We are a biopharmaceutical
company engaged in the acquisition and development of pharmaceutical drugs for the treatment of autoimmune diseases. Our current
drug development program is focused on the development of hCDR1 for the treatment of SLE and SS.



Company Information and History



Our legal and commercial
name is XTL Biopharmaceuticals Ltd. We were established as a private company limited by shares under the laws of the State of
Israel on March 9, 1993, under the name Xenograft Technologies Ltd. We re-registered as a public company on June 7, 1993, in Israel,
and changed our name to XTL Biopharmaceuticals Ltd. on July 3, 1995. We commenced operations to use and commercialize technology
developed at the Weizmann Institute, in Rehovot, Israel. Until 1999, our therapeutic focus was on the development of human monoclonal
antibodies to treat viral, autoimmune and oncological diseases. Our first therapeutic programs focused on antibodies against the
hepatitis B virus, interferon – γ and the Hepatitis C virus. Our current drug development program is currently focused
on the treatment of SLE and SS.



In March 2009, we
signed an asset purchase agreement to acquire the rights to develop rHuEPO for the treatment of Multiple Myeloma in exchange for
the issuance of ordinary shares of XTL representing approximately 69.44% of our then issued and outstanding ordinary share capital
at the issuance date. Under the agreement, we are obligated to pay 1% royalties on net sales of rHuEPO, as well as a fixed royalty
payment in the total amount of $350 thousand upon the success of Phase 2. Such payment of $350 thousand mentioned above shall
be made to Yeda upon the earlier of (i) six months from the successful completion of Phase 2 or (ii) the completion of a successful
fundraising by XTL at any time after the completion of Phase 2 of at least $2 million.



On
January 7, 2014, the Company entered into a licensing agreement with Yeda to research, develop and commercialize hCDR1, a Phase
II-ready asset for the treatment of Systemic Lupus Erythematosus ("SLE"), among
other indications. The terms of the licensing agreement include, among other things, expense reimbursement for patent expenses
payable in six installments (see below), certain milestone payments to Yeda, low single-digit royalties based on net sales, and
additional customary royalties to the Office of the Chief Scientist.



Lupus is a debilitating
disease affecting approximately five million people worldwide, according to the Lupus Foundation of America. hCDR1 is a peptide,
short chains of amino acid monomers, and acts as a disease-specific treatment to modify the SLE-related autoimmune process. It
does so by specific upstream immunomodulation through the generation of regulatory T cells, reducing inflammation and resuming
immune balance. More than 40 peer-reviewed papers have been published on hCDR1.



Prior to being licensed
to the Company by Yeda, hCDR1 was licensed to Teva Pharmaceutical Industries Ltd. (“Teva”), which performed two placebo
controlled Phase I trials and a placebo controlled Phase II trial (the “PRELUDE trial”). The studies consisted of
over 400 patients, demonstrating that hCDR1 is well tolerated by patients and has a favorable safety profile. The PRELUDE trial
did not achieve its primary efficacy endpoint based on the SLEDAI scale, resulting in Teva returning the asset to Yeda. However,
the PRELUDE trial showed encouraging results in its secondary clinical endpoint, the BILAG index, and, in fact, the 0.5 mg weekly
dose showed a substantial effect. Multiple post-hoc analyses also showed impressive results for this dose using the BILAG index.
It is currently planned by the Company that such dose will be the focus of the clinical development plan moving forward. Following
Teva’s return of the program to Yeda, the FDA directed that the primary endpoint in future trials for Lupus therapies, including
those for hCDR1, should be based on either the BILAG index or the SLE Responder Index (SRI). The FDA has provided the Company
with written guidance confirming the acceptability of BILAG as the primary endpoint in our planned study. Given the FDA’s
recommendation and the positive findings from the PRELUDE trial (which showed a substantial effect in the BILAG index), the Company
is planning to initiate a new Phase II clinical trial, which will include the 0.5 mg and a lower weekly dose of hCDR1.



25







On November 2, 2014,
InterCure’s Audit Committee and Board of Directors approved the signing of an agreement with Green Forest Global Ltd. (the
“Agreement” and “Green Forest”, respectively) a company wholly owned by Mr. Alexander Rabinovitch, an
interested party in the Company.



Pursuant to the Agreement,
Green Forest will be allotted 2,622,647 ordinary shares of InterCure (the “First Round Allotted Shares”) representing
34.23% of the issued and outstanding shares of InterCure at the time of the allotment for an investment of $230 thousand. Further,
upon InterCure’s shares' return to the main list of the TASE, an additional 2,622,648 ordinary shares of InterCure will
be allotted to Green Forest for an additional investment of $230 thousand (the “Second Round Allotted Shares”).



On December 23, 2014,
the extraordinary general meeting of shareholders of InterCure approved the Agreement.



The Agreement was
approved by the TASE and is effective as of February 12, 2015. After the execution of the Agreement and the conversion of an outstanding
loan, the Company’s holdings in InterCure’s issued and outstanding share capital decreased to 36.53%.



On March 23, 2015,
InterCure issued 37,804,012 ordinary shares as part of a rights offering, thus diluting the Company’s holding in InterCure’s
issued and outstanding share capital to approximately 6.16%.



On April 2, 2015,
InterCure issued the Second Round Allotted Shares, thus diluting the Company’s holding in InterCure’s issued and outstanding
share capital to approximately 5.82% (as of December 31, 2016 the holding precentage is 3.78%)



We currently have
one subsidiary, Xtepo Ltd., a private company limited by shares under the laws of the State of Israel which holds a license for
the exclusive use of rHuEPO for the treatment of multiple myeloma.



The ADSs are listed
for trading on the Nasdaq Capital Market under the symbol “XTLB.” Our ordinary shares are traded on the TASE under
the symbol “XTLB.” We operate under the laws of the State of Israel under the Israeli Companies Law, and in the U.S.,
the Securities Act and the Exchange Act.



Our principal offices
are located at 5 HaCharoshet Street, Raanana 4365603, Israel, and our telephone number is +972-9-955-7080. Our primary internet
address is www.xtlbio.com. None of the information on our website is incorporated by reference herein.



Since January 1,
2014 to the date hereof, our principal capital expenditures (divestitures) are as follows (in thousands of US dollars):



|                                                        |  | Year ended December 31, |  
|------------------------------------------------------- |  | ----------------------- | -
|                                                        |  | 2016                    |  
|                                                        |  |                         |  
|InterCure                                               |  |                         |  
|Conversion of loan convertible into shares of InterCure |  |                         | -
|Sale of shares and rights to shares                     |  |                         | -
|                                                        |  |                         |  
|Proteologics Ltd.                                       |  |                         |  
|Purchase of shares by means of equity issuance          |  |                         | -
|Sale of investment in Proteologics Ltd.                 |  |                         | -
|                                                        |  |                         |  
|Total                                                   |  |                         | -



26







B. Business Overview



Introduction



We are a biopharmaceutical
company engaged in the acquisition and development of pharmaceutical drugs for the treatment of autoimmune diseases. Our current
drug development program is focused on hCDR1 for the treatment of (1) systemic lupus erythematosus, or SLE and (2) Sjogren’s
syndrome, or SS.



Our lead drug candidate
is hCDR1, a Phase II-ready asset for the treatment of SLE. There is currently no known cure for SLE. The current treatment of
SLE aims to control disease activity by using hydroxychloroquine, and, based on disease activity and severity, treatment may also
require corticosteroids and various immunosuppressives such as cyclophosphamide, mycophenolate mofetil or azathioprine. Only one
new treatment, Benlysta, has been approved by the U.S. Food and Drug Administration, or FDA, in the last 50 years for SLE. SLE
is a chronic autoimmune disease involving many systems in the human body, including joints, kidneys, the central nervous system,
heart, the hematological system and others. The biologic basis of the disease is a defect in the immune (defense) system, leading
to production of self (auto) antibodies, attacking healthy organs and causing irreversible damage. According to research estimates
of the Lupus Foundation of America, at least 1.5 million Americans have the disease (more than 5 million worldwide) with more
than 16,000 new cases diagnosed each year in the United States.



hCDR1 is a peptide
that is administered subcutaneously and acts as a disease-specific treatment to modify the SLE-related autoimmune process. It
does so by specific upstream immunomodulation through the generation of regulatory T cells, reducing inflammation and resuming
immune balance. More than 40 peer-reviewed papers have been published on hCDR1. Two placebo controlled Phase I trials and a placebo
controlled Phase 2 trial, or the PRELUDE trial, were conducted on patients with SLE by Teva Pharmaceutical Industries, Ltd., or
Teva, which had previously in-licensed hCDR1 from Yeda Research and Development, or Yeda. The studies consisted of over 400 patients
and demonstrated that hCDR1 is well tolerated by patients and has a favorable safety profile. The PRELUDE trial did not achieve
its primary efficacy endpoint based on the SLE Disease Activity Index, or SLEDAI scale, resulting in Teva returning the asset
to Yeda. However, the PRELUDE trial showed encouraging results in its secondary clinical endpoint, the British Isles Lupus Activity
Group index, or BILAG index, and, in fact, the 0.5 mg weekly dose showed a substantial effect. Multiple post-hoc analyses also
showed impressive results for this dose using the BILAG index. Such dose will be the focus of the clinical development plan moving
forward. Subsequent to Teva’s return of the program to Yeda, the FDA directed that the primary endpoint in future trials
for SLE therapies, including those for hCDR1, should be based on either the BILAG index or the SLE Responder Index (“SRI”).
The FDA has provided the Company with written guidance confirming the acceptability of BILAG as the primary endpoint in our planned
study. Given the FDA’s recommendation and the positive findings from the PRELUDE trial (which showed a substantial effect
in the BILAG index), we intend to initiate a new advanced clinical trial, which will include the 0.5 mg dose.



hCDR1is also Phase II-ready for the treatment
of SS. SS is a chronic autoimmune disorder affecting lacrimal and salivary gland function (glandular) but may also affect other
organs and systems (extraglandular) such as the kidneys, gastrointestinal system, blood vessels, lungs, liver, pancreas, and the
nervous system. There is currently no known cure for SS. The only specific treatments available, such as Salagen and Evoxac, are
symptomatic, aiming to alleviate dry eyes and dry mouth. A number of immunomodulatory agents including corticosteroids, hydroxychloroquine,
cyclosporine, and other immunosuppressive agents are used to treat systemic manifestations of SS. The biologic basis of the disease
is a defect in the immune system, leading to production of antibodies that attack healthy organs causing irreversible damage.
Disease prevalence estimations vary from 2.5 million patients (Global Data Research 2016) to 4 million patients (Sjogren’s
Syndrome Foundation) in the US alone, with a worldwide estimate of up to an aggregate of 7.7 million in in the United States,
France, Germany, Italy, Spain, United Kingdom, and Japan by the year 2024 (Global Data Research).



In preclinical studies,
blood mononuclear cells (PBMCs) obtained from blood samples of patients with primary SS (pSS) were incubated in vitro in the presence
of hCDR1 and a control peptide. Following 48 hours of incubation, cells were collected and mRNA was prepared from all samples.
The expression of various genes was determined using real-time RT-PCR. The results obtained to date indicate that in vitro incubation
of PBMCs of pSS patients with hCDR1 resulted in a significant reduction of gene expression of 3 cytokines considered to be pathogenic
in SS. Such results are similar to the results observed with SLE patients. Because amelioration of SLE manifestations in murine
models as well as in SLE patients was associated with down-regulation of pathogenic cytokines, it is likely that hCDR1 is capable
of beneficially affecting SS patients. In addition, based on hCDR1’s favorable safety profile in over 400 SLE patients (as
noted above), as well as the same route of administration as in SLE and similar doses, we plan to begin the clinical; development
of hCDR1 in SS with a Phase 2 trial.



27







Our Strategy



Our objective is to
be a leading biopharmaceutical company engaged in the acquisition and development of pharmaceutical products for the treatment
of autoimmune diseases.



Under our current
near-term strategy with respect to our pharmaceutical and biopharmaceutical products, we plan to:



| | · | initiate
                                         an international, prospective advanced clinical study intended to assess the safety and
                                         efficacy of hCDR1 when given to patients with SLE;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | initiate
                                         a prospective Phase 2 study intended to assess the safety and efficacy of hCDR1 when
                                         given to patients with pSS;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | continually
                                         build our pipeline of therapeutic candidates; and
| | - | ------------------------------------------------------------------------------------------------------



| | · | develop
                                         collaborations with large pharmaceutical companies to sublicense/develop, and market
                                         our hCDR1 and rHuEPO drug development programs.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Recent Developments



Registered Direct Offerings



In April 2015, we
entered into security purchase agreements providing for the issuance of an aggregate of 355,556 ADSs representing 35,555,560 ordinary
shares in a registered direct offering at $11.25 per ADS for aggregate gross proceeds of $4,000,000. In addition, we issued unregistered
warrants to purchase 177,778 ADSs representing 17,777,778 ordinary shares in a private placement. At the closing, we also issued
placement agent warrants to purchase up to 17,978 ADSs representing 1,797,760 ordinary shares. The warrants may be exercised at
any time for a period of five and one-half years from issuance and have an exercise price of $11.25 per ADS, subject to adjustment
as set forth therein.



In February 2017,
we entered into security purchase agreements providing for the issuance of an aggregate of 1,000,000 ADSs in a registered direct
offering at $2.50 per ADS for aggregate gross proceeds of $2,500,000. In addition, we issued unregistered warrants to purchase
1,000,000 ADSs. The warrants may be exercised after six months from issuance and terminate five and a half years from issuance
and have an exercise price of $4.10 per ADS, subject to adjustment as set forth therein.



In March 2017, we
entered into security purchase agreements providing for the issuance of an aggregate of 1,400,000 ADSs in a private placement
transaction at $2.00 per ADS for aggregate gross proceeds of $2,800,000. In addition, we issued unregistered warrants to purchase
1,400,000 ADSs. The Company has agreed to hold a shareholder meeting to increase its authorized ordinary shares to allow for the
full exercise of the warrants (the “Authorized Capital Increase”). The
warrants have a term of five and a half years, an exercise price of $2.30 per ADS and shall be exercisable on the later of the
effectiveness of the Authorized Share Increase or six months following the issuance date.



28







InterCure Transactions



In July 2012, we acquired
the control over InterCure Ltd, or InterCure, a public company whose shares are traded on the TASE and which develops a home therapeutic
device for non-medicinal and non-invasive treatment of various diseases such as hypertension, heart failure, sleeplessness and
mental stress and markets and sells a home therapeutic device for hypertension. As a result of a series of transactions including
a transaction, that closed in February 2015, between InterCure and Green Forest Global Ltd., or Green Forest, a company wholly
owned by Mr. Alexander Rabinovitch (a greater than 5% shareholder of ours), our holdings in InterCure were diluted to approximately
5.82%. As of December 31, 2016, our holdings in InterCure were approximately 3.78%. See “Certain Relationships and Related
Party Transactions” on page 55.



Products Under Development



hCDR1 for the Treatment of Systemic Lupus Erythematosus



Market Opportunity



hCDR1 (edratide) is
a Phase 2-ready asset for the treatment of SLE, the most prominent type of lupus. SLE is a heterogenous, chronic, debilitating
inflammatory autoimmune disease characterized by the production of an array of autoantibodies, including antibodies to double-stranded
DNA, to other nuclear antigens, and to ribonucleoproteins. Although SLE can affect any part of the body, most patients experience
systemic symptoms including fever, fatigue and malaise along with symptoms in one or only a few organs. The most common signs
and symptoms are arthralgia, arthritis, fatigue, fever, skin rashes, including a characteristic butterfly-shaped rash across the
cheeks and nose, anemia and pleurisy. The clinical course of SLE may also include periods in which few, if any, symptoms are evident
and other times when the disease becomes more active.



According to research
estimates of the Lupus Foundation of America, at least 1.5 million Americans have the disease (more than 5 million worldwide)
with more than 16,000 new cases diagnosed each year in the United States. The Lupus Foundation of America reports that lupus affects
mostly women of childbearing age (15-44). SLE is one of the most common forms of lupus, affecting over 70% of lupus patients.



SLE treatment is highly
individualized and is based on a patient’s disease severity, organ involvement and previous response. Mild forms of SLE
may be treated with antimalarial medications, non-steroidal anti-inflammatory drugs, and topical and/or low-dose glucocorticoids,
although treatment with methotrexate may be needed. In addition, low-dose oral steroids or intramuscular injections of depot steroid
preparations can be used for mild disease. More severe cases of SLE may be treated with high-dose glucocorticoids and immunosuppressive
or cytotoxic drugs to suppress the immune system. GlaxoSmithKline’s Benlysta (belimumab), a monoclonal antibody, is a newer
medication that is FDA-approved for patients with mild to moderate SLE currently taking standard therapy who have not yet experienced
an adequate response. Benlysta is the first product to gain marketing approval for patients with SLE in more than 50 years, paving
the way for the introduction of new disease-modifying therapies and reigniting the interest of pharmaceutical developers in this
therapy area. GlaxoSmithKline reported that its 2015 sales of Benlysta were £230 million, up 25% on the prior year.



Decision Resources
estimates the drug sales for SLE in 2012 were approximately $900 million across the markets covered in its forecast. By the end
of the forecast period of 2022, sales are estimated to grow to $4.0 billion with a CAGR of 16.1%. This growth is expected to be
driven by improved uptake of Benlysta, the introduction of new biological therapies and the overall increase in prevalent cases
of SLE, mainly due to the increasing population in these markets.



hCDR1: General
& Mechanism of Action



hCDR1 is a synthetic
peptide composed of 19 amino-acid residues. It was developed by Teva in collaboration with Prof. Edna Mozes of the Weizmann Institute
of Science, Rehovot, Israel. The sequence of the peptide is based on the complementarity determining region 1 (CDR1) of a pathogenic
human anti-dsDNA mAb that bears the 16/6 idiotype. The idiotype was found to have clinical relevance in SLE patients.



29











Accumulating data
from in vivo and in vitro studies demonstrate that hCDR1 functions by inducing regulatory T cell function through
multiple pathways. Administration of hCDR1 to mice has been shown to induce CD4 + CD25 + cells using regulatory
and suppressor characteristics such as CD45RB LOW , TGF-, CTLA-4 and Foxp3. This induction suppresses autoreactive
CD4 + cell activation, indicated by the reduced expression of CD69 and Fas ligand; ultimately, resulting in reduced
rates of activation-induced apoptosis. Inhibition by hCDR1-induced CD4 + CD25 + cells is mediated through
the immunosuppressive cytokine TGF-. TGF- secretion is up regulated and activated autoreactive cells are decreased; both are associated
with a decrease of pathogenic cytokines such as interferon gamma (IFN-), interleukin-10 (IL-10), interleukin-1 beta (IL-1), and
tumor necrosis factor-alpha (TNF-). Effects on TGF- and Foxp3 have been shown to correlate with a significant decrease in SLEDAI-2K
and BILAG scores in patients treated with hCDR1 in comparison with patients treated with placebo. Another subset of T cells (CD8
+ CD28 - ) expresses Foxp3 and has been shown to be essential for the induction and the optimal suppressive
function of CD4 + CD25 + cells. The function of hCDR1-induced subsets of regulatory T cells result in the
effective suppression, ultimately leading to the modulation of the underlying aberrancy of the immune system, which culminates
in the diminished activity of the disease.



hCDR1 is currently
under investigation for its ability to down-regulate the autoimmune response elicited by the pathogenic antibodies and autoreactive
T cells in SLE and up-regulate the expression of gene markers, such as TGF-β and FoxP3. hCDR1 may attenuate the general SLE-associated
autoimmune process and provide effective treatment for many clinical manifestations of SLE. The clinical development plan is thus
designed to demonstrate the efficacy of hCDR1 in the systemic disease.



Clinical Trial
History



Prior to being licensed
to us by Yeda, hCDR1 was licensed to Teva which performed two placebo controlled Phase I trials and a placebo controlled Phase
2 trial, or the PRELUDE trial. The Phase I and Phase 2 studies consisted of over 400 patients, demonstrating that hCDR1 is well
tolerated by patients and has a favorable safety profile.



The PRELUDE trial
was a 26-week study conducted at 48 centers in 12 countries: Canada, France, Germany, Holland, Hungary, Israel, Italy, Mexico,
Russia, Spain, UK and U.S. enrolling 340 patients with mild to moderate SLE. The PRELUDE trial did not achieve its primary efficacy
endpoint based on the SLEDAI scale, resulting in Teva returning the asset to Yeda in 2009. However, the PRELUDE trial showed encouraging
results in its secondary clinical endpoint, the BILAG index, and, in fact, the 0.5 mg weekly dose showed a substantial effect.
Multiple post-hoc analyses also showed impressive results for this dose using the BILAG index. Such dose will be the focus of
clinical development moving forward. Subsequent to Teva’s return of the program to Yeda, in 2010 the FDA directed that the
primary endpoint in future trials for lupus therapies, including those for hCDR1, should be based on either the BILAG index or
the Systemic Lupus Erythematosus Responder Index. The FDA has provided the Company with written guidance confirming the acceptability
of BILAG as the primary endpoint in our planned study.



30







Planned Clinical
Trial



Given the FDA’s
recommendation and the positive findings from the PRELUDE trial (which showed a substantial effect in the BILAG index), we intend
to initiate a multinational, randomized, double blind, placebo-controlled, multiple dose, parallel group study to assess the efficacy,
tolerability and safety of hCDR1 administered subcutaneously to patients with active SLE. We estimate that the trial will take
over one year to enroll patients, 26 weeks for the treatment phase, and additional time to analyze the results for a total of
approximately two years. We intend to include an interim analysis which will provide a read-out of data prior to the end date
of the study.



The Company submitted
a pre-Investigational New Drug (“IND”) meeting package, including a draft protocol for our planned clinical trial,
to the FDA in December 2015. In January 2016, the Company received a written response to its pre-IND meeting package in which
the FDA provided guidance on several key aspects of its proposed clinical trial including: acceptance of the primary efficacy
endpoint to be based on the BILAG index, a measure of lupus disease activity which was the secondary efficacy endpoint in the
PRELUDE trial and confirmation of the appropriate patient population and total number of patients required to prove safety for
a new drug application (NDA) for marketing approval. The FDA recommended that the trial be a Phase 2 study and also provided additional
guidance on other aspects of the trial design including doses and study duration. Based on the FDA’s response, XTL plans
to file its IND, and in the coming quarters initiate a global clinical trial for hCDR1 in the treatment of SLE.



hCDR1 for the Treatment of Sjogren’s Syndrome



Market Opportunity



hCDR1 (Edratide) is
a Phase 2-ready asset for the treatment of SS. SS is a chronic systemic autoimmune disease characterized by lymphocytic infiltration
of exocrine glands. Sjogren's syndrome may be an isolated disease, termed primary Sjogren syndrome (pSS) or may accompany another
autoimmune disease, thus termed secondary Sjogren’s syndrome. Clinical presentation varies from mild symptoms such as classic
sicca symptoms of dry eyes (xerophthalmia), dry mouth (xerostomia) and parotid gland enlargements to severe systemic symptoms
involving multiple organ systems such as arthritis, arthralgia, myalgia, pulmonary disease, gastrointestinal disease, neuropathy
and lymphoma.



Similar
to SLE, SS is a heterogenous, chronic, inflammatory autoimmune disease. Some of the autoantibodies
characteristic of pSS occur in SLE as well, including antinuclear antibody (ANA), anti-Ro (also termed anti SSA), anti-La (also
termed anti SSB) as well as rheumatoid factor (RF). Hypergammaglobulinemia is common as well. pSS affects the salivary and lacrimal
glands with chronic inflammation leading to the most common symptoms seen in SS including dry eyes and dry mouth. In addition,
SS may affect multiple systems with clinical manifestations similar to those seen in SLE including fever, fatigue and malaise
along with symptoms in one or only a few organs including arthralgia, arthritis, fatigue, vasculitic rashes, interstitial lung
disease, kidney disease as well as neurologic manifestations.



Disease prevalence
estimations vary from 2.5 million (Global Data Research 2016) to 4 million patients (Sjogren’s Syndrome Fopundation) in
the US alone, with a worldwide estimate of up to 7.7 million in the 7 Major Markets (US, France, Germany, Italy, Spain, the UK
and Japan) by the year 2024 (Global Data Research). pSS affects mostly middle aged women (40-50 years of age) with a female to
male prevalence ratio of 9:1 (some estimates even go as far as 20:1). pSS patients have an increased risk of developing non-Hodgkin’s
B cell lymphoma (relative risk of 13.76.)



31







pSS treatment is highly
individualized and is based on a patient’s disease severity, organ involvement and previous response. Mild forms of pSS
may be treated symptomatically with artificial tears and salivary flow stimulation. Fatigue and arthralgia may respond to antimalarial
medications. More severe, systemic manifestations may be treated with high-dose glucocorticoids and immunosuppressive or cytotoxic
drugs to suppress the immune system.



Global Data estimates
the drug sales for SS in 2014 were approximately $990 million in the US and $1.1 billion across the markets covered in its forecast.
By the end of the forecast period of 2024, sales are estimated to grow to $1.9 billion in the US and $2.2 billion across the markets
covered in its forecast with a Compound Annual Growth Rate of 7.2%. The market size estimate in 2014 includes Salagen (pilocarpine)
and Evoxac (cevimeline), the only two agents to ever be approved for SS, and the use of off-label agents, such as biologics approved
for other autoimmune diseases, and systemic and topical immunosuppressants and corticosteroids. This growth is expected to be
driven by the anticipated approval of Orencia for use in patients with SS in the US and EU in 2021 and Japan in 2022.



hCDR1: General
& Mechanism of Action



See above discussion regarding the Mechanism
of Action of hCDR1 for SLE.



Since SS is an autoimmune
disease similar to SLE with some autoantibodies and clinical manifestations identical with those detected in SLE, and since there
is no specific treatment for Sjogren’s syndrome, the experiments were undertaken on the Company's behalf by Professor Edna
Mozes of the Weizmann Institute in Israel to determine the ability of hCDR1 to beneficially affect autoimmune responses related
to this disease. To this end, PBMCs obtained from blood samples of pSS patients were incubated in vitro in the presence of hCDR1
and a control peptide. Following 48 hours of incubation, cells were collected and mRNA was prepared from all samples. The expression
of various genes was determined using real-time RT-PCR. The results obtained to date indicate that in vitro incubation of PBMCs
of pSS patients with hCDR1 resulted in a significant reduction of gene expression of 3 cytokines considered to be pathogenic in
SS. These results were similar to the results observed with lupus patients.



Clinical Trial
History



No clinical trials
with hCDR1 in SS have been performed to date.



Planned Clinical
Trial



As noted above, hCDR1
has been tested in greater than 400 SLE patients to date. Given its clean safety profile, shown in three different clinical studies,
we intend to test hCDR1 in a small Phase 2 clinical trial in pSS. The objectives of the study will be to test the safety &
efficacy of [2] different doses of hCDR1 in pSS patients in addition to a control arm. The duration of the study will be three
months of active treatment. [We intend to enroll approximately 50 patients.] We estimate that the trial will take over one year
to enroll patients, three months for the treatment phase, and additional time to analyze the results for a total of approximately
1.5 years.



rHuEPO for the
Treatment of Multiple Myeloma



As our focus is currently
on the development of our lead drug candidate, we do not anticipate conducting material research and development activities for
rHuEPO



32







Intellectual Property



Patents



General



Patents and other
proprietary rights are very important to the development of our business. We will be able to protect our proprietary technologies
from unauthorized use by third parties only to the extent that our proprietary rights are covered by valid and enforceable patents
or are effectively maintained as trade secrets. We intend to seek and maintain patent and trade secret protection for our drug
candidates and our proprietary technologies. As part of our business strategy, our policy is to file patent applications in the
U.S. and internationally to cover methods of use, new chemical compounds, pharmaceutical compositions and dosing of the compounds
and compositions and improvements in each of these. We also rely on trade secret information, technical know-how, innovation and
agreements with third parties to continuously expand and protect our competitive position. Because of the extensive time required
for development, testing and regulatory review of a potential product, it is possible that before we commercialize any of our
products, any related patent may expire or remain in existence for only a short period following commercialization, thus reducing
any commercial advantage or financial value attributable to the patent.



Generally, patent
applications in the U.S. are maintained in secrecy for a period of at least 18 months. Since publication of discoveries in the
scientific or patent literature often lag behind actual discoveries, we are not certain that we were the first to make the inventions
covered by each of our pending patent applications or that we were the first to file those patent applications. The patent positions
of biotechnology and pharmaceutical companies are highly uncertain and involve complex legal and factual questions. Therefore,
we cannot predict the breadth of claims allowed in biotechnology and pharmaceutical patents, or their enforceability. To date,
there has been no consistent policy regarding the breadth of claims allowed in biotechnology patents. Third parties or competitors
may challenge or circumvent our patents or patent applications, if issued. Granted patents can be challenged and ruled invalid
at any time, therefore the grant of a patent is not of itself sufficient to demonstrate our entitlement to a proprietary right.
The disallowance of a claim or invalidation of a patent in any one territory can have adverse commercial consequences in other
territories.



If our competitors
prepare and file patent applications in the U.S. that claim technology also claimed by us, we may choose to challenge competing
patent rights, which could result in substantial cost, even if the eventual outcome is favorable to us. While we have the right
to defend patent rights related to our licensed drug candidates and technologies, we are not obligated to do so. In the event
that we decide to defend our licensed patent rights, we will be obligated to cover all of the expenses associated with that effort.



If a patent is issued
to a third party containing one or more preclusive or conflicting claims, and those claims are ultimately determined to be valid
and enforceable, we may be required to obtain a license under such patent or to develop or obtain alternative technology. In the
event of a litigation involving a third party claim, an adverse outcome in the litigation could subject us to significant liabilities
to such third party, require us to seek a license for the disputed rights from such third party, and/or require us to cease use
of the technology. Further, our breach of an existing license or failure to obtain a license to technology required to commercialize
our products may seriously harm our business. We also may need to commence litigation to enforce any patents issued to us or to
determine the scope, validity and/or enforceability of third-party proprietary rights. Litigation would involve substantial costs.



hCDR1
for the Treatment of SLE and SS



We have exclusively
licensed from Yeda, two families of patents relating to hCDR1.



| | · | A basic patent family entitled “Synthetic
    Human Peptides and Pharmaceutical Compositions Comprising Them” for the Treatment of Systemic Lupus Erythematosus”
    that covers the active pharmaceutical agent, the Edratide peptide. The patent has been granted in a large number of jurisdictions:
    U.S., Europe (Austria, Denmark, Finland, France, Germany, Ireland, Italy, Liechtenstein, Spain, Sweden, Switzerland, The Netherlands
    and the UK), Australia, Canada, Hong Kong, India, Israel, Japan, Korea, Mexico, Norway, Hungary and Russia. The patent expires
    on February 26, 2022 except in the case of the U.S., which expires on September 22, 2022.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



33







| | · | A patent family for the formulation entitled “Parenteral
    Formulations of Peptides for the Treatment of Systemic Lupus Erythematosus” that covers a very specific pharmaceutical
    composition comprising Edratide. It has been granted in the U.S., Europe (Switzerland, Germany, Denmark, Spain, Finland, France,
    Great Britain, Ireland, Italy, Netherlands and Sweden), China, India, Israel, Japan, and Mexico, and is under examination
    in Canada. The patent expires on January 14, 2024.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Two provisional patent applications for specific
    treatment regimens were filed on August 11, 2016 and an additional provisional patent application for treatment of Sjögren's
    syndrome was filed on January 5, 2017.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



rHuEPO
for the Treatment of Multiple Myeloma



We have exclusively
licensed from Yeda and Mor a family of patents relating to rHuEPO.



| | · | A main use patent entitled “Use of Erythropoietin
    in the Treatment of Multiple Myeloma that covers the active pharmaceutical agent, EPO. The main claims of this patent is directed
    to a method for the treatment of a multiple myeloma patient, comprising the administration of Erythropoietin or Recombinant
    Human Erythropoietin, for the inhibition of tumor growth, triggering of tumor regression or inhibition of multiple myeloma
    cell metastasis in the said patient. The patent was granted in the United States, Europe (Austria, Belgium, France, Germany,
    Great Britain, Ireland, Italy, Netherlands, Spain, Sweden and Switzerland), Israel, Japan, Hong Kong and Canada. The issued
    patent will expire on March 30, 2019.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Other
Intellectual Property Rights



We depend upon trademarks,
trade secrets, know-how and continuing technological advances to develop and maintain our competitive position. To maintain the
confidentiality of trade secrets and proprietary information, we require our employees, scientific advisors, consultants and collaborators,
upon commencement of a relationship with us, to execute confidentiality agreements and, in the case of parties other than our
research and development collaborators, to agree to assign their inventions to us. These agreements are designed to protect our
proprietary information and to grant us ownership of technologies that are developed in connection with their relationship with
us. These agreements may not, however, provide protection for our trade secrets in the event of unauthorized disclosure of such
information.



Licensing
Agreements and Collaborations



hCDR1



On January 7, 2014,
we entered into a license agreement with Yeda, as amended on September 6, 2015, which grants us the exclusive worldwide right
to research, develop, and commercialize hCDR1 for all indications. Yeda is the commercial arm of the Weizmann Institute of Science.



In consideration,
we are responsible for a patent expense reimbursement to Yeda in six installments totaling $382,989. On May 14, 2014, we issued
222,605 of our ordinary shares to Yeda, as the first of six installments, representing a value of approximately $38,000. On January
21, 2015, we issued a further 802,912 of our ordinary shares to Yeda as the second of six installments, representing a value of
approximately $84,000. The remaining installments of approximately $64,000 each, payable in cash, are due every six months commencing
on July 1, 2015, with the final payment due on January 1, 2017. In July 2016, the Company and Yeda signed a second amendment to
the license agreement whereby, the final two payments due under the Agreement will be made on April 7, 2017, provided that if
we receive funding of at least $5,000,000 then we shall be required to promptly pay Yeda any unpaid patent expense reimbursement
in one lump-sum cash payment.



34







Under the license
agreement, we are required to make milestone payments of up to $2.2 million: $200,000 upon starting a Phase 3 clinical trial,
$1 million upon FDA approval to market in the U.S., and $250,000 for marketing approval in each of China and three of the European
Union’s Group of Five. In addition, we are required to pay 2-3% royalties of annual net sales and sublicense fees of 15-20%
of whatever we receive from any sub-licensee. Under the license agreement, we are also required to meet certain development milestones
including the delivery of a trial protocol to Yeda by January 1, 2016 (which we delivered), receipt of investment of at least
$5 million by August 1, 2016 (of which $4 million was received in April 2015) and commencement of a Phase II clinical trial by
January 1, 2017. In subsequent amendments signed between the Company and Yeda, the parties agreed to postpone the last two installments
of the patent expense reimbursement until April 7, 2017, receipt of the remainder of the required $5 million investment by May
1, 2017 and commencement of a Phase 2 clinical trial in respect of hCDR1 by October 1, 2017.



The term of the license
agreement is the later of the date of expiry of the last of the licensed patents or the expiry of a continuous period of 11 years
after first commercial sale in any country during which there shall not have been a first commercial sale in the U.S., EU, Japan,
China or any OECD member. The license agreement may be terminated by us without cause upon 60 days prior written notice. The license
agreement may also be terminated by Yeda if either we fail to meet certain development milestones or commercial sale shall have
commenced and there shall be a period of 6 months of no sales, subject to certain exceptions. Yeda shall also be entitled to terminate
the license agreement if we were to commence legal action against Yeda challenging the validity of any of the licensed patents,
and we were unsuccessful in such challenge, in which event we would be required to pay to Yeda liquidated damages of $8 million.
Either party may also terminate the license agreement in the case of a material breach that remains uncured or certain bankruptcy
events.



rHuEPO



In August 2010 we
acquired from Bio-Gal, the rights to develop rHuEPO for the treatment of multiple myeloma under a research and license agreement
with Yeda and Mor. Bio-Gal had previously performed certain research and development studies under the research and license agreement.
Mor is the Israeli corporation and licensing arm of Kupat Holim Clalit, one of the largest HMOs in Israel.



We are obligated to
pay 1% royalties on net sales of the product, as well as a fixed royalty payment in the total amount of $350,000 upon the successful
completion of Phase 2. Such payment of $350,000 is payable to Yeda upon the earlier of (i) six months from the successful completion
of Phase 2 or (ii) the completion of a successful fundraising by XTL at any time after the completion of the Phase 2 of at least
$2 million.



Competition



Competition in the
pharmaceutical and biotechnology industries is intense. Our competitors include pharmaceutical companies and biotechnology companies,
as well as universities and public and private research institutions. In addition, companies that are active in different but
related fields represent substantial competition for us. Many of our competitors have significantly greater capital resources,
larger research and development staffs and facilities and greater experience in drug development, regulation, manufacturing and
marketing than we do. These organizations also compete with us to recruit qualified personnel, attract partners for joint ventures
or other collaborations, and license technologies that are competitive with ours. To compete successfully in this industry we
must identify novel and unique drugs or methods of treatment and then complete the development of those drugs as treatments in
advance of our competitors.



The drugs that we
are attempting to develop will have to compete with existing therapies. In addition, a large number of companies are pursuing
the development of pharmaceuticals that target the same diseases and conditions that we are targeting. Other companies have products
or drug candidates in various stages of pre-clinical or clinical development to treat diseases for which we are also seeking to
discover and develop drug candidates. Some of these potential competing drugs are further advanced in development than our drug
candidates and may be commercialized earlier.



35







Competing
Products for Treatment of SLE



There
is only one drug that has been approved for SLE in the last 50 years, GlaxoSmithKline’s Benlysta (belimumab) which was approved
in 2011. Other current therapies include non-steroidal anti-inflammatory drugs, corticosteroids, anti-malarials and immunosuppressants.
Corticosteroids and immunosuppressants lead to broad, non-selective immunosuppression often associated with significant adverse
events. In addition these therapies are not effective in all SLE patients.



Despite initial enthusiasm
following approval of Benlysta as the first drug approved for SLE with a selective target, efficacy has been tested only in patients
with mild to moderate disease, without active renal or CNS disease, its onset of action is slow and sales have been lower than
expected. Additional drugs are being developed to treat SLE including, among others, anifrolumab developed by MedImmune, belimumab
developed by GlaxoSmithKline, blisibimod developed by Anthera Pharmaceuticals, forigerimod acetate (lupuzor) developed by Immupharma,
abatacept developed by Bristol-Myers Squibb, ACT-334441 developed by Actelion, atacicept developed by Merck Serono, CC-220 developed
by Celgene, and INV-103 being developed by Invion. In the past eighteen months, there have been two late stage drugs, tabalumab
developed by Eli Lilly and epratuzumab developed by UCB/Immunomedics, for the treatment of SLE which have both failed to meet
the primary endpoint in Phase 3 trials.



Competing Products
for Treatment of pSS



No
specific drug has been approved for SS so far apart from the symptomatic relief of signs and symptoms with the use of cholinergic
agonists e.g. Salagen (pilocarpine) and Evoxac (cevilemine). Immunomodulary treatments, usually for extra-glandular disease, which
may be used include cyclosporine (ocular inflammation), hydroxychloroquine (mild inflammatory symptoms of joints, muscles &
skin), corticosteroids (rare but serious symptoms: vasculitic rash, interstitial lung disease, interstitial nephritis, glomerulonephritis),
immunosuppressive agents e.g. methotrexate, azathioprine, cyclophosphamide (used to treat serious internal organ manifestations)
and biologic agents e.g. rituximab. Corticosteroids and immunosuppressants lead to broad, non-selective immunosuppression often
associated with significant adverse events.



The pipeline of drugs
in development for the indication of SS is relatively small with only one product in Phase 3, Orencia, being developed by Bristol-Myers
Squibb, and a number of drugs in Phase 1 or 2 stages of development including AMG/MEDI5872 developed by Amgen, BIIB063 developed
by Biogen, CFZ533 and VAY736 developed by Novartis, GSK618960 developed by GSK, LY3090106 developed by Eli Lilly, MEDI4920 developed
by MedImmune, RG7625 developed by Roche, RSLV developed by Resolve Therapeutics and Actemra developed by the University Hospital
of Strasbourg. In addition, there is an ongoing Phase 2 combination study combining Benlysta and Rituxan..



Seasonality



Our business and operations
are generally not affected by seasonal fluctuations or factors.



Raw Materials and Suppliers



We believe that the
raw materials that we require to manufacture hCDR1 and rHuEPO are widely available from numerous suppliers and are generally considered
to be generic industrial chemical supplies. We do not rely on a single or unique supplier for the current production of any therapeutic
small molecule in our pipeline.



Manufacturing



We currently have
no manufacturing capabilities and do not intend to establish any such capabilities.



36







With respect to our
drug candidate, hCDR1, we believe that we will be able to outsource production to a contract manufacturer in order to obtain sufficient
inventory to satisfy the clinical supply needs for our future development for the treatment of SLE and SS. With respect to our
drug candidate rHuEPO, we believe that we will either be able to purchase rHuEPO from existing pharmaceutical companies or to
enter into collaborative agreements with contract manufacturers or other third-parties.



At the time of commercial
sale, to the extent that it is possible and commercially practicable, we plan to engage a back-up supplier for each of our product
candidates. Until such time, we expect that we will rely on a single contract manufacturer to produce each of our product candidates
under cGMP regulations. Our third-party manufacturers have a limited number of facilities in which our product candidates can
be produced and will have limited experience in manufacturing our product candidates in quantities sufficient for conducting clinical
trials or for commercialization. Our third-party manufacturers will have other clients and may have other priorities that could
affect our contractor’s ability to perform the work satisfactorily and/or on a timely basis. Both of these occurrences would
be beyond our control. We anticipate that we will similarly rely on contract manufacturers for our future proprietary product
candidates.



We expect to similarly
rely on contract manufacturing relationships for any products that we may in-license or acquire in the future. However, there
can be no assurance that we will be able to successfully contract with such manufacturers on terms acceptable to us, or at all.



Contract manufacturers
are subject to ongoing periodic inspections by the FDA, the U.S. Drug Enforcement Agency and corresponding state and local agencies
to ensure strict compliance with cGMP and other state and federal regulations. We do not have control over third-party manufacturers’
compliance with these regulations and standards, other than through contractual obligations.



If we need to change
manufacturers, the FDA and corresponding foreign regulatory agencies must approve these new manufacturers in advance, which will
involve testing and additional inspections to ensure compliance with FDA regulations and standards and may require significant
lead times and delay. Furthermore, switching manufacturers may be difficult because the number of potential manufacturers is limited.
It may be difficult or impossible for us to find a replacement manufacturer quickly or on terms acceptable to us, or at all.



Environmental Matters



We may from time to
time be subject to various environmental, health and safety laws and regulations, including those governing air emissions, water
and wastewater discharges, noise emissions, the use, management and disposal of hazardous, radioactive and biological materials
and wastes and the cleanup of contaminated sites. We believe that our business, operations and facilities are being operated in
compliance in all material respects with applicable environmental and health and safety laws and regulations. Based on information
currently available to us, we do not expect environmental costs and contingencies to have a material adverse effect on us. The
operation of our testing facilities, however, entails risks in these areas. Significant expenditures could be required in the
future if these facilities are required to comply with new or more stringent environmental or health and safety laws, regulations
or requirements.



Government and Industry Regulation



Numerous governmental
authorities, principally the FDA and corresponding state and foreign regulatory agencies, impose substantial regulations upon
the clinical development, manufacture and marketing of our drug candidates and technologies, as well as our ongoing research and
development activities. None of our drug candidates have been approved for sale in any market in which we have marketing rights.
Before marketing in the U.S., any drug that we develop must undergo rigorous pre-clinical testing and clinical trials and an extensive
regulatory approval process implemented by the FDA, under the Federal Food, Drug and Cosmetic Act of 1938, as amended. The FDA
regulates, among other things, the pre-clinical and clinical testing, safety, efficacy, approval, manufacturing, record keeping,
adverse event reporting, packaging, labeling, storage, advertising, promotion, export, sale and distribution of biopharmaceutical
products.



37







The regulatory review
and approval process is lengthy, expensive and uncertain. We are required to submit extensive pre-clinical and clinical data and
supporting information to the FDA for each indication or use to establish a drug candidate’s safety and efficacy before
we can secure FDA approval. The approval process takes many years, requires the expenditure of substantial resources and may involve
ongoing requirements for post-marketing studies or surveillance. According to the FDA, before commencing clinical trials in humans,
we must submit an IND to the FDA containing, among other things, pre-clinical data, chemistry, manufacturing and control information,
and an investigative plan. Our submission of an IND may not result in FDA authorization to commence a clinical trial.



We were granted an
Orphan-drug designation from the FDA in May 2011, for rHuEPO. In the U.S., Orphan-drug designation is granted by the FDA Office
of Orphan Drug Products to novel drugs or biologics that treat a rare disease or condition affecting fewer than 200,000 patients
in the U.S.. The designation provides the drug developer with a seven-year period of U.S. marketing exclusivity if the drug is
the first of its type approved for the specified indication or if it demonstrates superior safety, efficacy, or a major contribution
to patient care versus another drug of its type previously granted the designation for the same indication, as well as with tax
credits for clinical research costs, the ability to apply for annual grant funding, clinical research trial design assistance
and waiver of Prescription Drug User Fee Act filing fees.



We may apply to the
European Medicines Agency in order to obtain Orphan-drug designation for its Recombinant Erythropoietin in Europe. Orphan designation
is granted by the European Medicines Agency, following a positive opinion from the Committee for Orphan Medicinal Products, to
a medicinal product that is intended for the diagnosis, prevention or treatment of a life-threatening or a chronically debilitating
condition affecting not more than five in 10,000 persons in the European Community when the application for designation is submitted.
Orphan drug designation provides the sponsor with access to the Centralized Procedure for the application for marketing authorization,
protocol assistance, up to a 100% reduction in fees related to a marketing authorization application, pre-authorization inspection
and post-authorization activities, and could provide ten years of market exclusivity in the EU, once approved for the treatment
of Multiple Myeloma.



The FDA may permit
expedited development, evaluation, and marketing of new therapies intended to treat persons with serious or life-threatening conditions
for which there is an unmet medical need under its fast track drug development programs. A sponsor can apply for fast track designation
at the time of submission of an IND, or at any time prior to receiving marketing approval of the NDA. To receive fast track designation,
an applicant must demonstrate that the drug:



| | · | is
                                         intended to treat a serious or life-threatening condition;
| | - | ------------------------------------------------------------------------------------------------------



| | · | is
                                         intended to treat a serious aspect of the condition; and
| | - | ----------------------------------------------------------------------------------------------------



| | · | has
                                         the potential to address unmet medical needs, and this potential is being evaluated in
                                         the planned drug development program.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Clinical testing must
meet requirements for institutional review board oversight, informed consent and good clinical practices, and must be conducted
pursuant to an IND, unless exempted.



For purposes of NDA
approval, clinical trials are typically conducted in the following sequential phases:



| | · | Phase
                                         1: The drug is administered to a small group of humans, either healthy volunteers or
                                         patients, to test for safety, dosage tolerance, absorption, metabolism, excretion, and
                                         clinical pharmacology.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Phase
                                         2: Studies are conducted on a larger number of patients to assess the efficacy of the
                                         product, to ascertain dose tolerance and the optimal dose range, and to gather additional
                                         data relating to safety and potential adverse events.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Phase
                                         3: Studies establish safety and efficacy in an expanded patient population.
| | - | --------------------------------------------------------------------------------------------------------------------------



38







| | · | Phase
                                         4: The FDA may require Phase 4 post-marketing studies to find out more about the drug’s
                                         long-term risks, benefits, and optimal use, or to test the drug in different populations,
                                         such as children.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The length of time
necessary to complete clinical trials varies significantly and may be difficult to predict. Clinical results are frequently susceptible
to varying interpretations that may delay, limit or prevent regulatory approvals. Additional factors that can cause delay or termination
of our clinical trials, or that may increase the costs of these trials, include:



| | · | slow
                                         patient enrollment due to the nature of the clinical trial plan, the proximity of patients
                                         to clinical sites, the eligibility criteria for participation in the study or other factors,
                                         and the number of sites participating in the trial;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | inadequately
                                         trained or insufficient personnel at the study site to assist in overseeing and monitoring
                                         clinical trials or delays in approvals from a study site’s review board;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | longer
                                         treatment time required to demonstrate efficacy or determine the appropriate product
                                         dose;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | insufficient
                                         supply of the drug candidates;
| | - | ------------------------------------------------------------------------------------



| | · | adverse
                                         medical events or side effects in treated patients; and
| | - | --------------------------------------------------------------------------------------------------------



| | · | ineffectiveness
                                         of the drug candidates.
| | - | --------------------------------------------------------------------------------



In addition, the FDA
may place a clinical trial on hold or terminate it if it concludes that subjects are being exposed to an unacceptable health risk.
Any drug is likely to produce some toxicity or undesirable side effects when administered at sufficiently high doses and/or for
a sufficiently long period of time. Unacceptable toxicity or side effects may occur at any dose level at any time in the course
of studies designed to identify unacceptable effects of a drug candidate, known as toxicological studies, or clinical trials of
drug candidates. The appearance of any unacceptable toxicity or side effect could bring us or regulatory authorities to interrupt,
limit, delay or abort the development of any of our drug candidates and could ultimately prevent approval by the FDA or foreign
regulatory authorities for any or all targeted indications.



Before receiving FDA
approval to market a product, we must demonstrate that the product is safe and effective for its intended use by submitting to
the FDA an NDA containing the pre-clinical and clinical data that have been accumulated, together with chemistry and manufacturing
and controls specifications and information, and proposed labeling, among other things. The FDA may refuse to accept an NDA for
filing if certain content criteria are not met and, even after accepting an NDA, the FDA may often require additional information,
including clinical data, before approval of marketing a product.



As part of the approval
process, the FDA must inspect and approve each manufacturing facility. Among the conditions of approval is the requirement that
a manufacturer’s quality control and manufacturing procedures conform to cGMP. Manufacturers must expend time, money and
effort to ensure compliance with cGMP, and the FDA conducts periodic inspections to certify compliance. It may be difficult for
our manufacturers or us to comply with the applicable cGMP and other FDA regulatory requirements. If we or our contract manufacturers
fail to comply, then the FDA will not allow us to market products that have been affected by the failure.



39







If the FDA grants
approval, the approval will be limited to those disease states, conditions and patient populations for which the product is safe
and effective, as demonstrated through clinical studies. Further, a product may be marketed only in those dosage forms and for
those indications approved in the NDA. Certain changes to an approved NDA, including, with certain exceptions, any changes to
labeling, require approval of a supplemental application before the drug may be marketed as changed. Any products that we manufacture
or distribute pursuant to FDA approvals are subject to continuing regulation by the FDA, including compliance with cGMP and the
reporting of adverse experiences with the drugs. The nature of marketing claims that the FDA will permit us to make in the labeling
and advertising of our products will be limited to those specified in an FDA approval, and the advertising of our products will
be subject to comprehensive regulation by the FDA. Claims exceeding those that are approved will constitute a violation of the
Federal Food, Drug, and Cosmetic Act. Violations of the Federal Food, Drug, and Cosmetic Act or regulatory requirements at any
time during the product development process, approval process, or after approval may result in agency enforcement actions, including
withdrawal of approval, recall, seizure of products, injunctions, fines and/or civil or criminal penalties. Any agency enforcement
action could have a material adverse effect on our business.



Should we wish to
market our products in countries other than the U.S., we must receive marketing authorization from the appropriate regulatory
authorities. The requirements governing the conduct of clinical trials, marketing authorization, pricing and reimbursement vary
widely from country to country. At present, companies are typically required to apply for foreign marketing authorizations at
a national level. However, within the EU, registration procedures are available to companies wishing to market a product in more
than one EU member state. Typically, if the regulatory authority is satisfied that a company has presented adequate evidence of
safety, quality and efficacy, then the regulatory authority will grant a marketing authorization. This regulatory approval process,
however, involves risks similar or identical to the risks associated with FDA approval discussed above, and therefore we cannot
guarantee that we will be able to obtain the appropriate marketing authorization for any product in any particular country. Our
current development strategy calls for us to seek marketing authorization for our drug candidates in countries other than the
United States.



Failure to comply
with applicable laws and regulations would likely have a material adverse effect on our business. In addition, laws and regulations
regarding the manufacture and sale of new drugs are subject to future changes. We cannot predict the likelihood, nature, effect
or extent of adverse governmental regulation that might arise from future legislative or administrative action.



Employees



As of March 20, 2017,
we have 2 full-time employees, including our officers, and 5 part-time service providers. We and our Israeli employees are subject,
by an extension order of the Israeli Ministry of Welfare, to certain provisions of collective bargaining agreements between the
Histadrut, the General Federation of Labor Unions in Israel and the Coordination Bureau of Economic Organizations, including the
Industrialists Associations. These provisions principally address cost of living increases, recreation pay, travel expenses, vacation
pay and other conditions of employment. We provide our employees with benefits and working conditions equal to or above the required
minimum. Other than those provisions, our employees are not represented by a labor union.



Organizational structure



Our legal and commercial
name is XTL Biopharmaceuticals Ltd. We were established as a private company limited by shares under the laws of the State of
Israel on March 9, 1993, under the name Xenograft Technologies Ltd. We re-registered as a public company on June 7, 1993, in Israel,
and changed our name to XTL Biopharmaceuticals Ltd. on July 3, 1995.



We commenced operations
to use and commercialize technology developed at the Weizmann Institute, in Rehovot, Israel. Since 1993 we pursued therapeutic
and pharmaceutical development programs for the treatment of a variety of indications including hepatitis B, hepatitis C, diabetic
neuropathic pain, schizophrenia, SLE and multiple myeloma, most of which have terminated. Our current drug development program
is currently focused on the treatment of SLE and multiple myeloma.



We currently have
one subsidiary, Xtepo Ltd., a private company limited by shares under the laws of the State of Israel which holds a license for
the exclusive use of rHuEPO for the treatment of multiple myeloma. As of January 2017, we hold approximately 3.78% of the issued
and outstanding share capital of InterCure Ltd., a now former subsidiary of ours (See “Business – Recent Developments
– InterCure Transactions ”).



40







The ADSs are listed
for trading on the Nasdaq Capital Market under the symbol “XTLB.” Our ordinary shares are traded on the TASE under
the symbol “XTLB.” We operate under the laws of the State of Israel under the Israeli Companies Law, and in the U.S.,
the Securities Act and the Exchange Act.



Our principal offices
are located at 5 HaCharoshet Street, Raanana 4365603, Israel, and our telephone number is +972-9-955-7080. Our primary internet
address is www.xtlbio.com. None of the information on our website is incorporated by reference herein.



Property and Equipment



Since April 2015
we lease offices in Ra’anana, Israel. The basic lease period is for 24 months with an option for an additional 24-month
period.



To our knowledge,
there are no environmental issues that affect our use of the properties that we lease.



ITEM 4A. UNRESOLVED STAFF COMMENTS



None.



ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS



You should read the
following discussion and analysis in conjunction with our audited consolidated financial statements, including the related notes,
prepared in accordance with International Financial Reporting Standards ("IFRS") for the years ended December 31, 2016,
2015 and 2014, and as of December 31, 2016 and 2015, contained in “Item 18. Consolidated Financial Statements” and
with any other selected financial data included elsewhere in this annual report.



Selected Financial Data



The tables below
present selected financial data for the fiscal years ended as of December 31, 2016, 2015 and 2014 and as of December 31, 2016
and 2015. We have derived this selected financial data from our audited consolidated financial statements, included elsewhere
in this report and prepared in accordance with IFRS issued by the IASB. You should read the selected financial data in conjunction
with “Item 3. Key Information” and “Item 8. Financial Information” and “Item 18. Consolidated Financial
Statements.”



41







Consolidated Statements of Comprehensive Loss:



|                                                                                                |  | Year ended December 31,                           |       
|----------------------------------------------------------------------------------------------- |  | ------------------------------------------------- | ------
|                                                                                                |  | 2016                                              |       
|                                                                                                |  | U.S. dollars in thousands (except per share data) |       
|                                                                                                |  |                                                   |       
|Continuing operations:                                                                          |  |                                                   |       
|Research and development expenses                                                               |  |                                                   | (443  
|General and administrative expenses                                                             |  |                                                   | (1,270
|Impairment of intangible assets                                                                 |  |                                                   | (848  
|Other gains, net                                                                                |  |                                                   | -     
|                                                                                                |  |                                                   |       
|Operating loss                                                                                  |  |                                                   | (2,561
|                                                                                                |  |                                                   |       
|Finance income                                                                                  |  |                                                   | 23    
|Finance expenses                                                                                |  |                                                   | (7    
|                                                                                                |  |                                                   |       
|Finance income (expenses), net                                                                  |  |                                                   | 16    
|                                                                                                |  |                                                   |       
|Loss from continuing operations                                                                 |  |                                                   | (2,545
|                                                                                                |  |                                                   |       
|Loss from discontinued operations                                                               |  |                                                   | -     
|                                                                                                |  |                                                   |       
|Total loss for the year                                                                         |  |                                                   | (2,545
|                                                                                                |  |                                                   |       
|Other comprehensive income:                                                                     |  |                                                   |       
|Items that might be classified to profit or loss:                                               |  |                                                   |       
|Changes in the fair value of available-for-sale financial assets                                |  |                                                   | 163   
|Realized gain from sale available-for-sale financial assets                                     |  |                                                   | -     
|                                                                                                |  |                                                   |       
|Total other comprehensive income                                                                |  |                                                   | 163   
|                                                                                                |  |                                                   |       
|Total comprehensive loss                                                                        |  |                                                   | (2,382
|                                                                                                |  |                                                   |       
|Total loss attributable to:                                                                     |  |                                                   |       
|Equity holders of the Company                                                                   |  |                                                   | (2,545
|Non-controlling interests                                                                       |  |                                                   | -     
|                                                                                                |  |                                                   |       
|                                                                                                |  |                                                   | (2,545
|                                                                                                |  |                                                   |       
|Total comprehensive loss attributable to:                                                       |  |                                                   |       
|Equity holders of the Company                                                                   |  |                                                   | (2,382
|Non-controlling interests                                                                       |  |                                                   | -     
|                                                                                                |  |                                                   |       
|                                                                                                |  |                                                   | (2,382
|                                                                                                |  |                                                   |       
|Basic and diluted loss per share from continuing and discontinued operations (in U.S. dollars): |  |                                                   |       
|From continuing operations                                                                      |  |                                                   | (0.009
|From discontinued operations                                                                    |  |                                                   | -     
|                                                                                                |  |                                                   |       
|Loss per share for the period                                                                   |  |                                                   | (0.009



*)	Representing amount less than
$1 thousand



42







Consolidated Statements of Financial Position Data:



|                                             |  | As of December 31,           |      
|-------------------------------------------- |  | ---------------------------- | -----
|                                             |  | 2016                         |      
|                                             |  | U.S Dollars
    in thousands |      
|                                             |  |                              |      
|Cash, cash equivalents and
    bank deposits |  |                              | 2,019
|Working capital                              |  |                              | 2,424
|Total assets                                 |  |                              | 3,017
|Long term liabilities                        |  |                              | -    
|Total shareholders’ equity                   |  |                              | 2,687
|Non-controlling interests                    |  |                              | -    



Overview



We are a biopharmaceutical
company engaged in the acquisition and development of pharmaceutical drugs for the treatment of autoimmune diseases. Our current
drug development program is focused on the development of hCDR1 for the treatment of SLE and SS.



We were established
as a corporation under the laws of Israel in 1993, and commenced operations to use and commercialize technology developed at the
Weizmann Institute, in Rehovot, Israel. Since commencing operations, our activities have been primarily devoted to developing
our technologies and drug candidates, acquiring pre-clinical and clinical-stage compounds, raising capital, purchasing assets
for our facilities, and recruiting personnel. We have had no drug product sales to date. Our major sources of working capital
have been proceeds from various private and public offerings of our securities and option and warrant exercises.



We have incurred negative
cash flow from operations each year since our inception and we anticipate incurring negative cash flows from operating activities
for the foreseeable future. We have spent, and expect to continue to spend, substantial amounts in connection with implementing
our business strategy, including our planned product development efforts, our clinical trials, and potential in-licensing and
acquisition opportunities.



Our research and development
expenses primarily consisted of expenses related to the hCDR1 development plan. As part of the preparations for future clinical
trials of hCDR1, we engaged regulatory and clinical consultants and commenced work on Chemistry, Manufacturing and Control, or
CMC, including production and testing of the drug substance.



Our general and administrative
expenses consist primarily of salaries, consultant fees, and related expenses for executive, finance and other administrative
personnel, professional fees, director fees and other corporate expenses, including investor relations, business development costs
and facilities related expenses. We expense our general and administrative costs as incurred.



Our results of operations
include non-cash compensation expense as a result of the grants of XTL stock options. Compensation expense for awards of options
granted to employees and directors represents the fair value of the award (measured using the Black-Scholes valuation model) recorded
over the respective vesting periods of the individual stock options (see details below.)



For awards of options
and warrants to consultants and other third-parties, according to IFRS 2, the treatment of such options and warrants is the same
as employee options compensation expense (see note 16 to the consolidated financial statements for the year ended December 31,
2016). We record compensation expense based on the fair value of the award at the grant date according to the Black-Scholes valuation
model. According to IFRS 2, in non-performance-based options, we recognize options expenses using the graded vesting method (accelerated
amortization). Graded vesting means that portions of a single option grant will vest on several dates, equal to the number of
tranches. We treat each tranche as a separate share option grant; because each tranche has a different vesting period, and hence
the fair value of each tranche is different. Therefore, under this method the compensation cost amortization is accelerated to
earlier periods in the overall vesting period.



Our planned clinical
trials will be lengthy and expensive. Even if these trials show that our drug candidates are effective in treating certain indications,
there is no guarantee that we will be able to record commercial sales of any of our product candidates in the near future or generate
licensing revenues from upfront payments associated with out-licensing transactions. In addition, we expect losses in our drug
development activity to continue as we continue to fund development of our drug candidates. As we continue our development efforts,
we may enter into additional third-party collaborative agreements and may incur additional expenses, such as licensing fees and
milestone payments. As a result, our periodical results may fluctuate and a period-by-period comparison of our operating results
may not be a meaningful indication of our future performance.



43







A. Results of Operations



Year ended December 31, 2016 compared to the year ended
December 31, 2015



Research and Development
Expenses. Research and development expenses in the years ended December 31, 2016 and 2015 totaled approximately $443 thousand
and $578 thousand, respectively. Research and development expenses are comprised mainly of expenses related to preparations for
initiating the phase 2 clinical trials of the hCDR1 drug designed to treat SLE and pSS patients. The decrease in expenses in 2016
compared to 2015 is mainly due to professional consulting expenses in 2015 related to the preparation and submission to the U.S.
FDA of our pre-IND meeting package for our planned clinical study of the hCDR1 drug for the treatment of SLE patients filing of
a pre-IND meeting package related to our hCDR1 drug. Expenses incurred in 2016 include, among other things, chemistry, manufacturing
and control (CMC) costs for production of the drug product, pre-clinical experiments on the use of hCDR1 for the treatment of
pSS patients, as well as clinical and regulatory consulting fees.



General and Administrative
Expenses. General and administrative expenses for the years ended December 31, 2016 and 2015 totaled approximately $1,270
thousand and $1,419 thousand, respectively. The decrease in 2016 compared to 2015 is mainly due to the Company's efforts to reduce
overhead costs.



Impairment of
intangible assets. The Company is required to determine, at least on an annual basis and as of year-end, whether the fair
value of its unamortized intangible assets exceeds their book value. As of December 31, 2016 and 2015, the Company recognized
an impairment in the amount of $848 and $1,604 thousand, respectively, with regard to the rHuEPO intangible asset which is fully
impaired as of December 31, 2016. For further information, see also Note 10 of the consolidated financial statements for the year
ended December 31, 2016.



Finance (income)
expenses, net. Finance (income) expenses, net for the years ended December 31, 2016 and 2015 totaled approximately ($16) thousand
and $11 thousand, respectively. The decrease in finance expenses in 2016 compared to 2015 derives mainly from a reduced exposure
to NIS/USD exchange rate fluctuations due to lower NIS cash balances in 2016 compared to 2015.



Total loss from
discontinued operations. Total loss from discontinued operations of approximately $689 thousand for the year ended December
31, 2015 , is derived from the deconsolidation of the Company’s investment in InterCure, a former subsidiary.



Year ended December 31, 2015 compared to the year ended
December 31, 2014



Research and Development
Expenses. Research and development expenses in the years ended December 31, 2015 and 2014 totaled approximately $578 thousand
and $278 thousand, respectively. Research and development expenses are comprised mainly of expenses related to preparations for
initiating the phase 2 clinical trials of the hCDR1 drug designed to treat SLE patients. The increase in expenses in 2015 compared
to 2014 is mainly due to expenses related to our hCDR1 drug. Expenses incurred in 2015 include, among other things, chemistry,
manufacturing and control (CMC) costs for production of the drug substance and drug product, as well as clinical and regulatory
consulting fees related to the preparation and submission to the U.S. FDA of our pre-IND meeting package for our planned clinical
study of the hCDR1 drug for the treatment of SLE patients.



General and Administrative
Expenses. General and administrative expenses for the years ended December 31, 2015 and 2014 totaled approximately $1,419
thousand and $1,744 thousand, respectively. The decrease in 2015 compared to 2014 is mainly due to the Company's efforts to reduce
overhead costs as well as lower share-based compensation expenses.



Impairment of
intangible assets. The Company is required to determine, on at least an annual basis and as of year-end, whether the fair
value of its unamortized intangible assets exceeds their book value. As of December 31, 2015, the Company recognized an impairment
in the amount of $1,604 thousand with regard to the rHuEPO intangible asset. For further information, see note 10 of the consolidated
financial statements for the year ended December 31, 2016.



44







Finance expenses,
net. Finance expenses, net for the years ended December 31, 2015 and 2014 totaled approximately $11 thousand and $97 thousand,
respectively. The decrease in finance expenses in 2015 compared to 2014 derives mainly from a reduced exposure to NIS/USD exchange
rate fluctuations due to lower NIS cash balances in 2015 compared to 2014.



Total loss from
discontinued operations. Total loss from discontinued operations of approximately $689 thousand and $746 thousand, is derived
from the Company’s investment in InterCure, a former subsidiary. Such loss for the year ended December 31, 2015 represents
a loss from the deconsolidation of InterCure.



Significant Accounting Policies



Basis of presentation
of the consolidated financial statements. The consolidated financial statements of the Company and its subsidiary (the “Group”)
as of December 31, 2016 and 2015, and for each of the three years in the period ended December 31, 2016 have been prepared in
accordance with International Financial Reporting Standards which are standards and interpretations issued by the IASB.



The significant accounting
policies described below are consistent with those of all periods presented, unless indicated otherwise.



The preparation of
consolidated financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires
the Company’s management to exercise its judgment in the process of applying the Group’s accounting policies. The
areas that involve judgment which has significant effect or complexity or where assumptions and estimates are significant to the
consolidated financial statements are disclosed in Note 3 to the annual consolidated financial statements. Actual results could
significantly differ from the estimates and assumptions used by the Group’s management.



The Company analyzes
the expenses recognized in the statement of comprehensive loss by classification based on the function of expense.



We define critical
accounting policies as those that are reflective of significant judgments and uncertainties and which may potentially result in
materially different results under different assumptions and conditions. In applying these critical accounting policies, our management
uses its judgment to determine the appropriate assumptions to be used in making certain estimates. These estimates are subject
to an inherent degree of uncertainty. Our critical accounting policies include the following:



Intangible assets



| | 1. | Unamortized intangible assets (licenses and patent rights)
| | -- | ----------------------------------------------------------



The amortization of an asset
on a straight-line basis over its useful life begins when the development procedure is completed and the asset is available for
use. These assets are reviewed for impairment once a year or whenever there are indicators of a possible impairment, in accordance
with the provisions of IAS 36, “Impairment of Assets”.



| | 2. | Research and development
| | -- | ------------------------



Research expenditures are recognized
as expenses when incurred. Costs arising from development projects are recognized as intangible assets when the following criteria
are met:



| | · | it
                                         is technically feasible to complete the intangible asset so that it will be available
                                         for use;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



45







| | · | management
                                         intends to complete the intangible asset and use or sell it;
| | - | ----------------------------------------------------------------------------------------------------------------



| | · | there
                                         is an ability to use or sell the intangible asset;
| | - | -------------------------------------------------------------------------------------------------



| | · | it
                                         can be demonstrated how the intangible asset will generate probable future economic benefits;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------



| | · | adequate
                                         technical, financial and other resources to complete the development and to use or sell
                                         the intangible asset are available; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | the
                                         expenditure attributable to the intangible asset during its development can be reliably
                                         measured.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Other development expenditures
that do not meet these criteria are recognized as an expense when incurred. Development costs that were previously recognized
as an expense are not recognized as an asset in a later period. During the three years ended December 31, 2016, the Group did
not capitalize development costs to intangible assets.



Impairment of non-financial assets



Intangible assets
which are not yet available for use are not depreciated and impairment in their respect is tested every year. Depreciable assets
are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The
recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing
impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units).
Non-financial assets that sustained impairment are reviewed for possible reversal of the impairment at each date of the statement
of financial position.



As for testing impairment
of acquired intangible assets, see intangible assets above.



Share-based payment



The Group operates
a number of share-based payment plans to employees and to other service providers who render services that are similar to employees’
services that are settled with the Group’s equity instruments. In this framework, the Group grants employees, from time
to time, and at its sole discretion, options to purchase shares of the Group companies. The fair value of services received from
employees in consideration of the grant of options is recognized as an expense in the statement of comprehensive income (loss)
and correspondingly carried to equity. The total amount recognized as an expense over the vesting term of the options (the term
over which all pre-established vesting conditions are expected to be satisfied) is determined by reference to the fair value of
the options granted at grant date, except the effect of any non-market vesting conditions.



Non-market vesting
conditions are included in the assumptions used in estimating the number of options that are expected to vest. The total expense
is recognized over the vesting period, which is the period over which all of the specified vesting conditions of the share-based
payment arrangement are to be satisfied.



In each reporting
date, the Company revises its estimates of the number of options that are expected to vest based on the non-market vesting conditions
and recognizes the impact of the revision to original estimates, if any, in the statement of comprehensive income (loss) with
a corresponding adjustment in equity.



When the options are
exercised, the Company issues new shares. The proceeds net of any directly attributable transaction costs are credited to share
capital (nominal value) and share premium.



Share-based payment
transactions in which the Company acquired assets as consideration for the Company’s equity instruments are measured at
the value of the assets acquired.





46







Critical Accounting Estimates



Estimates are continually
evaluated and are based on historical experience and other factors, including expectations of future events that are believed
to be reasonable under the circumstances.



Accounting estimates
will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing
a material adjustment to the carrying amounts of assets and liabilities within the next financial year are addressed below.



| | · | Intangible assets
                                         -
| | - | ------------------------------------------------------------



| | (i) | In testing impairment of research and
                                         development assets, the Company’s management is required to estimate, among other
                                         things, the probable endpoints of trials conducted by the Company, the commercial technical
                                         feasibility of the development and the resulting economic benefits. Actual results and
                                         estimates to be made in the future may significantly differ from current estimates.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) | The Group is required to determine
                                         at the end of each reporting period whether there is any indication that an asset may
                                         be impaired. If indicators for impairment are identified, the Group estimates the asset’s
                                         recoverable amount, which is the higher of an asset’s fair value less costs to
                                         sell and its value-in-use. The value-in-use calculations require management to make estimates
                                         of the projected future cash flows. Determining the estimates of the future cash flows
                                         is based on management past experience and best estimate for the economic conditions
                                         that will exist over the remaining useful economic life of the CGU.
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Share-based
                                         payments - in evaluating the fair value and the recognition method of share-based payment,
                                         the Company’s management is required to estimate, among others, different parameters
                                         included in the computation of the fair value of the options and the Company’s
                                         results and the number of options that will vest.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Impact of Inflation and Currency
Fluctuations



We hold most of our
cash, cash equivalents and bank deposits in US dollars. While a substantial amount of our operating expenses are in US dollars,
we incur a portion of our expenses in New Israeli Shekels. In addition, we also pay for some of our services and supplies in the
local currencies of our suppliers. As a result, we are exposed to the risk that the US dollar will be devalued against the New
Israeli Shekel or other currencies, and as result our financial results could be harmed if we are unable to protect against currency
fluctuations in Israel or other countries in which services and supplies are obtained in the future. Accordingly, we may enter
into currency hedging transactions to decrease the risk of financial exposure from fluctuations in the exchange rates of currencies.
The Company’s treasury’s risk management policy is to hold NIS-denominated cash and cash equivalents and short-term
deposits in the amount of the anticipated NIS-denominated liabilities for six consecutive months from time to time in line with
the directives of the Company’s Board. These measures, however, may not adequately protect us from the adverse effects of
inflation in Israel. In addition, we are exposed to the risk that the rate of inflation in Israel will exceed the rate of devaluation
of the New Israeli Shekel in relation to the US Dollar or that the timing of any devaluation may lag behind inflation in Israel.
Future activities may lead us to perform a clinical trial in Israel, which may lead us to reassess our use of the US dollar as
our functional currency.



As of December 31,
2016, had the Group’s functional currency weakened by 10% against the NIS with all other variables remaining constant, loss
for the year would have been $22 thousand lower (2015 loss approximately $20 thousand lower; 2014 - loss approximately $85 thousand
lower), mainly as a result of exchange rate changes on translation of other accounts receivable, net and exchange rate changes
on NIS-denominated cash and cash equivalents and short-term deposits. Loss was less sensitive to fluctuations in the exchange
rate in relation to the NIS in 2016 than in 2015 mainly because of the decreased amount of the NIS-denominated balances in the
items of cash, receivables and payables of the Group.



47







Governmental Economic, Fiscal, Monetary or Political
Policies that Materially Affected or Could Materially Affect Our Operations



Tax rates applicable to the
Company:



| | · | Taxable
                                         income of the Company is subject to a corporate tax rate as follow: 2015 - 26.5% and
                                         2016 - 25%.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | On
                                         January 5, 2016, the Israeli Parliament officially published the Law for the Amendment
                                         of the Israeli Tax Ordinance (Amendment 216), that reduces the standard corporate income
                                         tax rate from 26.5% to 25%.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | In
                                         December 2016, the Israeli Parliament approved the Economic Efficiency Law (Legislative
                                         Amendments for Applying the Economic Policy for the 2017 and 2018 Budget Years), 2016
                                         which reduces the corporate income tax rate to 24% (instead of 25%) effective from January
                                         1, 2017 and to 23% effective from January 1, 2018.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As of December 31,
2016, XTL Biopharmaceuticals Ltd. did not have any taxable income. As of December 31, 2016, our net operating loss carry forwards
for Israeli tax purposes registered on behalf of XTL Biopharmaceuticals Ltd. amounted to approximately $30 million. Under Israeli
law, these net-operating losses may be carried forward indefinitely and offset within XTL Biopharmaceuticals Ltd only, against
future taxable income, including capital gains from the sale of assets used in the business, with no expiration date.



B. Liquidity and Capital Resources



We have financed our
operations from inception primarily through various private placement transactions, our initial public offering, a placement and
open offer transaction, option and warrant exercises, and private investments in public equities. As of December 31, 2016, we
had received net proceeds of approximately $74.2 million from various public offerings and private placement transactions, including
net proceeds of approximately $45.7 million from our initial public offering in September 2000, net proceeds of approximately
$15.4 million from the 2004 placement and open offer transaction, net proceeds of approximately $1.5 million from the Bio-Gal
transaction in August 2010, net proceeds of approximately $1.75 million from our public offering on TASE in March 2011, net proceeds
of $2.4 million from our private placement in March 2012, net proceeds of approximately $3.4 million from our public offering
on Nasdaq in April 2015, and proceeds of approximately $4.0 million from the exercise of options and warrants.



As of December 31,
2016, we had approximately $2 million in cash and cash equivalents (including bank deposits), an decrease of $1.8 million from
December 31, 2015.



Prior to the date
of this report, in February 2017 we recieved net proceeds of approximately $2.1 million from a public offering and in March 2017
we received net proceeds of approximately $2.7 million from a private placement to existing investors.



Cash flows used in
operating activities for the year ended December 31, 2016 totaled approximately $1.7 million, compared to cash flows used in operating
activities of approximately $1.9 million for the year ended December 31, 2015. Cash flows in 2016 mainly originated from annual
loss of $2,545 thousand less the impairment of intangible assets related to rHuEPO of $848 thousand and stock-based compensation
expenses of $182 thousand plus adjustments to operating cash flow relating to changes in operating asset and liability items of
$220 thousand. Cash flows in 2015 mainly originated from annual loss of $4,311 thousand less the impairment of intangible assets
related to rHuEPO of $1,604 thousand, divestment of subsidiary of $689 thousand and stock-based compensation expenses of $148
thousand plus adjustments to operating cash flow relating to changes in operating asset and liability items of $16 thousand.



Cash flows used in
investing activities in the year ended December 31, 2016 totaled approximately $66 thousand compared to cash flows provided by
investing activities of approximately $110 thousand in the previous year. Cash flows in 2016 mainly originated from payment made
to Yeda in connection with the hCDR1 asset. Cash flows in 2015 mainly originated from payment made to Yeda in connection with
the hCDR1 asset and Company’s divestment of InterCure.



48







Cash flows provided
by financing activities in the year ended December 31, 2016 totaled approximately $0 million compared to cash flows provided by
financing activities of approximately $3.6 million in the previous year. Amount for the year ended December 31, 2015 reflects
net cash flows during the period in connection with the April 2015 public offering.



The Company has incurred
continuing losses and depends on outside financing resources to continue its activities. Based on existing business plans, the
Company’s management estimates that its outstanding cash and cash equivalent balances, including short-term deposits, will
allow the Company to finance its activities for a period of at least twelve months from the date hereof. However, the amount of
cash which the Company will need in practice to finance its activities depends on numerous factors which include, but are not
limited to, the timing, planning and execution of clinical trials of existing drugs and future projects which the Company might
acquire or other business development activities such as acquiring new technologies and/or changes in circumstances which are
liable to cause significant expenses to the Company in excess of management’s current and known expectations as of the date
of these consolidated financial statements and which will require the Company to reallocate funds against plans, also due to circumstances
beyond its control.



The Company expects
to incur additional losses in 2017 arising from research and development activities, testing additional technologies and operating
activities, which will be reflected in negative cash flows from operating activities. In order to perform the clinical trials
aimed at developing a product until obtaining its marketing approval, the Company will be required to raise additional funds in
the future by issuing securities. Should the Company fail to raise additional capital in the future under standard terms, it will
be required to minimize its activities or sell or grant a sublicense to third parties to use all or part of its technologies.



C. Research and Development, Patents and Licenses



Research and development
costs in 2016, 2015 and 2014 substantially derived from costs related to the hCDR1 and, to a lesser degree, rHuEPO, development
plans. As part of the preparations for a planned clinical study of hCDR1, the Company engaged regulatory and clinical consultants
and completed work on CMC, including production and testing of the drug substance and drug product.



hCDR1 for the Treatment of SLE



The Company intends
to initiate a new Phase II clinical trial, which will include the 0.5 mg and a lower weekly dose. We estimate that the trial will
take over one year to enroll patients, 26 weeks for the treatment phase, and additional time to analyze the results for a total
of approximately two years.



rHuEPO for the Treatment of Multiple Myeloma



We have decided to
concentrate our efforts and resources on the development of hCDR1 and therefore do not expect to initiate any activities related
to rHuEPO.



The following table
sets forth the research and development costs for the years 2016, 2015 and 2014 including all costs related to the clinical-stage
projects, our pre-clinical activities, and all other research and development. We in-licensed hCDR1 in January 2014 and started
preparations for clinical development of this asset during the year. We started preparations for rHuEPO clinical development in
the last quarter of 2010 (after the completion of the Bio-Gal transaction on August 2010). We in-licensed SAM-101 in November
2011 and in June 2015, the Company terminated the license agreement and all rights in and to the licensed technology reverted
to MinoGuard. Whether or not and how quickly we commence and complete development of our clinical stage projects is dependent
on a variety of factors, including the rate at which we are able to engage clinical trial sites and the rate of enrollment of
patients. As such, the costs associated with the development of our drug candidates will probably increase significantly.



49









|                               |  | Research and development Expenses in thousand US$ |    
|------------------------------ |  | ------------------------------------------------- | ---
|                               |  | Year ended December 31,                           |    
|                               |  | 2016                                              |    
|                               |  |                                                   |    
|hCDR1                          |  |                                                   | 443
|rHuEPO                         |  |                                                   | -  
|SAM-101                        |  |                                                   | -  
|Other                          |  |                                                   | -  
|Total Research and Development |  |                                                   | 443



| | D. | Trend Information
| | -- | -----------------



We are a development stage
company and it is not possible for us to predict with any degree of accuracy the outcome of our research, development or commercialization
efforts. As such, it is not possible for us to predict with any degree of accuracy any significant trends, uncertainties, demands,
commitments or events that are reasonably likely to have a material effect on our net sales or revenues, income from continuing
operations, profitability, liquidity or capital resources, or that would cause financial information to not necessarily be indicative
of future operating results or financial condition. However, to the extent possible, certain trends, uncertainties, demands, commitments
and events are identified in the preceding subsections.



| | E. | Off-Balance Sheet Arrangements
| | -- | ------------------------------



We have not entered into
any transactions with unconsolidated entities whereby we have financial guarantees, subordinated retained interests, derivative
instruments or other contingent arrangements that expose us to material continuing risks, contingent liabilities, or any other
obligations under a variable interest in an unconsolidated entity that provides us with financing, liquidity, market risk or credit
risk support.



| | F. | Tabular disclosure of contractual Obligations
| | -- | ---------------------------------------------



As of December 31, 2016,
we had known contractual obligations, commitments and contingencies of approximately $10 thousand which relate to lease obligations
for our offices, all of which is due within the next year. In April 2015, we signed an operational lease agreement for our new
offices in Ra’anana. Under the new lease agreement, we will pay a monthly rent of approximately $2,500. In addition, we entered
into an agreement with subtenants to lease part of the office space in exchange for approximately $1,200 per month. The agreement
is in effect until April 2017.



We do not carry any contractual
obligations, commitments or contingencies relates to research and development operations.



|Payment due by period as of December 31, 2016 (in thousands of US$)
|-------------------------------------------------------------------
|Contractual obligations                                            
|                                                                   
|Operating lease obligations                                        
|                                                                   
|Total                                                              



Pursuant to our asset purchase
agreement to acquire the rights to develop rHuEPO for the treatment of Multiple Myeloma from Bio-Gal Ltd., we are obligated to
pay 1% royalties on net sales of the product, as well as a fixed royalty payment in the total amount of $350 thousand upon the
successful completion of Phase 2. The payment of $350 thousand is to be made to Yeda upon the earlier of (i) six months from the
successful completion of Phase 2 or (ii) the completion of a successful fundraising by XTL at any time after the completion of
the Phase 2 in an amount of at least $2 million. No Phase 2 study has been initiated on this compound.





50







According to the licensing
agreement signed with Yeda to develop hCDR1, a Phase II-ready asset for the treatment of Systemic Lupus Erythematosus (“SLE”).
The terms of the licensing agreement include, among other things, expense reimbursement for patent expenses payable in six installments
(as of December 31, 2016 three out of the six installments have been paid in cash or thourgh issuance of shares), certain milestone
payments to Yeda, low single-digit royalties based on net sales, and additional customary royalties to the Office of the Chief
Scientist.



ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES



| | A. | Directors and Senior Management
| | -- | -------------------------------



| | B. | The following sets forth information with respect to
our directors and executive officers as of the date hereof.
| | -- | ----------------------------------------------------------------------------------------------------------------



|Name                  |  | Age |  | Position                           
|--------------------- |  | --- |  | -----------------------------------
|Shlomo Shalev         |  | 55  |  | Chairman of the Board of Directors 
|Osnat Hillel Fain     |  | 51  |  | Non-Executive and External Director
|Oded Nagar            |  | 48  |  | Non-Executive and External Director
|David Bassa           |  | 55  |  | Non-Executive Director             
|Doron Turgeman        |  | 48  |  | Non-Executive Director             
|Dr. Jonathan Schapiro |  | 56  |  | Non-Executive Director             
|Dr. Dobroslav Melamed |  | 39  |  | Non-Executive Director             
|Josh Levine           |  | 52  |  | Chief Executive Officer            
|David Kestenbaum      |  | 52  |  | Chief Financial Officer            



Shlomo Shalev joined
our Board of Directors in December 2014 and in August 2015 was appointed to serve as Chairman. He most recently served as Chairman
of the Board of Micronet, a TASE listed company. In addition to serving as a board member on a number of NASDAQ and TASE listed
companies, such as OphirOptronics, Arel Communications and PowerDsine, Mr. Shalev was the Senior Vice President of Investments
for Ampal. He has also worked on a number of transactions in mergers and acquisitions and initial public offerings. With an educational
background in economics, Mr. Shalev was Israel’s Consul for Economic Affairs and the Economic Advisor to the Director General,
Ministry of Industry and Trade. Mr. Shalev holds an MBA from the University of San Francisco and a B.A. degree in Economics from
the University of Ben Gurion, Beer Sheva, Israel.



Osnat Hillel Fain joined
our Board of Directors in March 2015. She most recently served as Founder, Director and Managing Partner of Newton Propulsion Technologies
LTD. In addition to serving as a board member on a number of TASE listed companies, including First ET View LTD, Priortech LTD,
Aran R&D (1982) LTD, LeumiStart Fund and SDS LTD, Ms. Fain was the Business Development Manager at Giora Eiland Ltd., a representative
of The Cheyne Capital Group in Israel, CEO of InterVision, Co-manager of the Aran Medical Ventures hedge fund, Marketing Manager
at Datasphere Ltd. and an independent marketing consultant for TCB. She earned an Executive MBA and a BA in Humanities at Tel Aviv
University and completed a one year course in Management at the Tel Aviv campus of the College of Management.



Oded Nagar
joined our Board of Directors in March 2015. He currently serves as CEO and Owner of ABC - Advance Business Consulting Ltd, as
the CEO of Galaxy Properties and Real Estate LTD and as a board member of Bunkersec Ltd. In addition to serving as a board member
on a number of TASE listed companies, including IDB Development LTD, Gamatronic Electronic Industries LTD and Biri-Barashi Ltd.,
Mr. Nagar was the CEO and Founder of Pretium Group LTD/Pretium Renewable Energy LTD, VP Finance and Operations at Matrix IT (Formula
Group) and the CFO of Bashan Systems (Formula Group). Previously, Oded worked in the Department of the General Controller at the
Ministry of Finance in Israel, as an accountant at KPMG Israel and as an Economist at Bank Leumi. He earned an MBA in Finance and
Banking and Information Systems and a BA in Accounting and Economics from the Hebrew University of Jerusalem. Mr. Nagar is also
a Certified Public Accountant in Israel.





51







David Bassa
joined our Board of Directors in November 2013 and served as Chairman from June 2014 until August 2015. He is the CEO and co-founder
of Sela Software Ltd., a leading knowledge center and software house for the high-tech and IT industry, since 1990. In 2000, Mr.
Bassa founded Bio-Gal, a biopharmaceutical company which subsequently merged into XTL, for the purpose of developing Erythropoietin
(EPO) for the treatment of Multiple Myeloma. Mr. Bassa graduated with a B.A in Economics from Bar-Ilan University and an M.Sc in
Computer Science studies (without thesis), also from Bar-Ilan University. Mr. Bassa was twice awarded the President Excellency
Award (1981, 2002) and managed the Israeli branch of the international AIESEC organization, of which he is a Hall of Fame member.



Doron Turgeman joined
our Board of Directors in December 2014. He has significant public company experience with both NASDAQ and TASE listed companies.
Mr. Turgeman is currently the Chief Executive Officer of B Communications (BCOM) and Internet Gold (IGLD), both of which are listed
on the NASDAQ. He has gained considerable experience in mergers and acquisitions involving both debt and equity, with, among other
things, the purchase of the controlling interest of Bezeq by B Communications. He is knowledgeable in capital markets in Israel,
the U.S. and Europe as well as SEC and TASE reporting standards. Mr. Turgeman holds a B.A. degree in Economics and Accounting from
the Hebrew University of Jerusalem and is a certified public accountant in Israel.



Dr. Jonathan Schapiro joined
our Board of Directors in December 2014. He is currently an Adjunct Clinical Assistant Professor in the Department of Medicine,
Division of Infectious Diseases and Geographic Medicine at Stanford University School of Medicine and a Director of HIV/AIDS at
the National Hemophilia Center at Sheba Medical Center in Tel-Aviv, Israel. He has served as a committee member on the United States
Food and Drug Administration Antiviral Drugs Advisory Committee and is a member of the World Health Organization Global HIV Drug
Resistance Network Steering Group. Dr. Schapiro is on the organizing and scientific committee of international conferences on antiviral
drug development, clinical pharmacology and resistance, as well as contributing to guidelines publications. His research has appeared
in major journals such as Lancet and Annals of Internal Medicine. He has served on the scientific advisory boards of major pharmaceutical
and molecular diagnostic companies and has been involved in the development of multiple antiviral drugs over the last 20 years.
Dr. Schapiro has devoted his career to HIV clinical care, research and education since completing his Fellowship in Infectious
Diseases and Geographic Medicine at Stanford University School of Medicine, Stanford CA. He graduated from the Ben Gurion University
School of Medicine and completed his Medical Residency at the Rabin Medical Center in Israel.



Dr. Dobroslav
Melamed joined our Board of Directors in December 2014. He is a biotech entrepreneur with over 10 years of experience
in the life science industry. Until September 2014, he was the President of SciVac (formerly SciGen IL), a high growth biopharmaceutical
company that develops, manufactures and markets recombinant human health care biotechnology derived products, including vaccines.
Dr. Melamed was responsible for SciVac’s operations, clinical trials and new business. Dr. Melamed is the co-founder of Periness
LTD, a developer of new drugs for male infertility and Oshadi LTD, a developer of oral carriers for proteins like insulin. He has
also been a researcher at Bar-Ilan University’s Male Fertility clinic, where he assisted in the development of new drugs
for male infertility; and QBI, where he worked in the Pre-clinical and Research Pharmacology Department establishing In-Vivo models
for drug discovery and delivery. Dr. Melamed earned a PhD in Biotechnology and a Bachelor of Arts degree in Biotechnology from
the Bar-Ilan University, Israel.



Josh Levine
was appointed our Chief Executive Officer in October 2013. Mr. Levine was the Chief Executive Officer of Proteologics Ltd. (TASE:
PRTL) from January 2011 until October 2013. Previously, from September 2008 until September 2010, he was Chairman of the Board
of Proteologics Ltd. Concurrently, he was Senior Director at Teva Innovative Ventures responsible for, among other things, business
development as well as alliance management for the unit. He had also held several executive positions within venture capital funds
and boutique investment banks. Previously, he was a corporate attorney at a large New York City law firm. Mr. Levine holds a JD
degree from Columbia University Law School and a BA degree in Chemistry from Yeshiva University.



David Kestenbaum
was appointed our Chief Financial Officer in January 2014. Before joining XTL, he served as CFO of Zenith Solar Ltd., from 2010
to 2012. Prior positions include Finance Director of Colbar Lifescience Ltd., a medical device/biotech company and division of
Johnson and Johnson (NYSE:JNJ) from 2007 to 2010, CFO of ZAG Industries Ltd., a division of The Stanleyworks (NYSE:SWK) from 2003
to 2007, and CFO and other senior financial positions at affiliates of Unilever NV (NYSE: UN) in the U.S. and Israel. He worked
in public accounting at PriceWaterhouseCoopers in NY from 1986 to 1990. Mr. Kestenbaum is a U.S. Certified Public Accountant and
holds a BSc in Accounting from Yeshiva University (NY), and a MBA in Finance and International Business from Columbia University
(NY).





52







| | B. | Compensation
| | -- | ------------



The aggregate compensation
paid by us to all persons who served as directors or officers for the year 2016 (10 persons) was approximately $552 thousand. This
amount includes payments of approximately $37 thousand made for social security, pension, disability insurance and health insurance
premiums, severance accruals, payments made in lieu of statutory severance, payments for continuing education plans and payments
made for the redemption of accrued vacation.



All members of our Board
of Directors who are not our employees are reimbursed for their expenses for each meeting attended, save for Mr. David Bassa, who
is a significant shareholder of our Company. Our directors are eligible to receive stock options under our stock option plans.
With the exception of the Chairman of the Board of Directors who receives monthly compensation, non-executive directors do not
receive any remuneration from us other than fees for their services as members of the board or committees of the board and expense
reimbursement, save for one director who is eligible for fees for consulting services provided to the Company.



In March 2012, we granted
to each of our former external directors, Jaron Diament and Dafna Cohen, options to purchase 150,000 ordinary shares exercisable
at an exercise price of NIS 0.58633 per share (which is the average of the three-day closing price on TASE prior to the issuance).
33% of the options are vested and the remaining 67% shall vest and be exercisable on a monthly basis, commencing from the date
of the mentioned shareholders meeting, for the duration of two years. Ms. Cohen and Mr. Diament ceased serving on the Board of
Directors on March 18, 2015 and the 300,000 vested options granted to them expired on March 17, 2016.



On December 30, 2014, we
granted to each of four of our directors – Mr. Doron Turgeman, Mr. Shlomo Shalev, Dr. Jonathan Schapiro and Dr. Dobroslav
Melamed - options to purchase 150,000 ordinary shares exercisable at an exercise price of NIS 0.4325 per share. One third of the
options vest on the twelve month anniversary of the grant date, and the remaining two thirds vest on a quarterly basis over the
following two years provided the respective director provides services to us. The options have a term of ten years.



On March 25, 2015, we granted
to each of two of our directors - Osnat Hillel Fain and Oded Nagar - options to purchase 150,000 ordinary shares at an exercise
price of NIS 0.40 per share. One third of the options vest on the twelve month anniversary of the grant date, and the remaining
two thirds vest on a quarterly basis over the following two years provided the respective director provides services to us. The
options have a term of ten years.



In March 2015, we fixed
the monetary compensation for non-executive directors as follows: annual consideration of $10 thousand (to be paid in 4 equal quarterly
payments), payments of NIS 1,460 for attendance at each board or committee meeting in person, NIS 744 for meetings held by teleconference,
NIS 620 for unanimous written board resolutions and reimbursement of reasonable out-of-pocket expenses.



We previously granted to
each of our three former directors, Mr. Yonay, Mr. Shweiger and Mr. Allouche, options to purchase 150,000 ordinary shares exercisable
at NIS 0.298 per share (which is the average of the three-day closing price on TASE prior to the issuance). 33% of the options
are vested and the remaining 67% vest on a monthly basis from March 2, 2010 over two years. On November 22, 2010, Mr. Shweiger
ceased serving on our Board of Directors and therefore 63,747 of the total options granted to him were forfeited. Upon his departure,
Mr. Shweiger exercised the vested 86,253 options. Mr. Allouche ceased serving on our Board of Directors on May 18, 2014, and during
August 2014 he exercised the 150,000 vested options granted to him. Mr. Yonay ceased serving on our Board of Directors on December
30, 2014 and the 150,000 vested options granted to him expired on December 29, 2015.





53







On March 31, 2016, a general
meeting of shareholders of the Company approved the remuneration terms of the Chairman of the Board of Directors of the Company,
retroactive to as of September 1, 2015. The terms include monthly remuneration in the amount of NIS 20 thousand, as well as the
allocation of 1,500,000 stock options, exercisable into 1,500,000 ordinary shares of NIS 0.1 par value each of the Company, for
an exercise price of NIS 0.6 per stock option. The exercise period of the stock options is a maximum of ten years from the grant
date. The stock options vest in twelve equal portions each quarter over a period of three years from the grant date.



For further details regarding
share options granted to our employees, directors and service providers, see Note 16 to the consolidated financial statements for
the year ended December 31, 2016.



Employment Agreements



Joshua Levine



We entered into an employment
agreement dated as of September 11, 2013, as amended on January 30, 2014, with Mr. Joshua Levine, our Chief Executive Officer,
or CEO. Mr. Levine commenced his term as CEO on October 15, 2013 and is entitled to a monthly gross base salary of NIS 40 thousand
(NIS 480 thousand annually), paid retroactively, effective from said commencement date.



The employment agreement
provides that upon the successful completion of cash fund raising of at least $3 million in a public offering or private placement
of equity securities, including securities convertible or exercisable into equity of the Company or any entity under its control
(which for this purpose means ownership by the Company of greater than 50% of the outstanding voting securities), as long as Mr.
Levine is appointed as such entity’s CEO, during the thirty six month period from the date of the agreement, the Company
will pay Mr. Levine a bonus equal to 1% of the above fund raising amount, up to a maximum aggregate amount of $200 thousand in
any calendar year. The employment agreement further provides that in the event the Company or its wholly-owned subsidiary or any
entity under its control, as long as Mr. Levine is appointed as such entity’s CEO, receives payment in connection with any
collaboration or other transaction relating to their respective products or technologies, excluding payments made to finance specific
research and development activity and royalty payments, Mr. Levine shall be entitled to payment of 1% of the cash actually received
by the Company in such transaction, up to an aggregate maximum amount of $200 thousand in any calendar year. Furthermore, the employment
agreement provides that in the event the Company or its wholly-owned subsidiary or any entity under its control, as long as Mr.
Levine is appointed as such entity’s CEO, receives payment in connection with payments made to finance specific research
and development activity, Mr. Levine shall be entitled to receive payment of 0.5% of such funding actually received by the Company
up to an aggregate maximum of $200 thousand in any calendar year and per single research and development funding. The aggregate
of all such bonuses payable to Mr. Levine in any calendar year cannot exceed $300 thousand. In addition, the employment agreement
provides that Mr. Levine shall be entitled to an annual bonus of NIS 66 thousand upon meeting goals set by the Board of Directors.
The employment agreement also provides that Mr. Levine will be entitled to benefits such as convalescence pay, managers’
insurance, a study fund and a company car.



In consideration for his
service as our CEO, under the employment agreement, on March 17, 2014, Mr. Levine was granted options to purchase 1,500,000 ordinary
shares. 600,000 of the options are exercisable at NIS 0.60 each and 900,000 of the options are exercisable at NIS 0.90 each. The
options vest over 36 months from October 20, 2013 in 12 equal installments at the end of each calendar quarter for as long as Mr.
Levine’s employment with us has not terminated. The options have a term of ten years.



The employment agreement
is in effect as of the date of approval at our general meeting of shareholders on March 17, 2014, and continues for a three-year
term as of that date. Either party may terminate the employment agreement without cause upon three months’ advance written
notice during the first year of the agreement and four months’ advance written notice thereafter. In the case of death or
disability, as such terms are defined in the employment agreement, Mr. Levine or his heirs shall be entitled to four months’
salary in addition to any severance pay under applicable law.





54







On March 25, 2015, a special
meeting of shareholders approved a grant to Mr. Levine of an additional bonus of 0.5% of any funds raised by us from any non-existing
shareholder of ours up to $36 thousand as well as options to purchase 100,000 ordinary shares exercisable at NIS 0.40 per share.
Half the options vest upon grant and half vest in equal quarterly installments over 36 months provided Mr. Levine remains employed
or provides services to us. The options have a term of ten years. Such grant was made in consideration of Mr. Levine’s consent
to waive 10% of his monthly compensation until the later of a qualified financing and December 31, 2015.



On March 31, 2016, a general
meeting of shareholders of the Company approved the allocation of 1,000,000 stock options to the Company’s Chief Executive
Officer, exercisable into 1,000,000 ordinary shares of NIS 0.1 par value each of the Company, for an exercise price of NIS 0.6
per stock option. The exercise period of the stock options is a maximum of ten years from the grant date. 33.33% of the stock options
vest following the lapse of 12 months from the grant date, and the remaining 66.67% vest in eight equal portions each quarter over
a period of two years from the first anniversary.



David Kestenbaum



We entered into an employment
agreement dated as of January 9, 2014 with Mr. David Kestenbaum, our Chief Financial Officer, or CFO. Mr. Kestenbaum is entitled
to a monthly gross base salary of NIS 33 thousand (NIS 396 thousand annually).



The employment agreement
provides that upon the successful completion of fund raising of at least $3 million in a public offering or private placement of
equity securities, including securities convertible or exercisable into equity by the Company within a period of three years as
of the effective date and, as long as Mr. Kestenbaum is employed by us as CFO, Mr. Kestenbaum shall be entitled to a one-time bonus
payment equal to 0.6% of the funds raised, and up to maximum aggregate payment of $120 thousand per year. The employment agreement
further provides that upon the successful completion of a transaction made by the Company or any of its fully owned subsidiaries
or any entity in its controls receives payment in connection with any collaboration or other transaction relating to their respective
products or technologies, excluding payments made to finance specific research and development activity and royalty payment, as
long as the Mr. Kestenbaum is employed by us as CFO, Mr. Kestenbaum shall be entitled to a one-time payment equal to 0.5% of the
transaction amount actually received by us in such transaction, whether as upfront payments, milestone payments or payments of
any other form, and up to maximum aggregate payment of $100 thousand per year. Furthermore, the employment agreement provides that
upon the successful completion of a research and development funding in the Company, Mr. Kestenbaum shall be entitled to a one-time
bonus payment equal to 0.4% of the funding amount, and up to a maximum aggregate payment of $75 thousand per year. The aggregate
of all such bonuses payable to Mr. Kestenbaum in any calendar year cannot exceed $150 thousand. The employment agreement also provides
that Mr. Kestenbaum will be entitled to pension and severance benefits, managers’ insurance as commonly acceptable for office
holders and a company car.



In consideration for his
service as our CFO, under the employment agreement, on December 30, 2013, Mr. Kestenbaum was granted options to purchase 750,000
ordinary shares at an exercise price of NIS 0.5328 per share. The options vest over 36 months in 12 equal installments at the end
of each calendar quarter following the grant date for as long as Mr. Kestenbaum’s employment with us has not terminated.
The options have a term of ten years.



The employment agreement
has a three-year term from the effective date of January 5, 2014. Either party may terminate the employment agreement without cause
upon 60 days’ advance written notice. The employment agreement is renewed automatically for an additional period of 12 months
unless terminated by either party with 60 day prior written notice to the other party. In the case of death or disability, as such
terms are defined in the employment agreement, Mr. Kestenbaum or his heirs shall be entitled to four months’ salary in addition
to any severance pay under applicable law.



On March 25, 2015, we granted
to Mr. Kestenbaum options to purchase 100,000 ordinary shares at an exercise price of NIS 0.40 per share. Half the options vest
upon grant and half vest in equal quarterly installments over 36 months provided Mr. Kestenbaum remains employed or provides services
to us. The options have a term of ten years.





55







On June 1, 2015, we granted
to Mr. Kestenbaum options to purchase 200,000 ordinary shares at an exercise price of NIS 0.4283 per share. One third of the options
vest on the twelve month anniversary of the grant date, and the remaining two thirds vest on a quarterly basis over the following
two years provided Mr. Kestenbaum remains employed or provides services to us. The options have a term of ten years.



On May 31, 2016, we granted
to Mr. Kestenbaum options to purchase 400,000 ordinary shares at an exercise price of NIS 0.60 per share. One third of the options
vest on the twelve month anniversary of the grant date, and the remaining two thirds vest on a quarterly basis over the following
2 years provided Mr. Kestenbaum remains employed or provides services to us. The options have a term of ten years.



Shlomo Shalev



On December 28, 2015, our
Board of Directors approved the terms upon which Shlomo Shalev shall serve as Chairman, subject to shareholder approval. Commencing
September 1, 2015, Mr. Shalev shall be entitled to a monthly fee of NIS 20 thousand for at least 65 hours per month. In addition,
Mr. Shalev shall be entitled to options to purchase 1,500,000 ordinary shares at an exercise price of NIS 0.60 per share. One third
of the options vest on the twelve month anniversary of the grant date, and the remaining two thirds vest on a quarterly basis over
the following two years provided Mr. Shalev provides services to us. The options have a term of ten years. On March 31, 2016, Mr.
Shalev’s remuneration as Chairman was approved by an annual general meeting of the Company’s shareholders.



Jonathan Schapiro



We entered into a consulting
agreement dated January 1, 2015 with Dr. Jonathan Schapiro, a director. Commencing on such date, Dr. Schapiro shall serve as a
consultant to us for a monthly fee of $1.5 thousand increasing to $3 thousand upon the successful completion of a cash fund raising
of at least $3 million in a public offering or private placement of equity securities, including securities convertible or exercisable
into equity by us or any entity in our control. In addition under the consulting agreement, on December 30, 2014, Dr. Schapiro
was granted options to purchase 150,000 ordinary shares at an exercise price of NIS 0.4915 per share (in addition to the options
granted to him as a director on the same day as described above). One third of the options vest on the twelve month anniversary
of the grant date, and the remaining two thirds vest on a quarterly basis over the following two years provided Dr. Schapiro provides
services to us. The options have a term of ten years. The consulting agreement continues in force unless terminated without cause
upon 30 days’ advance written notice.



In accordance with the
requirements of Israeli Law, we determine our directors’ compensation in the following manner:



| | · | first, our compensation committee reviews the proposal for compensation.
| | - | ------------------------------------------------------------------------



| | · | second, provided that the compensation committee approves the proposed compensation, the proposal
is then submitted to our Board of Directors for review, except that a director who is the beneficiary of the proposed compensation
does not participate in any discussion or voting with respect to such proposal; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | finally, if our Board of Directors approves the proposal, it must then submit its recommendation
to our shareholders, which is usually done in connection with our shareholders’ general meeting.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The approval of a majority
of the shareholders voting at a duly convened shareholders meeting is required to implement any such compensation proposal.





56







| | C. | Board Practices
| | -- | ---------------



Election of Directors and Terms of Office



Our Board of Directors
currently consists of seven members, including our non-executive Chairman. Other than our two external directors, our directors
are elected by an ordinary resolution at the annual general meeting of our shareholders. The nomination of our directors is proposed
by a nomination committee of our Board of Directors, whose proposal is then approved by the board. The current members of the nomination
committee are David Bassa, Osnat Hillel Fain and Oded Nagar. Our board, following receipt of a proposal of the nomination committee,
has the authority to add additional directors up to the maximum number of 12 directors allowed under our Articles. Such directors
appointed by the board serve until the next annual general meeting of the shareholders. Unless they resign before the end of their
term or are removed in accordance with our Articles, all of our directors, other than our external directors, will serve as directors
until our next annual general meeting of shareholders. On December 30, 2014, the annual general meeting of our shareholders appointed
four new members to the Company’s board of directors - Dr. Jonathan Schapiro, Dr. Dobroslav Melamed, Doron Turgeman and Shlomo
Shalev. At the same annual general meeting, Mr. David Bassa was re-elected to serve as a director of the Company. On March 25,
2015, Osnat Hillel Fain and Oded Nagar were elected as external directors to serve for a three-year term until March 24, 2018.
On August 31, 2015, David Bassa resigned as Chairman of the Board of Directors (though he remains as a director) and Shlomo Shalev
was appointed to serve as interim Chairman of the Board of Directors on such date. On March 31, 2016, an annual general meeting
of the Company’s shareholders approved the appointment of Shlomo Shalev as Chairman of the Board of Directors. At the same
general meeting, Dr. Jonathan Schapiro, Dr. Dobroslav Melamed, Doron Turgeman and David Bassa were re-elected to serve as directors
of the Company.



None of our directors or
officers has any family relationship with any other director or officer.



Our Articles permit us
to maintain directors’ and officers’ liability insurance and to indemnify our directors and officers for actions performed
on behalf of us, subject to specified limitations. We maintain a directors and officers insurance policy which covers the liability
of our directors and officers as allowed under Israeli Companies Law.



There are no service contracts
or similar arrangements with any director that provide for benefits upon termination of a directorship.



External and Independent Directors



The Israeli Companies Law
requires Israeli companies with shares that have been offered to the public either in or outside of Israel to appoint two external
directors. No person may be appointed as an external director if that person or that person’s relative, partner, employer
or any entity under the person’s control, has or had, on or within the two years preceding the date of that person’s
appointment to serve as an external director, any affiliation with the company or any entity controlling, controlled by or under
common control with the company. The term affiliation includes:



| | · | an employment relationship;
| | - | ---------------------------



| | · | a business or professional relationship maintained on a regular basis;
| | - | ----------------------------------------------------------------------



| | · | control; and
| | - | ------------



| | · | service as an office holder, other than service as an officer for a period of not more than three months, during which the
company first offered shares to the public.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



No person may serve as
an external director if that person’s position or business activities create, or may create, a conflict of interest with
that person’s responsibilities as an external director or may otherwise interfere with his/her ability to serve as an external
director. If, at the time external directors are to be appointed, all current members of the Board of Directors are of the same
gender, then at least one external director must be of the other gender. A director in one company shall not be appointed as an
external director in another company if at that time a director of the other company serves as an external director in the first
company. In addition, no person may be appointed as an external director if he/she is a member or employee of the Israeli Security
Authority, and also not if he/she is a member of the Board of Directors or an employee of a stock exchange in Israel.





57







External directors are
to be elected by a majority vote at a shareholders’ meeting, provided that either:



| | · | the majority of shares voted at the meeting, including at least one-half of the shares held by
non-controlling shareholders or other shareholders who have a personal interest in such election voted at the meeting, vote in
favor of election of the director, with abstaining votes not being counted in this vote; or
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | the total number of shares held by non-controlling shareholders voted against the election of the
director does not exceed two percent of the aggregate voting rights in the company.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The initial term of an
external director is three years and may be extended for two additional three-year terms. An external director may be removed only
by the same percentage of shareholders as is required for their election, or by a court, and then only if such external director
ceases to meet the statutory qualifications for their appointment or violates his or her duty of loyalty to the company. Both external
directors must serve on every committee that is empowered to exercise one of the functions of the Board of Directors.



An external director is
entitled to compensation as provided in regulations adopted under the Israeli Companies Law and is otherwise prohibited from receiving
any other compensation, directly or indirectly, in connection with service provided as an external director.



Osnat Hillel Fain and Oded
Nagar serve as external directors pursuant to the provisions of the Israeli Companies Law. They both serve on our audit committee,
our committee for the approval of consolidated financial statements, our nomination committee and our compensation committee.



Audit Committee



The Israeli Companies Law
requires public companies to appoint an audit committee. The responsibilities of the audit committee include identifying irregularities
in the management of the company’s business and approving related party transactions as required by law. An audit committee
must consist of at least three directors, including all of its external directors. The chairman of the Board of Directors, any
director employed by or otherwise providing services to the company, and a controlling shareholder or any relative of a controlling
shareholder, may not serve as members of the audit committee. An audit committee may not approve an action or a transaction with
a controlling shareholder, or with an office holder, unless at the time of approval two external directors are serving as members
of the audit committee and at least one of the external directors was present at the meeting in which an approval was granted.



Our audit committee is
currently comprised of three independent non-executive directors. The audit committee is chaired by Osnat Hillel Fain, with Doron
Turgeman, who serves as the audit committee financial expert, and Oded Nagar as members. The audit committee meets at least four
times a year and monitors the adequacy of our internal controls, accounting policies and financial reporting. It regularly reviews
the results of the ongoing risk self-assessment process, which we undertake, and our interim and annual reports prior to their
submission for approval by the full Board of Directors. The audit committee oversees the activities of the internal auditor, sets
its annual tasks and goals and reviews its reports. The audit committee reviews the objectivity and independence of the external
auditors and also considers the scope of their work and fees.



We have adopted a written
charter for our audit committee, setting forth its responsibilities as outlined by the regulations of the SEC. In addition, our
audit committee has adopted procedures for the receipt, retention and treatment of complaints we may receive regarding accounting,
internal accounting controls, or auditing matters and the submission by our employees of concerns regarding questionable accounting
or auditing matters. In addition, SEC rules mandate that the audit committee of a listed issuer consist of at least three members,
all of whom must be independent, as such term is defined by rules and regulations promulgated by the SEC. We are in compliance
with the independence requirements of the SEC rules.





58







Financial Statement Examination Committee



The Israeli Companies Law
regulations require each public company to appoint a committee that examines the financial statements (the “Committee”)
which shall be compounded from at least three (3) members, of which the majority among them shall be independent directors and
the Committee’s Chairman shall be an external director. The Committee’s duties are, among other things, to examine
the Company’s financial statements and to recommend and report to the board of directors of the Company regarding any problem
or defect found in such financial statements.



In addition to the
above-said, all of the Committee’s members must meet the following requirements:



| | · | All members shall be members of the board of directors of the Company.
| | - | ----------------------------------------------------------------------



| | · | At least one of the Committee’s members shall have financial and accounting expertise and
the rest of the Committee’s members must have the ability to read and understand financial statements.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Company is in full
compliance with the requirements outlined above.



According to a resolution
of our Board of Directors, the Audit Committee has been assigned the responsibilities and duties of a financial statements examination
committee, as permitted under relevant regulations promulgated under the Companies Law. From time to time as necessary and required
to approve our financial statements, the Audit Committee holds separate meetings, prior to the scheduled meetings of the entire
Board of Directors, regarding financial statement approval. The function of a financial statements examination committee is to
discuss and provide recommendations to its board of directors (including the report of any deficiency found) with respect to the
following issues: (i) estimations and assessments made in connection with the preparation of financial statements; (ii) internal
controls related to the financial statements; (iii) completeness and propriety of the disclosure in the financial statements; (iv)
the accounting policies adopted and the accounting treatments implemented in material matters of the Company; (v) value evaluations,
including the assumptions and assessments on which evaluations are based and the supporting data in the financial statements. Our
independent auditors and our internal auditors are invited to attend all meetings of the Audit Committee when it is acting in the
role of the financial statements examination committee.



Compensation Committee



Amendment no. 20 to the
Companies Law was published on November 12, 2012 and became effective on December 12, 2012, or Amendment no. 20. In general, Amendment
no. 20 requires public companies to appoint a compensation committee and to adopt a compensation policy with respect to its officers,
or the Compensation Policy. In addition, Amendment no. 20 addresses the corporate approval process required for a public company’s
engagement with its officers (with specific reference to a director, a non-director officer, a chief executive officer and controlling
shareholders and their relatives who are employed by the company).



The compensation committee
shall be nominated by the board of directors and be comprised of its members. The compensation committee must consist of at least
three members. All of the external directors must serve on the compensation committee and constitute a majority of its members.
The remaining members of the compensation committee must be directors who qualify to serve as members of the audit committee (including
the fact that they are independent) and their compensation should be identical to the compensation paid to the external directors
of the company. The approval of the compensation committee is required in order to approve terms of office and/or employment of
office holders. The Company’s Compensation Policy was duly approved on November 19, 2013.



Similar to the rules that
apply to the audit committee, the compensation committee may not include the chairman of the board, or any director employed by
the company, by a controlling shareholder or by any entity controlled by a controlling shareholder, or any director providing services
to the company, to a controlling shareholder or to any entity controlled by a controlling shareholder on a regular basis, or any
director whose primary income is dependent on a controlling shareholder, and may not include a controlling shareholder or any of
its relatives. Individuals who are not permitted to be compensation committee members may not participate in the committee’s
meetings other than to present a particular issue; provided, however, that an employee that is not a controlling shareholder or
relative may participate in the committee’s discussions, but not in any vote, and the company’s legal counsel and corporate
secretary may participate in the committee’s discussions and votes if requested by the committee.





59







The roles of the compensation
committee are, among other things, to: (i) recommend to the board of directors the Compensation Policy for office holders and recommend
to the board once every three years the extension of a Compensation Policy that had been approved for a period of more than three
years; (ii) recommend to the directors any update of the Compensation Policy, from time to time, and examine its implementation;
(iii) decide whether to approve the terms of office and of employment of office holders that require approval of the compensation
committee; and (iv) decide, in certain circumstances, whether to exempt the approval of terms of office of a chief executive officer
from the requirement of shareholder approval.



The Compensation Policy
requires the approval of the general meeting of shareholders with a “Special Majority”, which requires a majority of
the shareholders of the company who are not either a controlling shareholder or an “interested party” in the proposed
resolution, or the shareholders holding less than 2% of the voting power in the company voted against the proposed resolution at
such meeting. However, under special circumstances, the board of directors may approve the Compensation Policy without shareholder
approval, if the compensation committee and thereafter the board of directors decided, based on substantiated reasons after they
have reviewed the compensation policy again, that the Compensation Policy is in the best interest of the company.



Amendment no. 20 details
the considerations that should be taken into account in determining the Compensation Policy and certain issues which the Compensation
Policy should include.



Osnat Hillel Fain is the
chairman of our compensation committee. Doron Turgeman and Oded Nagar serve as the other members of our compensation committee.



Approval of Compensation to Our Officers



The Israeli Companies Law
prescribes that compensation to officers must be approved by a company’s board of directors.



As detailed above, our
compensation committee consists of three independent directors: Doron Turgeman, Osnat Hillel Fain and Oded Nagar. The responsibilities
of the compensation committee are to set our overall policy on executive remuneration and to decide the specific remuneration,
benefits and terms of employment for directors, officers and the Chief Executive Officer.



The objectives of the compensation
committee’s policies are that such individuals should receive compensation which is appropriate given their performance,
level of responsibility and experience. Compensation packages should also allow us to attract and retain executives of the necessary
caliber while, at the same time, motivating them to achieve the highest level of corporate performance in line with the best interests
of shareholders. In order to determine the elements and level of remuneration appropriate to each executive director, the compensation
committee reviews surveys on executive pay, obtains external professional advice and considers individual performance.



Internal Auditor



Under the Israeli Companies
Law, the board of directors must appoint an internal auditor, nominated by the audit committee. The role of the internal auditor
is to examine, among other matters, whether the company’s actions comply with the law and orderly business procedure. Under
the Israeli Companies Law, an internal auditor may not be:



| | · | a person (or a relative of a person) who holds more than 5% of the company’s shares;
| | - | ------------------------------------------------------------------------------------





60







| | · | a person (or a relative of a person) who has the power to appoint a director or the general manager
of the company;
| | - | -------------------------------------------------------------------------------------------------------------------



| | · | an executive officer or director of the company; or
| | - | ---------------------------------------------------



| | · | a member of the company’s independent accounting firm.
| | - | ------------------------------------------------------



We comply with the requirement
of the Israeli Companies Law relating to internal auditors. Our internal auditors examine whether our various activities comply
with the law and orderly business procedure.



We comply with the requirement
of the Israeli Companies Law relating to internal auditors. Our internal auditors examine whether our various activities comply
with the law and orderly business procedure.



| | D. | Employees
| | -- | ---------



As of the date of this
Report, the Company has 2 full-time employees, and 5 part-time service providers. We and our Israeli employees are subject, by
an extension order of the Israeli Ministry of Welfare, to certain provisions of collective bargaining agreements between the Histadrut,
the General Federation of Labor Unions in Israel and the Coordination Bureau of Economic Organizations, including the Industrialists
Associations. These provisions principally address cost of living increases, recreation pay, travel expenses, vacation pay and
other conditions of employment. We provide our employees with benefits and working conditions equal to or above the required minimum.
Other than those provisions, our employees are not represented by a labor union.



| | E. | Share Ownership
| | -- | ---------------



The following table sets
forth information regarding the beneficial ownership of our outstanding ordinary shares as of the date hereof by the members of
our senior management, board of directors, individually and as a group. The beneficial ownership of ordinary shares is based on
514,205,799 ordinary shares outstanding as of the date hereof and is determined in accordance with the rules of the SEC and generally
includes any ordinary shares over which a person exercises sole or shared voting or investment power. For purposes of the
table below, we deem shares subject to options or warrants that are currently exercisable or exercisable within 60 days of the
date hereof, to be outstanding and to be beneficially owned by the person holding the options or warrants for the purposes of computing
the percentage ownership of that person but we do not treat them as outstanding for the purpose of computing the percentage ownership
of any other person.



|Name of Beneficial Owner                               |  | Number of Ordinary Shares |            |     | Percentage of Class* | 
|------------------------------------------------------ |  | ------------------------- | ---------- | --- | -------------------- | 
|                                                       |  |                           |            |     |                      | 
|Senior Management and Directors                        |  |                           |            |     |                      | 
|                                                       |  |                           |            |     |                      | 
|Shlomo ShalevChairman of the Board                     |  |                           | 862,500    | (1) |                      | 
|Josh LevineChief Executive Officer                     |  |                           | 1,916,666  | (2) |                      | 
|David KestenbaumChief Financial Officer                |  |                           | 1,072,916  | (3) |                      | 
|Osnat Hillel FainDirector                              |  |                           | 112,500    | (4) |                      | 
|Oded NagarDirector                                     |  |                           | 112,500    | (4) |                      | 
|David BassaDirector                                    |  |                           | 48,339,347 | (5) |                      | 
|Jonathan SchapiroDirector                              |  |                           | 225,000    | (6) |                      | 
|Dobroslav MelamedDirector                              |  |                           | 112,500    | (7) |                      | 
|Doron TurgemanDirector                                 |  |                           | 602,500    | (8) |                      | 
|                                                       |  |                           |            |     |                      | 
|Directors and Senior Management as a group (9 persons) |  |                           | 53,356,429 |     |                      | 



* Denotes less than 1%





61







| | (1) | Includes (i) 112,500 ordinary shares issuable upon the exercise of
options at an exercise price of NIS 0.4325 per share exercisable until December 29, 2024 (ii) 750,000 ordinary shares issuable
upon the exercise of options at an exercise price of NIS 0.6 per share exercisable until March 30, 2026. Excludes options to purchase
787,500 ordinary shares that vest in more than 60 days from the date hereof.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | Includes (i) 600,000 ordinary shares issuable upon the exercise of
options at an exercise price of NIS 0.60 per share exercisable until October 13, 2023, (ii) 900,000 ordinary shares issuable upon
the exercise of options at an exercise price of NIS 0.90 per share exercisable until October 13, 2023, (iii) 83,333 ordinary shares
issuable upon the exercise of options at an exercise price of NIS 0.40 per share exercisable until March 24, 2025 and (iv) 333,333
ordinary shares issuable upon the exercise of options at an exercise price of NIS 0.60 per share exercisable until March 30, 2026.
Excludes 683,334 ordinary shares issuable upon the exercise of options that vest in more than 60 days from the date hereof.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (3) | Includes (i) 750,000 ordinary shares issuable upon the exercise of
options at an exercise price of NIS 0.5328 per share exercisable until December 29, 2023, (ii) 83,333 ordinary shares issuable
upon the exercise of options at an exercise price of NIS 0.40 per share exercisable until March 24, 2025, (iii) 106,250 ordinary
shares issuable upon exercise of options at an exercise price of NIS 0.4283 per share until May 31, 2025 and (iv) 133,333 ordinary
shares issuable upon exercise of options at an exercise price of NIS 0.6 per share until May 31, 2026. Excludes 377,084 ordinary
shares issuable upon the exercise of options that vest in more than 60 days from the date hereof.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (4) | Includes 112,500 ordinary shares issuable upon the exercise of options
at an exercise price of NIS 0.4 per share exercisable until March 24, 2025. Excludes options to purchase 37,500 ordinary shares
that vest in more than 60 days from the date hereof.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (5) | Includes (i) 33,955,987 ordinary shares, (ii) 14,222 ADSs representing
1,422,240 ordinary shares, ,(iii) warrants to purchase 7,111 ADSs representing 711,120 ordinary shares at $11.25 per ADS until
October 6, 2020 and (iv) warrants to purchase 122,500 ADSs representing 12,250,000 ordinary shares at $11.25 per ADS until October
6, 2020. Pursuant to the terms of the foregoing warrants the holder cannot exercise such warrants if it would beneficially own,
after any such exercise, more than 4.99% of the outstanding ordinary shares. The percentage in the table above does not give effect
to the blocker.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (6) | Includes (i) 112,500 ordinary shares issuable upon the exercise of
options at an exercise price of NIS 0.4325 per share exercisable until December 29, 2024, and (ii) 112,500 ordinary shares issuable
upon the exercise of options at an exercise price of NIS 0.4915 per share exercisable until December 29, 2024. Excludes options
to purchase 75,000 ordinary shares that vest in more than 60 days from the date hereof.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (7) | Includes (i) 112,500 ordinary shares issuable upon the exercise of
options at an exercise price of NIS 0.4325 per share exercisable until December 29, 2024. Excludes options to purchase 37,500 ordinary
shares that vest in more than 60 days from the date hereof.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (8) | Includes (i) 340,000 ordinary shares represented by 3,400 ADSs, (ii)
150,000 ordinary shares, and (iii) 112,500 ordinary shares issuable upon the exercise of options at an exercise price of NIS 0.4325
per share exercisable until December 29, 2024. Excludes options to purchase 37,500 ordinary shares that vest in more than 60 days
from the date hereof.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





62







Share Option Plans



We maintain the following
share option plans for our and our subsidiary’s employees, directors and consultants. In addition to the discussion below,
see note 16 of our consolidated financial statements for the year ended December 31, 2016.



Our Board of Directors
administers our share option plans and has the authority to designate all terms of the options granted under our plans including
the grantees, exercise prices, grant dates, vesting schedules and expiration dates, which may be no more than ten years after the
grant date. Options may not be granted with an exercise price of less than the fair market value of our ordinary shares on the
date of grant, unless otherwise determined by our Board of Directors.



As of the date hereof,
we have granted to employees, directors and consultants options that are outstanding to purchase up to 6,750,000 ordinary shares
under two share option plans.



2001 Share Option Plan



Under a share option plan
established in 2001, referred to as the 2001 Plan, we granted options between 2001 and 2011, at exercise prices between $0.03 and
$1.58 per ordinary share. Up to 2,200,000 ordinary shares were available to be granted under the 2001 Plan. On July 29, 2009, the
option pool was increased by 5,000,000 unissued additional ordinary shares, as well as forfeited and expired options that reverted
to the pool due to departure of employees. Options granted to Israeli employees were made in accordance with section 102 of the
Tax Ordinance, under the capital gains option set out in section 102(b)(2) of the ordinance. The options are non-transferable.



As of the date hereof,
options to purchase 60,000 ordinary shares were outstanding, all of which were fully vested. The option term is for a period of
ten years from the grant date. On May 2, 2011, the 2001 Plan expired and no further options may be granted under this plan.



2011 Share Option Plan



On August 29, 2011, our
Board of Directors approved the adoption of an employee stock option scheme for the grant of options exercisable into shares of
the Company according to section 102 to the Israeli Tax Ordinance, or the 2011 Plan, and to reserve up to 10 million ordinary shares
in the framework of the 2011 Plan, for options allocation to employees, directors and consultants.



The 2011 Plan shall be
subject to section 102 of the Israeli Tax Ordinance. According to the Capital Gain Track, which was adopted by us and the abovementioned
section 102, we are not entitled to receive a tax deduction that relates to remuneration paid to our employees, including amounts
recorded as salary benefit in our accounts for options granted to employees in the framework of the 2011 Plan, except the yield
benefit component, if available, that was determined on the grant date. The terms of the options which will be granted according
to the 2011 Plan, including option period, exercise price, vesting period and exercise period, shall be determined by our Board
of Directors on the date of the actual allocation.



As of the date hereof,
we have granted options to purchase 6,690,000 ordinary shares under the 2011 Plan at exercise prices between $0 and $0.42 per ordinary
share.



For further details regarding
share options granted to our employees, directors and service providers, see note 17 to the consolidated financial statements for
the year ended December 31, 2016.



ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS



A. Major shareholders



As of the date hereof,
there were 1,381,555 ADSs outstanding, held by 49 DTC participants and 1 registered shareholder, whose holdings represented approximately
 27% of the total outstanding ordinary shares.





63







The following table sets
forth the number of our ordinary shares owned by any person known to us to be the beneficial owner of 5% or more of our ordinary
shares as of the date hereof. The information in this table is based on 785,178,019 outstanding ordinary shares as of such date.
The number of Ordinary Shares beneficially owned by a person includes Ordinary Shares subject to options held by that person that
were currently exercisable. None of the holders of the Ordinary Shares listed in this table have voting rights different from other
holders of the Ordinary Shares.



|Name                  |  | Number of shares owned |             |  | Percent of ordinary shares | 
|--------------------- |  | ---------------------- | ----------- |  | -------------------------- | 
|Alexander Rabinovitch |  |                        | 157,988,387 |  |                            | 
|                      |  |                        |             |  |                            | 
|David Bassa           |  |                        | 48,339,347  |  |                            | 



| | B. | Related Party Transactions
| | -- | --------------------------



The following is a description
of some of the transactions with related parties to which we, or our subsidiary, are party, and which were in effect within the
past three fiscal years. The descriptions provided below are summaries of the terms of such agreements, do not purport to be complete
and are qualified in their entirety by the complete agreements.



We believe that we have
executed all of our transactions with related parties on terms no less favorable to us than those we could have obtained from unaffiliated
third parties. We are required by Israeli law to ensure that all future transactions between us and our officers, directors and
principal shareholders and their affiliates are approved by a majority of our board of directors, including a majority of the independent
and disinterested members of our board of directors, and that they are on terms no less favorable to us than those that we could
obtain from unaffiliated third parties.



Employment and Consulting Agreements



We have or have had employment,
consulting or related agreements with each member of our senior management. See “Management-Compensation-Employment Agreements”.



InterCure



In July 2012, we acquired
the control over InterCure Ltd, or InterCure, a public company whose shares are traded on the TASE and which develops a home therapeutic
device for non-medicinal and non-invasive treatment of various diseases such as hypertension, heart failure, sleeplessness and
mental stress and markets and sells a home therapeutic device for hypertension. As a result of a series of transactions including
a transaction, that closed in February 2015, between InterCure and Green Forest Global Ltd., or Green Forest, a company wholly
owned by Mr. Alexander Rabinovitch (a greater than 5% shareholder of ours), our holdings in InterCure were diluted to 5.82% of
the issued and outstanding share capital of InterCure. As of December 31, 2016, our holdings in InterCure were approximetaly 3.78%.



More specifically, on November
3, 2014, InterCure announced that on November 2, 2014, its Audit Committee and Board of Directors approved the signing of an agreement
with Green Forest which was then approved by InterCure’s shareholders on December 23, 2014. The agreement closed on February
15, 2015 with the following material events occurring between February 1, 2015 and April 2, 2015:



| | · | On February 1, 2015, in accordance with a request made by the Israeli Securities Authority to increase
public holdings in InterCure prior to the execution of the agreement, we sold 2,166,667 shares of InterCure to a non-related third
party, for an amount of approximately $17 thousand.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | On February 8, 2015, InterCure effected a 1 for 10 reverse split.
| | - | -----------------------------------------------------------------





64







| | · | On February 15, 2015, an outstanding loan of $50 thousand owed by InterCure to us was converted
into 569,470 ordinary shares of InterCure. At the same time, Green Forest was issued 2,622,647 ordinary shares of InterCure.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | On March 23, 2015, InterCure issued 37,804,012 ordinary shares as part of a rights offering dated
February 22, 2015.
| | - | --------------------------------------------------------------------------------------------------------------------



| | · | On March 31, 2015, we and Green Forest mutually agreed to terminate the voting agreement signed
by the parties on February 12, 2015. Following said termination, the directors appointed by us resigned from the board of directors
of InterCure.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | On April 2, 2015, Green Forest was issued an additional 2,622,647 ordinary shares of InterCure.
| | - | -----------------------------------------------------------------------------------------------



The foregoing information is based
on public filings made by InterCure to the Israeli Securities Authorities.



Alexander Rabinovitch



In April 2015, Alex Rabinovitch,
a holder of more than 5% of our ordinary shares, entered into a security purchase agreement resulting in the issuance of an aggregate
of 31,111 ADSs representing 3,111,120 ordinary shares in a registered direct offering at $11.25 per ADS for a purchase price of
$350,001. In addition, we issued unregistered warrants to purchase 15,556 ADSs representing 1,555,560 ordinary shares in a private
placement. The warrants may be exercised at any time for a period of five and one-half years from issuance and have an exercise
price of $11.25 per ADS, subject to adjustment as set forth therein.



In March 2017, Alex
Rabinovitch, a holder of more than 5% of our ordinary shares, entered into a security purchase agreement resulting in the issuance
of an aggregate of 250,000 ADSs representing 25,000,000 ordinary shares in a registered direct offering at $2.00 per ADS for a
purchase price of $500,000. In addition, we issued unregistered warrants to purchase 250,000 ADSs representing 25,000,000 ordinary
shares in a private placement. The warrants may be exercised at any time for a period of five and one-half years from issuance
and have an exercise price of $2.30 per ADS, subject to adjustment as set forth therein.



David Bassa



In April 2015, David Bassa,
a holder of more than 5% of our ordinary shares, entered into a security purchase agreement resulting in the issuance of an aggregate
of 14,222 ADSs representing 1,422,240 ordinary shares in a registered direct offering at $11.25 per ADS for a purchase price of
$160,002. In addition, we issued unregistered warrants to purchase 7,112 ADSs representing 711,120 ordinary shares in a private
placement. The warrants may be exercised at any time for a period of five and one-half years from issuance and have an exercise
price of $11.25 per ADS, subject to adjustment as set forth therein.



In March 2017, David
Bassa, a holder of more than 5% of our ordinary shares, entered into a security purchase agreement resulting in the issuance of
an aggregate of 122,500 ADSs representing 12,250,000 ordinary shares in a registered direct offering at $2.00 per ADS for a purchase
price of $245,000. In addition, we issued unregistered warrants to purchase 122,500 ADSs representing 12,250,000 ordinary shares
in a private placement. The warrants may be exercised at any time for a period of five and one-half years from issuance and have
an exercise price of $2.30 per ADS, subject to adjustment as set forth therein.



ITEM 8. FINANCIAL INFORMATION



| | A. | Consolidated Statements and Other Financial Information
| | -- | -------------------------------------------------------



Our audited consolidated
financial statements appear in this annual report on Form 20-F. See “Item 18. Financial Statements.”





65







Significant Changes



None.



ITEM 9. THE OFFER AND LISTING



Markets and Share Price History



Our ordinary shares have
been trading on the Tel Aviv Stock Exchange, or TASE, since July 2005. Our ordinary shares currently trade on the TASE under the
symbol “XTLB”.



On June 1, 2012, the
Company filed an application for relisting its ADSs on the Nasdaq Capital Market, or Nasdaq. On July 10, 2013, the Company received
a notice from Nasdaq stating that the admission committee had approved the Company’s application to relist its ADSs for trading
on the Nasdaq Capital Market. Accordingly, on July 15, 2013, the Company’s ADSs began trading on Nasdaq under the ticker
symbol “XTLB”.



American Depositary Shares



The following table presents,
for the periods indicated, the high and low market closing prices for the ADSs as reported on the Pink Sheets from 2011 until
July 14, 2013, and on Nasdaq from July 15, 2013 to the present. Effective February 10, 2017, we effected a change in the ratio
of our ADSs to ordinary shares from one ADS representing 20 ordinary shares to one ADS representing 100 ordinary shares. For convenience
of the readers of this prospectus supplement, the data below was adjusted so that all the quotes of the ADS price would represent
the current ADS to ordinary share ratio, meaning 1:100.



|                                               |  | U.S.$         |      
|---------------------------------------------- |  | ------------- | -----
|                                               |  | Price Per ADS |      
|                                               |  | High          |      
|Annual:                                        |  |               |      
|2016                                           |  |               | 7.50 
|2015                                           |  |               | 13.00
|2014                                           |  |               | 24.75
|2013                                           |  |               | 37.10
|2012                                           |  |               | 42.50
|                                               |  |               |      
|Quarterly:                                     |  |               |      
|First Quarter of 2017 (through March 29, 2017) |  |               | 3.80 
|Fourth Quarter 2016                            |  |               | 4.85 
|Third Quarter 2016                             |  |               | 6.35 
|Second Quarter 2016                            |  |               | 6.40 
|First Quarter 2016                             |  |               | 7.50 
|Fourth Quarter 2015                            |  |               | 9.80 
|Third Quarter 2015                             |  |               | 10.00
|Second Quarter 2015                            |  |               | 12.20
|First Quarter 2015                             |  |               | 13.00
|Fourth Quarter 2014                            |  |               | 16.90
|Third Quarter 2014                             |  |               | 17.50
|Second Quarter 2014                            |  |               | 24.75
|First Quarter 2014                             |  |               | 21.50
|                                               |  |               |      
|Most Recent Six Months:                        |  |               |      
|March 2017 (through March 29, 2017)            |  |               | 2.68 
|February 2017                                  |  |               | 3.58 
|January 2017                                   |  |               | 3.80 
|December 2016                                  |  |               | 3.90 
|November 2016                                  |  |               | 4.10 
|October 2016                                   |  |               | 4.85 
|September 2016                                 |  |               | 5.20 





66







The following table sets
forth, for the periods indicated, the high and low closing prices of our ordinary shares on the TASE. For comparative purposes
only, we have also provided such figures translated into U.S. Dollars at an exchange rate of _____ NIS per U.S. Dollar, as of March
___, 2017 according to the Bank of Israel.



|                                               |  | NIS                      |      |  | U.S. dollar ($)          | 
|---------------------------------------------- |  | ------------------------ | ---- |  | ------------------------ | 
|                                               |  | Price Per Ordinary Share |      |  | Price Per Ordinary Share | 
|                                               |  | High                     |      |  | Low                      | 
|Annual:                                        |  |                          |      |  |                          | 
|2016                                           |  |                          | 0.32 |  |                          | 
|2015                                           |  |                          | 0.48 |  |                          | 
|2014                                           |  |                          | 0.75 |  |                          | 
|2013                                           |  |                          | 1.35 |  |                          | 
|2012                                           |  |                          | 1.68 |  |                          | 
|                                               |  |                          |      |  |                          | 
|Quarterly:                                     |  |                          |      |  |                          | 
|First Quarter of 2017 (through March 29, 2017) |  |                          | 0.15 |  |                          | 
|Fourth Quarter of 2016                         |  |                          | 0.18 |  |                          | 
|Third Quarter of 2016                          |  |                          | 0.25 |  |                          | 
|Second Quarter 2016                            |  |                          | 0.24 |  |                          | 
|First Quarter 2016                             |  |                          | 0.32 |  |                          | 
|Fourth Quarter 2015                            |  |                          | 0.36 |  |                          | 
|Third Quarter 2015                             |  |                          | 0.39 |  |                          | 
|Second Quarter 2015                            |  |                          | 0.47 |  |                          | 
|First Quarter 2015                             |  |                          | 0.48 |  |                          | 
|Fourth Quarter 2014                            |  |                          | 0.52 |  |                          | 
|Third Quarter 2014                             |  |                          | 0.58 |  |                          | 
|Second Quarter 2014                            |  |                          | 0.75 |  |                          | 
|First Quarter 2014                             |  |                          | 0.73 |  |                          | 
|                                               |  |                          |      |  |                          | 
|Most Recent Six Months:                        |  |                          |      |  |                          | 
|March 2017 (through March 29, 2017)            |  |                          | 0.10 |  |                          | 
|February 2017                                  |  |                          | 0.15 |  |                          | 
|January 2017                                   |  |                          | 0.14 |  |                          | 
|December 2016                                  |  |                          | 0.15 |  |                          | 
|November 2016                                  |  |                          | 0.17 |  |                          | 
|October 2016                                   |  |                          | 0.18 |  |                          | 
|September 2016                                 |  |                          | 0.21 |  |                          | 



ITEM 10. ADDITIONAL
INFORMATION



Memorandum and Articles of Association



Objects and Purposes of the Company



Pursuant to Part B, Section
3 of our Articles of Association, we may undertake any lawful activity.





67







Powers and Obligations of the Directors



Pursuant to the Israeli
Companies Law and our Articles of Association, a director is not permitted to vote on a proposal, arrangement or contract in which
he or she has a personal interest. Also, the directors may not vote on compensation to themselves or any members of their body,
as that term is defined under Israeli law, without the approval of our audit committee and our shareholders at a general meeting.
The power of our directors to enter into borrowing arrangements on our behalf is limited to the same extent as any other transaction
by us.



The Israeli Companies Law
codifies the fiduciary duties that office holders, including directors and executive officers, owe to a company. An office holder’s
fiduciary duties consist of a duty of care and a duty of loyalty. The duty of care generally requires an office holder to act with
the same level of care as a reasonable office holder in the same position would employ under the same circumstances. The duty of
loyalty includes avoiding any conflict of interest between the office holder’s position in the company and such person’s
personal affairs, avoiding any competition with the company, avoiding exploiting any corporate opportunity of the company in order
to receive personal advantage for such person or others, and revealing to the company any information or documents relating to
the company’s affairs which the office holder has received due to his or her position as an office holder.



Indemnification of Directors and Officers;
Limitations on Liability



Israeli law permits a company
to insure an office holder in respect of liabilities incurred by him or her as a result of an act or omission in the capacity of
an office holder for:



| | · | a breach of the office holder’s duty of care towards the company or towards another person;
| | - | -------------------------------------------------------------------------------------------



| | · | a breach of the office holder’s fiduciary duty to the company, provided that he or she acted
in good faith and had reasonable cause to believe that the act would not prejudice the company; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | a financial liability imposed upon the office holder in favor of another person.
| | - | --------------------------------------------------------------------------------



| | · | A financial liability imposed on the office holder's for all victims of the violation in an Administrative
Proceeding.
| | - | ----------------------------------------------------------------------------------------------------------------------



| | · | Expenses incurred by the office holder's in connection with an Administrative Proceeding conducted
in his or her case, including litigation expenses and reasonable legal fees.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Moreover, a company can
indemnify an office holder for any of the following obligations or expenses incurred in connection with the acts or omissions of
such person in his or her capacity as an office holder:



| | · | monetary liability imposed upon him or her in favor of a third party by a judgment, including a
settlement or an arbitral award confirmed by the court; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | reasonable litigation expenses, including legal fees, actually incurred by the office holder or
imposed upon him or her by a court, in a proceeding brought against him or her by or on behalf of the company or by a third party,
or in a criminal action in which he or she was acquitted, or in a criminal action which does not require criminal intent in which
he or she was convicted; furthermore, a company can, with a limited exception, exculpate an office holder in advance, in whole
or in part, from liability for damages sustained by a breach of duty of care to the company.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | financial liability imposed on the office holder for all victims of the violation in an Administrative
Proceeding.
| | - | ------------------------------------------------------------------------------------------------------------------



| | · | expenses incurred by the office holder in connection with an Administrative Proceeding conducted
in his or her case, including litigation expenses and reasonable legal fees.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Our Articles of Association
allow for insurance, exculpation and indemnification of office holders to the fullest extent permitted by law. We have entered
into indemnification, insurance and exculpation agreements with our directors and executive officers, following shareholder approval
of these agreements. We have directors’ and officers’ liability insurance covering our officers and directors for a
claim imposed upon them as a result of an action carried out while serving as an officer or director, for (a) the breach of duty
of care towards us or towards another person, (b) the breach of fiduciary duty towards us, provided that the officer or director
acted in good faith and had reasonable grounds to assume that the action would not harm our interests, and (c) a monetary liability
imposed upon him in favor of a third party.





68







Approval of Related Party Transactions
under the Israeli Companies Law



Fiduciary duties of the office holders



The Israeli Companies Law
imposes a duty of care and a duty of loyalty on all office holders of a company. The duty of care of an office holder is based
on the duty of care set forth in connection with the tort of negligence under the Israeli Torts Ordinance (New Version) 5728-1968.
This duty of care requires an office holder to act with the degree of proficiency with which a reasonable office holder in the
same position would have acted under the same circumstances. The duty of care includes a duty to use reasonable means, in light
of the circumstances, to obtain:



| | · | information on the advisability of a given action brought for his or her approval or performed
by virtue of his or her position; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------



| | · | All other important information pertaining to these actions.
| | - | ------------------------------------------------------------



The duty of loyalty requires
an office holder to act in good faith and for the benefit of the company, and includes the duty to:



| | · | refrain from any act involving a conflict of interest between the performance of his or her duties
in the company and his or her other duties or personal affairs;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | refrain from any activity that is competitive with the business of the company;
| | - | -------------------------------------------------------------------------------



| | · | refrain from exploiting any business opportunity of the company for the purpose of gaining a personal
advantage for himself or herself or others; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------



| | · | disclose to the company any information or documents relating to the company’s affairs which
the office holder received as a result of his or her position as an office holder.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We may approve an act performed
in breach of the duty of loyalty of an office holder provided that the office holder acted in good faith, the act or its approval
does not harm the company, and the office holder discloses his or her personal interest, as described below.



Disclosure of personal interests of an office
holder and approval of acts and transactions



The Israeli Companies Law
requires that an office holder promptly disclose to the company any personal interest that he or she may have and all related material
information or documents relating to any existing or proposed transaction by the company. An interested office holder’s disclosure
must be made promptly and in any event no later than the first meeting of the board of directors at which the transaction is considered.
An office holder is not obligated to disclose such information if the personal interest of the office holder derives solely from
the personal interest of his or her relative in a transaction that is not considered as an extraordinary transaction.



The term personal interest
is defined under the Israeli Companies Law to include the personal interest of a person in an action or in the business of a company,
including the personal interest of such person’s relative or the interest of any corporation in which the person is an interested
party, but excluding a personal interest stemming solely from the fact of holding shares in the company. A personal interest furthermore
includes the personal interest of a person for whom the office holder holds a voting proxy or the interest of the office holder
with respect to his or her vote on behalf of the shareholder for whom he or she holds a proxy even if such shareholder itself has
no personal interest in the approval of the matter. An office holder is not, however, obligated to disclose a personal interest
if it derives solely from the personal interest of his or her relative in a transaction that is not considered an extraordinary
transaction.





69







Under the Israeli Companies
Law, an extraordinary transaction which requires approval is defined any of the following:



| | · | a transaction other than in the ordinary course of business;
| | - | ------------------------------------------------------------



| | · | a transaction that is not on market terms; or
| | - | ---------------------------------------------



| | · | a transaction that may have a material impact on the company’s profitability, assets or liabilities.
| | - | ----------------------------------------------------------------------------------------------------



Under the Israeli Companies
Law, once an office holder has complied with the disclosure requirement described above, a company may approve a transaction between
the company and the office holder or a third party in which the office holder has a personal interest, or approve an action by
the office holder that would otherwise be deemed a breach of duty of loyalty. However, a company may not approve a transaction
or action that is adverse to the company’s interest or that is not performed by the office holder in good faith.



Under the Companies Law,
unless the articles of association of a company provide otherwise, a transaction with an office holder, a transaction with a third
party in which the office holder has a personal interest, and an action of an office holder that would otherwise be deemed a breach
of duty of loyalty requires approval by the board of directors. Our Articles of Association do not provide otherwise. If the transaction
or action considered is (i) an extraordinary transaction, (ii) an action of an office holder that would otherwise be deemed a breach
of duty of loyalty and may have a material impact on a company’s profitability, assets or liabilities, (iii) an undertaking
to indemnify or insure an office holder who is not a director, or (iv) for matters considered an undertaking concerning the terms
of compensation of an office holder who is not a director, including, an undertaking to indemnify or insure such office holder,
then approval by the audit committee is required prior to approval by the board of directors. Arrangements regarding the compensation,
indemnification or insurance of a director require the approval of the audit committee, board of directors and shareholders, in
that order.



A director who has
a personal interest in a matter that is considered at a meeting of the board of directors or the audit committee may generally
not be present at the meeting or vote on the matter, unless a majority of the directors or members of the audit committee have
a personal interest in the matter or the chairman of the audit committee or board of directors, as applicable, determines that
he or she should be present to present the transaction that is subject to approval. If a majority of the directors have a personal
interest in the matter, such matter would also require approval of the shareholders of the company.



Disclosure of personal interests of a controlling
shareholder and approval of transactions



Under the Israeli Companies
Law and a recent amendment thereto, the disclosure requirements that apply to an office holder also apply to a controlling shareholder
of a public company. See “Audit Committee” for a definition of controlling shareholder. Extraordinary transactions
with a controlling shareholder or in which a controlling shareholder has a personal interest, including a private placement in
which a controlling shareholder has a personal interest, as well as transactions for the provision of services whether directly
or indirectly by a controlling shareholder or his or her relative, or a company such controlling shareholder controls, and transactions
concerning the terms of engagement of a controlling shareholder or a controlling shareholder’s relative, whether as an office
holder or an employee, require the approval of the audit committee, the board of directors and a majority of the shares voted by
the shareholders of the company participating and voting on the matter in a shareholders’ meeting. In addition, such shareholder
approval must fulfill one of the following requirements:



| | · | at least a majority of the shares held by shareholders who have no personal interest in the transaction
and are voting at the meeting must be voted in favor of approving the transaction, excluding abstentions; or
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





70







| | · | the shares voted by shareholders who have no personal interest in the transaction who vote against
the transaction represent no more than 2% of the voting rights in the company.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



To the extent that any
such transaction with a controlling shareholder is for a period extending beyond three years, approval is required once every three
years, unless the audit committee determines that the duration of the transaction is reasonable given the circumstances related
thereto.



Duties of shareholders



Under the Israeli Companies
Law, a shareholder has a duty to refrain from abusing its power in the company and to act in good faith and in an acceptable manner
in exercising its rights and performing its obligations to the company and other shareholders, including, among other things, voting
at general meetings of shareholders on the following matters:



| | · | an amendment to the articles of association;
| | - | --------------------------------------------



| | · | an increase in the company’s authorized share capital;
| | - | ------------------------------------------------------



| | · | a merger;
| | - | ---------



| | · | an increase in the company’s authorized share capital; and
| | - | ----------------------------------------------------------



| | · | the approval of related party transactions and acts of office holders that require shareholder approval.
| | - | --------------------------------------------------------------------------------------------------------



A shareholder also has
a general duty to refrain from discriminating against other shareholders.



The remedies generally
available upon a breach of contract will also apply to a breach of the above mentioned duties, and in the event of discrimination
against other shareholders, additional remedies are available to the injured shareholder.



In addition, any controlling
shareholder, any shareholder that knows that its vote can determine the outcome of a shareholder vote and any shareholder that,
under a company’s articles of association, has the power to appoint or prevent the appointment of an office holder, or has
another power with respect to a company, is under a duty to act with fairness towards the company. The Israeli Companies Law does
not describe the substance of this duty except to state that the remedies generally available upon a breach of contract will also
apply in the event of a breach of the duty to act with fairness, taking the shareholder’s position in the company into account.



ORDINARY SHARES



Rights Attached to Ordinary Shares



Through March 18, 2009,
our authorized share capital was NIS 10,000,000 consisting of 500,000,000 ordinary shares, par value NIS 0.02 per share. On March
18, 2009, pursuant to a shareholder’s meeting, the share capital of our company was consolidated and re-divided so that each
five (5) shares of NIS 0.02 nominal value was consolidated into one (1) share of NIS 0.1 nominal value so that following such consolidation
and re-division, our authorized share capital consisted of 100,000,000 ordinary shares, par value NIS 0.10 per share. In addition,
the authorized share capital of our company was increased from NIS 10,000 thousand to NIS 70,000 thousand divided into 700,000,000
ordinary shares, NIS 0.10 nominal value. The share consolidation was effected in June 22, 2009.



Holders of ordinary shares
have one vote per share, and are entitled to participate equally in the payment of dividends and share distributions and, in the
event of our liquidation, in the distribution of assets after satisfaction of liabilities to creditors. No preferred shares are
currently authorized. All outstanding ordinary shares are validly issued and fully paid.





71







Transfer of Shares



Fully paid ordinary shares
are issued in registered form and may be freely transferred under our Articles of Association unless the transfer is restricted
or prohibited by another instrument or applicable securities laws.



Dividend and Liquidation Rights



We may declare a dividend
to be paid to the holders of ordinary shares according to their rights and interests in our profits. In the event of our liquidation,
after satisfaction of liabilities to creditors, our assets will be distributed to the holders of ordinary shares in proportion
to the nominal value of their holdings.



This right may be affected
by the grant of preferential dividend or distribution rights, to the holders of a class of shares with preferential rights that
may be authorized in the future. Under the Israeli Companies Law, the declaration of a dividend does not require the approval of
the shareholders of the company, unless the company’s articles of association require otherwise. Our Articles provide that
the Board of Directors may declare and distribute dividends without the approval of the shareholders.



Annual and Extraordinary General Meetings



We must hold our annual
general meeting of shareholders each year no later than 15 months from the last annual meeting, at a time and place determined
by the Board of Directors, upon at least 21 days’ prior notice to our shareholders, to which we need to add an additional
three days for notices sent outside of Israel. A special meeting may be convened by request of two directors, 25% of the directors
then in office, one or more shareholders holding at least 5% of our issued share capital and at least 1% of our issued voting rights,
or one or more shareholders holding at least 5% of our issued voting rights. Notice of a general meeting must set forth the date,
time and place of the meeting. Such notice must be given at least 21 days but not more than 45 days prior to the general meeting.
The quorum required for a meeting of shareholders consists of at least two shareholders present in person or by proxy who hold
or represent between them at least one-third of the voting rights in the company. A meeting adjourned for lack of a quorum generally
is adjourned to the same day in the following week at the same time and place (with no need for any notice to the shareholders)
or until such other later time if such time is specified in the original notice convening the general meeting, or if we serve notice
to the shareholders no less than seven days before the date fixed for the adjourned meeting. If at an adjourned meeting there is
no quorum present half an hour after the time set for the meeting, any number participating in the meeting shall represent a quorum
and shall be entitled to discuss the matters set down on the agenda for the original meeting. All shareholders who are registered
in our registrar on the record date, or who will provide us with proof of ownership on that date as applicable to the relevant
registered shareholder, are entitled to participate in a general meeting and may vote as described in “Voting Rights”
and “Voting by Proxy and in Other Manners,” below.



Voting Rights



Our ordinary shares do
not have cumulative voting rights in the election of directors. As a result, the holders of ordinary shares that represent more
than 50% of the voting power represented at a shareholders meeting in which a quorum is present have the power to elect all of
our directors, except the external directors whose election requires a special majority.



Holders of ordinary shares
have one vote for each ordinary share held on all matters submitted to a vote of shareholders. Shareholders may vote in person
or by proxy. These voting rights may be affected by the grant of any special voting rights to the holders of a class of shares
with preferential rights that may be authorized in the future.



Under the Israeli Companies
Law, unless otherwise provided in the Articles of Association or by applicable law, all resolutions of the shareholders require
a simple majority. Our Articles of Association provide that all decisions may be made by a simple majority. See “Duties of
Shareholders” above for certain duties of shareholders towards the company.





72







Voting by Proxy and in Other Manners



Our Articles of Association
enable a shareholder to appoint a proxy, who need not be a shareholder, to vote at any shareholders meeting. We require that the
appointment of a proxy be in writing signed by the person making the appointment or by an attorney authorized for this purpose,
and if the person making the appointment is a corporation, by a person or persons authorized to bind the corporation. In the document
appointing a proxy, each shareholder may specify how the proxy should vote on any matter presented at a shareholders meeting. The
document appointing the proxy shall be deposited in our offices or at such other address as shall be specified in the notice of
the meeting not less than 48 hours before the time of the meeting at which the person specified in the appointment is due to vote.



The Israeli Companies Law
and our Articles of Association do not permit resolutions of the shareholders to be adopted by way of written consent, for as long
as our ordinary shares are publicly traded.



Limitations on the Rights to Own Securities



The ownership or voting
of ordinary shares by non-residents of Israel is not restricted in any way by our Articles of Association or the laws of the State
of Israel, except that nationals of countries which are, or have been, in a state of war with Israel may not be recognized as owners
of ordinary shares.



Anti-Takeover Provisions under Israeli
Law



The Israeli Companies Law
permits merger transactions with the approval of each party’s board of directors and shareholders. In accordance with the
Israeli Companies Law, a merger may be approved at a shareholders meeting by a majority of the voting power represented at the
meeting, in person or by proxy, and voting on that resolution. In determining whether the required majority has approved the merger,
shares held by the other party to the merger, any person holding at least 25% of the outstanding voting shares or means of appointing
the board of directors of the other party to the merger, or the relatives or companies controlled by these persons, are excluded
from the vote.



Under the Israeli Companies
Law, a merging company must inform its creditors of the proposed merger. Any creditor of a party to the merger may seek a court
order blocking the merger, if there is a reasonable concern that the surviving company will not be able to satisfy all of the obligations
of the parties to the merger. Moreover, a merger may not be completed until at least 30 days have passed from the time the merger
was approved in a general meeting of each of the merging companies, and at least 50 days have passed from the time that a merger
proposal was filed with the Israeli Registrar of Companies.



Israeli corporate law provides
that an acquisition of shares in a public company must be made by means of a tender offer if, as a result of such acquisition,
the purchaser would become a 25% or greater shareholder of the company. This rule does not apply if there is already another shareholder
with 25% or greater shares in the company. Similarly, Israeli corporate law provides that an acquisition of shares in a public
company must be made by means of a tender offer if, as a result of the acquisition, the purchaser’s shareholdings would entitle
the purchaser to over 45% of the shares in the company, unless there is a shareholder with 45% or more of the shares in the company.
These requirements do not apply if, in general, the acquisition (1) was made in a private placement that received the approval
of the company’s shareholders; (2) was from a 25% or greater shareholder of the company which resulted in the purchaser becoming
a 25% or greater shareholder of the company, or (3) was from a 45% or greater shareholder of the company which resulted in the
acquirer becoming a 45% or greater shareholder of the company. These rules do not apply if the acquisition is made by way of a
merger. Regulations promulgated under the Israeli Companies Law provide that these tender offer requirements do not apply to companies
whose shares are listed for trading external of Israel if, according to the law in the country in which the shares are traded,
including the rules and regulations of the stock exchange or which the shares are traded, either:



| | · | there is a limitation on acquisition of any level of control of the company; or
| | - | -------------------------------------------------------------------------------





73







| | · | the acquisition of any level of control requires the purchaser to do so by means of a tender offer to the public.
| | - | -----------------------------------------------------------------------------------------------------------------



The Israeli Companies Law
provides specific rules and procedures for the acquisition of shares held by minority shareholders, if the majority shareholder
holds more than 90% of the outstanding shares. If, as a result of an acquisition of shares, the purchaser will hold more than 90%
of a company’s outstanding shares, the acquisition must be made by means of a tender offer for all of the outstanding shares.
If less than 5% of the outstanding shares are not tendered in the tender offer, all the shares that the purchaser offered to purchase
will be transferred to it. The Israeli Companies Law provides for appraisal rights if any shareholder files a request in court
within three months following the consummation of a full tender offer. If more than 5% of the outstanding shares are not tendered
in the tender offer, then the purchaser may not acquire shares in the tender offer that will cause his shareholding to exceed 90%
of the outstanding shares of the company. Israeli tax law treats specified acquisitions, including a stock-for-stock swap between
an Israeli company and a foreign company, less favorably than does US tax law. These laws may have the effect of delaying or deterring
a change in control of us, thereby limiting the opportunity for shareholders to receive a premium for their shares and possibly
affecting the price that some investors are willing to pay for our securities.



Rights of Shareholders



Under the Israeli Companies
Law, our shareholders have the right to inspect certain documents and registers including the minutes of general meetings, the
register of shareholders and the register of substantial shareholders, any document held by us that relates to an act or transaction
requiring the consent of the general meeting as stated above, our Articles of Association and our financial statements, and any
other document which we are required to file under the Israeli Companies Law or under any law with the Registrar of Companies or
the Israeli Securities Authority, and is available for public inspection at the Registrar of Companies or the Securities Authority,
as the case may be.



If the document required
for inspection by one of our shareholders relates to an act or transaction requiring the consent of the general meeting as stated
above, we may refuse the request of the shareholder if in our opinion the request was not made in good faith, the documents requested
contain a commercial secret or a patent, or disclosure of the documents could prejudice our good in some other way.



The Israeli Companies Law
provides that with the approval of the court any of our shareholders or directors may file a derivative action on our behalf if
the court finds the action is a priori, to our benefit, and the person demanding the action is acting in good faith. The demand
to take action can be filed with the court only after it is serviced to us, and we decline or omit to act in accordance to this
demand.



Enforceability of Civil Liabilities



We are incorporated in
Israel and most of our directors and officers and the Israeli experts named in this report reside outside the US. Service of process
upon them may be difficult to effect within the US. Furthermore, because substantially all of our assets, and those of our non-US
directors and officers and the Israeli experts named herein, are located outside the US, any judgment obtained in the US against
us or any of these persons may not be collectible within the US.



We have been informed by
our legal counsel in Israel, Doron Tikotsky Kantor Gutman Cederboum & Co., that there is doubt as to the enforceability of
civil liabilities under the Securities Act or the Exchange Act, pursuant to original actions instituted in Israel. However, subject
to particular time limitations, executory judgments of a US court for monetary damages in civil matters may be enforced by an Israeli
court, provided that:



| | · | the judgment was obtained after due process before a court of competent jurisdiction, that recognizes
and enforces similar judgments of Israeli courts, and the court had authority according to the rules of private international law
currently prevailing in Israel;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





74









| | · | adequate service of process was effected and the defendant had a reasonable opportunity to be heard;
| | - | ----------------------------------------------------------------------------------------------------



| | · | the judgment is not contrary to the law, public policy, security or sovereignty of the State of
Israel and its enforcement is not contrary to the laws governing enforcement of judgments;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | the judgment was not obtained by fraud and does not conflict with any other valid judgment in the
same matter between the same parties;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------



| | · | the judgment is no longer appealable; and
| | - | -----------------------------------------



| | · | an action between the same parties in the same matter is not pending in any Israeli court at the
time the lawsuit is instituted in the foreign court.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------



Foreign judgments enforced
by Israeli courts generally will be payable in Israeli currency. The usual practice in an action before an Israeli court to recover
an amount in a non-Israeli currency is for the Israeli court to render judgment for the equivalent amount in Israeli currency at
the rate of exchange in force on the date of the judgment. Under existing Israeli law, a foreign judgment payable in foreign currency
may be paid in Israeli currency at the rate of exchange for the foreign currency published on the day before date of payment. Current
Israeli exchange control regulations also permit a judgment debtor to make payment in foreign currency. Pending collection, the
amount of the judgment of an Israeli court stated in Israeli currency ordinarily may be linked to Israel’s consumer price
index plus interest at the annual statutory rate set by Israeli regulations prevailing at that time. Judgment creditors must bear
the risk of unfavorable exchange rates.



AMERICAN DEPOSITORY SHARES



We have issued and
deposited ordinary shares with Bank Hapoalim B.M., The Bank of New York’s custodian in Tel Aviv, Israel. The Bank of New
York in turn issued American Depositary Shares, or ADSs, representing American Depositary Shares, or ADSs. One ADS represents an
ownership interest in one hundred of our ordinary shares. Each ADS also represents securities, cash or other property deposited
with The Bank of New York but not distributed to ADS holders. The Bank of New York’s Corporate Trust Office is located at
101 Barclay Street, New York, NY 10286, U.S.A. Their principal executive office is located at One Wall Street, New York, NY 10286,
U.S.A.



You may hold ADSs either
directly or indirectly through your broker or other financial institution. If you hold ADSs directly, you are an ADS holder. This
description assumes you hold your ADSs directly. If you hold the ADSs indirectly, you must rely on the procedures of your broker
or other financial institution to assert the rights of ADS holders described in this section. You should consult with your broker
or financial institution to find out what those procedures are.



Because The Bank of
New York will actually hold the ordinary shares, you must rely on it to exercise the rights of a shareholder. The obligations of
The Bank of New York are set out in a deposit agreement among us, The Bank of New York and you, as an ADS holder. The agreement
and the ADSs are generally governed by New York law.



The following is a
summary of the agreement. Because it is a summary, it does not contain all the information that may be important to you. For more
complete information, you should read the entire agreement and the ADS. Directions on how to obtain copies of these are provided
in the section entitled “Where You Can Find More Information.”



Share Dividends and Other Distributions



The Bank of New York
has agreed to pay to you the cash dividends or other distributions it or the custodian receives on shares or other deposited securities
after deducting its fees and expenses. You will receive these distributions in proportion to the number of shares your ADSs represent.



75







Cash. The Bank
of New York will convert any cash dividend or other cash distribution we pay on the shares into U.S. dollars, if it can do so on
a reasonable basis and can transfer the U.S. dollars to the U.S. If that is not possible or if any approval from any government
or agency thereof is needed and cannot be obtained, the agreement allows The Bank of New York to distribute the foreign currency
only to those ADS holders to whom it is possible to do so. It will hold the foreign currency it cannot convert for the account
of the ADS holders who have not been paid. It will not invest the foreign currency and it will not be liable for the interest.



Before making a distribution,
any withholding taxes that must be paid under U.S. law will be deducted. The Bank of New York will distribute only whole U.S. dollars
and cents and will round fractional cents to the nearest whole cent. If the exchange rates fluctuate during a time when The Bank
of New York cannot convert the foreign currency, you may lose some or all of the value of the distribution.



Shares. The
Bank of New York may distribute new ADSs representing any shares we may distribute as a dividend or free distribution, if we furnish
it promptly with satisfactory evidence that it is legal to do so. The Bank of New York will only distribute whole ADSs. It will
sell shares which would require it to use a fractional ADS and distribute the net proceeds in the same way as it does with cash.
If The Bank of New York does not distribute additional ADSs, each ADS will also represent the new shares.



Rights to receive
additional shares. If we offer holders of our ordinary shares any rights to subscribe for additional shares or any other rights,
The Bank of New York may make these rights available to you. We must first instruct The Bank of New York to do so and furnish it
with satisfactory evidence that it is legal to do so. If we do not furnish this evidence and/or give these instructions, and The
Bank of New York decides it is practical to sell the rights, The Bank of New York will sell the rights and distribute the proceeds,
in the same way as it does with cash. The Bank of New York may allow rights that are not distributed or sold to lapse. In that
case, you will receive no value for them. If The Bank of New York makes rights available to you, upon instruction from you, it
will exercise the rights and purchase the shares on your behalf. The Bank of New York will then deposit the shares and issue ADSs
to you. It will only exercise rights if you pay it the exercise price and any other charges the rights require you to pay.



U.S. securities laws
may restrict the sale, deposit, cancellation and transfer of the ADSs issued after exercise of rights. For example, you may not
be able to trade the ADSs freely in the U.S. In this case, The Bank of New York may issue the ADSs under a separate restricted
deposit agreement which will contain the same provisions as the agreement, except for the changes needed to put the restrictions
in place.



Other Distributions.
The Bank of New York will send to you anything else we distribute on deposited securities by any means it thinks is legal, fair
and practical. If it cannot make the distribution in that way, The Bank of New York has a choice. It may decide to sell what we
distributed and distribute the net proceeds in the same way as it does with cash or it may decide to hold what we distributed,
in which case the ADSs will also represent the newly distributed property.



The Bank of New York
is not responsible if it decides that it is unlawful or impractical to make a distribution available to any ADS holders. We have
no obligation to register ADSs, shares, rights or other securities under the Securities Act. We also have no obligation to take
any other action to permit the distribution of ADSs, shares, rights or anything else to ADS holders. This means that you may not
receive the distribution we make on our shares or any value for them if it is illegal or impractical for us to make them available
to you.



Deposit, Withdrawal and Cancellation



The Bank of New York
will issue ADSs if you or your broker deposits shares or evidence of rights to receive shares with the custodian upon payment of
its fees and expenses and of any taxes or charges, such as stamp taxes or stock transfer taxes or fees. The Bank of New York will
register the appropriate number of ADSs in the names you request and will deliver the ADSs at its office to the persons you request.



76







You may turn in your
ADSs at The Bank of New York’s office. Upon payment of its fees and expenses and of any taxes or charges, such as stamp taxes
or stock transfer taxes or fees, The Bank of New York will deliver (1) the underlying shares to an account designated by you and
(2) any other deposited securities underlying the ADS at the office of the custodian; or, at your request, risk and expense, The
Bank of New York will deliver the deposited securities at its office.



Voting Rights



You may instruct The
Bank of New York to vote the shares underlying your ADSs but only if we ask The Bank of New York to ask for your instructions.
Otherwise, you will not be able to exercise your right to vote unless you withdraw the shares. However, you may not know about
the meeting enough in advance to withdraw the shares.



If we ask for your
instructions, The Bank of New York will notify you of the upcoming vote and arrange to deliver our voting materials to you. The
materials will (1) describe the matters to be voted on and (2) explain how you, on a certain date, may instruct The Bank of New
York to vote the shares or other deposited securities underlying your ADSs as you direct. For instructions to be valid, The Bank
of New York must receive them on or before the date specified. The Bank of New York will try, as far as practical, subject to Israeli
law and the provisions of our Articles of Association, to vote or to have its agents vote the shares or other deposited securities
as you instruct. The Bank of New York will only vote or attempt to vote as you instruct. However, if The Bank of New York does
not receive your voting instructions, it will deem you to have instructed it to give a discretionary proxy to vote the shares underlying
your ADSs to a person designated by us provided that no such instruction shall be deemed given and no such discretionary proxy
shall be given with respect to any matter as to which we inform The Bank of New York that (x) we do not wish such proxy given,
(y) substantial opposition exists, (z) such matter materially affects the rights of the holders of the shares underlying the ADSs.



We cannot assure you
that you will receive the voting materials in time to ensure that you can instruct The Bank of New York to vote your shares. In
addition, The Bank of New York and its agents are not responsible for failing to carry out voting instructions or for the manner
of carrying out voting instructions. This means that you may not be able to exercise your right to vote and there may be nothing
you can do if your shares are not voted as you requested.



Rights of Non-Israeli Shareholders
to Vote



Our ADSs may be freely
held and traded pursuant to the General Permit and the Currency Control Law. The ownership or voting of ADSs by non-residents of
Israel is not restricted in any way by our Articles of Association or by the laws of the State of Israel.



77







Fees and Expenses



|ADS holders must pay:                                                                                                                                                       |  | For:                                                                                                                                                                                   
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|$5.00 (or less) per 100 ADSs (or portion thereof)                                                                                                                           |  | Each issuance of an ADS, including as a result of a distribution of shares or rights or other property.                                                                                
|                                                                                                                                                                            |  |                                                                                                                                                                                        
|                                                                                                                                                                            |  | Each cancellation of an ADS, including if the agreement terminates.                                                                                                                    
|                                                                                                                                                                            |  |                                                                                                                                                                                        
|$0.05 (or less) per ADS                                                                                                                                                     |  | Any cash payment.                                                                                                                                                                      
|                                                                                                                                                                            |  |                                                                                                                                                                                        
|Registration or Transfer Fees                                                                                                                                               |  | Transfer and registration of shares on the share register of the Foreign Registrar from your name to the name of The Bank of New York or its agent when you deposit or withdraw shares.
|                                                                                                                                                                            |  |                                                                                                                                                                                        
|Expenses of The Bank of New York                                                                                                                                            |  | Conversion of foreign currency to U.S. dollars.                                                                                                                                        
|                                                                                                                                                                            |  |                                                                                                                                                                                        
|                                                                                                                                                                            |  | Cable, telex and facsimile transmission expenses.                                                                                                                                      
|                                                                                                                                                                            |  |                                                                                                                                                                                        
|                                                                                                                                                                            |  | Servicing of shares or deposited securities.                                                                                                                                           
|                                                                                                                                                                            |  |                                                                                                                                                                                        
|$0.02 (or less) per ADS per calendar year (if the depositary has not collected any cash distribution fee during that year)                                                  |  | Depositary services.                                                                                                                                                                   
|                                                                                                                                                                            |  |                                                                                                                                                                                        
|Taxes and other governmental charges                                                                                                                                        |  | As necessary The Bank of New York or the Custodian have to pay on any ADS or share underlying an ADS, for example, stock transfer taxes, stamp duty or withholding taxes.              
|                                                                                                                                                                            |  |                                                                                                                                                                                        
|A fee equivalent to the fee that would be payable if securities distributed to you had been ordinary shares and the ordinary shares had been deposited for issuance of ADSs |  | Distribution of securities distributed to holders of deposited securities which are distributed by the depositary to ADS holders.                                                      



Payment of Taxes



You will be responsible
for any taxes or other governmental charges payable on your ADSs or on the deposited securities underlying your ADSs. The Bank
of New York may refuse to transfer your ADSs or allow you to withdraw the deposited securities underlying your ADSs until such
taxes or other charges are paid. It may apply payments owed to you or sell deposited securities underlying your ADSs to pay any
taxes owed and you will remain liable for any deficiency. If it sells deposited securities, it will, if appropriate, reduce the
number of ADSs to reflect the sale and pay to you any proceeds, or send to you any property, remaining after it has paid the taxes.



Reclassifications, Recapitalizations and Mergers



|If we:                                                                                                                |  | Then:                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Change the nominal or par value of our
        shares;                                                                |  | The cash, shares or other securities received by The Bank of New York will become deposited securities. Each ADS will automatically represent its equal share of the new deposited securities. The Bank of New York may, and will if we ask it to, distribute some or all of the cash, shares or other securities it received. It may also issue new ADSs or ask you to surrender your outstanding ADSs in exchange for new ADSs, identifying the new deposited securities.
|                                                                                                                      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|Reclassify, split up or consolidate any of the deposited securities;                                                  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                                                                                                                      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|Distribute securities on the shares that are not distributed to you; or                                               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                                                                                                                      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|Recapitalize, reorganize, merge, liquidate, sell all or substantially all of our assets, or takes any similar action. |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            



78







Amendment and Termination



We may agree with The
Bank of New York to amend the agreement and the ADSs without your consent for any reason. If the amendment adds or increases fees
or charges, except for taxes and other governmental charges or registration fees, cable, telex or facsimile transmission costs,
delivery costs or other such expenses, or prejudices an important right of ADS holders, it will only become effective thirty days
after The Bank of New York notifies you of the amendment. At the time an amendment becomes effective, you are considered, by continuing
to hold your ADS, to agree to the amendment and to be bound by the ADSs and the agreement is amended.



The Bank of New York
will terminate the agreement if we ask it to do so. The Bank of New York may also terminate the agreement if The Bank of New York
has told us that it would like to resign and we have not appointed a new depositary bank within ninety days. In both cases, The
Bank of New York must notify you at least ninety days before termination.



After termination,
The Bank of New York and its agents will be required to do only the following under the agreement: (1) advise you that the agreement
is terminated, and (2) collect distributions on the deposited securities and deliver shares and other deposited securities upon
cancellation of ADSs. After termination, The Bank of New York will, if practical, sell any remaining deposited securities by public
or private sale. After that, The Bank of New York will hold the proceeds of the sale, as well as any other cash it is holding under
the agreement for the pro rata benefit of the ADS holders that have not surrendered their ADSs. It will not invest the money and
will have no liability for interest. The Bank of New York’s only obligations will be to account for the proceeds of the sale
and other cash. After termination our only obligations will be with respect to indemnification and to pay certain amounts to The
Bank of New York.



Limitations on Obligations and Liability
to ADS Holders



The agreement expressly
limits our obligations and the obligations of The Bank of New York, and it limits our liability and the liability of The Bank of
New York. We and The Bank of New York:



| | · | are only obligated to take the actions specifically set forth in the agreement without negligence
or bad faith;
| | - | ---------------------------------------------------------------------------------------------------------------



| | · | are not liable if either is prevented or delayed by law or circumstances beyond their control from
performing their obligations under the agreement;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------



| | · | are not liable if either exercises discretion permitted under the agreement;
| | - | ----------------------------------------------------------------------------



| | · | have no obligation to become involved in a lawsuit or other proceeding related to the ADSs or the
agreement on your behalf or on behalf of any other party; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | may rely upon any documents they believe in good faith to be genuine and to have been signed or
presented by the proper party.
| | - | ------------------------------------------------------------------------------------------------------------------------------



In the agreement, we
and The Bank of New York agree to indemnify each other under certain circumstances.



Requirements for Depositary Actions



Before The Bank of
New York will issue or register transfer of an ADS, make a distribution on an ADS, or make a withdrawal of shares, The Bank of
New York may require payment of stock transfer or other taxes or other governmental charges and transfer or registration fees charged
by third parties for the:



| | · | transfer of any shares or other deposited securities;
| | - | -----------------------------------------------------



| | · | production of satisfactory proof of the identity and genuineness of any signature or other information
it deems necessary, and
| | - | ------------------------------------------------------------------------------------------------------------------------------



| | · | compliance with regulations it may establish, from time to time, consistent with the agreement,
including presentation of transfer documents.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------



79







The Bank of New York
may refuse to deliver, transfer, or register transfers of ADSs generally when the books of The Bank of New York or our books are
closed, or at any time if The Bank of New York or we think it advisable to do so. You have the right to cancel your ADSs and withdraw
the underlying shares at any time except:



| | · | when temporary delays arise because: (1) The Bank of New York or we have closed its transfer books;
(2) the transfer of shares is blocked to permit voting at a shareholders’ meeting; or (3) we are paying a dividend on the
shares; or
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | when it is necessary to prohibit withdrawals in order to comply with any laws or governmental regulations
that apply to ADSs or to the withdrawal of shares or other deposited securities.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



This right of withdrawal
may not be limited by any other provision of the agreement.



Pre-Release of ADSs



In certain circumstances,
subject to the provisions of the agreement, The Bank of New York may issue ADSs before deposit of the underlying shares. This is
called a pre-release of the ADS. The Bank of New York may also deliver shares upon cancellation of pre-released ADSs (even if the
ADSs are cancelled before the pre-release transaction has been closed out). A pre-release is closed out as soon as the underlying
shares are delivered to The Bank of New York. The Bank of New York may receive ADSs instead of shares to close out a pre-release.
The Bank of New York may pre-release ADSs only under the following conditions: (1) before or at the time of the pre-release, the
person to whom the pre-release is being made must represent to The Bank of New York in writing that it or its customer owns the
shares or ADSs to be deposited; (2) the pre-release must be fully collateralized with cash or other collateral that The Bank of
New York considers appropriate; and (3) The Bank of New York must be able to close out the pre-release on not more than five business
days’ notice. In addition, The Bank of New York will limit the number of ADSs that may be outstanding at any time as a result
of prerelease, although The Bank of New York may disregard the limit from time to time, if it thinks it is appropriate to do so.



Inspection of Books of the Depositary



Under the terms of
the agreement, holders of ADSs may inspect the transfer books of the depositary at any reasonable time, provided that such inspection
shall not be for the purpose of communicating with holders of ADSs in the interest of a business or object other than either our
business or a matter related to the deposit agreement or ADSs.



Book-Entry Only Issuance - The Depository
Trust Company



The Depository Trust
Company, or DTC, New York, New York, will act as securities depository for the ADSs. The ADSs will be represented by one global
security that will be deposited with and registered in the name of Cede & Co. (DTC’s partnership nominee), or such other
name as may be requested by an authorized representative of DTC. This means that we will not issue certificates to you for the
ADSs. One global security will be issued to DTC, which will keep a computerized record of its participants (for example, your broker)
whose clients have purchased the ADSs. Each participant will then keep a record of its clients. Unless it is exchanged in whole
or in part for a certificated security, a global security may not be transferred. However, DTC, its nominees, and their successors
may transfer a global security as a whole to one another. Beneficial interests in the global security will be shown on, and transfers
of the global security will be made only through, records maintained by DTC and its participants.



DTC is a limited-purpose
trust company organized under the New York Banking Law, a “banking organization” within the meaning of the New York
Banking Law, a member of the United States Federal Reserve System, a “clearing corporation” within the meaning of the
New York Uniform Commercial Code and a “clearing agency” registered under the provisions of Section 17A of the
Exchange Act. DTC holds securities that its participants (direct participants) deposit with DTC. DTC also records the settlement
among direct participants of securities transactions, such as transfers and pledges, in deposited securities through computerized
records for direct participant’s accounts. This eliminates the need to exchange certificates. Direct participants include
securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations.



80







DTC’s book-entry
system is also used by other organizations such as securities brokers and dealers, banks and trust companies that work through
a direct participant. The rules that apply to DTC and its participants are on file with the SEC.



DTC is a wholly-owned
subsidiary of The Depository Trust & Clearing Corporation, or DTCC. DTCC is, in turn, owned by a number of DTC’s direct
participants and by the New York Stock Exchange, Inc., the American Stock Exchange, Inc. and the National Association
of Securities Dealers, Inc.



When you purchase ADSs
through the DTC system, the purchases must be made by or through a direct participant, who will receive credit for the ADSs on
DTC’s records. Since you actually own the ADSs, you are the beneficial owner and your ownership interest will only be recorded
on the direct (or indirect) participants’ records. DTC has no knowledge of your individual ownership of the ADSs. DTC’s
records only show the identity of the direct participants and the amount of ADSs held by or through them. You will not receive
a written confirmation of your purchase or sale or any periodic account statement directly from DTC. You will receive these from
your direct (or indirect) participant. Thus the direct (or indirect) participants are responsible for keeping accurate account
of the holdings of their customers like you.



We will wire dividend
payments to DTC’s nominee, and we will treat DTC’s nominee as the owner of the global security for all purposes. Accordingly,
we will have no direct responsibility or liability to pay amounts due on the global security to you or any other beneficial owners
in the global security.



Any redemption notices
will be sent by us directly to DTC, who will in turn inform the direct participants, who will then contact you as a beneficial
holder.



It is DTC’s current
practice, upon receipt of any payment of dividends or liquidation amount, to credit direct participants’ accounts on the
payment date based on their holdings of beneficial interests in the global securities as shown on DTC’s records. In addition,
it is DTC’s current practice to assign any consenting or voting rights to direct participants whose accounts are credited
with preferred securities on a record date, by using an omnibus proxy. Payments by participants to owners of beneficial interests
in the global securities, and voting by participants, will be based on the customary practices between the participants and owners
of beneficial interests, as is the case with the ADSs held for the account of customers registered in “street name.”
However, payments will be the responsibility of the participants and not of DTC or us.



ADSs represented by
a global security will be exchangeable for certificated securities with the same terms in authorized denominations only if:



| | · | DTC is unwilling or unable to continue as depositary or if DTC ceases to be a clearing agency registered
under applicable law and a successor depositary is not appointed by us within 90 days; or
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | we determine not to require all of the ADSs to be represented by a global security.
| | - | -----------------------------------------------------------------------------------



If the book-entry only
system is discontinued, the transfer agent will keep the registration books for the ADSs at its corporate office.



The information in
this section concerning DTC and DTC’s book-entry system has been obtained from sources we believe to be reliable, but we
take no responsibility for the accuracy thereof.



81







Material Contracts



Bio-Gal Ltd.



On March 18, 2009,
we announced that we had entered into an asset purchase agreement with Bio-Gal Ltd. (“Bio-Gal ”), a Gibraltar
private company, for the rights to a use patent on rHuEPO for the prolongation of Multiple Myeloma patients’ survival and
improvement of their quality of life. On December 31, 2009, we amended the asset purchase agreement with Bio-Gal, so that XTL could
acquire XTEPO Ltd., a special purpose company that was established by Bio-Gal’s shareholders who received from Bio-Gal all
of Bio-Gal’s rights on rHuEPO and raised approximately $1.5 million. We intend to develop rHuEPO for the prolongation of
Multiple Myeloma patients’ survival and improvement of their quality of life. Multiple Myeloma is a severe and incurable
malignant hematological cancer of plasma cells. In accordance with the terms of the amended asset purchase agreement, we issued
to XTEPO’s shareholders ordinary shares representing approximately 69.44% of our then issued and outstanding ordinary share
capital. In addition, the parties agreed to cancel a $10 million cash milestone payment to Bio-Gal upon the successful completion
of a Phase 2 clinical trial, which was under the original asset purchase agreement. We are obligated to pay 1% royalties on net
sales of the product, as well as a fixed royalty payment in the total amount of $350 thousand upon the successful completion of
Phase 2. Such payment of $350 thousand mentioned above shall be made to Yeda upon the earlier of (i) six months from the successful
completion of the Phase 2 or (ii) the completion of a successful fundraising by XTL or XTEPO at any time after the completion of
the Phase 2 of at least $2 million. On August 3, 2010, the Bio-Gal transaction was completed according to the outline signed by
the parties to the agreement on December 31, 2009, after all the prerequisites had been met, including, among other things, the
signing of an agreement with the Israeli Tax Authority regarding the tax exemption granted to the share swap transaction pursuant
to article 104 and 103 to the Israeli tax ordinance (Revised), 1961. (See note 12 to the consolidated financial statements: Intangible
Asset).



MinoGuard Ltd.



On March 24, 2011,
we entered into a Memorandum of Understanding with MinoGuard, pursuant to which we agreed to acquire the exclusive rights to SAM-101
by obtaining an exclusive license to use MinoGuard’s entire technology. SAM-101 is based on a combination of anti-psychotic
drugs with minocycline, a recognized medicinal compound. On November 30, 2011, we received a worldwide exclusive license from MinoGuard
under which we agreed to develop and commercialize MinoGuard’s technology for the treatment of psychotic disorders focusing
on Schizophrenia. Under the agreement, we are to conduct clinical trials, develop, register, market, distribute and sell the drugs
that will emerge from MinoGuard’s technology, with no limitations for a specific disorder. In consideration, we shall pay
MinoGuard accumulated clinical development and marketing approvals milestone-based payments of approximately $2.5 million. In addition,
we agreed to pay MinoGuard royalty-based payments on products that are based on the technology, equal to 3.5% of the net sales
and/or percentage from the Company third-party out-license receipts in the range of 7.5%-20% according to the clinical phase of
the drug at the time of an out-license transaction. It should be noted that the Company had the sole discretion to pay any of the
above amounts in cash or by way of issuing ordinary shares of the Company to MinoGuard. In addition to the above payments, and
in accordance with the above agreement, since as of June 30, 2013, XTL had not commenced a phase 2 clinical trial, we have paid
MinoGuard an annual license fee, by way of the issuance of 175,633 ordinary shares of the Company, representing a value of $45
thousand, for the 12 month period between July 1, 2013 and June 30, 2014. On September 3, 2014, the Company issued an additional
889,822 ordinary shares, representing a value of $135 thousand, for the 12 month period between July 1, 2014 and June 30, 2015.



On May 25, 2015, the
Company provided MinoGuard with a notice of termination whereby, as of June 24, 2015, the rights and license granted according
to the license agreement were terminated and all rights in and to the licensed technology reverted to MinoGuard.



hCDR1



On January 7, 2014,
the Company entered into a licensing agreement with Yeda to research, develop, and commercialize hCDR1, a Phase II-ready asset
for the treatment of SLE, among other indications. In consideration, the Company is responsible for a patent expense reimbursement
in six installments totaling approximately $400 thousand. The Company is required to make milestone payments of $2.2 million: $200
thousand upon starting Phase III, $1 million upon U.S. Food and Drug Administration approval and $250 thousand for regulatory approval
in each of China and three of the European Union’s Group of Six. In addition, the Company will pay 2-3% royalties of annual
net sales and sublicense fees of 15-20% of whatever the Company receives from any sub-licensee.



82







Lupus is a debilitating
disease affecting approximately five million people worldwide according to the Lupus Foundation of America. hCDR1, is a peptide
and acts as a disease-specific treatment to modify the SLE-related autoimmune process. It does so by specific upstream immunomodulation
through the generation of regulatory T cells, reducing inflammation and resuming immune balance. Prior to being licensed to the
Company by Yeda, hCDR1 was licensed to Teva Pharmaceutical Industries (“Teva”), which performed two placebo controlled
Phase I trials and a placebo controlled Phase II trial called the PRELUDE trial. The studies consisted of over 400 patients, demonstrating
that hCDR1 is well tolerated by patients and has a favorable safety profile. The PRELUDE trial did not achieve its primary efficacy
endpoint based on the SLEDAI scale, resulting in Teva returning the asset to Yeda. However, the PRELUDE trial showed encouraging
results in its secondary clinical endpoint, the BILAG index, and, in fact, the 0.5 mg weekly dose showed a substantial effect.
Multiple post-hoc analyses also showed impressive results for this dose using the BILAG index. The Company plans that such dose
be the focus of the clinical development plan moving forward. Subsequent to Teva’s return of the program to Yeda, the FDA
directed that the primary endpoint in future trials for Lupus therapies, including those for hCDR1, should be based on either the
BILAG index or the SRI. Given the FDA’s recommendation and the positive findings from the PRELUDE trial (which showed a substantial
effect in the BILAG index), the Company intends to initiate a new Phase II clinical trial, which will include the 0.5 mg (and a
0.25 mg) weekly dose of hCDR1.



Proteologics



On November 21, 2012,
in an off-market transaction, we purchased from 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, for approximately NIS 6.5 million (approximately $ 1.7 million). Proteologics is a public company whose shares
are listed on the TASE and was engaged at the time of acquisition in the discovery and development of drugs comprised of various
components of the UBIQUITIN system, which was discovered by Dr. Avram Hershko and Dr. Aaron Ciechanover, both 2004 Nobel Prize
laureates in Chemistry for the discovery of the UBIQUITIN system.



On August 22, 2013,
Proteologics’ board of directors resolved to terminate Proteologics’ operations effective immediately.



On September 11, 2013,
the Company entered into an agreement for the purchase of another 14.13% of the shares of Proteologics from Aurum Ventures MKI
Ltd. (“Aurum”) in consideration for the issuance of 3,031,299 shares of NIS 0.1 par value each of the Company to Aurum.
On September 12, 2013, the Company signed an agreement with Zmiha Investment House Ltd. (“Zmiha”) for the sale of its
entire investment in Proteologics, representing 44.95% of Proteologics’ issued and outstanding share capital as of the date
of the agreement in consideration of approximately $ 3.4 million (approximately NIS 12 million). According to the agreement,
on the consummation date, the Company received an amount of approximately $ 2.7 million (approximately NIS 9.6 million)
and the balance was held in escrow until the completion of an inspection process by an inspector and the execution of a stay of
proceeding pursuant to Section 350 to the Israeli Companies Law in Proteologics. As of the date hereof the entire considerations
has been delivered to the Company and no amount remains in escrow.



Exchange Controls



Under Israeli Law,
Israeli non-residents who purchase ordinary shares with certain non-Israeli currencies (including dollars) may freely repatriate
in such non-Israeli currencies all amounts received in Israeli currency in respect of the ordinary shares, whether as a dividend,
as a liquidating distribution, or as proceeds from any sale in Israel of the ordinary shares, provided in each case that any applicable
Israeli income tax is paid or withheld on such amounts. The conversion into the non-Israeli currency must be made at the rate of
exchange prevailing at the time of conversion.



83







Taxation



The following discussion
summarizes certain Israeli and U.S. federal income tax consequences that may be material to our shareholders, but is not intended,
and should not be construed, as legal or professional tax advice and does not exhaust all possible tax considerations that may
be relevant to holders of our ordinary shares. This discussion is based on existing law, judicial authorities and administrative
interpretations, all of which are subject to change or differing interpretations, possibly with retroactive effect. This summary
does not purport to be a complete analysis of all potential tax consequences of owning our ordinary shares. In particular, this
discussion does not take into account the specific circumstances of any particular holder or holders who may be subject to special
rules, such as tax-exempt entities, broker-dealers, shareholders subject to Alternative Minimum Tax, shareholders that actually
or constructively own 10% or more of our voting securities, shareholders that hold ordinary shares or ADSs as part of straddle
or hedging or conversion transaction, traders in securities that elect mark to market, banks and other financial institutions or
partnerships or other pass-through entities.



We urge shareholders
to consult their own tax advisors as to the potential U.S., Israeli, or other tax consequences of the purchase, ownership and disposition
of ordinary shares and ADSs, including, in particular, the effect of any foreign, state or local taxes. For purposes of the entire
Taxation discussion, we refer to ordinary shares and ADSs collectively as ordinary shares.



Israeli Tax Considerations



The following discussion
refers to the current tax law applicable to companies in Israel, with special reference to its effect on us. This discussion also
includes specified Israeli tax consequences to holders of our ordinary shares and Israeli Government programs benefiting us.



Corporate Tax Rate



Taxable income of the
Company is subject to a corporate tax rate as follow: 2014 and 2015 - 26.5% and 2016 - 25%.



On January 5, 2016,
the Israeli Parliament officially published the Law for the Amendment of the Israeli Tax Ordinance (Amendment 216), that reduces
the standard corporate income tax rate from 26.5% to 25%.



In December 2016, the
Israeli Parliament approved the Economic Efficiency Law (Legislative Amendments for Applying the Economic Policy for the 2017 and
2018 Budget Years), 2016 which reduces the corporate income tax rate to 24% (instead of 25%) effective from January 1, 2017 and
to 23% effective from January 1, 2018.



Capital gains in the
hands of the Company and its Israeli subsidiary are taxable according to the corporate tax rate applicable in the tax year.



Tax Benefits for Research and Development



Israeli tax law allows,
under specific conditions, a tax deduction in the year incurred for expenditures, including capital expenditures, relating to scientific
research and development projects, if the expenditures are approved by the relevant Israeli government ministry, determined by
the field of research, and the research and development is for the promotion of the company and is carried out by or on behalf
of the company seeking the deduction. Expenditures not so approved are deductible over a three-year period. In the past, expenditures
that were made out of proceeds made available to us through government grants were automatically deducted during a one year period.



84







Israeli Estate and Gift Taxes



Israel does not currently
impose taxes on inheritance or bona fide gifts. For transfers of assets by inheritance or gift that would normally be subject to
capital gains tax or land appreciation tax, the recipient’s tax cost basis and date of purchase are generally deemed to be
the same as those for the transferor of the property.



Capital Gains Tax on Sales of our Ordinary Shares by Both
Residents and Non-Residents of Israel



Israeli law generally
imposes a capital gains tax on the sale of capital assets located in Israel, including shares in Israeli resident companies, by
both residents and non-residents of Israel, unless a specific exemption is available or unless a treaty between Israel and the
country of the non-resident provides otherwise. The law distinguishes between the inflationary surplus and the real gain. The inflationary
surplus is the portion of the total capital gain, which is equivalent to the increase of the relevant asset’s purchase price
attributable to the increase in the Israeli consumer price index from the date of purchase to the date of sale. The real gain is
the excess of the total capital gain over the inflationary surplus. A non-resident that invests in taxable assets with foreign
currency may elect to calculate the inflationary amount by using such foreign currency.



Non-Israeli residents
will be exempt from Israeli capital gains tax on any gains derived from the sale of shares publicly traded on a stock exchange
recognized by the Israeli Ministry of Finance (including the Tel-Aviv Stock Exchange and Nasdaq), provided such shareholders did
not acquire their shares prior to an initial public offering and that such capital gains are not derived by a permanent establishment
of the foreign resident in Israel. Notwithstanding the foregoing, dealers in securities in Israel are taxed at the regular tax
rates applicable to business income. However, Non-Israeli corporations will not be entitled to such exemption if an Israeli resident
(1) has a controlling interest of 25% or more in such non-Israeli corporation, or (2) is the beneficiary of, or is entitled to,
25% or more of the revenue or profits of such non-Israeli corporation, whether directly or indirectly. In any event, the provisions
of the tax reform shall not affect the exemption from capital gains tax for gains accrued before January 1, 2003, as described
in the previous paragraph.



The capital gains tax
imposed on Israeli tax resident individuals on the sale of securities was 20%. With respect to an Israeli tax resident individual
who is a “substantial shareholder” on the date of sale of the securities or at any time during the 12 months preceding
such sale, the capital gains tax rate was increased to 25%. In December 2011, following the enactment of the Tax Burden Distribution
Law, the tax rates mentioned above were increased to 25% and 30%, respectively, from 2012 and thereafter. A “substantial
shareholder” is defined as someone who alone, or together with another person, holds, directly or indirectly, at least 10%
in one or all of any of the means of control in the corporation. With respect to Israeli tax resident corporate investors, capital
gains tax at the regular corporate rate will be imposed on such taxpayers on the sale of traded shares.



In addition, pursuant
to the Convention Between the Government of the United States of America and the Government of Israel with Respect to Taxes on
Income, as amended (the “United States- Israel Tax Treaty”), the sale, exchange or disposition of ordinary shares by
a person who qualifies as a resident of the U.S. within the meaning of the United States-Israel Tax Treaty and who is entitled
to claim the benefits afforded to such person by the United States- Israel Tax Treaty (a “Treaty United States Resident”)
generally will not be subject to the Israeli capital gains tax unless such Treaty United States Resident holds, directly or indirectly,
shares representing 10% or more of our voting power during any part of the twelve- month period preceding such sale, exchange or
disposition, subject to certain conditions or if the capital gains from such sale are considered as business income attributable
to a permanent establishment of the U.S. resident in Israel. However, under the United States-Israel Tax Treaty, such “Treaty
United States Resident” would be permitted to claim a credit for such taxes against the U.S. federal income tax imposed with
respect to such sale, exchange or disposition, subject to the limitations in U.S. laws applicable to foreign tax credits.



Taxation of Dividends



As of the beginning
of 2012 Israeli tax resident individuals or non-Israeli resident individuals are generally subject to Israeli income tax on the
receipt of dividends paid on our ordinary Shares at the rate of 25% or 30% if such recipient is a “substantial shareholders"
at the time receiving the dividend or on any date in the 12 months preceding such date, unless a lower tax rate is provided in
a tax treaty between Israel and the shareholder's country of residence"



85







Under the U.S.-Israel
Tax Treaty, the maximum Israeli tax and withholding tax on dividends paid to a holder of ordinary shares who is a resident of the
U.S. is generally 25%, but is reduced to 12.5% if the dividends are paid to a corporation that holds in excess of 10% of the voting
rights of a company during the company’s taxable year preceding the distribution of the dividend and the portion of the company’s
taxable year in which the dividend was distributed. A non-resident of Israel who has dividend income derived from or accrued in
Israel, from which tax was withheld at the source, is generally exempt from the duty to file tax returns in Israel in respect of
such income, provided such income was not derived from a business conducted in Israel by the taxpayer.



U.S. Federal Income Tax Considerations



TO ENSURE COMPLIANCE
WITH U.S. TREASURY DEPARTMENT CIRCULAR 230, PROSPECTIVE HOLDERS OF ORDINARY SHARES ARE HEREBY NOTIFIED THAT: (A) ANY DISCUSSION
OF U.S. FEDERAL TAX ISSUES IN THIS MEMORANDUM IS NOT INTENDED OR WRITTEN TO BE RELIED UPON, AND CANNOT BE RELIED UPON, BY HOLDERS
OF ORDINARY SHARES FOR THE PURPOSE OF AVOIDING PENALTIES THAT MAY BE IMPOSED ON SUCH HOLDERS UNDER THE INTERNAL REVENUE CODE OF
1986, AS AMENDED (THE “CODE”); (B) SUCH DISCUSSION IS WRITTEN IN CONNECTION WITH THE PROMOTION OR MARKETING OF THE
TRANSACTIONS OR MATTERS ADDRESSED HEREIN; AND (C) PROSPECTIVE HOLDERS OF ORDINARY SHARES SHOULD SEEK ADVICE BASED ON THEIR PARTICULAR
CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR.



The following discussion
applies only to a holder of our ordinary shares who qualifies as a “U.S. holder”. For purposes of this discussion a
“U.S. holder” is a beneficial owner of our ordinary shares that is for U.S. federal income tax purposes:



| | · | an individual who is a U.S. citizen or U.S. resident alien;
| | - | -----------------------------------------------------------



| | · | a corporation (or other entity taxable as a corporation for U.S.
federal income tax purposes) that was created or organized under the laws of the U.S., any state thereof or the District of Columbia;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | an estate whose income is subject to U.S. federal income taxation
regardless of its source; or
| | - | ----------------------------------------------------------------------------------------------



| | · | a trust (i) if a U.S. court is able to exercise primary supervision
over the administration of the trust and one or more “United States persons” (as defined in the Code) have the authority
to control all substantial decisions of the trust, or (ii) if the trust has a valid election in effect under applicable Treasury
Regulations to be treated as a “United States person.”
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



This discussion is
based on current provisions of the Internal Revenue Code of 1986, as amended, which we refer to as the Code, current and proposed
Treasury regulations promulgated under the Code, and administrative and judicial decisions as of the date of this prospectus,
all of which are subject to change or differing interpretation, possibly on a retroactive basis. This discussion does not address
any aspect of state, local or non-U.S. tax laws. Except where noted, this discussion addresses only those holders who hold our
shares as capital assets. This discussion does not purport to be a comprehensive description of all of the tax considerations that
may be relevant to U.S. holders entitled to special treatment under U.S. federal income tax laws, for example, financial institutions,
insurance companies, tax-exempt organizations and broker/dealers, and it does not address all aspects of U.S. federal income taxation
that may be relevant to any particular shareholder based on the shareholder’s individual circumstances. In particular, this
discussion does not address the potential application of the alternative minimum tax, or the special U.S. federal income tax rules
applicable in special circumstances, including to U.S. holders who:



| | · | have elected mark-to-market accounting;
| | - | ---------------------------------------



86







| | · | hold our ordinary shares as part of a straddle, hedge or conversion
transaction with other investments;
| | - | -------------------------------------------------------------------------------------------------------



| | · | own directly, indirectly or by attribution at least 10% of our voting
power;
| | - | ----------------------------------------------------------------------------



| | · | are tax exempt entities;
| | - | ------------------------



| | · | are persons who acquire shares in connection with employment or other
performance of services; and
| | - | --------------------------------------------------------------------------------------------------



| | · | have a functional currency that is not the U.S. dollar.
| | - | -------------------------------------------------------



Additionally, this
discussion does not consider the tax treatment of partnerships or persons who hold ordinary shares through a partnership or other
pass-through entity or the possible application of U.S. federal gift or estate taxes.



EACH PROSPECTIVE SHAREHOLDER
IS URGED TO CONSULT ITS TAX ADVISOR REGARDING THE PARTICULAR TAX CONSEQUENCES TO SUCH HOLDER OF OWNERSHIP AND DISPOSITION OF OUR
SHARES, AS WELL AS ANY TAX CONSEQUENCES THAT MAY ARISE UNDER THE LAWS OF ANY OTHER RELEVANT FOREIGN, STATE, LOCAL, OR OTHER TAXING
JURISDICTION.



Taxation of Distributions Paid on
Ordinary Shares



Subject to the description
of the passive foreign investment company rules below, a U.S. holder will be required to include in gross income as ordinary income
from sources outside of the U.S. the amount of any distribution paid on ordinary shares, including any Israeli taxes withheld from
the amount paid, to the extent the distribution is paid out of our current or accumulated earnings and profits as determined for
U.S. federal income tax purposes. Distributions in excess of these earnings and profits will be applied against and will reduce
the U.S. holder’s basis in the ordinary shares and, to the extent in excess of this basis, will be treated as gain from the
sale or exchange of ordinary shares.



Certain dividend income
may be eligible for a reduced rate of taxation. Dividend income will be taxed to a non-corporate holder at the applicable long-term
capital gains rate if the dividend is received from a “qualified foreign corporation,” and the shareholder of such
foreign corporation holds such stock for more than 60 days during the 121 day period that begins on the date that is 60 days before
the ex-dividend date for the stock. The holding period is tolled for any days on which the shareholder has reduced his risk of
loss with respect to the stock. A “qualified foreign corporation” is either a corporation that is eligible for the
benefits of a comprehensive income tax treaty with the U.S. or a corporation whose stock, the shares of which are with respect
to any dividend paid by such corporation, is readily tradable on an established securities market in the United States (including,
for this purpose, ADSs traded on a securities market in the United States with respect to the foreign corporation’s shares).
However, a foreign corporation will not be treated as a “qualified foreign corporation” if it is a passive foreign
investment company (as discussed below) for the year in which the dividend was paid or the preceding year. Distributions of current
or accumulated earnings and profits paid in foreign currency to a US holder will be includible in the income of a U.S. holder in
a U.S. dollar amount calculated by reference to the exchange rate in effect on the day the distribution is received by the US holder
(or, in the case of ADSs, on the day the distribution is received by the depository). A U.S. holder that receives a foreign currency
distribution and converts the foreign currency into US dollars subsequent to receipt will have foreign exchange gain or loss based
on any appreciation or depreciation in the value of the foreign currency against the U.S. dollar, which will generally be U.S.
source ordinary income or loss.



As described above,
we will generally be required to withhold Israeli income tax from any dividends paid to holders who are not resident in Israel.
See “- Israeli Tax Considerations-Taxation of Dividends” above. If a U.S. holder receives a dividend from us that is
subject to Israeli withholding, the following would apply:



87







| | · | You must include the gross amount of the dividend, not reduced by the amount of Israeli tax withheld,
in your U.S. taxable income.
| | - | ----------------------------------------------------------------------------------------------------------------------------------



| | · | You may be able to claim the Israeli tax withheld as a foreign tax credit against your U.S. income
tax liability. However, to the extent that 25% or more of our gross income from all sources was effectively connected with the
conduct of a trade or business in the U.S. (or treated as effectively connected, with limited exceptions) for a three-year period
ending with the close of the taxable year preceding the year in which the dividends are declared, a portion of this dividend will
be treated as U.S. source income, possibly reducing the allowable foreign tax.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The foreign tax credit is subject to significant and complex limitations. Generally, the credit
can offset only the part of your U.S. tax attributable to your net foreign source passive income. Additionally, if we pay dividends
at a time when 50% or more of our stock is owned by U.S. persons, you may be required to treat the part of the dividend attributable
to U.S. source earnings and profits as U.S. source income, possibly reducing the allowable credit.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | A U.S. holder will be denied a foreign tax credit with respect to Israeli income tax withheld from
dividends received on the ordinary shares to the extent the U.S. holder has not held the ordinary shares for at least 16 days of
the 31-day period beginning on the date which is 15 days before the ex-dividend date or, alternatively, to the extent the U.S.
holder is under an obligation to make related payments with respect to substantially similar or related property. Any days during
which a U.S. holder has substantially diminished its risk of loss on the ordinary shares are not counted toward meeting the 16-day
holding period required by the statute.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | If you do not elect to claim foreign taxes as a credit, you will be entitled to deduct the Israeli
income tax withheld from your XTL dividends in determining your taxable income.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Individuals who do not claim itemized deductions, but instead utilize the standard deduction, may
not claim a deduction for the amount of the Israeli income taxes withheld.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | If you are a U.S. corporation holding our stock, the general rule is that you cannot claim the
dividends-received deduction with respect to our dividends. There is an exception to this rule if you own at least 10% of our ordinary
shares (by vote) and certain conditions are met.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Special rules, described
below, apply if we are a passive foreign investment company.



Taxation of the Disposition of Ordinary
Shares



Subject to the description
of the passive foreign investment company rules below, upon the sale, exchange or other disposition of our ordinary shares, a U.S.
holder will recognize capital gain or loss in an amount equal to the difference between the U.S. holder’s basis in the ordinary
shares, which is usually the cost of those shares, and the amount realized on the disposition. Capital gain from the sale, exchange
or other disposition of ordinary shares held more than one year is long-term capital gain and is eligible for a reduced rate of
taxation for non-corporate holders. In general, gain realized by a U.S. holder on a sale, exchange or other disposition of ordinary
shares generally will be treated as U.S. source income for U.S. foreign tax credit purposes. A loss realized by a U.S. holder on
the sale, exchange or other disposition of ordinary shares is generally allocated to U.S. source income. However, regulations require
the loss to be allocated to foreign source income to the extent certain dividends were received by the taxpayer within the 24-month
period preceding the date on which the taxpayer recognized the loss. The deductibility of a loss realized on the sale, exchange
or other disposition of ordinary shares is subject to limitations for both corporate and individual shareholders.



A U.S. holder that
uses the cash method of accounting calculates the U.S. dollar value of the proceeds received from a sale of ordinary shares as
of the date that the sale settles, and will generally have no additional foreign currency gain or loss on the sale, while a U.S.
holder that uses the accrual method of accounting is required to calculate the value of the proceeds of the sale as of the trade
date and may therefore realize foreign currency gain or loss, unless the U.S. holder has elected to use the settlement date to
determine its proceeds of sale for purposes of calculating this foreign currency gain or loss. In addition, a U.S. holder that
receives foreign currency upon disposition of our ordinary shares and converts the foreign currency into U.S. dollars subsequent
to receipt will have foreign exchange gain or loss based on any appreciation or depreciation in the value of the foreign currency
against the U.S. dollar, which will generally be U.S. source ordinary income or loss.



88







Tax Consequences if we are a Passive
Foreign Investment Company



Special federal income
tax rules apply to the timing and character of income received by a U.S. holder of a PFIC. We will be a PFIC if either 75% or more
of our gross income in a tax year is passive income or the average percentage of our assets (by value) that produce or are held
for the production of passive income in a tax year is at least 50%. The IRS has indicated that cash balances, even if held as working
capital, are considered to be assets that produce passive income. Therefore, any determination of PFIC status will depend upon
the sources of our income, and the relative values of passive and non- passive assets, including goodwill. Furthermore, because
the goodwill of a publicly-traded corporation is largely a function of the trading price of its shares, the valuation of that goodwill
is subject to significant change throughout each year. A determination as to a corporation’s status as a PFIC must be made
annually. We believe we may be a PFIC during 2016 and although we have not determined whether we will be a PFIC in 2017, or in
any subsequent year, our operating results for any such years may cause us to be a PFIC. Although we may not be a PFIC in any one
year, the PFIC taint remains with respect to those years in which we were or are a PFIC and the special PFIC taxation regime will
continue to apply.



If we are classified
as a PFIC, a special tax regime would apply to both (a) any “excess distribution” by us (generally, the U.S. holder’s
ratable share of distributions in any year that are greater than 125% of the average annual distributions received by such U.S.
holder in the three preceding years or its holding period, if shorter) and (b) any gain recognized on the sale or other disposition
of your ordinary shares. Under this special regime, any excess distribution and recognized gain would be treated as ordinary income
and the federal income tax on such ordinary income would be determined as follows: (i) the amount of the excess distribution or
gain would be allocated ratably over the U.S. holder’s holding period for our ordinary shares; (ii) U.S. federal income tax
would be determined for the amounts allocated to the first year in the holding period in which we were classified as a PFIC and
for all subsequent years (except the year in which the excess distribution was received or the sale occurred) by applying the highest
applicable tax rate in effect in the year to which the income was allocated; (iii) an interest charge would be added to this tax,
calculated by applying the underpayment interest rate to the tax for each year determined under the preceding sentence from the
due date of the income tax return for such year to the due date of the return for the year in which the excess distribution or
sale occurs; and (iv) amounts allocated to a year prior to the first year in the U.S. holder’s holding period in which we
were classified as a PFIC or to the year in which the excess distribution or the disposition occurred would be taxed as ordinary
income but without the imposition of an interest charge.



A U.S. holder may generally
avoid the PFIC “excess distribution” regime by electing to treat his PFIC shares as a “qualified electing fund.”
If a U.S. holder elects to treat PFIC shares as a qualified electing fund, also known as a “QEF Election,” the U.S.
holder must include annually in gross income (for each year in which PFIC status is met) hispro rata share of the PFIC’s
ordinary earnings and net capital gains, whether or not such amounts are actually distributed to the U.S. holder. A U.S. holder
may make a QEF Election with respect to a PFIC for any taxable year in which he was a shareholder. A QEF Election is effective
for the year in which the election is made and all subsequent taxable years of the U.S. holder. Procedures exist for both retroactive
elections and the filing of protective statements. A U.S. holder making the QEF Election must make the election on or before the
due date, as extended, for the filing of the U.S. holder’s income tax return for the first taxable year to which the election
will apply.



A QEF Election is made
on a shareholder-by-shareholder basis. A U.S. holder must make a QEF Election by completing Form 8621, Return by a Shareholder
of a Passive Foreign Investment Company or Qualified Electing Fund, and attaching it to the holder’s timely filed U.S. federal
income tax return.



89







Alternatively, a U.S.
holder may also generally avoid the PFIC regime by making a so-called “mark-to-market” election. Such an election may
be made by a U.S. holder with respect to ordinary shares owned at the close of such holder’s taxable year, provided that
we are a PFIC and the ordinary shares are considered “marketable stock.” The ordinary shares will be marketable stock
if they are regularly traded on a national securities exchange that is registered with the Securities and Exchange Commission,
or the national market system established pursuant to section 11A of the Securities Exchange Act of 1934, or an equivalent regulated
and supervised foreign securities exchange.



If a U.S. holder were
to make a mark-to-market election with respect to ordinary shares, such holder generally will be required to include in its annual
gross income the excess of the fair market value of the PFIC shares at year-end over such shareholder’s adjusted tax basis
in the ordinary shares. Such amounts will be taxable to the U.S. holder as ordinary income, and will increase the holder’s
tax basis in the ordinary shares. Alternatively, if in any year, a United States holder’s tax basis exceeds the fair market
value of the ordinary shares at year-end, then the U.S. holder generally may take an ordinary loss deduction to the extent of the
aggregate amount of ordinary income inclusions for prior years not previously recovered through loss deductions and any loss deductions
taken will reduce the shareholder’s tax basis in the ordinary shares. Gains from an actual sale or other disposition of the
ordinary shares with a “mark-to-market” election will be treated as ordinary income, and any losses incurred on an
actual sale or other disposition of the ordinary shares will be treated as an ordinary loss to the extent of any prior “unreversed
inclusions” as defined in Section 1296(d) of the Code.



The mark-to-market
election is made on a shareholder-by-shareholder basis. The mark-to-market election is made by completing Form 8621, Return by
a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund, and attaching it to the holder’s timely
filed U.S. federal income tax return for the year of election. Such election is effective for the taxable year for which made and
all subsequent years until either (a) the ordinary shares cease to be marketable stock or (b) the election is revoked with the
consent of the IRS.



In view of the
complexity of the issues regarding our treatment as a PFIC, U.S. shareholders are urged to consult their own tax advisors for guidance
as to our status as a PFIC.



Information Reporting and Back-Up
Withholding



U.S. holders generally
are subject to information reporting requirements with respect to dividends paid in the U.S. on ordinary shares. Existing regulations
impose information reporting and back-up withholding on dividends paid in the U.S. on ordinary shares and on proceeds from the
disposition of ordinary shares unless the U.S. holder provides IRS Form W-9 or otherwise establishes an exemption.



Prospective investors
should consult their tax advisors concerning the effect, if any, of these Treasury regulations on an investment in ordinary shares.
Back-up withholding is not an additional tax. The amount of any back-up withholding will be allowed as a credit against a holder’s
U.S. federal income tax liability and may entitle the holder to a refund, provided that specified required information is furnished
to the IRS on a timely basis.



Documents on Display



We file reports and
other information with the SEC under the Exchange Act and the regulations thereunder applicable to foreign private issuers. You
may inspect and copy reports and other information filed by us with the SEC at the SEC’s public reference facilities described
below. Although as a foreign private issuer we are not required to file periodic information as frequently or as promptly as US
companies, we generally announce publicly our interim and year-end results promptly on a voluntary basis and will file that periodic
information with the SEC under cover of Form 6-K. As a foreign private issuer, we are also exempt from the rules under the Exchange
Act prescribing the furnishing and content of proxy statements, and our officers, directors and principal shareholders are exempt
from the reporting and other provisions in Section 16 of the Exchange Act.



90







You may read and copy
any document we file or furnish with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C.
20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference facilities. You
can review our SEC filings and the registration statement by accessing the SEC’s internet site at http://www.sec.gov.



We also maintain a
website at http://www.xtlbio.com, but information contained on our website does not constitute a part of this report and
is not incorporated by reference into this report.



ITEM 11. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK



Interest Rate Risk.
The primary objective of our investment activities is to preserve principal while maximizing our income from investments and minimizing
our market risk. We invest in bank deposits and marketable securities in accordance with our investment policy. As of December
31, 2016, our portfolio of financial instruments consists of cash and cash equivalents, short-term bank deposits with multiple
institutions and marketable securities. The average duration of all of our investments held as of December 31, 2016, was less than
one year. Due to the short-term nature of these investments, we believe we have no material exposure to interest rate risk arising
from our investments.



Foreign Currency
and Inflation Risk. We hold most of our cash, cash equivalents and bank deposits in U.S. dollars. While a substantial amount
of our operating expenses are in U.S. dollars, we incur a portion of our expenses in New Israeli Shekels. In addition, we also
pay for some of our services and supplies in the local currencies of our suppliers, as our head office is located in Israel. As
a result, we are exposed to the risk that the U.S. dollar will be devalued against the New Israeli Shekel or other currencies,
and as a result our financial results could be harmed if we are unable to guard against currency fluctuations in Israel or other
countries in which services and supplies are obtained in the future. Accordingly, we may enter into currency hedging transactions
to decrease the risk of financial exposure from fluctuations in the exchange rates of currencies. The Company’s treasury
risk management policy is to hold NIS-denominated cash and cash equivalents and short-term deposits in the amount of the anticipated
NIS-denominated liabilities for six consecutive months from time to time and this in line with the directives of the Company’s
Board. These measures, however, may not adequately protect us from the adverse effects of inflation in Israel. In addition, we
are exposed to the risk that the rate of inflation in Israel will exceed the rate of devaluation of the New Israeli Shekel in relation
to the dollar or that the timing of any devaluation may lag behind inflation in Israel.



As of December 31,
2016, had the Group’s functional currency weakened by 10% against the NIS with all other variables remaining constant, post-tax
loss for the year would have been $22 thousand lower (2015 - post-tax loss approximately $20 thousand lower; 2014 - post-tax loss
approximately $85 thousand lower), mainly as a result of exchange rate changes on translation of other accounts receivable and
exchange rate changes on NIS-denominated cash and cash equivalents.



Credit Risk.
Credit risks are managed at the Group level. The Group has no significant concentrations of credit risk. The Group has a policy
to ensure collection through sales of its products to wholesalers with an appropriate credit history and through retail sales in
cash or by credit card.



Liquidity Risk.
Cash flow forecasting is performed by the Group’s management both in the entities of the Group and aggregated by the Group.
The Group’s management monitors rolling forecasts of the Group’s liquidity requirements to ensure it has sufficient
cash to meet operations. The Group currently does not use credit facilities. Forecasting takes into consideration several factors
such as raising capital to finance operations and certain liquidity ratios that the Group strives to achieve.



91







Surplus cash held to
finance operating activities is invested in interest bearing current accounts, time deposits and other similar channels. These
channels were chosen by reference to their appropriate maturities or liquidity to provide sufficient cash balances to the Group
as determined by the abovementioned forecasts.



ITEM 12. DESCRIPTION OF SECURITIES OTHER
THAN EQUITY SECURITIES



Not applicable.



PART II



ITEM 13. DEFAULTS, DIVIDEND ARREARAGES
AND DELINQUENCIES



Not applicable.



ITEM 14. MATERIAL MODIFICATIONS TO THE
RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS



Not applicable.



ITEM 15. CONTROLS AND PROCEDURES



(a)     Disclosure
controls and procedures. Our management is responsible for establishing and maintaining effective disclosure controls
and procedures, as defined under Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934. As of December 31, 2016, an evaluation
was performed under the supervision and with the participation of our management of the effectiveness of the design and operation
of our disclosure controls and procedures. Based on that evaluation, management, including the Chief Executive Officer and Chief
Financial Officer, concluded that our disclosure controls and procedures as of December 31, 2016 were effective.



(b)     Internal
controls over financial reporting. Our management is responsible for establishing and maintaining adequate control over financial
reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. Under the supervision and with the participation of our
management, including our Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of the effectiveness
of our internal control over financial reporting as of December 31, 2016. In making this assessment, our management used the criteria
established inInternal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) (2013). Based on that evaluation, our management believes our internal control over financial reporting was effective
as of December 31, 2016.



All internal control
systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective may not
prevent or detect misstatements and can provide only reasonable assurances with respect to the preparation and presentation of
financial statements.



(c)     Internal
controls. There have been no significant changes in our internal control over financial reporting that occurred during the
year ended December 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control
over financial reporting.



ITEM 16. RESERVED



ITEM 16A. AUDIT COMMITTEE FINANCIAL
EXPERT



Our Board of Directors
has determined that Osnat Hillel Fain, chairperson of our audit committee, is an audit committee financial expert, as defined by
applicable SEC regulations, and is independent in accordance with applicable SEC regulations.



92







ITEM 16B. CODE OF ETHICS



We have adopted a
Code of Conduct applicable to all employees, directors and officers of our company, including our principal executive officer,
principal financial officer, principal accounting officer or controller and other individuals performing similar functions. A copy
of our Code of Conduct can be found on our website (http://www.xtlbio.com) and may also be obtained, without charge, upon a written
request addressed to our investor relations department, XTL Biopharmaceuticals Ltd., 5 HaCharoshet Street, Raanana 4365603, Israel.



ITEM 16C. PRINCIPAL ACCOUNTANT FEES
AND SERVICES



Policy on Pre-Approval of Audit and Non-Audit Services of
Independent Registered Public Accounting Firm



Our audit committee
is responsible for the oversight of the independent registered public accounting firm’s work. The audit committee’s
policy is to pre-approve all audit and non-audit services provided by our independent registered public accounting firm, Kesselman
& Kesselman, a member firm of PricewaterhouseCoopers International Ltd. (“PwC”). These services may include audit
services, audit-related services and tax services, as further described below.



Principal Accountant Fees and Services



We were billed the
following fees for professional services rendered by PwC, for the years ended December 31, 2016 and 2015.



|                   |  | 2016                      |    |  | 2015 | 
|------------------ |  | ------------------------- | -- |  | ---- | 
|                   |  | U.S. dollars in thousands |   
|Audit fees         |  |                           | 52 |  |      | 
|Audit-related fees |  |                           | 43 |  |      | 
|Total              |  |                           | 95 |  |      | 



The audit fees for
the years ended December 31, 2016 and 2015 were for professional services rendered for the audit of our annual consolidated financial
statements, review of interim consolidated financial information and statutory audits, including Israeli tax reports.



The audit-related
fees for the years ended December 31, 2016 and 2015 were for the Company’s filing of registration statements.



For the fiscal years
ended December 31, 2016 and 2015, all of our audit and audit-related fees were pre-approved by our audit committee.



ITEM 16D. EXEMPTIONS FROM THE LISTING
STANDARDS FOR AUDIT COMMITTEES



Not applicable.



ITEM 16E. PURCHASES OF EQUITY SECURITIES
BY THE ISSUER AND AFFILIATED PURCHASERS



None.



ITEM 16F. CHANGE IN REGISTRANT’S
REGISTERED ACCOUNTANT



None.



93







ITEM 16G. CORPORATE GOVERNANCE



Under the Nasdaq corporate
governance rules, foreign private issuers are exempt from many of the requirements if they instead elect to comply with home country
practices and disclose where they have elected to do so. As noted above, we are currently in compliance with Nasdaq rules relating
to the independence of our board of directors and our audit committee. Our board of directors and our audit committee has adopted
a written charter for the audit committee setting forth the responsibilities of the audit committee as required by the SEC and
Nasdaq. Also as noted above, we currently have a nomination committee to identify, review and recommend to the Board of Directors
individuals believed to be qualified to become directors. We have adopted a written charter for the nomination committee, as required
by Nasdaq. We currently have in place a compensation committee, as discussed in more detail above. We have adopted a written charter
for the compensation committee.



In August 2005, our
board of directors adopted a Code of Conduct that applies to all employees, directors and officers of our company, including our
principal executive officer, principal financial officer, principal accounting officer or controller and other individuals performing
similar functions. A copy of our Code of Conduct may be obtained, without charge, upon a written request addressed to our investor
relations department, XTL Biopharmaceuticals Ltd., 5 HaCharoshet Street, Raanana 4365603, Israel.



PART III



ITEM 17. FINANCIAL STATEMENTS



We have elected to
furnish financial statements and related information specified in Item 18.



ITEM 18. FINANCIAL STATEMENTS



XTL BIOPHARMACEUTICALS LTD.



CONSOLIDATED FINANCIAL STATEMENTS



AS OF DECEMBER 31, 2016



INDEX



|                                                         | Page     
|-------------------------------------------------------- | ---------
|                                                         |          
|Report of Independent Registered Public Accounting Firm  | 95       
|                                                         |          
|Consolidated Financial Statements - in U.S.
    dollars: |          
|                                                         |          
|Statements of Financial Position                         | 96       
|                                                         |          
|Statements of Comprehensive Loss                         | 97       
|                                                         |          
|Statements of Changes in Equity                          | 98 - 99  
|                                                         |          
|Statements of Cash Flows                                 | 100 - 101
|                                                         |          
|Notes to Consolidated Financial Statements               | 102 - 130



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

94











Report of Independent Registered
Public Accounting Firm



To the shareholders of

XTL BIOPHARMACEUTICALS LTD.



We have audited the accompanying consolidated statements of
financial position of XTL Biopharmaceuticals Ltd and its subsidiary as of December 31, 2016 and 2015, and the related consolidated
statements of comprehensive loss, changes in equity and cash flows for each of the three years in the period ended December 31,
2016. These financial statements are the responsibility of the Company’s Board of Directors and management. Our responsibility
is to express an opinion on these financial statements based on our audits.



We conducted our audits in accordance with the standards of
the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by the Company’s Board of Directors and management,
as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.



In our opinion, the consolidated financial statements referred
to above, present fairly, in all material respects, the financial position of XTL Biopharmaceuticals Ltd. and its subsidiary as
of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period
ended December 31, 2016 in conformity with International Financial Reporting Standards (“IFRS”) as issued by the International
Accounting Standards Board (“IASB”).



|Tel-Aviv, Israel | Kesselman & Kesselman                                        
|---------------- | -------------------------------------------------------------
|March 30, 2017   | Certified Public Accountants (lsr.)                          
|                 | A member firm of PricewaterhouseCoopers International Limited



95









XTL BIOPHARMACEUTICALS LTD.



CONSOLIDATED STATEMENTS
OF FINANCIAL POSITION



|                                                                                                                                            |  |        |  | December 31,              |         
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ------ |  | ------------------------- | --------
|                                                                                                                                            |  |        |  | 2016                      |         
|                                                                                                                                            |  | Note   |  | U.S. dollars in thousands |         
|ASSETS                                                                                                                                      |  |        |  |                           |         
|                                                                                                                                            |  |        |  |                           |         
|CURRENT ASSETS:                                                                                                                             |  |        |  |                           |         
|Cash and cash equivalents                                                                                                                   |  | 6      |  |                           | 2,019   
|Marketable securities                                                                                                                       |  | 7      |  |                           | 414     
|Other accounts receivable                                                                                                                   |  | 8      |  |                           | 321     
|                                                                                                                                            |  |        |  |                           |         
|                                                                                                                                            |  |        |  |                           | 2,754   
|                                                                                                                                            |  |        |  |                           |         
|NON-CURRENT ASSETS:                                                                                                                         |  |        |  |                           |         
|Restricted deposit                                                                                                                          |  |        |  |                           | -       
|Property and equipment, net                                                                                                                 |  |        |  |                           | 10      
|Intangible assets, net                                                                                                                      |  | 10     |  |                           | 253     
|                                                                                                                                            |  |        |  |                           |         
|                                                                                                                                            |  |        |  |                           | 263     
|                                                                                                                                            |  |        |  |                           |         
|Total assets                                                                                                                                |  |        |  |                           | 3,017   
|                                                                                                                                            |  |        |  |                           |         
|LIABILITIES AND EQUITY                                                                                                                      |  |        |  |                           |         
|                                                                                                                                            |  |        |  |                           |         
|CURRENT LIABILITIES:                                                                                                                        |  |        |  |                           |         
|Trade payables                                                                                                                              |  | 11     |  |                           | 17      
|Other accounts payable                                                                                                                      |  | 12     |  |                           | 313     
|                                                                                                                                            |  |        |  |                           |         
|                                                                                                                                            |  |        |  |                           | 330     
|                                                                                                                                            |  |        |  |                           |         
|EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY:                                                                                       |  | 15, 16 |  |                           |         
|Share capital - ordinary shares of NIS 0.1 par value: authorized - December 31, 2016 and 2015 - 700,000,000 shares; issued and outstanding: |  |        |  |                           |         
|December 31, 2016 and 2015 - 274,205,799 and 273,525,799 shares, respectively                                                               |  |        |  |                           | 6,624   
|Premium on shares, options and warrants                                                                                                     |  |        |  |                           | 150,784 
|Reserve from transactions with non-controlling interests                                                                                    |  |        |  |                           | 20      
|Other comprehensive income                                                                                                                  |  |        |  |                           | 163     
|Accumulated deficit                                                                                                                         |  |        |  |                           | (154,904
|                                                                                                                                            |  |        |  |                           |         
|Total equity                                                                                                                                |  |        |  |                           | 2,687   
|                                                                                                                                            |  |        |  |                           |         
|Total liabilities and equity                                                                                                                |  |        |  |                           | 3,017   



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



|                      |  |                         |  |                        
|--------------------- |  | ----------------------- |  | -----------------------
|Shlomo Shalev         |  | Josh Levine             |  | David Kestenbaum       
|Chairman of the Board |  | Chief Executive Officer |  | Chief Financial Officer



Date of approval of the financial statements by the Company’s
Board of Directors: March 30, 2017.



96









XTL BIOPHARMACEUTICALS LTD.



CONSOLIDATED STATEMENTS
OF COMPREHENSIVE LOSS



|                                                                 |  |      |  | Year ended December 31,                           |            
|---------------------------------------------------------------- |  | ---- |  | ------------------------------------------------- | -----------
|                                                                 |  |      |  | 2016                                              |            
|                                                                 |  | Note |  | U.S. dollars in thousands (except per share data) |            
|                                                                 |  |      |  |                                                   |            
|Research and development expenses                                |  | 17   |  |                                                   | (443       
|General and administrative expenses                              |  | 18   |  |                                                   | (1,270     
|Impairment of intangible assets                                  |  | 10   |  |                                                   | (848       
|Other losses                                                     |  |      |  |                                                   | -          
|                                                                 |  |      |  |                                                   |            
|Operating loss from continuing operations                        |  |      |  |                                                   | (2,561     
|                                                                 |  |      |  |                                                   |            
|Finance income                                                   |  |      |  |                                                   | 23         
|Finance expenses                                                 |  |      |  |                                                   | (7         
|                                                                 |  |      |  |                                                   |            
|Finance income (expenses), net                                   |  | 19   |  |                                                   | 16         
|                                                                 |  |      |  |                                                   |            
|Loss from continuing operations                                  |  |      |  |                                                   | (2,545     
|                                                                 |  |      |  |                                                   |            
|Loss from discontinued operations                                |  | 5    |  |                                                   | -          
|                                                                 |  |      |  |                                                   |            
|Total loss                                                       |  |      |  |                                                   | (2,545     
|                                                                 |  |      |  |                                                   |            
|Total loss attributable to:                                      |  |      |  |                                                   |            
|Equity holders of the Company                                    |  |      |  |                                                   | (2,545     
|Non-controlling interests from discontinued operations           |  |      |  |                                                   | -          
|                                                                 |  |      |  |                                                   |            
|Total loss                                                       |  |      |  |                                                   | (2,545     
|                                                                 |  |      |  |                                                   |            
|Other comprehensive income                                       |  |      |  |                                                   |            
|Items that may be reclassified to profit or loss:                |  |      |  |                                                   |            
|Changes in the fair value of available-for-sale financial assets |  |      |  |                                                   | 163        
|Realized gain from sale available-for-sale financial assets      |  |      |  |                                                   | -          
|                                                                 |  |      |  |                                                   |            
|Other comprehensive income                                       |  |      |  |                                                   | 163        
|                                                                 |  |      |  |                                                   |            
|Total comprehensive loss                                         |  |      |  |                                                   | (2,382     
|                                                                 |  |      |  |                                                   |            
|Total loss attributable to:                                      |  |      |  |                                                   |            
|Equity holders of the Company                                    |  |      |  |                                                   | (2,545     
|Non-controlling interests from discontinued operations           |  |      |  |                                                   | -          
|                                                                 |  |      |  |                                                   |            
|                                                                 |  |      |  |                                                   | (2,545     
|                                                                 |  |      |  |                                                   |            
|Total comprehensive loss attributable to:                        |  |      |  |                                                   |            
|Equity holders of the Company                                    |  |      |  |                                                   | (2,382     
|Non-controlling interests from discontinued operations           |  |      |  |                                                   | -          
|                                                                 |  |      |  |                                                   |            
|                                                                 |  |      |  |                                                   | (2,382     
|                                                                 |  |      |  |                                                   |            
|Basic and diluted loss per share:                                |  |      |  |                                                   |            
|From continuing operations                                       |  |      |  |                                                   | (0.009     
|From discontinued operations                                     |  |      |  |                                                   | -          
|                                                                 |  |      |  |                                                   |            
|Loss per share for the period                                    |  |      |  |                                                   | (0.009     
|                                                                 |  |      |  |                                                   |            
|Weighted average number of issued ordinary shares                |  |      |  |                                                   | 274,035,533



*)	         Representing amount less than $1 thousand



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



97









XTL BIOPHARMACEUTICALS LTD.



CONSOLIDATED STATEMENTS
OF CHANGES IN EQUITY



|                                                                 |  | Attributable to equity holders of the Company |       |  |                                         | 
|---------------------------------------------------------------- |  | --------------------------------------------- | ----- |  | --------------------------------------- | 
|                                                                 |  | Share capital                                 |       |  | Premium on shares, options and warrants | 
|                                                                 |  | U.S. dollars in thousands                     |      
|                                                                 |  |                                               |       |  |                                         | 
|Balance as of January 1, 2016                                    |  |                                               | 6,606 |  |                                         | 
|                                                                 |  |                                               |       |  |                                         | 
|Total comprehensive loss                                         |  |                                               | -     |  |                                         | 
|Changes in the fair value of available-for-sale financial assets |  |                                               | -     |  |                                         | 
|Share-based payment to employees and non-employees               |  |                                               | -     |  |                                         | 
|Issuance of shares                                               |  |                                               | 18    |  |                                         | 
|                                                                 |  |                                               |       |  |                                         | 
|Balance as of December 31, 2016                                  |  |                                               | 6,624 |  |                                         | 



|                                                         |  | Attributable to equity holders of the Company |       |  |                                         | 
|-------------------------------------------------------- |  | --------------------------------------------- | ----- |  | --------------------------------------- | 
|                                                         |  | Share capital                                 |       |  | Premium on shares, options and warrants | 
|                                                         |  | U.S. dollars in thousands                     |      
|                                                         |  |                                               |       |  |                                         | 
|Balance as of January 1, 2015                            |  |                                               | 6,198 |  |                                         | 
|                                                         |  |                                               |       |  |                                         | 
|Total comprehensive loss                                 |  |                                               | -     |  |                                         | 
|                                                         |  |                                               |       |  |                                         | 
|Share-based payment to employees and non-employees       |  |                                               | -     |  |                                         | 
|Purchase of intangible assets through issuance of equity |  |                                               | 8     |  |                                         | 
|Issuance of shares and warrants                          |  |                                               | 400   |  |                                         | 
|Transaction with non-controlling interests in InterCure  |  |                                               | -     |  |                                         | 
|Loss of control in InterCure                             |  |                                               | -     |  |                                         | 
|                                                         |  |                                               |       |  |                                         | 
|Balance as of December 31, 2015                          |  |                                               | 6,606 |  |                                         | 



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



98









XTL BIOPHARMACEUTICALS LTD.



CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY








|                                                   |  | Attributable to equity holders of the
    Company |       |  |                                           | 
|-------------------------------------------------- |  | ------------------------------------------------- | ----- |  | ----------------------------------------- | 
|                                                   |  | Share capital                                     |       |  | Premium  on shares, options and  warrants | 
|                                                   |  | U.S. dollars in thousands                         |      
|                                                   |  |                                                   |       |  |                                           | 
|Balance as of January 1, 2014                      |  |                                                   | 6,093 |  |                                           | 
|                                                   |  |                                                   |       |  |                                           | 
|Total comprehensive loss                           |  |                                                   | -     |  |                                           | 
|                                                   |  |                                                   |       |  |                                           | 
|Share-based payment to employees and non-employees |  |                                                   | -     |  |                                           | 
|Issuance of ordinary shares                        |  |                                                   | 14    |  |                                           | 
|Sale of treasury shares                            |  |                                                   | -     |  |                                           | 
|Exercise of options into shares                    |  |                                                   | 91    |  |                                           | 
|                                                   |  |                                                   |       |  |                                           | 
|Balance as of December 31, 2014                    |  |                                                   | 6,198 |  |                                           | 



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



99







XTL BIOPHARMACEUTICALS LTD.



CONSOLIDATED STATEMENTS OF CASH FLOWS








|                                                                                     |  |      |  | Year
    ended December 31,   |       
|------------------------------------------------------------------------------------ |  | ---- |  | ----------------------------- | ------
|                                                                                     |  |      |  | 2016                          |       
|                                                                                     |  | Note |  | U.S.
    dollars in thousands |       
|                                                                                     |  |      |  |                               |       
|Cash
    flows from operating activities:                                            |  |      |  |                               |       
|                                                                                     |  |      |  |                               |       
|Loss
    for the year                                                                |  |      |  |                               | (2,545
|Adjustments
    to reconcile loss to net cash used in operating activities (a)       |  |      |  |                               | 813   
|                                                                                     |  |      |  |                               |       
|Net
    cash used in operating activities                                            |  |      |  |                               | (1,732
|                                                                                     |  |      |  |                               |       
|Cash
    flows from investing activities:                                            |  |      |  |                               |       
|                                                                                     |  |      |  |                               |       
|Deconsolidation of subsidiary                                                        |  |      |  |                               | -     
|Proceeds from sale
    of investment in associate                                    |  |      |  |                               | -     
|Proceeds from maturity
    of restricted deposit                                     |  |      |  |                               | -     
|Investment in restricted
    deposit                                                 |  |      |  |                               | -     
|Proceeds from maturity
    of short-term bank deposits                               |  |      |  |                               | -     
|Purchase of property
    and equipment                                               |  |      |  |                               | (2    
|Purchase
    of intangible assets                                                    |  | 10   |  |                               | (64   
|                                                                                     |  |      |  |                               |       
|Net
    cash provided by (used in) investing activities                              |  |      |  |                               | (66   
|                                                                                     |  |      |  |                               |       
|Cash
    flows from financing activities:                                            |  |      |  |                               |       
|                                                                                     |  |      |  |                               |       
|Proceeds from issuance
    of shares and warrants                                    |  | 15   |  |                               | -     
|Proceeds from sale
    of available-for-sale financial assets                        |  |      |  |                               | -     
|Sale of subsidiary's shares                                                          |  |      |  |                               | -     
|Sale of treasury
    shares                                                          |  |      |  |                               | -     
|                                                                                     |  |      |  |                               |       
|Net
    cash provided by financing activities                                        |  |      |  |                               | -     
|                                                                                     |  |      |  |                               |       
|Increase (decrease)
    in cash and cash equivalents                                 |  |      |  |                               | (1,798
|Losses from exchange
    rate differences on cash and cash equivalents               |  |      |  |                               | -     
|Reclassification
    of cash in subsidiary to assets of disposal group held for sale |  |      |  |                               | -     
|Cash
    and cash equivalents at beginning of year                                   |  |      |  |                               | 3,817 
|                                                                                     |  |      |  |                               |       
|Cash
    and cash equivalents at end of year                                         |  |      |  |                               | 2,019 



| | *) | Representing amount less than $1 thousand
| | -- | -----------------------------------------



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



100







XTL BIOPHARMACEUTICALS LTD.



CONSOLIDATED STATEMENT OF CASH FLOWS








|    |  |                                                                                       |  |      |  | Year ended December 31,   |      
|--- |  | ------------------------------------------------------------------------------------- |  | ---- |  | ------------------------- | -----
|    |  |                                                                                       |  |      |  | 2016                      |      
|    |  |                                                                                       |  | Note |  | U.S. dollars in thousands |      
|    |  |                                                                                       |  |      |  |                           |      
|(a) |  | Adjustments to reconcile loss to net cash provided by (used in) operating activities: |  |      |  |                           |      
|    |  |                                                                                       |  |      |  |                           |      
|    |  | Income and expenses not involving cash flows:                                         |  |      |  |                           |      
|    |  |                                                                                       |  |      |  |                           |      
|    |  | Depreciation and amortization                                                         |  |      |  |                           | 3    
|    |  | Loss from disposal of property and equipment                                          |  |      |  |                           | -    
|    |  | Loss from disposal of intangible assets                                               |  | 10   |  |                           | -    
|    |  | Share-based payment transactions to employees and non-employees                       |  | 16   |  |                           | 182  
|    |  | Revaluation of short-term bank deposits                                               |  |      |  |                           | -    
|    |  | Gains from exchange rate differences on cash and cash equivalents                     |  |      |  |                           | -    
|    |  | Disposal of investment in subsidiary                                                  |  | 5    |  |                           | -    
|    |  | Change in employee benefit liabilities, net                                           |  |      |  |                           | -    
|    |  | Impairment of intangible assets                                                       |  | 10   |  |                           | 848  
|    |  | Other financial expenses                                                              |  |      |  |                           | -    
|    |  |                                                                                       |  |      |  |                           |      
|    |  |                                                                                       |  |      |  |                           | 1,033
|    |  | Changes in operating asset and liability items:                                       |  |      |  |                           |      
|    |  |                                                                                       |  |      |  |                           |      
|    |  | Decrease in trade receivables                                                         |  |      |  |                           | -    
|    |  | Decrease (increase) in other accounts receivable                                      |  |      |  |                           | (114 
|    |  | Decrease in inventories                                                               |  |      |  |                           | -    
|    |  | Decrease in trade payables                                                            |  |      |  |                           | (101 
|    |  | Increase (decrease) in other accounts payable                                         |  |      |  |                           | (5   
|    |  |                                                                                       |  |      |  |                           |      
|    |  |                                                                                       |  |      |  |                           | (220 
|    |  |                                                                                       |  |      |  |                           |      
|    |  |                                                                                       |  |      |  |                           | 813  
|    |  |                                                                                       |  |      |  |                           |      
|b)  |  | Additional information on cash flows from operating activities:                       |  |      |  |                           |      
|    |  |                                                                                       |  |      |  |                           |      
|    |  | Interest received                                                                     |  |      |  |                           | -    
|    |  |                                                                                       |  |      |  |                           |      
|(c) |  | Non-cash transactions:                                                                |  |      |  |                           |      
|    |  |                                                                                       |  |      |  |                           |      
|    |  | Share-based payment to third party                                                    |  |      |  |                           | 54   
|    |  |                                                                                       |  |      |  |                           |      
|(d) |  | De-consolidation of subsidiary:                                                       |  | 5    |  |                           |      
|    |  |                                                                                       |  |      |  |                           |      
|    |  | Non-current assets held for sale                                                      |  |      |  |                           | -    
|    |  | Non-current liabilities held for sale                                                 |  |      |  |                           | -    
|    |  | Disposal of treasury shares                                                           |  |      |  |                           | -    
|    |  | Negative premium from disposal of treasury shares                                     |  |      |  |                           | -    
|    |  | Investment in associate at fair value                                                 |  |      |  |                           | -    
|    |  | Loss from disposal of subsidiary                                                      |  |      |  |                           |      
|    |  | Non-controlling interests                                                             |  |      |  |                           | -    
|    |  |                                                                                       |  |      |  |                           |      
|    |  |                                                                                       |  |      |  |                           | -    



| | *) | Representing amount less than $1 thousand
| | -- | -----------------------------------------



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



101







XTL BIOPHARMACEUTICALS LTD.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,
2016








| | 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 for the treatment of unmet medical needs. The Company was
incorporated under the Israeli Companies Law on March 9, 1993. The registered office of the Company is located at 5 HaCharoshet
Street, Raanana, Israel.



The Company’s American Depository
Shares (“ADSs”) are listed for trading on the Nasdaq Capital Market (“Nasdaq”) and its ordinary shares
are traded on the Tel-Aviv Stock Exchange (“TASE”).



As of December 31, 2016, the Company
has a wholly-owned subsidiary, Xtepo Ltd. (“Xtepo”), which was incorporated in Israel and which holds a license for
the exclusive use of the patent for rHuEPO drug for treating Multiple Myeloma patients.



The Company and Xtepo are heretofore
referred to as the Group.



| | b. | The Company has incurred continuing losses and depends on outside financing resources to continue
its activities. Based on existing business plans, the Company’s management estimates that its outstanding cash and cash equivalent
balances will allow the Company to finance its activities for an additional period of at least 12 months from the date of this
report. However, the amount of cash which the Company will need in practice to finance its activities depends on numerous factors
which include, but are not limited to, the timing, planning and execution of clinical trials of existing drugs and future projects
which the Company might acquire or other business development activities such as acquiring new technologies and/or changes in circumstances
which are liable to cause significant expenses to the Company in excess of management’s current and known expectations as
of the date of these Financial Statements and which will require the Company to reallocate funds against plans, also due to circumstances
beyond its control.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Company expects to incur additional
losses in 2017 arising from research and development activities, testing additional technologies and operating activities, which
will be reflected in negative cash flows from operating activities. In order to perform the clinical trials aimed at developing
a product until obtaining its marketing approval, the Company will need to raise additional funds by issuing securities. Should
the Company fail to raise additional capital at terms acceptable to the Company, it will be required to further reduce its development
activities or sell or grant a sublicense to third parties to use all or part of its technologies.



| | c. | On February 17, 2017, the Company raised gross proceeds amounted to $2,500 thousand from institutional
investors by issuance of 1,000,000 registered ADSs and 1,000,000 warrants to purchase one ADSs (see also Note 23b).
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



102







XTL BIOPHARMACEUTICALS LTD.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,
2016








| | NOTE 2: | SIGNIFICANT ACCOUNTING POLICIES
| | ------- | -------------------------------



The following is a discussion of significant accounting
policies relating to continuing operations of the Group. For a discussion of significant accounting policies with regard to discontinued
operations, see also Note 5 below.



| | a. | Basis of presentation of the consolidated financial statements:
| | -- | ---------------------------------------------------------------



The consolidated
financial statements of the Company (the “Financial Statements”) have been prepared in accordance with International
Financial Reporting Standards (IFRSs), as issued by the International Accounting Standards Board (IASB).



The accounting policies have been consistently applied
to all the years presented, unless otherwise stated and have been prepared under the historical cost convention, as adjusted for
financial assets measured at fair value.



The preparation
of Financial Statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires the
Group’s management to exercise its judgment in the process of applying the Group’s accounting policies. The areas that
involve judgment which have significant effect or complexity or where assumptions and estimates are significant to the Financial
Statements are disclosed in note 3. Actual results could significantly differ from the estimates and assumptions used by the Group’s
management.



| | b. | Consolidated financial statements:
| | -- | ----------------------------------



| | 1. | Subsidiary consolidation and business combinations:
| | -- | ---------------------------------------------------



The consolidated
financial statements include the accounts of the Company and entities controlled by the Company. Control exists when the Company
has the power over the investee; has exposure, or rights, to variable returns from involvement in the investee; and has the ability
to use its power over the investee to affect its returns.



Subsidiary is
fully consolidated starting from the date on which control therein is attained by the Company. The consolidation ceases when such
control is discontinued.



Intra-group balances
and transactions, including revenues and expenses in respect of transactions between the Group companies, are eliminated.



| | 2. | Transactions with non-controlling interests which do not result in loss of control:
| | -- | -----------------------------------------------------------------------------------



Transactions
with non-controlling interests in subsidiary which do not result in loss of control in the subsidiary are accounted for as transactions
with owners. In these transactions, the difference between the fair value of any consideration paid or received and the amount
of adjustment of the non-controlling interests to reflect the changes in their relative rights in the subsidiary is directly recognized
in equity and attributed to the equity holders of the parent.



103







XTL BIOPHARMACEUTICALS LTD.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,
2016








| | NOTE 2: | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
| | ------- | ---------------------------------------



| | c. | Translation of balances and transactions in foreign currency:
| | -- | -------------------------------------------------------------



| | 1. | Functional currency and presentation currency:
| | -- | ----------------------------------------------



Items included
in the Financial Statements of each of the Group’s entities are measured using the currency of the primary economic environment
in which the entity operates (the “Functional Currency”). The consolidated financial statements are presented in U.S.
dollars, which is the Functional Currency of each of the Group’s entities and the Company’s presentation currency.



Below are the
exchange rate of the U.S. dollar in relation to the NIS:



|                  |  | Exchange rate |      
|----------------- |  | ------------- | -----
|As of             |  | of U.S. $ 1   |      
|                  |  | NIS           |      
|                  |  |               |      
|December 31, 2016 |  |               | 3.845
|December 31, 2015 |  |               | 3.902



| | 2. | Transactions and balances:
| | -- | --------------------------



Transactions
in a currency other than the Functional Currency (“Foreign Currency”) are translated into the Functional Currency using
the exchange rates at the dates of the transactions. After initial recognition, monetary assets and liabilities denominated in
Foreign Currency are translated at the end of each reporting period into the Functional Currency at the exchange rate at that date.
Exchange differences are recognized in the statement of comprehensive loss in the line item finance income (expenses), net. Non-monetary
assets and liabilities denominated in foreign currency and measured at cost are translated at the exchange rate at the date of
the transaction.



| | d. | Property and equipment:
| | -- | -----------------------



Items of property
and equipment are measured at cost with the addition of direct acquisition costs, less accumulated depreciation and accumulated
impairment losses.



Depreciation of property and equipment is calculated
on a straight-line basis to reduce their cost to their residual value over their useful life as follows:



|                               |  | % per-year       
|------------------------------ |  | -----------------
|                               |  |                  
|Computers                      |  | 33               
|Office furniture and equipment |  | 6 - 15 (mainly 6)



An asset’s
carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its
estimated recoverable amount (see also Note 2f).



104







XTL BIOPHARMACEUTICALS LTD.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,
2016








| | NOTE 2: | SIGNIFICANT ACCOUNTING POLICIES(Cont.)
| | ------- | --------------------------------------



| | e. | Intangible assets:
| | -- | ------------------



| | 1. | Unamortized intangible assets (licenses and patent rights):
| | -- | -----------------------------------------------------------



These assets
are reviewed for impairment once a year and whenever there are indicators of a possible impairment, in accordance with the provisions
of IAS 36, Impairment of Assets (see also Note 10). The amortization of an asset on a straight-line basis over its useful
life begins when the development procedure is completed and the asset is available for use.



| | 2. | Research and development:
| | -- | -------------------------



Research expenditures
are recognized as expenses when incurred. Costs arising from development projects are recognized as intangible assets when the
following criteria are met:



| | - | it is technically feasible to complete the intangible asset so that it will be available for use;
| | - | -------------------------------------------------------------------------------------------------

| | - | management intends to complete the intangible asset and use or sell it;
| | - | -----------------------------------------------------------------------

| | - | there is an ability to use or sell the intangible asset;
| | - | --------------------------------------------------------

| | - | it can be demonstrated how the intangible asset will generate probable future economic benefits;
| | - | ------------------------------------------------------------------------------------------------

| | - | adequate technical, financial and other resources to complete the development and to use or sell
the intangible asset are available; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------

| | - | the expenditure attributable to the intangible asset during its development can be reliably measured.
| | - | -----------------------------------------------------------------------------------------------------



Other development
expenditures that do not meet these criteria are recognized as an expense when incurred. Development costs that were previously
recognized as an expense are not recognized as an asset in a later period. As of December 31, 2016 and 2015, the Group did not
capitalize development project costs as intangible assets.



| | f. | Impairment of non-financial assets:
| | -- | -----------------------------------



Intangible assets
which are not yet available for use are not depreciated and impairment in their respect is tested at least every year. Depreciable
assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The
recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing
impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units).
Non-financial assets that sustained impairment are reviewed for possible reversal of the impairment at each date of the statement
of financial position.



105







XTL BIOPHARMACEUTICALS LTD.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,
2016








| | NOTE 2: | SIGNIFICANT ACCOUNTING POLICIES(Cont.)
| | ------- | --------------------------------------



| | g. | Financial assets:
| | -- | -----------------



| | 1. | Classification:
| | -- | ---------------



The Group classifies
its financial assets into the loans and receivables and available for sale categories. The classification depends on the purpose
for which the financial assets were acquired. The Group’s management determines the classification of its financial assets
at initial recognition.



Loans and
receivables:



Loans and receivables
are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included
in current assets, except for maturities greater than 12 months after the date of the statement of financial position. The Group’s
loans and receivables are included in the line items: “other accounts receivable”, “cash and cash equivalents”,
and “restricted deposits” in the statement of financial position.



Financial assets available
for sale:



Available-for-sale financial
assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They
are included in non-current assets unless the investment matures or management intends to dispose of it within 12 months
of the end of the reporting period. The financial assets of the Company are marketable securities.



| | 2. | Recognition and measurement:
| | -- | ----------------------------



Regular purchases and sales of financial assets are
recognized in the books of the Group companies on the transaction settlement date which is the date on which the asset is transferred
to the Group or transferred by the Group. Investments are initially recognized at fair value plus transaction costs and are subsequently
carried at fair value through other comprehensive income (loss). Loans and receivables are subsequently carried at amortized cost
using the effective interest method.



| | 3. | Impairment of financial assets:
| | -- | -------------------------------



Assets classified
as available-for-sale



If there is objective
evidence of impairment for available-for-sale financial assets, the cumulative loss is measured as the difference between the
acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in profit
or loss is removed from equity and recognized in profit or loss. Impairment losses on equity instruments that were recognized
in profit or loss are not reversed through profit or loss in a subsequent period.



106







XTL BIOPHARMACEUTICALS LTD.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,
2016








| | NOTE 2: | SIGNIFICANT ACCOUNTING POLICIES(Cont.)
| | ------- | --------------------------------------



Financial
assets carried at amortized cost:



The Group assesses
at the date of each statement of financial position whether there is objective evidence that a financial asset or group of financial
assets is impaired. Impairment losses are incurred only if there is objective evidence of impairment as a result of one or more
events that occurred after the initial recognition of the asset (a “loss event”) and that loss event (or events) has
an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.



The amount of
the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash
flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective
interest rate. The carrying amount of the asset is reduced and the amount of the loss is recognized in profit or loss



| | h. | Cash and cash equivalents:
| | -- | --------------------------



Cash and cash
equivalents include cash at hand and short-term bank deposits with original maturities of three months or less, that are not restricted
as to withdrawal or use, and are therefore considered to be cash equivalents.



| | i. | Share capital:
| | -- | --------------



The Company’s
ordinary shares are classified as share capital. Incremental costs directly attributable to the issuance of new shares, options
and warrants are shown in equity as a deduction, from the issuance proceeds.



| | j. | Trade payables:
| | -- | ---------------



Trade payables
are the Group’s obligations to pay for goods or services that have been acquired in the ordinary course of business from
suppliers. Trade payables are initially recognized at fair value and subsequently measured at amortized cost using the effective
interest method.



| | k. | Employee benefits:
| | -- | ------------------



| | 1. | Employment benefits for retirement compensation/pension:
| | -- | --------------------------------------------------------



The Group operates
various pension plans. The plans are generally funded through payments to insurance companies or trustee-administered funds. Said
pension plans qualify for the criteria of defined contribution plan based on their terms.



| | 2. | Vacation and recreation benefits:
| | -- | ---------------------------------



According to the Law, an employee is entitled to paid
annual leave and sick leave on an annual basis. The entitlement is based on the number of years of service. The Company recognizes
an obligation and expense for paid annual leave and sick leave based on the benefit accumulated for each employee.



107







XTL BIOPHARMACEUTICALS LTD.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,
2016








| | NOTE 2: | SIGNIFICANT ACCOUNTING POLICIES(Cont.)
| | ------- | --------------------------------------



| | l. | Share-based payment:
| | -- | --------------------



The Group operates a number of share-based payment plan
to employees, directors, officers and to other service providers who render services that are settled with the Group’s equity
instruments. In this framework, the Company grants employees, from time to time, and, at its discretion, options to purchase shares
of the Company. The fair value of services received from employees in consideration of the grant of options is measured according
to the Black-Scholes model as of the date of grant (the date of the Company's Board of Directors' decision unless shareholders’
approval is required) and recognized as an expense in the statement of comprehensive loss and correspondingly carried to equity.
The total amount recognized as an expense over the vesting term of the options (the term over which all pre-established vesting
conditions are expected to be satisfied) is determined by reference to the fair value of the options granted at grant date.



At each reporting date, the Company revises its estimates
of the number of options that are expected to vest based on the non-market vesting conditions and recognizes the impact of the
revision to original estimates, if any, in the statement of comprehensive loss with a corresponding adjustment in equity.



When options are exercised, the Company issues new shares.
The proceeds net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium.



Share-based payment transactions in which the Company
acquired assets as consideration for the Company’s equity instruments are measured at the value of the intangible assets
acquired.



| | m. | Operating leases:
| | -- | -----------------



Operating leases in which a significant portion of the
risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases
are charged to the statement of comprehensive loss on a straight-line basis over the period of the lease.



| | n. | Loss per share:
| | -- | ---------------



Basic loss per share is calculated by dividing the loss
attributable to equity holders of the Company by the weighted average number of ordinary shares outstanding during the period,
less treasury shares.



In calculating diluted loss per share, in addition to
the average of ordinary shares (net of treasury shares) used for calculating basic loss per share, the weighted average number
of shares that will be issued assuming that all the potentially dilutive shares are converted into shares is also taken into consideration.
Potential shares are taken into account as above only when their effect is dilutive by increasing the loss per share. For each
of the three years ended December 31, 2016, the effect of potential shares was anti-dilutive, and therefore were not taken into
consideration when calculating loss per share.

108







XTL BIOPHARMACEUTICALS LTD.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,
2016








| | NOTE 2: | SIGNIFICANT ACCOUNTING POLICIES(Cont.)
| | ------- | --------------------------------------



| | o. | New and amended IFRS standards:
| | -- | -------------------------------



Certain new accounting standards
and interpretations have been published that are not mandatory for December 31, 2016 reporting periods and have not been early
adopted by the Company:



| | p. | New and amended IFRS standards:
| | -- | -------------------------------



Certain new accounting standards and interpretations
have been published that are not mandatory for December 31, 2016 reporting periods and have not been early adopted by the Company:



International Financial Reporting Standard No. 9 “Financial
Instruments” )“IFRS 9”)



IFRS 9 addresses the classification, measurement and
recognition of financial assets and financial liabilities. The complete version of IFRS 9 was issued in July 2014. It replaces
the guidance in IAS 39 that relates to the classification and measurement of financial instruments. IFRS 9 retains but simplifies
the mixed measurement model and establishes three primary measurement categories for financial assets: amortized cost, fair value
through other comprehensive income and fair value through profit or loss. The basis of classification depends on the entity’s
business model and the contractual cash flow characteristics of the financial asset. Investments in equity instruments are required
to be measured at fair value through profit or loss with the irrevocable option at inception to present changes in fair value in
other comprehensive income. Further, the expected credit losses model replaces the incurred loss impairment model used in IAS 39.
For financial liabilities, there were no changes to classification and measurement except for the recognition of changes in the
Company’s own credit risk in other comprehensive income for liabilities designated at fair value through profit or loss.



The new impairment model requires the recognition of
impairment provisions based on expected credit losses (ECL) rather than only incurred credit losses as is the case under IAS 39.
It applies to financial assets classified at amortized cost, debt instruments measured at FVOCI, contract assets under IFRS 15
Revenue from Contracts with Customers, lease receivables, loan commitments and certain financial  guarantee contracts. While
the group has not yet undertaken a detailed assessment of how its impairment provisions would be affected by the new model, it
may result in an earlier recognition of credit losses



The standard is effective for accounting
periods beginning on or after 1 January, 2018. Early adoption is permitted. The Company is currently assessing the impact of IFRS
9. International Financial Reporting Standard No. 16 “Leases” (“IFRS 16”)



IFRS 16 defines a lease as a contract, or part of a
contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration. Under
IFRS 16, lessees have to recognize a lease liability reflecting future lease payments and a ‘right-of-use asset’ for
almost all lease contracts.



109







XTL BIOPHARMACEUTICALS LTD.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,
2016








| | NOTE 2: | SIGNIFICANT ACCOUNTING POLICIES(Cont.)
| | ------- | --------------------------------------



The standard replaces the current guidance in IAS 17.
The standard is effective for annual periods beginning on or after January 1, 2019. The Company is currently assessing the impact
of adopting IFRS 16.



| | NOTE 3: | CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS
| | ------- | -------------------------------------------



Estimates and judgments are continually evaluated and
are based on historical experience and other factors, including expectations of future events that are believed to be reasonable
under the circumstances.



| | a. | Critical accounting estimates and assumptions:
| | -- | ----------------------------------------------



Accounting estimates will, by definition, seldom equal
the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial year are addressed below.



| | 1. | Intangible assets
| | -- | -----------------



| | (i) | In testing impairment of unamortized
intangible assets (licenses and patent rights), the Company’s management
is required to estimate, among other things, the probable endpoints of trials conducted by the Company, the commercial technical
feasibility of the development and the resulting economic benefits. Actual results and estimates to be made in the future may significantly
differ from current estimates.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) | The Group is required to determine at the end of each reporting period whether there is any indication
that an asset may be impaired. If indicators for impairment are identified, the Group estimates the assets’ recoverable amount,
which is the higher of an asset’s fair value less costs to sell and its value-in-use.
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



See note 10 below for further information regarding impairment of intangible assets.



| | 2. | Share-based payments - in evaluating the fair value of share-based payment, the Company’s
management is required to estimate, among others, different parameters included in the computation of the fair value of the options
and the number of options that will vest.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



110







XTL BIOPHARMACEUTICALS LTD.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,
2016








| | NOTE 4: | FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT
| | ------- | ---------------------------------------------------



| | a. | Financial risk management:
| | -- | --------------------------



| | 1. | Financial risk factors:
| | -- | -----------------------



The Group’s activities expose it to a variety
of financial risks: market risks, currency risk and liquidity risk. The Group’s overall risk management program focuses on
the unpredictability of financial markets and seeks to minimize potential adverse effects on the Group’s financial performance.



Risk management is carried out by the Group’s
management under policies approved by the Board. The Group’s treasury identifies, evaluates and defines financial risks.
The Board provides written principles for overall risk management, as well as written policies covering specific areas, such as
foreign exchange risk, interest rate risk and investment of excess liquidity.



| | a. | Market risks:
| | -- | -------------



Foreign currency exchange rate risk:



The Group operates internationally and is exposed to
foreign exchange risk arising from various currency exposures with respect to the NIS. Foreign exchange risk arises from assets
and liabilities denominated in currency that is other than the functional currency.



The Company treasury’s risk management policy
is to hold NIS-denominated cash and cash equivalents in the amount of the anticipated NIS-denominated liabilities for six to twelve
consecutive months from time to time and this in line with the directives of the Company’s Board.



As of December 31, 2016, had the Group’s functional
currency weakened by 10% against the NIS with all other variables remaining constant, post-tax loss for the year would have been
$22 thousand lower (2015 - loss approximately $20 thousand lower; 2014 - loss approximately $85 thousand lower), mainly as a result
of exchange rate changes on translation of other accounts receivable and exchange rate changes on NIS-denominated cash and cash
equivalents.



| | b. | Liquidity risk:
| | -- | ---------------



Cash flow forecasting is performed by the Group’s
management both in the entities of the Group and aggregated by the Group. The Group’s management monitors rolling forecasts
of the Group’s liquidity requirements to ensure it has sufficient cash to meet operations. The Group does not use borrowing
credit facilities.



111







XTL BIOPHARMACEUTICALS LTD.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,
2016








| | NOTE 4: | FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT
(Cont.)
| | ------- | -----------------------------------------------------------



Surplus cash held to finance operating activities is
invested in interest bearing current accounts and time deposits. These channels were chosen by reference to their appropriate maturities
or liquidity to provide sufficient cash balances to the Group as determined by the abovementioned forecasts.



As of December 31, 2016 and 2015, the maturity
of the Group’s financial liabilities is less than one year from each of the reporting dates.



| | 2. | Capital management:
| | -- | -------------------



The Group’s objectives when managing capital are
to ensure the Group’s ability to continue as a going concern in order to provide returns on investments for shareholders
and benefits for other interested parties and to maintain an optimal capital structure to reduce the cost of capital.



In order to maintain or adjust the capital structure,
the Group may take a variety of measures such as issue new shares or sell assets to reduce liabilities.



| | b. | Financial instruments by category:
| | -- | ----------------------------------



As of December 31, 2016 and 2015, all financial
assets were classified in one of two categories: (a) loans and receivables, measured at amortized cost, and (b) marketable securities
measured at fair value. All financial liabilities as of such dates were classified in the category of other financial liabilities
at amortized cost.



| | NOTE 5: | INTERCURE - DISCONTINUED OPERATION
| | ------- | ----------------------------------



On June 13,
2012, the Company entered into an agreement to acquire the control over InterCure Ltd. (“InterCure”) for a consideration
of approximately $2.7 million.



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 TASE, was approximately $2.2 million, and which represents a value of InterCure of $1.75 million before the money,
but after all of InterCure’s debts were 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 $2.5 million. In
the year ended December 31, 2013, InterCure sold 1,097,719 shares of the Company for an aggregate amount of approximately $283
thousand. In addition, the Company provided InterCure an amount of approximately $150 thousand in cash on the basis of InterCure’s
Adjusted Value. After affecting the above allocation, the Company held approximately 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.



112







XTL BIOPHARMACEUTICALS LTD.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,
2016








| | NOTE 5: | INTERCURE - DISCONTINUED OPERATION (Cont.)
| | ------- | ------------------------------------------



On May 16, 2013,
the Company informed InterCure of its decision to convert its entire convertible loan which had been extended by the Company in
the context of the acquisition into 7,620,695 ordinary shares of InterCure, as predetermined in the original acquisition agreement.
Upon conversion, the Company held approximately 54.72% of InterCure’s issued and outstanding share capital.



In
November 2014, InterCure announced that its Audit Committee and Board of Directors approved the signing of an agreement with Green
Forest Global Ltd. (the “Agreement” and “Green Forest”, respectively) a company wholly owned by Mr. Alexander
Rabinovitch, an interested party in the Company.



Pursuant
to the Agreement, following a reverse split in InterCure shares at a 10:1 ratio, Green Forest was allotted 2,622,647 ordinary
shares of InterCure (the “First Round Allotted Shares”) representing 34.23% of the issued and outstanding shares of
InterCure at the time of the allotment for an investment of $230 thousand. Further, upon InterCure’s shares return to the
main list of the TASE, an additional 2,622,648 ordinary shares of InterCure were allotted to Green Forest for an additional investment
of $230 thousand (the “Second Round Allotted Shares”).



In
addition, the Agreement granted Green Forest the following three options:



| | 1. | Option to purchase up to an additional 3,416,818 ordinary
shares of InterCure for $300 thousand (representing an exercise price of $0.0878 per share), exercisable within 12 months of the
Transaction Completion Date, as defined in the Agreement.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | Option to acquire the Company shares held by InterCure
at a price of NIS 0.35 per share, exercisable within 6 months of the Transaction Completion Date.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. | Option to acquire InterCure’s assets, rights and
obligations relating to the “Resperate” business at the cost of inventory held at the time of the exercise of the
option, exercisable within 6 months of the Transaction Completion Date.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Under
the Agreement, Green Forest provided InterCure with a qualifying, non-secured, non-guaranteed, non-interest bearing and non-indexed
loan of $40 thousand for a period of 60 days. At the time of the completion of the transaction, the loan was repaid by the sale
of shares of the Company held by InterCure to Green Forest for the value of the loan ($40 thousand) at a price of NIS 0.30 per
share.



InterCure
was granted the right to a Put option to sell all or part of the Company’s shares held by InterCure at the Put option exercise
date, for an exercise price of NIS 0.30 per share, exercisable within 6 months of the Transaction Completion Date.



In
addition, at the time of and as a condition for the completion of the transaction, the outstanding loan of $50 thousand owed by
InterCure to the Company was be converted to 569,470 ordinary shares of InterCure.



On December 23,
2014, the extraordinary general meeting of InterCure approved the Agreement. Upon receiving the required approval to the Agreement
from TASE, the Agreement turned effective as of February 12, 2015.



113







XTL BIOPHARMACEUTICALS LTD.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,
2016








| | NOTE 5: | INTERCURE - DISCONTINUED OPERATION (Cont.)
| | ------- | ------------------------------------------



On February 1, 2015, in accordance with a request made
by the Israeli Securities Authority to increase public holdings in InterCure prior to the execution of the Agreement, the Company
sold 2,166,667 shares of InterCure to a non-related third party, for an amount of approximately $17 thousand. As a result, the
Company’s holding in InterCure’s issued and outstanding share capital decreased to approximately 49.87%. The sale of
InterCure shares was considered as a transaction with non-controlling interests without loss of control.



After the issuance
of the 2,622,647 First Round Allotted Shares, as well as the conversion of the loan granted to InterCure into 569,470 ordinary
shares of InterCure, the Company’s holdings in InterCure were diluted to 36.53% of the issued and outstanding share capital
of InterCure. The Company’s management then determined that implementation of the Agreement constituted a loss of control
in InterCure as of the same date.



On March 23, 2015, InterCure issued 37,804,012 ordinary
shares as part of a rights offering, thus diluting the Company’s holding in InterCure’s issued and outstanding share
capital to approximately 6.16%.



On March 31, 2015, the Company and Green Forest mutually
agreed to terminate the voting agreement signed by the parties on February 12, 2015. Following said termination, the directors
appointed by the Company resigned from the board of directors of InterCure.



On April 2, 2015, InterCure issued the Second Round Allotted
Shares, thus diluting the Company’s holding in InterCure’s issued and outstanding share capital to approximately 5.82%.



As a result of the accounting treatment of the deconsolidation
of InterCure, the Company recorded a loss from discontinued operations of $689 thousand. In addition, the Company recorded its
remaining investment in InterCure shares at a fair value of $482 thousand, as quoted on the TASE as of the loss of control date.
Following the aforementioned rights offering, the Company recorded a loss from the change in fair value of InterCure shares in
the amount of $225 thousand.



As for intangible
assets recognized for the first time after the completion of the InterCure transaction, as presented above, and due to a significant
decline in InterCure’s share price as quoted on the TASE as of December 31, 2013, the Company hired the services of an external
independent expert in order to establish whether or not an impairment exists in connection with the technology and brand name assets
recognized in the purchase price allocation study of InterCure.



The recoverable
amount was assessed by management with the assistance of a consultant. In light of recent developments in InterCure, namely conclusions
reached by its management and board of directors regarding its ability to continue operating as a going concern, several scenarios
were taken into account by the expert. Each scenario was assigned a different weight in order to accommodate all scenarios into
a weighted-average discounted cash flow. Such scenarios were as follows:



| | (i) | The liquidation scenario, under which the realizable
value of InterCure’s net operational assets was estimated, was assigned a weighting of 60%.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------



114







XTL BIOPHARMACEUTICALS LTD.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,
2016








| | NOTE 5: | INTERCURE - DISCONTINUED OPERATION (Cont.)
| | ------- | ------------------------------------------



| | (ii) | The going concern scenario, establishing the value-in-use
of InterCure’s operations using the discounted cash flow method, was assigned a weighting of 40%. The value-in-use calculations
use pre-tax cash flow projections covering an eight-year period and using extrapolation with specific adjustments expected until
2021, and a pre-tax discount rate of 33.3%. The value-in-use calculations included all factors in nominal terms.
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The impairment
test was based on assessments of financial performance and future strategies in light of current and expected market and economic
conditions. Trends in the economic and financial environment, competition and regulatory authorities’ decisions, or changes
in competitors’ behavior in response to the economic environment may affect the estimate of recoverable amounts in future
periods.



For the purpose
of the impairment test, InterCure was considered the lowest level for which there are separately identifiable cash flows - a Cash
Generating Unit (“CGU”). Upon examination, the expert concluded that an impairment exists, and that InterCure’s
recoverable amount stands at $ 300 thousand. The impairment loss in the amount of $1.8 million was recognized in loss from operations,
and allocated between said intangible assets of the CGU pro rata, based on their respective carrying amounts (net of amortization),
in the following amounts:



Technology - $1.4
million;

Brand Name - $357
thousand.



Since termination of the voting agreement between the
Company and Green Forest on March 31, 2015, the Company’s investment in InterCure is classified as marketable securities.



| | a. | Analysis of the results of discontinued operations is as follows:
| | -- | -----------------------------------------------------------------



|                  |  | Period from  January 1 to  February 12, |     |   | Year ended  December 31, | 
|----------------- |  | --------------------------------------- | --- | - | ------------------------ | 
|                  |  | 2015                                    |     |   | 2014                     | 
|                  |  | U.S. dollars in thousands               |    
|                  |  |                                         |     |   |                          | 
|Revenues          |  |                                         | 75  |   |                          | 
|Expenses          |  |                                         | (72 | ) |                          | 
|                  |  |                                         |     |   |                          | 
|Total gain (loss) |  |                                         | 3   |   |                          | 



| | b. | Analysis of cash flow of discontinued operations for the year ended December 31, 2014, is as follows:
| | -- | -----------------------------------------------------------------------------------------------------



|                     |  | Period from  January 1 to February 12, |   |  | Year ended  December 31, | 
|-------------------- |  | -------------------------------------- | - |  | ------------------------ | 
|                     |  | 2015                                   |   |  | 2014                     | 
|                     |  | U.S. dollars in thousands              |  
|                     |  |                                        |   |  |                          | 
|Operating cash flows |  |                                        | 3 |  |                          | 
|Investing cash flows |  |                                        | - |  |                          | 
|Financing cash flows |  |                                        | - |  |                          | 
|                     |  |                                        |   |  |                          | 
|Total cash flows     |  |                                        | 3 |  |                          | 



115







XTL BIOPHARMACEUTICALS LTD.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,
2016








| | NOTE 6: | CASH AND CASH EQUIVALENTS
| | ------- | -------------------------



|                                                               |  | December 31,              |      
|-------------------------------------------------------------- |  | ------------------------- | -----
|                                                               |  | 2016                      |      
|                                                               |  | U.S. dollars in thousands |      
|                                                               |  |                           |      
|Cash in banks and on hand                                      |  |                           | 2,019
|Bank deposits with original maturities of three months or less |  |                           | -    
|                                                               |  |                           |      
|                                                               |  |                           | 2,019



The currencies in which the cash and cash equivalents
are denominated or linked to are:



|                                    |  | December 31,              |      
|----------------------------------- |  | ------------------------- | -----
|                                    |  | 2016                      |      
|                                    |  | U.S. dollars in thousands |      
|                                    |  |                           |      
|U.S. dollars                        |  |                           | 1,908
|NIS (not linked to the Israeli CPI) |  |                           | 110  
|Other currencies                    |  |                           | 1    
|                                    |  |                           |      
|                                    |  |                           | 2,019



| | NOTE 7: | MARKETABLE SECURITIES
| | ------- | ---------------------



| | a. | All marketable securities held by the
Company constitute Level 1 financial instruments, as defined in IFRS 13 - “Fair Value Measurement”.Level
1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the
measurement date.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. | The Company holds the following financial instruments:
| | -- | ------------------------------------------------------



|                                    |  | December 31,              |    
|----------------------------------- |  | ------------------------- | ---
|                                    |  | 2016                      |    
|                                    |  | U.S. dollars in thousands |    
|                                    |  |                           |    
|Financial assets available for sale |  |                           | 414
|                                    |  |                           |    
|                                    |  |                           | 414



| | c. | Changes in marketable securities for the years ended December 31, 2016 and 2015, were as follows:
| | -- | -------------------------------------------------------------------------------------------------



|                                        |  | December 31,              |    
|--------------------------------------- |  | ------------------------- | ---
|                                        |  | 2016                      |    
|                                        |  | U.S. dollars in thousands |    
|                                        |  |                           |    
|Fair value opening balance              |  |                           | 251
|Changes in fair value during the period |  |                           | 163
|                                        |  |                           |    
|                                        |  |                           | 414



116







XTL BIOPHARMACEUTICALS LTD.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,
2016








| | NOTE 8: | OTHER ACCOUNTS RECEIVABLE
| | ------- | -------------------------



Composition:



|                           |  | December 31,              |    
|-------------------------- |  | ------------------------- | ---
|                           |  | 2016                      |    
|                           |  | U.S. dollars in thousands |    
|                           |  |                           |    
|Government authorities (*) |  |                           | 179
|Prepaid expenses           |  |                           | 130
|Other                      |  |                           | 12 
|                           |  |                           |    
|                           |  |                           | 321



| | (*) | The government authorities and others are monetary items which are denominated or linked is NIS.
| | --- | ------------------------------------------------------------------------------------------------



The carrying amount of other accounts receivable is a
reasonable approximation of the fair value because the effect of discounting is immaterial.



| | NOTE 9: | ADDITIONAL INFORMATION ABOUT INVESTMENT IN INVESTEES
| | ------- | ----------------------------------------------------



|Name and country of  incorporation of  subsidiary |  | Date                              |  | Equity  interests and voting rights |  |  | Scope of investments in investee (in $ 000) |   |  | Stock Exchange data
|------------------------------------------------- |  | --------------------------------- |  | ----------------------------------- |  |  | ------------------------------------------- | - |  | -------------------
|                                                  |  |                                   |  |                                     |  |  |                                             |   |  |                    
|1                                                 |  | Xtepo, incorporated in Israel     |  | 31.12.2016                          |  |  | 100                                         | % |  |                    
|                                                  |  |                                   |  | 31.12.2015                          |  |  | 100                                         | % |  |                    
|2                                                 |  | InterCure, incorporated in Israel |  | 31.12.2016                          |  |  | 3.78                                        | % |  |                    
|                                                  |  |                                   |  | 31.12.2015                          |  |  | 5.82                                        | % |  |                    



| | NOTE 10: | INTANGIBLE ASSETS
| | -------- | -----------------



| | a. | On August 3, 2010, the Company completed the share swap transaction with the shareholders of Bio-Gal
Ltd. (the “Transaction”) in which the Company acquired 100% of the shares of Xtepo, which for the Transaction purposes
held an exclusive license to use the patented recombinant EPO (rHuEPO) drug for treating Multiple Myeloma and also held cash totaling
approximately $1.5 million on the date of completion of the transaction, in return for the allocation of 133,063,688 ordinary shares
of NIS 0.1 par value each, representing approximately 69.44% of the Company’s issued and outstanding share capital after
completion of the Transaction.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Following the closing of the Transaction,
the Company recognized in its accounts an intangible asset representing the license for the exclusive use of the patent for the
rHuEPO drug for Multiple Myeloma as well as every clinical study and accumulated knowhow underlying the patent in a total of approximately
$2,265 thousand (excluding transaction costs of approximately $187 thousand), based on its fair value as of the date of closing
of the Transaction according to an independent external valuation.



117







XTL BIOPHARMACEUTICALS LTD.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31,
2016








| | NOTE 10: | INTANGIBLE ASSETS (Cont.)
| | -------- | -------------------------



On May 29, 2011, the Company received
the approval of the FDA, a subdivision of the U.S. Health and Human Services, for orphan drug status for the rHuEPO drug which
is patented by the Company until 2019.



According to the guidance of IAS
38, this asset is not ready for usage according to the Company's management intention and therefore has not amortized yet and the
Company reviews the asset for impairment once a year or more frequently if indicators show that the asset may be impaired.



In December 2015, the Company tested
the asset for impairment in accordance with the guidance of IAS 36. According to the valuation performed, as of December 31, 2015,
the book value amounted to $2,452 thousand of the rHuEPO intangible asset exceeded its recoverable amount by $1,604 thousand. Therefore,
a loss from impairment should be recorded regarding the asset. The recoverable amount was determined as fair value less costs of
disposal, which was determined on the basis of the discounted future cash flow method for the years 2016 to 2029 less costs of
disposal. The discount period was determined on the basis of the estimated timelines to perform the clinical trials in order to
approve the drug for marketing and under the limitation of the patent years and the orphan drug designation as above.



The key assumptions used in measuring
the recoverable amount related to the rHuEPO intangible asset as of December 31, 2015 include: duration of phase 2 and 3 clinical
trials of 2.5 and 3.5 years, respectively, expected penetration levels from 10% in 2023 to 55% in 2027-2029 out of an estimate
of 67,566 new cases of Multiple Myeloma diagnosed each year, royalties at the rate of 12.5% and (post-tax) discount rate of 24%.



In March 2017, the Company’s
Board of Directors decided on the abandonment of the EPO development and therefore the carrying amount of the rHuEPO intangible
asset of $848 has been reduced to zero as of December 31, 2016 in a separate line in the statement of comprehensive loss.



| | b. | On January 7, 2014, the Company signed a licensing agreement with Yeda to develop hCDR1, a Phase
II-ready asset for the treatment of Systemic Lupus Erythematosus (“SLE”). The terms of the licensing agreement include,
among other things, expense reimbursement for patent expenses payable in six installments, certain milestone payments to Yeda,
low single-digit royalties based on net sales, and additional customary royalties to the Office of the Chief Scientist.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



On May 14, 2014, the Company issued
222,605 ordinary shares of the Company of NIS 0.1 par value each to Yeda, as the first of six installments for the aforementioned
patent expenses reimbursement, representing a value of approximately $38 thousand.



On January 21, 2015, the Company
issued Yeda 802,912 ordinary shares of the Company of NIS 0.1 par value each, as the second of six installments for the aforementioned
patent expenses reimbursement, representing a value of approximately $84 thousand.



118









XTL
BIOPHARMACEUTICALS LTD.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER
31, 2016



| | NOTE 10: | INTANGIBLE ASSETS (Cont.)
| | -------- | -------------------------



On August 3, 2015, the Company
paid Yeda an amount of approximately $64 thousand, as the third of six installments for the aforementioned patent expenses reimbursement.



On February 1, 2016, the Company
paid Yeda an amount of approximately $64 thousand, as the fourth of six installments for the aforementioned patent expenses reimbursement.



In July 2016, the Company and
Yeda signed a second amendment to the license agreement whereby, the final two payments due under the Agreement will be made on
April 7, 2017, provided that if the Company receives funding of at least $5,000 thousand then the Company shall be required to
promptly pay Yeda any unpaid patent expense reimbursement in one lump-sum cash payment.



In order to measure the fair value of the hCDR1 asset, Company
management deducted the fair value of its other assets and liabilities from the amount representing its market value as of December
31, 2016. The resulting fair value attributable to the hCDR1 asset was higher than the book value of the hCDR1 asset and therefore
no impairment was recorded in the Company's financial statements as of December 31, 2016.



| | c. | Composition and movement:
| | -- | -------------------------

The composition of intangible assets, net, by major
classes, and the movement therein in the three years ended December 31, 2016, 2015 and 2014, are:



|                                    |  | rHuEPO |      |   | hCDR1 |  |     | Total | 
|----------------------------------- |  | ------ | ---- | - | ----- |  | --- | ----- | 
|                                    |  |        |     
|Cost:                               |  |        |      |   |       |  |     |       | 
|                                    |  |        |      |   |       |  |     |       | 
|Balance at January 1, 2016          |  |        | 848  |   |       |  | 189 |       | 
|                                    |  |        |      |   |       |  |     |       | 
|Additions during the year           |  |        | -    |   |       |  | 64  |       | 
|Impairment of intangible assets     |  |        | (848 | ) |       |  | -   |       | 
|                                    |  |        |      |   |       |  |     |       | 
|Amortized cost at December 31, 2016 |  |        | -    |   |       |  | 253 |       | 



|                                    |  | rHuEPO                    |        |   | hCDR1 |  |     | Other |  |  | Total |  
|----------------------------------- |  | ------------------------- | ------ | - | ----- |  | --- | ----- |  |  | ----- | -
|                                    |  | U.S. dollars in thousands |       
|Cost:                               |  |                           |        |   |       |  |     |       |  |  |       |  
|                                    |  |                           |        |   |       |  |     |       |  |  |       |  
|Balance at January 1, 2015          |  |                           | 2,452  |   |       |  | 41  |       |  |  | 5     |  
|                                    |  |                           |        |   |       |  |     |       |  |  |       |  
|Additions during the year           |  |                           | -      |   |       |  | 148 |       |  |  | -     |  
|Impairment of intangible assets     |  |                           | (1,604 | ) |       |  | -   |       |  |  | -     |  
|Disposal                            |  |                           | -      |   |       |  | -   |       |  |  | (5    | )
|                                    |  |                           |        |   |       |  |     |       |  |  |       |  
|Amortized cost at December 31, 2015 |  |                           | 848    |   |       |  | 189 |       |  |  | -     |  



119







XTL
BIOPHARMACEUTICALS LTD.



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS AS OF DECEMBER 31, 2016



| | NOTE 10: | INTANGIBLE ASSETS (Cont.)
| | -------- | -------------------------



|                                    |  | rHuEPO                    |       |  | hCDR1 |  |    | Other |  |  | Total | 
|----------------------------------- |  | ------------------------- | ----- |  | ----- |  | -- | ----- |  |  | ----- | 
|                                    |  | U.S. dollars in thousands |      
|                                    |  |                           |       |  |       |  |    |       |  |  |       | 
|Cost:                               |  |                           |       |  |       |  |    |       |  |  |       | 
|                                    |  |                           |       |  |       |  |    |       |  |  |       | 
|Balance at January 1, 2014          |  |                           | 2,452 |  |       |  | -  |       |  |  | 5     | 
|                                    |  |                           |       |  |       |  |    |       |  |  |       | 
|Additions during the year           |  |                           | -     |  |       |  | 41 |       |  |  | -     | 
|                                    |  |                           |       |  |       |  |    |       |  |  |       | 
|Amortized cost at December 31, 2014 |  |                           | 2,452 |  |       |  | 41 |       |  |  | 5     | 



| | NOTE 11: | TRADE PAYABLES
| | -------- | --------------



| | a. | Composition:
| | -- | ------------



|               |  | December 31,              |   
|-------------- |  | ------------------------- | --
|               |  | 2016                      |   
|               |  | U.S. dollars in thousands |   
|               |  |                           |   
|Open accounts  |  |                           | 15
|Checks payable |  |                           | 2 
|               |  |                           |   
|               |  |                           | 17



The carrying amount of trade payables is a reasonable
approximation of their fair value because the effect of discounting is immaterial.



| | b. | The carrying amount of trade payables is denominated in the following currencies:
| | -- | ---------------------------------------------------------------------------------



|                                    |  | December 31,              |   
|----------------------------------- |  | ------------------------- | --
|                                    |  | 2016                      |   
|                                    |  | U.S. dollars in thousands |   
|                                    |  |                           |   
|U.S. dollars                        |  |                           | 11
|NIS (not linked to the Israeli CPI) |  |                           | 6 
|                                    |  |                           |   
|                                    |  |                           | 17



| | NOTE 12: | OTHER ACCOUNTS PAYABLE
| | -------- | ----------------------



| | a. | Composition:
| | -- | ------------



|                                            |  | December 31,              |    
|------------------------------------------- |  | ------------------------- | ---
|                                            |  | 2016                      |    
|                                            |  | U.S. dollars in thousands |    
|                                            |  |                           |    
|Employees, consultants and payroll accruals |  |                           | 43 
|Accrued expenses                            |  |                           | 270
|                                            |  |                           |    
|                                            |  |                           | 313



120







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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER
31, 2016



| | NOTE 12: | OTHER ACCOUNTS PAYABLE (Cont.)
| | -------- | ------------------------------



The carrying amount of other accounts payable is
a reasonable approximation of their fair value because the effect of discounting is immaterial.



| | b. | The carrying amount of other accounts payable is denominated in the following currencies:
| | -- | -----------------------------------------------------------------------------------------



|                                    |  | December 31,              |    
|----------------------------------- |  | ------------------------- | ---
|                                    |  | 2016                      |    
|                                    |  | U.S. dollars in thousands |    
|                                    |  |                           |    
|U.S. dollars                        |  |                           | 249
|NIS (not linked to the Israeli CPI) |  |                           | 64 
|Other                               |  |                           | -  
|                                    |  |                           |    
|                                    |  |                           | 313



| | NOTE 13: | EMPLOYEE BENEFIT LIABILITIES
| | -------- | ----------------------------



According
to the effective labor laws and employment agreements in Israel, the Company is obligated to pay compensation and/or pension to
employees who are dismissed and, under certain circumstances, to employees who retire.



The Company’s
obligation for pension payment in Israel and the Company’s obligation for compensation payments to employees in Israel for
whom the applicable obligation is pursuant to section 14 to the Severance Pay Law, are covered by fixed contributions into defined
contribution plans. The amounts contributed as above are not reflected in the statements of financial position. Section 14 to the
Severance Pay Law applies to all of the Company’s employees.



The amounts
recognized as expenses for defined contribution plans for employees of the Company in 2016, 2015 and 2014 was $17, $16 and $25
thousand, respectively.



| | NOTE 14: | COMMITMENTS
| | -------- | -----------



| | a. | Royalty and contingent milestone payments:
| | -- | ------------------------------------------



On August 3, 2010, the
Company entered into Asset Purchase Agreement ("APA") to acquire from Bio-Gal the rights to develop rHuEPO for the treatment
of multiple myeloma under the research and license agreement with Yeda (see also Note 10b). According to the APA, the Company is
obligated to pay 1% royalties on net sales of the developed product as well as a fixed royalty payment in the amount of $350 thousand
upon the successful completion of a phase 2 clinical trial. The payment conditions for the above amount are at the earlier of occurrence
of the following events:



121







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BIOPHARMACEUTICALS LTD.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER
31, 2016



| | NOTE 14: | COMMITMENTS (Cont.)
| | -------- | -------------------



| | (i) | Raising capital of at least $2 million by the Company or Xtepo after a successful completion of
a phase 2 clinical trial;
| | --- | -------------------------------------------------------------------------------------------------------------------------



| | (ii) | Six months after the successful completion of a phase 2
clinical trial.
| | ---- | -----------------------------------------------------------------------



| |  | As of December 31, 2016, the Company has not completed the phase 2 clinical trial and therefore
no royalty expenses have been recorded.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------



| | b. | Operating lease commitments:
| | -- | ----------------------------



The Company entered into an
operating lease agreement on the offices it uses, which is in effect until April 2017 with an option upon the Company's discretion
for extension of additional two years. The lease fees are stated in NIS and are not linked to the Israeli CPI. To secure the lease,
the Company provided a bank guarantee, which is secured by a restricted NIS deposit of approximately $10 thousand.The expected
lease fees and management fees for subsequent years under the prevailing lease fees as of December 31, 2016 are as follows:



|     |  | U.S. dollars in thousands |   
|---- |  | ------------------------- | --
|     |  |                           |   
|2017 |  |                           | 10



The Company entered into an
agreement with subtenants to lease part of the office space in exchange for approximately $1.2 thousand per month. The sublease
agreement is in effect until April 2017.



| | NOTE 15: | SHARE CAPITAL, RESERVES AND RETAINED EARNINGS
| | -------- | ---------------------------------------------



| | a. | The Company’s Ordinary shares of NIS 0.1 are traded on the TASE. The Company’s
ADSs are listed for trading on the Nasdaq Capital Market in the U.S. The share price was NIS 0.116 as of December 31, 2016.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. | Ordinary shares confer upon their holders voting rights and right to participate in the shareholders’
meeting, right to receive dividends and the right to participate in the excess of assets upon liquidation of the Company.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



122







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BIOPHARMACEUTICALS LTD.



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2016



| | NOTE 15: | SHARE CAPITAL, RESERVES AND RETAINED EARNINGS (Cont.)
| | -------- | -----------------------------------------------------





| | c. | On June 1, 2012, the Company applied for the relisting of its ADSs on the Nasdaq (after the ADSs had been delisted from trade on the Nasdaq in July 2009), subject to compliance with all the criteria reviewed by the Nasdaq admissions committee, including minimum ADS price (according to the various listing criteria). On September 24, 2012, the Company’s Board of Directors approved a change in the number of shares underlying the ADSs such that 20 ordinary shares of the Company will constitute a single ADS, this in order to support the Company’s compliance with the Nasdaq’s ADS listing conditions. The record date of change in the ADS ratio is October 4, 2012. On July 10, 2013, the Company’s management received a notice from Nasdaq representatives stating that the admission committee had approved the Company’s application to relist its ADSs for trading on the Nasdaq Capital Market. Accordingly, on July 15, 2013, the Company’s ADSs began trading on Nasdaq.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Effective February 10, 2017,
the number of shares underlying the ADSs was changed such that 100 ordinary shares of the Company will constitute a single ADS
(see also Note 23a).



In April 2015, the Company
raised gross funds amounted to $4.0 million by means of issuing a total of 355,556 ADSs to several investors. In addition, under
the share purchase agreements, the investors received unregistered warrants to purchase 177,778 ADSs (excluding warrant to purchase
up to 17,978 ADSs that has been issued to placement agent). The warrants may be exercised from the six-month anniversary of the
issuance date and for five years thereafter and have an exercise price of $11.25 per ADS, subject to standard adjustments as set
forth therein.



| | d. | In February 2016 and May 2016, the Company issued total of 680,000 ordinary shares, represented
by 6,800 ADSs, to a service provider, as part of the terms of a investor relationship service agreement signed in January 2016.
Consequently, the Company recorded expenses amounted to $54 thousand, which representing the fair value of the ordinary shares
in January 2016.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | NOTE 16: | SHARE-BASED PAYMENT
| | -------- | -------------------



On August 29, 2011, the Company’s Board of
Directors approved the adoption of an employee share option plan for the grant of options exercisable into shares of the Company
in accordance with section 102 to the Israeli Tax Ordinance (the “2011 Plan”) which ended after 10 years, and the holding
of up to 10,000,000 shares in the framework of the 2011 Plan, for option allocation to Company employees, directors and consultants.
The terms of the options which will be granted according to the 2011 Plan, including the option period, exercise price, vesting
period and exercise period shall be determined by the Company’s Board of Directors on the date of the actual allocation.
As of December 31, 2016, the remaining number of options available for grant under the 2011 Plan is 3,180,000 options.



Movements
in the number of share options and their related weighted average exercise prices (in dollars) during the years ended December
31, 2016, 2015 and 2014 are as follows:



123







XTL BIOPHARMACEUTICALS LTD.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER
31, 2016



| | NOTE 16: | SHARE-BASED PAYMENT (Cont.)
| | -------- | ---------------------------



|                                 |  | Year ended December 31, |           
|-------------------------------- |  | ----------------------- | ----------
|                                 |  | 2016                    |           
|                                 |  | Number of options       |           
|                                 |  |                         |           
|Outstanding at beginning of year |  |                         | 4,870,000 
|Granted                          |  |                         | 2,950,000 
|Exercised                        |  |                         | -         
|Expired                          |  |                         | (1,070,000
|Forfeited                        |  |                         | -         
|                                 |  |                         |           
|Outstanding at end of year       |  |                         | 6,750,000 
|                                 |  |                         |           
|Exercisable at end of year       |  |                         | 3,833,333 



Below is information
about the exercise price (in dollars) and the remaining contractual life (in years) for options outstanding at end of year:



|December 31,                       |          
|---------------------------------- | ---------
|2016                               |          
|Options outstanding at end of year |          
|                                   |          
|                                   | 1,450,000
|                                   | 5,300,000
|                                   |          
|                                   | 6,750,000



Net expenses
recognized in the Company’s statements of comprehensive loss for the years ended December 31, 2016, 2015 and 2014 for grant
of options to employees were $182 (($54 thousand out of which related to certain service provider as detailed in Note 15d) , $148
and $278 thousand, respectively.



124







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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER
31, 2016








| | NOTE 16: | SHARE-BASED PAYMENT (Cont.)
| | -------- | ---------------------------



The table below summarizes
the outstanding options as of December 31, 2016 that have been granted to the Company’s executives, directors and consultants
-



|Options  outstanding |           |  | Position |                         | Grant date (*) |                   | Exercise price in NIS |  |        | Fair value USD |  |  | Vesting schedule
|-------------------- | --------- |  | -------- | ----------------------- | -------------- | ----------------- | --------------------- |  | ------ | -------------- |  |  | ----------------
|                     |           |  |          |                         |                |                   |                       |  |        |                |  |  |                 
|                     | 60,000    |  |          | Legal counsel           |                | January 15, 2008  |                       |  | 1.575  |                |  |  | 12              
|                     | 10,000    |  |          | Bookkeeper              |                | April 12, 2012    |                       |  | 0.9    |                |  |  | 8               
|                     | 900,000   |  |          | Chief Executive Officer |                | October 15, 2013  |                       |  | 0.9    |                |  |  | 508             
|                     | 600,000   |  |          | Chief Executive Officer |                | October 15, 2013  |                       |  | 0.6    |                |  |  | 343             
|                     | 750,000   |  |          | Chief Financial Officer |                | December 30, 2013 |                       |  | 0.5328 |                |  |  | 354             
|                     | 30,000    |  |          | Consultant              |                | February 26, 2014 |                       |  | 0.644  |                |  |  | 10              
|                     | 600,000   |  |          | Four Directors          |                | December 30, 2014 |                       |  | 0.4325 |                |  |  | 184             
|                     | 150,000   |  |          | Consultant              |                | December 30, 2014 |                       |  | 0.4915 |                |  |  | 45              
|                     | 300,000   |  |          | Two Directors           |                | March 25, 2015    |                       |  | 0.40   |                |  |  | 98              
|                     | 100,000   |  |          | Chief Financial Officer |                | March 25, 2015    |                       |  | 0.4    |                |  |  | 27              
|                     | 100,000   |  |          | Chief Executive Office  |                | March 25, 2015    |                       |  | 0.4    |                |  |  | 27              
|                     | 200,000   |  |          | Chief Financial Officer |                | June 1, 2015      |                       |  | 0.4283 |                |  |  | 55              
|                     | 50,000    |  |          | Medical Director        |                | March 4, 2016     |                       |  | 0.6    |                |  |  | 8               
|                     | 1,500,000 |  |          | Chairman of Board       |                | March 31, 2016    |                       |  | 0.6    |                |  |  | 239             
|                     | 1,000,000 |  |          | Chief Executive Officer |                | March 31, 2016    |                       |  | 0.6    |                |  |  | 159             
|                     | 400,000   |  |          | Chief Financial Officer |                | May 31, 2016      |                       |  | 0.6    |                |  |  | 53              
|                     |           |  |          |                         |                |                   |                       |  |        |                |  |  |                 
|                     | 6,750,000 |  |          |                         |                |                   |                       |  |        |                |  |  |                 



| | (*) | Date of the Company's Board of Directors’ decision
(or shareholders, if required).
| | --- | ----------------------------------------------------------------------------------



125







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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS AS OF DECEMBER 31, 2016



| | NOTE 16: | SHARE-BASED PAYMENT (Cont.)
| | -------- | ---------------------------



The fair value for options granted in 2016 and 2015
is estimated at the date of grant using a Black-Scholes-Merton Options pricing model with the following weighted average assumptions:



|                      |  | 2016 |       |  | 2015 | 
|--------------------- |  | ---- | ----- |  | ---- | 
|                      |  |      |       |  |      | 
|Dividend yield        |  |      | 0%    |  |      | 
|Expected volatility   |  |      | 74.4% |  |      | 
|Risk-free interest    |  |      | 1.97% |  |      | 
|Expected life (years) |  |      | 10    |  |      | 



Wehave calculated the volatility based on the company's historical volatilityand comparable companies' historical volatility. The share price was set according to the Company's share market value as
of grant date.



| | NOTE 17: | RESEARCH AND DEVELOPMENT EXPENSES
| | -------- | ---------------------------------



|                                                            |  | Year ended December 31,   |    
|----------------------------------------------------------- |  | ------------------------- | ---
|                                                            |  | 2016                      |    
|                                                            |  | U.S. dollars in thousands |    
|                                                            |  |                           |    
|Fees related to service providers                           |  |                           | 145
|Expenses relating to options to employees and non-employees |  |                           | 7  
|Professional consulting                                     |  |                           | 109
|Lab materials                                               |  |                           | 134
|Other                                                       |  |                           | 48 
|                                                            |  |                           |    
|                                                            |  |                           | 443



| | NOTE 18: | GENERAL AND ADMINISTRATIVE EXPENSES
| | -------- | -----------------------------------



|                                                                       |  | Year ended December 31,   |      
|---------------------------------------------------------------------- |  | ------------------------- | -----
|                                                                       |  | 2016                      |      
|                                                                       |  | U.S. dollars in thousands |      
|                                                                       |  |                           |      
|Salaries and expenses relating to employees and service providers      |  |                           | 297  
|Expenses relating to options and shares to employees and non-employees |  |                           | 175  
|Patents and fees                                                       |  |                           | 162  
|Directors’ fees                                                        |  |                           | 124  
|Investor relations and travel                                          |  |                           | 168  
|Rent and office maintenance                                            |  |                           | 39   
|Vehicle maintenance                                                    |  |                           | 5    
|Insurance                                                              |  |                           | 48   
|Professional services                                                  |  |                           | 213  
|Depreciation and loss from disposal                                    |  |                           | 3    
|Other                                                                  |  |                           | 36   
|                                                                       |  |                           |      
|                                                                       |  |                           | 1,270



126







XTL BIOPHARMACEUTICALS
LTD.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER
31, 2016








| | NOTE 19: | FINANCE INCOME (EXPENSES), NET
| | -------- | ------------------------------



|                                             |  | Year ended December 31,   |   
|-------------------------------------------- |  | ------------------------- | --
|                                             |  | 2016                      |   
|                                             |  | U.S. dollars in thousands |   
|Finance expenses:                            |  |                           |   
|                                             |  |                           |   
|Exchange differences                         |  |                           | - 
|Bank account management fees and commissions |  |                           | 7 
|Other financial expenses                     |  |                           | - 
|                                             |  |                           |   
|Total finance expenses                       |  |                           | 7 
|                                             |  |                           |   
|Finance income:                              |  |                           |   
|                                             |  |                           |   
|Interest income on bank deposits             |  |                           | - 
|Exchange differences                         |  |                           | 23
|                                             |  |                           |   
|Total finance income                         |  |                           | 23
|                                             |  |                           |   
|Finance income (expenses), net               |  |                           | 16



| | NOTE 20: | TAXES ON INCOME
| | -------- | ---------------



| | a. | Tax rates applicable to the Company:
| | -- | ------------------------------------



| | 1. | Taxable income of the Company is subject to a corporate tax rate as follow: 2015 - 26.5% and 2016
- 25%.
| | -- | --------------------------------------------------------------------------------------------------------



| | 2. | On January 5, 2016, the Israeli Parliament officially published the Law for the Amendment of the
Israeli Tax Ordinance (Amendment 216), that reduces the standard corporate income tax rate from 26.5% to 25%.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. | In December 2016, the Israeli Parliament approved the Economic Efficiency Law (Legislative Amendments
for Applying the Economic Policy for the 2017 and 2018 Budget Years), 2016 which reduces the corporate income tax rate to 24% (instead
of 25%) effective from January 1, 2017 and to 23% effective from January 1, 2018.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c. | The Group’s carryforward tax losses as of December 31, 2016, totaled approximately $30 million which may be carried
forward and offset against taxable income in the future for an indefinite period. The Company did not recognize deferred taxes
for carryforward losses and temporary differences, as well as capital losses and real losses, because their utilization in the
foreseeable future is not probable.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





127







XTL BIOPHARMACEUTICALS
LTD.



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS AS OF DECEMBER 31, 2016



| | NOTE 20: | TAXES ON INCOME (Cont.)
| | -------- | -----------------------



| | d. | Below is the reconciliation between the “theoretical” tax expense, assuming that all the income were taxed at the
regular tax rate applicable to companies in Israel and the taxes recorded in the statements of comprehensive income in the reporting
year:
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                                                                                        |  | Year ended December 31,   |       
|----------------------------------------------------------------------------------------------------------------------- |  | ------------------------- | ------
|                                                                                                                        |  | 2016                      |       
|                                                                                                                        |  | U.S. dollars in thousands |       
|                                                                                                                        |  |                           |       
|Loss before taxes on income, as reported in the statements of comprehensive loss                                        |  |                           | (2,545
|                                                                                                                        |  |                           |       
|Theoretical tax saving on this loss                                                                                     |  |                           | (636  
|Decrease in taxes resulting from different tax rates for foreign subsidiaries                                           |  |                           | -     
|Expenses not deductible for tax purposes                                                                                |  |                           | 32    
|Effect of lower tax rates on capital gains                                                                              |  |                           | -     
|Increase in taxes resulting mainly from taxable losses in the reported year for which no deferred taxes were recognized |  |                           | 604   
|                                                                                                                        |  |                           |       
|Tax benefit                                                                                                             |  |                           | -     



| | e. | Tax assessments:
| | -- | ----------------

The Company filed self-assessments that are deemed
final through the 2012 tax year. Xtepo has not received tax assessments since its incorporation in November 2009.



| | NOTE 21: | TRANSACTIONS AND BALANCES WITH RELATED PARTIES
| | -------- | ----------------------------------------------



“Related party” - as the term is defined
in IAS 24, “Related Party Disclosures” (“IAS 24”).



The Company’s key management personnel who
are included, along with other factors, in the definition of related party, as above in IAS 24, includes directors and members
of the executive committee.



Compensation to key management
personnel:



128







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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER
31, 2016








| | NOTE 21: | TRANSACTIONS AND BALANCES WITH RELATED PARTIES (Cont.)
| | -------- | ------------------------------------------------------



The compensation to key management personnel for
employee services provided to the Company is shown below:



|                                                                       |  | Year ended December 31,   |    
|---------------------------------------------------------------------- |  | ------------------------- | ---
|                                                                       |  | 2016                      |    
|                                                                       |  | U.S. dollars in thousands |    
|                                                                       |  |                           |    
|Salaries, management and consulting fees and other short-term benefits |  |                           | 424
|Share-based payments, net                                              |  |                           | 127
|                                                                       |  |                           |    
|                                                                       |  |                           | 551
|                                                                       |  |                           |    
|Number of persons                                                      |  |                           | 10 



As of December 31, 2016 and 2015, the Company’s
balances with related parties total approximately $61 thousand ($46 thousand out of which were linked to the NIS) and $58 thousand
(of which $37 thousand were linked to the NIS), respectively.



For further information regarding share-based payment
to related parties, see also Note 16 above.



| | NOTE 22: | SEGMENT INFORMATION
| | -------- | -------------------



The Group’s management establishes operating
segments in accordance with reports reviewed by the Chief Operating Decision Maker (“CODM”) and which are used to make
strategic decisions. Given the deconsolidation of InterCure and the classification of related results to discontinued operations,
the Company operates in one operating segment.



| | NOTE 23: | EVENTS AFTER THE REPORTING DATE
| | -------- | -------------------------------



| | a. | On January 17, 2017, the Company's
                                         Board of Directors approved the change which was effective as of February 10, 2017 in
                                         the number of shares underlying the ADSs such that 100 ordinary shares of the Company
                                         will constitute a single ADS, this in order to support the Company’s compliance
                                         with the Nasdaq’s ADS listing conditions.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



All ADS data was adjusted to
reflect the current ADS to ordinary share ratio, meaning 1:100.



| | b. | On
                                         February 17, 2017, the Company entered into Securities Purchase Agreement ("SPA")
                                         with Institutional Investors ("Investors") for the sale of 1,000,000 registered
                                         ADSs for gross proceeds of $2,500 thousand, representing a purchase price of $2.50 per
                                         ADS in a registered direct offering ("Offering"). Additionally, for each ADS
                                         purchased by Investors, the Investors received an unregistered warrant to purchase one
                                         ADS ("Warrant"). The Warrant has an exercise price of $4.10 per ADS, shall
                                         be exercisable six months following the issuance date and will expire five and one-half
                                         years from the issuance date. The closing of the offering took place on February 23,
                                         2017.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



129







XTL BIOPHARMACEUTICALS LTD.



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS AS OF DECEMBER 31, 2016



| | NOTE 23: | EVENTS AFTER THE REPORTING DATE (Cont.)
| | -------- | ---------------------------------------



In addition, the Company entered
into engagement agreement ("Agreement") with an exclusive placement agent ("Agent") pursuant to which at the
closing of each Offering, the Company will compensate the Agent for its service under the Agreement as follows:



| | § | Cash fee equal to 7% of the aggregate gross proceeds raised in each Offering, except that in relation
to any proceeds raised from certain existing shareholders of the Company participating in an Offering and listed in the Agreement
("Existing Shareholders"), the Company shall pay to the Agent a cash fee equal to 3.5% of the aggregate gross proceeds
raised from such Existing Shareholders in each such Offering. In addition, the Company shall pay the Agent a cash management fee
equal to 1% of the aggregate gross proceeds raised in each Offering.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | § | Warrants to purchase ADSs equal to 5% of the aggregate number of warrants to purchase ADSs placed
in each Offering. The Warrant shall have the same terms as the warrants, if any, issued to investors in the applicable Offering.
If no warrants are issued to investors in an Offering, the Warrant shall have a term of five years and an exercise price equal
to 120% of the then market price of the ADSs.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | § | Expense allowance equal to (i) $35 thousand for accountable fees and expenses of HCW (other than
legal) as defined in the Agreement and (ii) the greater of $75 thousand and 1% of the gross proceeds raised in such Offering for
legal counsel fees and expenses.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The direct and incremental
costs (in addition to the aforesaid Agent's compensation) related to the aforementioned Offering under SPA amounted to approximately
$423 thousand.



| | c. | On March 6, 2017, the Company entered into private placement transaction with existing investors
pursuant to which 1,400,000 ADSs have been issued at a purchase price of $2.00 per ADS for total gross consideration of $2,800
thousand. The direct and incremental costs related to the aforesaid transaction amounted to $67 thousand. For each ADS purchased
by investors, the investors will receive an unregistered warrant to purchase one ADS subject to authorized capital increase through
the Company's shareholders meeting. The warrants have a term of five and a half years, an exercise price of $2.30 per ADS and shall
be exercisable on the later of the effectiveness of the authorized share increase or six months following the issuance date. The
closing of the offering has taken place on March 22, 2017.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



130







ITEM 19. EXHIBITS



The following exhibits are filed as part
of this annual report:



|Exhibit No. |  | Description                                                                                                                                                                                                                                
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|            |  |                                                                                                                                                                                                                                            
|3.1         |  | Articles of Association (1)                                                                                                                                                                                                                
|            |  |                                                                                                                                                                                                                                            
|4.1         |  | Form of Share Certificate (including both Hebrew and English translations) (2)                                                                                                                                                             
|            |  |                                                                                                                                                                                                                                            
|4.2         |  | Form of American Depositary Receipt (included in Exhibit 10.1)                                                                                                                                                                             
|            |  |                                                                                                                                                                                                                                            
|10.1        |  | Deposit Agreement, dated as of August 31, 2005, by and between XTL Biopharmaceuticals Ltd., The Bank of New York, as Depositary, and each holder and beneficial owner of American Depositary Shares issued thereunder (1)                  
|            |  |                                                                                                                                                                                                                                            
|10.2        |  | 2001 Share Option Plan dated February 28, 2001 (1)                                                                                                                                                                                         
|            |  |                                                                                                                                                                                                                                            
|10.3        |  | 2011 Share Option Plan dated August 29, 2011 (6)                                                                                                                                                                                           
|            |  |                                                                                                                                                                                                                                            
|10.4        |  | Research and License Agreement Between Yeda Research and Development Company Ltd., Mor Research Applications Ltd., Biogal Ltd. (under its previous name Haverfield Ltd.) and Biogal Advanced Biotechnology Ltd. dated January 7, 2002 (3) †
|            |  |                                                                                                                                                                                                                                            
|10.5        |  | Amendment to Research and License Agreement Between Yeda Research and Development Company Ltd., Mor Research Applications Ltd., Haverfield Ltd. and Biogal Advanced Biotechnology Ltd. effective as of April 1, 2008 (3) †                 
|            |  |                                                                                                                                                                                                                                            
|10.6        |  | Option to License Agreement, dated as of September 1, 2010, between XTL Biopharmaceuticals Ltd. and Yeda Research and Development Company Limited (4)                                                                                      
|            |  |                                                                                                                                                                                                                                            
|10.7        |  | License Agreement dated January 7, 2014, by and between Yeda Research and Development Company Limited and XTL Biopharmaceuticals Ltd (5)                                                                                                   
|            |  |                                                                                                                                                                                                                                            
|10.8        |  | Form of First Amendment to License Agreement by and by and between Yeda Research and Development Company Limited and XTL Biopharmaceuticals Ltd (6)                                                                                        
|            |  |                                                                                                                                                                                                                                            
|10.9        |  | Form of Employment Agreement dated September 11, 2013 between XTL Biopharmaceuticals Ltd. and Joshua Levine (6)                                                                                                                            
|            |  |                                                                                                                                                                                                                                            
|10.10       |  | Form of Employment Agreement dated January 9, 2014 between XTL Biopharmaceuticals Ltd. and David Kestenbaum (6)                                                                                                                            
|            |  |                                                                                                                                                                                                                                            
|10.11       |  | Form of Consulting Agreement dated January 1, 2015 between XTL Biopharmaceuticals Ltd. and Schapiro Education Ltd. (6)                                                                                                                     
|            |  |                                                                                                                                                                                                                                            
|10.12       |  | Letter Agreement between Rodman & Renshaw, a unit of H.C. Wainwright & Co., LLC, and XTL Biopharmaceuticals Ltd. dated November 7, 2016 (7)                                                                                                
|            |  |                                                                                                                                                                                                                                            
|10.13       |  | Amendment to Letter Agreement between Rodman & Renshaw, a unit of H.C. Wainwright & Co., LLC, and XTL Biopharmaceuticals Ltd. dated February 16, 2017 (7)                                                                                  
|            |  |                                                                                                                                                                                                                                            
|10.14       |  | Form of Securities Purchase Agreement (7)                                                                                                                                                                                                  
|            |  |                                                                                                                                                                                                                                            
|10.15       |  | Form of Warrant (7)                                                                                                                                                                                                                        



131







|21.1 |  | List of Subsidiaries (6)                                                                                                                                                                   
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |  |                                                                                                                                                                                            
|23.1 |  | Consent of Kesselman & Kesselman, a member firm of PricewaterhouseCoopers International Ltd *                                                                                              
|     |  |                                                                                                                                                                                            
|23.2 |  | Consent of BDO Ziv Haft Consulting and Management Ltd.*                                                                                                                                    
|     |  |                                                                                                                                                                                            
|31.1 |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated April 25, 2013.*                
|     |  |                                                                                                                                                                                            
|31.2 |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated April 25, 2013.*                
|     |  |                                                                                                                                                                                            
|32.1 |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 USC. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated April 25, 2013*
|     |  |                                                                                                                                                                                            
|99.1 |  | Consolidated Financial Statements of Proteologics Ltd. for the nine months ended September 30, 2013 (5)                                                                                    



| | * | Filed herewith.
| | - | ---------------

| | † | Certain confidential information contained in this exhibit was omitted.
| | - | -----------------------------------------------------------------------



| | (1) | Incorporated by reference from the registration statement on F-6 filed with the Securities and Exchange Commission on November
28, 2007, as it may be amended or restated.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Incorporated by reference from the annual report on Form 20-F filed by XTL Biopharmaceuticals Ltd. with the Securities and
Exchange Commission on March 23, 2007.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Incorporated by reference from the annual report on Form 20-F filed by XTL Biopharmaceuticals Ltd. with the Securities and
Exchange Commission on April 6, 2009.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | Incorporated by reference from the annual report on Form 20-F filed by XTL Biopharmaceuticals Ltd. with the Securities and
Exchange Commission on May 30, 2011.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (5) | Incorporated by reference from the annual report on Form 20-F filed by XTL Biopharmaceuticals Ltd. with the Securities and
Exchange Commission on April 2, 2014.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (6) | Incorporated by reference from the registration statement on Form F-1 filed by XTL Biopharmaceuticals Ltd. with the Securities
and Exchange Commission on December 31, 2015.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (7) | Incorporated by reference from the current report on Form 6-K filed by XTL Biopharmaceuticals Ltd. with the Securities and
Exchange Commission on February 22, 2017.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



132







SIGNATURES



The registrant hereby certifies that it
meets all the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this registration
statement on its behalf.



|                     | XTL BIOPHARMACEUTICALS LTD.
|-------------------- | ---------------------------
|                     | (Registrant)               
|                     |                            
|Date: March 30, 2017 | Signature:                 
|                     |                            
|                     |                            



133