Document:

Warrant
To Purchase American Depositary Receipts

 

Warrant No.: _______________

Number of American Depositary Receipts:  _______________

Date of Issuance:  ____________
(“Issuance Date”)

 

XTL Biopharmaceuticals
Ltd., an Israeli company (the “Company”), hereby certifies that, for good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, _____________, the registered holder hereof or its permitted assigns (the “Holder”),
is entitled, subject to the terms set forth below, to purchase from the Company, at the Exercise Price (as defined below) then
in effect, pursuant to this Warrant to Purchase American Depositary Receipts (“ADRs”) (including any Warrants to Purchase
ADRs issued in exchange, transfer or replacement hereof, the “Warrant”), at any time or times on or after the
Issuance Date, but not after 11:59 p.m., New York time, on the Expiration Date (as defined below), up to ______________ ADRs (the
“Warrant ADRs”).  For purposes of clarification, each ADR represents twenty ordinary shares, par value
NIS 0.01 per share (the “Ordinary Shares”), of the Company.  Except as otherwise defined herein, capitalized
terms in this Warrant shall have the meanings set forth in Section 17.  This Warrant is one of a series of
similar warrants to purchase ADRs issued pursuant to (i) that certain Warrant Purchase Agreement (the “Warrant Purchase
Agreement”) dated as of ______________ (the “Subscription Date”), and (ii) the Company’s Registration
Statement on Form F-3 (File Number 333-194338) (the “Registration Statement”) .

 

1.  EXERCISE
OF WARRANT.

 

 (a)  Mechanics
of Exercise.  Subject to the terms and conditions hereof, this Warrant may be exercised by the Holder on any day
on or after the Issuance Date, in whole or in part, by delivery of a written notice, in the form attached hereto as Exhibit
A (the “Exercise Notice”), of the Holder’s election to exercise this Warrant.  Notwithstanding
anything herein to the contrary, the Holder shall not be required to physically surrender this Warrant to the Company until the
Holder has purchased all of the Warrant ADRs available hereunder and the Warrant has been exercised in full, in which case, the
Holder shall surrender this Warrant to the Company for cancellation within three (3) Trading Days of the date the final Notice
of Exercise is delivered to the Company. Partial exercises of this Warrant resulting in purchases of a portion of the total number
of Warrant ADRs available hereunder shall have the effect of lowering the outstanding number of Warrant ADRs purchasable hereunder
in an amount equal to the applicable number of Warrant ADRs purchased.  The Holder and the Company shall maintain records
showing the number of Warrant ADRs purchased and the date of such purchases.  The Holder and any assignee, by acceptance
of this Warrant, acknowledge and agree that, by reason of the provisions of this paragraph, following the purchase of a portion
of the Warrant ADRs hereunder, the number of Warrant ADRs available for purchase hereunder at any given time may be less than the
amount stated on the face hereof.  On or before the first (1st) Business Day following the date on which the Company
has received the Exercise Notice, the Company shall transmit by facsimile an acknowledgment of confirmation of receipt of the Exercise
Notice to the Holder and The Bank of New York Mellon, the Depositary (“Depositary”) for the ADRs.  On
or before the third (3rd) Business Day following the date on which the Company has received the Exercise Notice (the “Share
Delivery Date”), the Company shall (X) issue and deposit with the Depositary a number of Ordinary Shares that will
be represented by the number of Warrant ADRs to which the Holder is entitled in respect of that exercise, (Y) pay the fee of the
Depositary for the issuance of that number of ADRs and (Z) instruct the Depositary to execute and deliver to that Holder an American
Depositary Receipt (“ADR”) evidencing that number of Warrant ADRs.  No fractional ADRs are to be issued
upon the exercise of this Warrant.  If any fractional share of an ADR would, except for the provisions of the prior sentence,
be deliverable upon such exercise, the Company, in lieu of delivering such fractional share, shall pay to the exercising Holder
an amount in cash equal to the Closing Sale Price on the Principal Market of such fractional ADR on the date of exercise.  The
Company shall pay any and all taxes which may be payable with respect to the issuance and delivery of Warrant ADRs upon exercise
of this Warrant.

  

(b)  Exercise
Price.  For purposes of this Warrant, “Exercise Price” means $______, subject to adjustment as
provided herein.

 

    	 

    	 

    

 

(c)   Payment
of Exercise Price.  The Company shall promptly, and in no case later than the Business Day immediately following
such receipt, confirm receipt of an Exercise Notice via facsimile to the number specified in such Exercise Notice.  Within
two (2) Trading Days of the date of the Exercise Notice, the Holder shall make payment to the Company of an amount equal to
the applicable Exercise Price multiplied by the number of Warrant ADRs as to which this Warrant is being exercised (the “Aggregate
Exercise Price”) in cash or by wire transfer of immediately available funds.

 

(d)  Cashless
Exercise. Notwithstanding anything contained herein to the contrary, if at any time prior to the Expiration Date, the Registration
Statement covering the Warrant ADRs that are the subject of the Exercise Notice (the “Unavailable Warrant ADRs”),
or an exemption from registration, is not available for the resale of such Unavailable Warrant ADRs as of the
date the Company receives an Exercise Notice with respect to such Unavailable Warrant ADRs, the Holder may, in its sole discretion,
exercise this Warrant in whole or in part and, in lieu of making the cash payment otherwise contemplated to be made to the Company
upon such exercise in payment of the Aggregate Exercise Price pursuant to paragraph (d) above, elect instead to receive upon such
exercise the “Net Number” of ADRs determined according to the following formula (a “Cashless
Exercise”):

 

	 	X = Y [(A-B)/A]
	where:	 
	 	X = the Net Number of Warrant ADRs to be issued to the Holder.
	 	 
	 	Y = the number of Warrant ADRs with respect to which this Warrant is being exercised.
	 	 
	 	A = the Closing Sale Price of the ADRs on the Principal Market immediately prior to (but no including) the Exercise Date.
	 	 
	 	B = the Exercise Price.

 

For the avoidance of doubt, if the
Registration Statement is available at the time this Warrant is exercised, the Holder shall have no rights under this paragraph
(e) to cashless exercise and the Warrant shall only be exercisable for the Exercise Price payable in cash.

 

(e)      Disputes.  In
the case of a dispute as to the determination of the Exercise Price or the arithmetic calculation of the Warrant ADRs, the Company
shall promptly issue to the Holder the number of Warrant ADRs that are not disputed.

 

2.  ADJUSTMENT
OF EXERCISE PRICE AND NUMBER OF WARRANT SHARES.  The Exercise Price and the number of Warrant ADRs shall be adjusted
from time to time as follows:

 

(a)      Adjustment
upon Subdivision or Combination of Ordinary Shares or ADRs.  If the Company at any time on or after the Subscription
Date subdivides (by any stock split, stock dividend, recapitalization, reorganization, scheme, arrangement or otherwise) one or
more classes of its outstanding Ordinary Shares or ADRs into a greater number of shares, the Exercise Price in effect immediately
prior to such subdivision will be proportionately reduced and the number of Warrant ADRs will be proportionately increased.  If
the Company at any time on or after the Subscription Date combines (by any stock split, stock dividend, recapitalization, reorganization,
scheme, arrangement or otherwise) one or more classes of its outstanding Ordinary Shares or ADRs into a smaller number of shares,
the Exercise Price in effect immediately prior to such combination will be proportionately increased and the number of Warrant
ADRs will be proportionately decreased.  Any adjustment under this Section 2(a) shall become effective at the close of
business on the date the subdivision or combination becomes effective. 

 

(b)  Other
Events.  If any event occurs of the type contemplated by the provisions of this Section 2 but not expressly provided
for by such provisions, then the Company’s Board of Directors will make an appropriate adjustment in the Exercise Price and
the number of Warrant ADRs so as to protect the rights of the Holder; provided that no such adjustment pursuant
to this Section 2(b) will increase the Exercise Price or decrease the number of Warrant ADRs as otherwise determined pursuant to
this Section 2.

 

    	 

    	 

    

 

3.  RIGHTS
UPON DISTRIBUTION OF ASSETS.  If the Company shall declare or make any dividend or other distribution of its assets
(or rights to acquire its assets) to holders of Ordinary Shares or ADRs, by way of return of capital or otherwise (including, without
limitation, any distribution of cash, stock or other securities, property or options by way of a dividend, stock split, spin off,
subdivision, reclassification, corporate rearrangement, scheme of arrangement or other similar transaction) (a “Distribution”),
at any time after the issuance of this Warrant, then, in each such case:

 

(a)  any
Exercise Price in effect immediately prior to the close of business on the record date fixed for the determination of holders of
Ordinary Shares entitled to receive the Distribution shall be reduced, effective as of the close of business on such record date,
to a price determined by multiplying such Exercise Price by a fraction of which (i) the numerator shall be the Closing Bid Price
of the Ordinary Shares or ADRs, as applicable, on the Trading Day immediately preceding such record date minus the value of the
Distribution (as determined in good faith by the Company’s Board of Directors) applicable to one Ordinary Share or ADR, as
applicable, and (ii) the denominator shall be the Closing Bid Price of the Ordinary Shares or ADRs, as applicable on the Trading
Day immediately preceding such record date; and

 

(b)  the
number of Warrant ADRs shall be increased or decreased to a number equal to the number of ADRs obtainable immediately prior to
the close of business on the record date fixed for the determination of holders of Ordinary Shares or ADRs, as applicable, entitled
to receive the Distribution multiplied by the reciprocal of the fraction set forth in the immediately preceding paragraph (a); provided that
in the event that the Distribution is of shares of common stock (“Other Shares of Common Stock”) of a company
whose common shares are traded on a national securities exchange or a national automated quotation system, then the Holder may
elect to receive a warrant to purchase Other Shares of Common Stock in lieu of an adjustment in the number of Warrant ADRs, the
terms of which shall be identical to those of this Warrant, except that such warrant shall be exercisable into the number of shares
of Other Shares of Common Stock that would have been payable to the Holder pursuant to the Distribution had the Holder exercised
this Warrant immediately prior to such record date and with an aggregate exercise price equal to the product of the amount by which
the exercise price of this Warrant was decreased with respect to the Distribution pursuant to the terms of the immediately preceding
paragraph (a) and the number of Warrant ADRs calculated in accordance with the first part of this paragraph (b).

 

4.  PURCHASE
RIGHTS; FUNDAMENTAL TRANSACTIONS.

 

(a)   Purchase
Rights.  In addition to any adjustments pursuant to Section 2 above, if at any time the Company grants, issues or
sells any rights to purchase stock, warrants, securities or other property pro rata to the record holders of Ordinary Shares or
ADRs (the “Purchase Rights”), then the Holder will be entitled to acquire, upon the terms applicable to such
Purchase Rights, the aggregate Purchase Rights which the Holder could have acquired if the Holder had held the number of Ordinary
Shares or ADRs acquirable upon complete exercise of this Warrant (without regard to any limitations on the exercise of this Warrant)
immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such
record is taken, the date as of which the record holders of Ordinary Shares or ADRs are to be determined for the grant, issue or
sale of such Purchase Rights.

 

(b)  In
connection with any Fundamental Transaction, the Company shall make appropriate provision so that this Warrant shall thereafter
be exercisable for shares of the Successor Entity based upon the conversion ratio or other consideration payable in the Fundamental
Transaction. The provisions of this Section shall apply similarly and equally to successive Fundamental Transactions and shall
be applied without regard to any limitations on the exercise of this Warrant.

 

In the event that
any person becomes a Parent Entity of the Company, such person shall assume all of the obligations of the Company under this Warrant
with the same effect as if such person had been named as the Company herein.

 

    	 

    	 

    

 

5.  NONCIRCUMVENTION.  The
Company hereby covenants and agrees that the Company will not, by amendment of its Certificate of Incorporation, Bylaws or through
any reorganization, transfer of assets, consolidation, merger, scheme of arrangement, dissolution, issue or sale of securities,
or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, and will
at all times in good faith carry out all the provisions of this Warrant and take all action as may be required to protect the rights
of the Holder.  Without limiting the generality of the foregoing, the Company (i) shall not increase the par value
of any Ordinary Shares underlying the ADRs receivable upon the exercise of this Warrant above the Exercise Price then in effect,
(ii) shall take all such actions as may be necessary or appropriate in order that the Company may validly and legally issue
fully paid and nonassessable ADRs upon the exercise of this Warrant, and (iii) shall, so long as this Warrant is outstanding, take
all action necessary to reserve and keep available out of its authorized and unissued Ordinary Shares, solely for the purpose of
effecting the exercise of this Warrant, 100% of the number of Ordinary Shares issuable upon exercise of this Warrant then outstanding
(without regard to any limitations on exercise).

 

6.  WARRANT
HOLDER NOT DEEMED A SHAREHOLDER.  Except as otherwise specifically provided herein, the Holder, solely in such Person’s
capacity as a holder of this Warrant, shall not be entitled to vote or receive dividends or be deemed the holder of share capital
of the Company or a holder of ADRs for any purpose, nor shall anything contained in this Warrant be construed to confer upon the
Holder, solely in such Person’s capacity as the Holder of this Warrant, any of the rights of a stockholder of the Company
or any right to vote, give or withhold consent to any corporate action (whether any reorganization, issue of stock, reclassification
of stock, consolidation, merger, conveyance or otherwise), receive notice of meetings, receive dividends or subscription rights,
or otherwise, prior to the issuance to the Holder of the Warrant ADRs which such Person is then entitled to receive upon the due
exercise of this Warrant.  In addition, nothing contained in this Warrant shall be construed as imposing any liabilities
on the Holder to purchase any securities (upon exercise of this Warrant or otherwise) or as a shareholder of the Company, whether
such liabilities are asserted by the Company or by creditors of the Company.

 

7.  REISSUANCE
OF WARRANTS.

 

(a)  Transfer
of Warrant.  If this Warrant is to be transferred, the Holder shall surrender this Warrant to the Company, whereupon
the Company will forthwith issue and deliver upon the order of the Holder a new Warrant (in accordance with Section 7(d)), registered
as the Holder may request, representing the right to purchase the number of Warrant ADRs being transferred by the Holder and, if
less then the total number of Warrant ADRs then underlying this Warrant is being transferred, a new Warrant (in accordance with
Section 7(d)) to the Holder representing the right to purchase the number of Warrant ADRs not being transferred.

 

(b)  Lost,
Stolen or Mutilated Warrant.  Upon receipt by the Company of evidence reasonably satisfactory to the Company of the
loss, theft, destruction or mutilation of this Warrant, and, in the case of loss, theft or destruction, of any indemnification
undertaking by the Holder to the Company in customary form and, in the case of mutilation, upon surrender and cancellation of this
Warrant, the Company shall execute and deliver to the Holder a new Warrant (in accordance with Section 7(d)) representing the right
to purchase the Warrant ADRs then underlying this Warrant.

 

(c)  Exchangeable
for Multiple Warrants.  This Warrant is exchangeable, upon the surrender hereof by the Holder at the principal office
of the Company, for a new Warrant or Warrants (in accordance with Section 7(d)) representing in the aggregate the right to purchase
the number of Warrant ADRs then underlying this Warrant, and each such new Warrant will represent the right to purchase such portion
of such Warrant ADRs as is designated by the Holder at the time of such surrender; provided, however, that no Warrants for fractional
ADRs will be given.

 

(d)  Issuance
of New Warrants.  Whenever the Company is required to issue a new Warrant pursuant to the terms of this Warrant,
such new Warrant (i) shall be of like tenor with this Warrant, (ii) shall represent, as indicated on the face of such new Warrant,
the right to purchase the Warrant ADRs then underlying this Warrant (or in the case of a new Warrant being issued pursuant to Section
7(a) or Section 7(c), the Warrant ADRs designated by the Holder which, when added to the number of ADRs underlying the other new
Warrants issued in connection with such issuance, does not exceed the number of Warrant ADRs then underlying this Warrant), (iii)
shall have an issuance date, as indicated on the face of such new Warrant which is the same as the Issuance Date, and (iv) shall
have the same rights and conditions as this Warrant. 

 

    	 

    	 

    

 

8.  NOTICES.  Whenever
notice is required to be given under this Warrant, unless otherwise provided herein, such notice shall be given in accordance with
the notice provisions of that certain Warrant Purchase Agreement.  The Company shall provide the Holder with prompt written
notice of all actions taken pursuant to this Warrant, including in reasonable detail a description of such action and the reason
therefore.

 

9. AMENDMENT
AND WAIVER.  Except as otherwise provided herein, the provisions of this Warrant may be amended and the Company may
take any action herein prohibited, or omit to perform any act herein required to be performed by it, only if the Company has obtained
the written consent of the Holder.

 

10. GOVERNING
LAW.  This Warrant shall be governed by and construed and enforced in accordance with, and all questions concerning
the construction, validity, interpretation and performance of this Warrant shall be governed by, the internal laws of the State
of New York, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of New York
or any other jurisdictions) that would cause the application of the laws of any jurisdictions other than the State of New York.

 

11. CONSTRUCTION;
HEADINGS.  This Warrant shall be deemed to be jointly drafted by the Company and the Holder and shall not be construed
against any person as the drafter hereof.  The headings of this Warrant are for convenience of reference and shall not
form part of, or affect the interpretation of, this Warrant.

 

12. REMEDIES,
OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF.  The remedies provided in this Warrant shall be cumulative and
in addition to all other remedies available under this Warrant, at law or in equity (including a decree of specific performance
and/or other injunctive relief), and nothing herein shall limit the right of the Holder to pursue actual damages for any failure
by the Company to comply with the terms of this Warrant.

 

13. TRANSFER.  This
Warrant may be offered for sale, sold, transferred or assigned without the consent of the Company.

 

14. WARRANT
AGENT.  The Company shall serve as warrant agent under this Warrant. Upon 30 days’ notice to the Holder,
the Company may appoint a new warrant agent. Any corporation into which the Company or any new warrant agent may be merged or any
corporation resulting from any consolidation to which the Company or any new warrant agent shall be a party or any corporation
to which the Company or any new warrant agent transfers substantially all of its corporate trust or stockholder services business
shall be a successor warrant agent under this Warrant without any further act. Any such successor warrant agent shall promptly
cause notice of its succession as warrant agent to be mailed (by first class mail, postage prepaid) to the Holder at the Holder’s
last address as shown on the Warrant Register.

 

15. RESTRICTIONS.  The
Holder acknowledges that the Warrant ADRs acquired upon the exercise of this Warrant, if not registered, and if not acquired by
cashless exercise, will have restrictions upon resale imposed by state and federal securities laws.

 

16. SEVERABILITY. Wherever
possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective
to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions
of this Warrant.

 

17. CERTAIN
DEFINITIONS.  For purposes of this Warrant, the following terms shall have the following meanings:

 

(a)“Bloomberg”
means Bloomberg Financial Markets.

  

(b)  “Business
Day” means any day on which both the Principal Market and the Tel Aviv Stock Exchange are open for trading during their
full customary business hours.

 

    	 

    	 

    

 

(c)  “Closing
Bid Price” and “Closing Sale Price” means, for any security as of any date, the last closing bid price
and last closing trade price, respectively, for such security on the Principal Market, as reported by Bloomberg, or, if the Principal
Market begins to operate on an extended hours basis and does not designate the closing bid price or the closing trade price, as
the case may be, then the last bid price or the last trade price, respectively, of such security prior to 4:00 p.m., New York time,
as reported by Bloomberg, or, if the Principal Market is not the principal securities exchange or trading market for such security,
the last closing bid price or last trade price, respectively, of such security on the principal securities exchange or trading
market where such security is listed or traded as reported by Bloomberg, or if the foregoing do not apply, the last closing bid
price or last trade price, respectively, of such security in the over-the-counter market on the electronic bulletin board for such
security as reported by Bloomberg, or, if no closing bid price or last trade price, respectively, is reported for such security
by Bloomberg, the average of the bid prices, or the ask prices, respectively, of any market makers for such security as reported
in the “pink sheets” by Pink Sheets LLC (formerly the National Quotation Bureau, Inc.).  If the Closing Bid
Price or the Closing Sale Price cannot be calculated for a security on a particular date on any of the foregoing bases, the Closing
Bid Price or the Closing Sale Price, as the case may be, of such security on such date shall be the fair market value as mutually
determined by the Company and the Holder.  All such determinations to be appropriately adjusted for any stock dividend,
stock split, stock combination or other similar transaction during the applicable calculation period.

 

(d)  “Eligible
Market” means the Principal Market, The New York Stock Exchange, Inc. or the NYSE MKT.

 

(e)  “Expiration
Date” means the date _____________ after the Issuance Date or, if such date falls on a day other than a Business Day
or on which trading does not take place on the Principal Market (a “Holiday”), the next date that is not a Holiday.

 

(f)  “Fundamental
Transaction” means that the Company shall, directly or indirectly, in one or more related transactions, (i) consolidate
or merge with or into (whether or not the Company is the surviving corporation) another Person, or (ii) sell, assign, transfer,
convey or otherwise dispose of all or substantially all of the properties or assets of the Company to another Person, or (iii)
allow another Person to make a purchase, tender or exchange offer that is accepted by the holders of more than the 50% of the outstanding
Ordinary Shares (not including any Ordinary Shares held by the Person or Persons making or party to, or associated or affiliated
with the Persons making or party to, such purchase, tender or exchange offer), or (iv) consummate a stock purchase agreement or
other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement)
with another Person whereby such other Person acquires more than the 50% of the outstanding Ordinary Shares (not including any
Ordinary Shares held by the other Person or other Persons making or party to, or associated or affiliated with the other Persons
making or party to, such stock purchase agreement or other business combination), (v) reorganize, recapitalize or reclassify its
Ordinary Shares, or (vi) any “person” or “group” (as these terms are used for purposes of Sections 13(d)
and 14(d) of the Exchange Act) is or shall become the “beneficial owner” (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of 50% of the aggregate ordinary voting power represented by issued and outstanding Ordinary Shares.

 

(g)  “Ordinary
Shares” means (i) the Company’s Ordinary Shares, par value NIS 0.01 per share, and (ii) any share capital
into which such Ordinary Shares shall have been changed or any share capital resulting from a reclassification of such Ordinary
Shares.

 

(h)  “Parent
Entity” of a Person means an entity that, directly or indirectly, controls the applicable Person and whose common stock
or equivalent equity security is quoted or listed on an Eligible Market, or, if there is more than one such Person or Parent Entity,
the Person or Parent Entity with the largest public market capitalization as of the date of consummation of the Fundamental Transaction.

 

(i)  “Person”
means an individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization,
any other entity and a government or any department or agency thereof.

  

(j)  “Principal
Market” means The Nasdaq Capital Market.

 

(k)  “Securities
Act” means the Securities Act of 1933, as amended.

 

    	 

    	 

    

 

(l)  “Successor
Entity” means the Person (or, if so elected by the Holder, the Parent Entity) formed by, resulting from or surviving
any Fundamental Transaction or the Person (or, if so elected by the Holder, the Parent Entity) with which such Fundamental Transaction
shall have been entered into.

 

(m)  “Trading
Day” means any day on which the ADRs are traded on the Principal Market, or, if the Principal Market is not the principal
trading market for the ADRs, then on the principal securities exchange or securities market on which the ADRs are then traded;
provided that “Trading Day” shall not include any day on which the ADRs are scheduled to trade on such exchange or
market for less than 4.5 hours or any day that the ADRs are suspended from trading during the final hour of trading on such exchange
or market (or if such exchange or market does not designate in advance the closing time of trading on such exchange or market,
then during the hour ending at 4:00 p.m., New York time).

 

[Signature Page
Follows]

 

 

    	 

    	 

    

  

IN WITNESS WHEREOF, the
Company has caused this Warrant to Purchase American Depositary Receipts to be duly executed as of the Issuance Date set out above.

 

	 	XTL BIOPHARMACEUTICALS, LTD.
	 	 
	 	By:	 
	 	Name:
	 	Title:

 

    	 

    	 

    

  

EXHIBIT A

 

EXERCISE NOTICE

TO BE EXECUTED
BY THE REGISTERED HOLDER TO EXERCISE THIS

WARRANT TO PURCHASE
AMERICAN DEPOSITARY RECEIPTS

 

XTL BIOPHARMACEUTICALS,
LTD.

 

The undersigned holder hereby exercises
the right to purchase _________________ American Depositary Receipts (“Warrant ADRs”) of XTL Biopharmaceuticals,
Ltd., an Israeli company (the “Company”), evidenced by the attached Warrant to American Depositary Receipts
(the “Warrant”).  Capitalized terms used herein and not otherwise defined shall have the respective
meanings set forth in the Warrant.

 

1.  Form of Exercise Price.  The
Holder’s payment of the Exercise Price shall be made as:

 

	 	____________	a “Cash Exercise” with respect to _________________ Warrant ADRs; and/or

 

	 	____________	a “Cashless Exercise” with respect to _______________ Warrant ADRs (only if permitted pursuant to Section 1(e) of the Warrant).

 

2.  Payment of Exercise
Price.  In the event that the Holder conducted a Cash Exercise with respect to some or all of the Warrant ADRs to
be issued pursuant hereto, the holder shall pay the Aggregate Exercise Price in the sum of $___________________ to the Company
in accordance with the terms of the Warrant.

 

3.  Delivery of Warrant
ADRs.  The Company shall deliver to the Holder __________ Warrant ADRs in accordance with the terms of the Warrant.

 

4.  Confirmation.  Please
send confirmation of receipt of this Exercise Notice to the following facsimile number: ______________________.

 

Date: _______________ __, ______

 

Name of Registered Holder

 

	By:	 
	Name:	 
	Title:	 

 

    	 

    	 

    

  

ACKNOWLEDGMENT

 

The Company hereby acknowledges this
Exercise Notice and hereby directs The Bank of New York Mellon to issue the above indicated number of American Depositary Receipts
in accordance with the Depositary Instructions dated _____, 2014 from the Company and acknowledged and agreed to by The Bank of
New York Mellon Trust Company.

 

XTL BIOPHARMACEUTICALS, LTD.

 

	By:	    	 
	Name:		 
	Title:INTERCURE LTD.

 

CONSOLIDATED FINANCIAL STATEMENTS 

 

AS OF DECEMBER 31, 2011

 

INDEX

 

	 	 	Page
	 	 	 
	Independent Auditors' Report to the Shareholders	 	2
	 	 	 
	Consolidated Financial Statements:	 	 
	 	 	 
	Consolidated Statements of Financial Position  	 	3
	 	 	 
	Consolidated Statements of Comprehensive Loss	 	4
	 	 	 
	Consolidated Statements of Shareholders’ Deficiency	 	5
	 	 	 
	Consolidated Statements of Cash Flows 	 	6 - 7
	 	 	 
	Notes to the Consolidated Financial Statements	 	8 - 80

 

- - -
- - - - - - - -

 

    	 

    	 

    

 

 

Auditors' report to the shareholders
of InterCure Ltd.

 

We have audited the
accompanying consolidated statements of financial position of InterCure Ltd. and its subsidiaries ("the Company") as
of December 31, 2011 and 2010, and the related consolidated statements of comprehensive loss, changes in shareholders’ deficiency
and cash flows for each of the three years in the period ended December 31, 2011. These consolidated 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 auditing standards generally accepted in the 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 consideration of internal control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company's internal
control over financial reporting. Accordingly, we express no such opinion. An audit includes also 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 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
financial statements referred to above present fairly, in all material respects, the financial position of the Company and its
subsidiaries as of December 31, 2011 and 2010, and the results of their operations, changes in shareholders’ deficiency
and cash flows for each of the three years in the period ended December 31, 2011, in conformity with International Financial Reporting
Standards (IFRS).

 

Without qualifying
our opinion, we draw attention to Note 1e to the Company's consolidated financial statements as of December 31, 2011
which reflect a deficit of $ 13,589 thousand, losses of $ 1,787 thousand and negative cash flows from operating activities
of $ 226 thousand for 2011. These factors raise substantial doubt about the Company's ability to continue as a going concern.
The Company's ability to continue as a going concern is contingent on obtaining external financial resources and/or reaching a
refinancing agreement with the holders of the Company's debentures. The financial statements do not include any adjustments to
the carrying amounts and classifications of assets and liabilities that might result if the Company was unable to continue as a
going concern.

 

Brightman Almagor Zohar
& Co.

Certified Public Accountants

 

Tel Aviv, Israel

March 28, 2012

 

 

    	 

    	 

    

 

INTERCURE LTD.

 

	CONSOLIDATED STATEMENTS OF FINANCIAL POSITION  

 

	 	 	 	 	December 31,	 
	 	 	 	 	2011	 	 	2010	 
	 	 	Note	 	US dollars in thousands	 
	ASSETS	 	 	 		 	 	 		 	 
	 	 	 	 	 	 	 	 	 	 	 
	CURRENT ASSETS:	 	 	 	 	 	 	 	 	 	 
	Cash and cash equivalents	 	5a	 	 	306	 	 	 	245	 
	Short-term deposits	 	5b	 	 	9	 	 	 	100	 
	Trade receivables	 	5c	 	 	220	 	 	 	466	 
	Other accounts receivable	 	5d	 	 	79	 	 	 	36	 
	Inventories	 	5e	 	 	77	 	 	 	316	 
	 	 	 	 	 	 	 	 	 	 	 
	Total current assets	 	 	 	 	691	 	 	 	1,163	 
	 	 	 	 	 	 	 	 	 	 	 
	NON-CURRENT ASSETS:	 	 	 	 	 	 	 	 	 	 
	Prepaid expenses and long-term deposits	 	 	 	 	13	 	 	 	13	 
	Property, plant and equipment, net	 	7	 	 	63	 	 	 	141	 
	 	 	 	 	 	 	 	 	 	 	 
	Total non-current assets	 	 	 	 	76	 	 	 	154	 
	 	 	 	 	 	 	 	 	 	 	 
	Total assets	 	 	 	 	767	 	 	 	1,317	 
	 	 	 	 	 	 	 	 	 	 	 
	LIABILITIES AND DEFICIT	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 
	CURRENT LIABILITIES:	 	 	 	 	 	 	 	 	 	 
	Short-term loan	 	8a	 	 	300	 	 	 	500	 
	Trade payables	 	8b	 	 	787	 	 	 	982	 
	Other accounts payable	 	8c	 	 	2,926	 	 	 	2,046	 
	Convertible debentures	 	9	 	 	10,291	 	 	 	9,733	 
	 	 	 	 	 	 	 	 	 	 	 
	Total current liabilities	 	 	 	 	14,304	 	 	 	13,261	 
	 	 	 	 	 	 	 	 	 	 	 
	NON-CURRENT LIABILITIES:	 	 	 	 	 	 	 	 	 	 
	Employee benefit liabilities	 	10	 	 	52	 	 	 	89	 
	Liability for options	 	 	 	 	-	 	 	 	*)   -	 
	Financial liabilities for conversion component	 	9	 	 	*)   -	 	 	 	*)   -	 
	 	 	 	 	 	 	 	 	 	 	 
	Total non-current liabilities	 	 	 	 	52	 	 	 	89	 
	 	 	 	 	 	 	 	 	 	 	 
	SHAREHOLDERS’ DEFICIENCY:	 	 	 	 	 	 	 	 	 	 
	Ordinary share capital	 	13	 	 	60	 	 	 	60	 
	Additional paid in capital	 	 	 	 	28,346	 	 	 	27,514	 
	Payments on account of shares	 	 	 	 	400	 	 	 	-	 
	Capital reserve for share-based payment	 	14	 	 	723	 	 	 	1,724	 
	Equity component of the Company's compound financial instruments	 	 	 	 	765	 	 	 	765	 
	Accumulated deficit	 	 	 	 	(43,883	)	 	 	(42,096	)
	 	 	 	 	 	 	 	 	 	 	 
	Total shareholders’ deficiency	 	 	 	 	(13,589	)	 	 	(12,033	)
	 	 	 	 	 	 	 	 	 	 	 
	Total liabilities and shareholders’ deficiency	 	 	 	 	767	 	 	 	1,317	 

 

		*)	Less than $ 1 thousand.

 

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

 

	March 28, 2012	 	 	 	 	 	 
	Date of approval of the financial statements	 	
        Daniel Plotkin

        Chairman of the Board
	 	
        Erez Gavish

        Chief Executive Officer
	 	
        Uri Ben-Or

        Chief Financial Officer

 

    	- 3 -

    	 

    

 

INTERCURE LTD.

 

	CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

 

	 	 	 	 	Year ended December 31,	 
	 	 	 	 	2011	 	 	2010	 	 	2009	 
	 	 	Note	 	US dollars in thousands	 
	 	 	 	 	 	 	 	 	 	 	 	 
	Revenues from sales	 	 	 		3,171	 	 		3,728	 	 		4,263	 
	Cost of sales	 	15a	 	 	(760	)	 	 	(882	)	 	 	(1,344	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Gross profit	 	 	 	 	2,411	 	 	 	2,846	 	 	 	2,919	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Research and development expenses	 	15b	 	 	(222	)	 	 	(290	)	 	 	(423	)
	Selling and marketing expenses	 	15c	 	 	(1,806	)	 	 	(2,363	)	 	 	(3,924	)
	General and administrative expenses	 	15d	 	 	(852	)	 	 	(1,603	)	 	 	(1,561	)
	Other income (expenses)	 	 	 	 	(5	)	 	 	-	 	 	 	18	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Operating loss	 	 	 	 	(474	)	 	 	(1,410	)	 	 	(2,971	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Finance income	 	16	 	 	576	 	 	 	1	 	 	 	48	 
	Finance expenses	 	17	 	 	(1,878	)	 	 	(2,552	)	 	 	(1,661	)
	Remeasurement of derivative financial liabilities	 	 	 	 	-	 	 	 	433	 	 	 	(87	)
	Gain from early redemption of debentures	 	 	 	 	-	 	 	 	-	 	 	 	282	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Total finance expenses, net	 	 	 	 	(1,302	)	 	 	(2,118	)	 	 	(1,418	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Loss before taxes on income	 	 	 	 	(1,776	)	 	 	(3,528	)	 	 	(4,389	)
	Taxes on income	 	11	 	 	(11	)	 	 	(13	)	 	 	(7	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Loss for the year attributable to stockholders of the Company	 	 	 	 	(1,787	)	 	 	(3,541	)	 	 	(4,396	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Total comprehensive loss for the period	 	 	 	 	(1,787	)	 	 	(3,541	)	 	 	(4,396	)

 

	 	 	 	 	US dollars	 
	 	 	 	 	 	 	 	 	 	 	 	 
	Basic and diluted loss per Ordinary share of NIS 0.01 par value	 	18	 	 	(0.07	)	 	 	(0.14	)	 	 	(0.18	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Weighted average share capital used in the computation of basic and diluted loss per share	 	 	 	 	24,703,164	 	 	 	24,703,164	 	 	 	24,703,164	 

 

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

 

    	- 4 -

    	 

    

 

INTERCURE LTD.

 

	CONSOLIDATED STATEMENTS OF CHANGES IN DEFICIT

 

	 	 	Share
    
capital	 	 	Additional
    
paid-in 
capital	 	 	Payments
    
on account 
of shares	 	 	Capital
    
reserve for 
share-based 
payment	 	 	Equity
    
component of 
the Company's 
compound 
financial 
instruments	 	 	Accumulated
    
deficit	 	 	Total	 
	 	 	US dollars in thousands	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance at
    January 1, 2009	 		60	 			27,514	 	 		-	 	 		1,519	 	 		-	 	 		(34,159	)	 		(5,066	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Stock-based compensation
    expenses	 	 	-	 	 	 	-	 	 	 	-	 	 	 	145	 	 	 	-	 	 	 	-	 	 	 	145	 
	Equity component of the
    Company's compound financial instruments	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	765	 	 	 	-	 	 	 	765	 
	Loss
    for the year	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	(4,396	)	 	 	(4,396	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance at December 31,
    2009	 	 	60	 	 	 	27,514	 	 	 	-	 	 	 	1,664	 	 	 	765	 	 	 	(38,555	)	 	 	(8,552	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Stock-based compensation
    expenses	 	 	-	 	 	 	-	 	 	 	-	 	 	 	60	 	 	 	-	 	 	 	-	 	 	 	60	 
	Loss
    for the year	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	(3,541	)	 	 	(3,541	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance at December 31,
    2010	 	 	60	 	 	 	27,514	 	 	 	-	 	 	 	1,724	 	 	 	765	 	 	 	(42,096	)	 	 	(12,033	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Stock-based compensation
    expenses	 	 	-	 	 	 	-	 	 	 	-	 	 	 	(169	)	 	 	-	 	 	 	-	 	 	 	(169	)
	Payments on account of
    shares	 	 	-	 	 	 	-	 	 	 	400	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	400	 
	Expiration of options	 	 	-	 	 	 	832	 	 	 	-	 	 	 	(832	)	 	 	-	 	 	 	-	 	 	 	-	 
	Loss
    for the year	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	(1,787	)	 	 	(1,787	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance
    at December 31, 2011	 	 	60	 	 	 	28,346	 	 	 	400	 	 	 	723	 	 	 	765	 	 	 	(43,883	)	 	 	(13,589	)

 

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

 

    	- 5 -

    	 

    

 

INTERCURE LTD.

 

	CONSOLIDATED STATEMENTS OF CASH FLOWS

 

	 	 	Year ended December 31,	 
	 	 	2011	 	 	2010	 	 	2009	 
	 	 	US dollars in thousands	 
	Cash flows from operating activities:	 		 	 	 		 	 	 		 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Loss for the year	 	 	(1,787	)	 	 	(3,541	)	 	 	(4,396	)
	Adjustments to reconcile loss to net cash used in operating activities (a)	 	 	1,561	 	 	 	2,643	 	 	 	1,295	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Net cash used in operating activities	 	 	(226	)	 	 	(898	)	 	 	(3,101	)
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Cash flows from investing activities:	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Withdrawal of short-term deposit	 	 	91	 	 	 	142	 	 	 	134	 
	Purchase of property, plant and equipment	 	 	(4	)	 	 	-	 	 	 	(65	)
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Net cash provided by investing activities	 	 	87	 	 	 	142	 	 	 	69	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Cash flows from financing activities:	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Receipt of short-term loan	 	 	-	 	 	 	500	 	 	 	-	 
	Purchase of the Company's convertible debentures by subsidiary	 	 	-	 	 	 	-	 	 	 	(135	)
	Issuance of convertible debentures, net	 	 	-	 	 	 	-	 	 	 	235	 
	Issuance of equity component of compound financial instruments	 	 	-	 	 	 	-	 	 	 	765	 
	Payments on account of shares	 	 	200	 	 	 	-	 	 	 	-	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Net cash provided by financing activities	 	 	200	 	 	 	500	 	 	 	865	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Increase (decrease) in cash and cash equivalents	 	 	61	 	 	 	(256	)	 	 	(2,167	)
	Cash and cash equivalents at the beginning of the year	 	 	245	 	 	 	501	 	 	 	2,668	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Cash and cash equivalents at the end of the year	 	 	306	 	 	 	245	 	 	 	501	 

 

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

 

    	- 6 -

    	 

    

 

	INTERCURE LTD.
	 
	CONSOLIDATED STATEMENTS OF CASH FLOWS

 

		 	 	 	Year ended December 31,	 
	 	 	 	 	2011	 	 	2010	 	 	2009	 
	 	 	 	 	US dollars in thousands	 
	(a)	 	Adjustments to reconcile loss to net cash used in operating activities:	 			 	 			 	 			 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Expenses (income) not involving cash flows:	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Depreciation and amortization	 	 	59	 	 	 	140	 	 	 	128	 
	 	 	Capital loss from disposal of property, plant and equipment	 	 	23	 	 	 	-	 	 	 	-	 
	 	 	Gain from early redemption of debentures	 	 	-	 	 	 	-	 	 	 	(282	)
	 	 	Decrease in employee benefit liabilities	 	 	(37	)	 	 	(17	)	 	 	(47	)
	 	 	Non-cash finance expenses	 	 	2,008	 	 	 	2,476	 	 	 	863	 
	 	 	Cost of stock-based compensation	 	 	(169	)	 	 	60	 	 	 	145	 
	 	 	Revaluation of derivative financial liabilities and options	 	 	(695	)	 	 	(426	)	 	 	70	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	1,189	 	 	 	2,233	 	 	 	877	 
	 	 	Changes in assets and liabilities:	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Decrease (increase) in trade receivables	 	 	246	 	 	 	216	 	 	 	(128	)
	 	 	Decrease in inventories	 	 	239	 	 	 	107	 	 	 	214	 
	 	 	Decrease (increase) in other accounts receivable	 	 	(43	)	 	 	64	 	 	 	6	 
	 	 	Decrease (increase) in long-term prepaid expenses	 	 	-	 	 	 	(13	)	 	 	25	 
	 	 	Increase (decrease) in trade payable	 	 	(195	)	 	 	(153	)	 	 	96	 
	 	 	Increase in other accounts payable	 	 	125	 	 	 	189	 	 	 	205	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	372	 	 	 	410	 	 	 	418	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	1,561	 	 	 	2,643	 	 	 	1,295	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	(b)	 	Interest and taxes in cash:	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Interest paid	 	 	-	 	 	 	-	 	 	 	(746	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Interest received	 	 	-	 	 	 	1	 	 	 	6	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Taxes paid	 	 	(11	)	 	 	(13	)	 	 	(9	)

 

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

 

    	- 7 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 1:-	GENERAL

 

		a.	InterCure Ltd. ("the Company") was incorporated in Israel and commenced its operations
in November 1994. Since its establishment, the Company has been engaged in the research, development, marketing and sale of non-drug
and non-invasive personal therapeutic devices for treating various diseases such as hypertension, cardiovascular diseases, insomnia
and stress.

 

		b.	In February 2000, the Company founded InterCure Inc., a private company registered in Delaware,
USA, engaged in marketing and distributing the Company's products in the US. The Company holds 100% of the shares of InterCure
Inc.

 

		c.	In May 2008, the Company founded InterCure UK Limited, a private company registered in the UK which
is yet inactive. The Company holds 100% of the shares of InterCure UK Limited.

 

		d.	Definitions in the financial statements:

 

	The Company	 	-	InterCure Ltd.
	 	 	 	 
	The Group	 	-	The Company and its subsidiaries.
	 	 	 	 
	Related parties	 	-	As defined in IAS 24.
	 	 	 	 
	Interested parties	 	-	As defined in the Israeli Securities Regulations (Annual Financial Statements), 2010.
	 	 	 	 
	Controlling shareholders	 	-	As defined in the Israeli Securities Regulations (Annual Financial Statements), 2010.
	 	 	 	 
	Israeli CPI	 	-	Israeli Consumer Price Index as published by the Israel Central Bureau of Statistics.
	 	 	 	 
	Dollar or $	 	-	US dollar.
	 	 	 	 
	Euro or €	 	-	The currency used by the European Union.
	 	 	 	 
	British Pound or £	 	-	The currency used by the UK.
	 	 	 	 
	NIS	 	-	New Israeli Shekel.
	 	 	 	 
	Subsidiaries	 	-	Companies that are directly or indirectly controlled by the Company (as defined in IAS 27) and whose accounts are consolidated with those of the Company.
	 	 	 	 
	Investee	 	-	Subsidiary.

 

    	- 8 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 1:-	GENERAL (Cont.)

 

		e.	Risk factors and the global financial crisis:

 

The Company's
financial statements as of December 31, 2011 reflect a deficit of $ 13,589 thousand (as of December 31, 2010 - $ 12,033
thousand), losses of $ 1,787 thousand (2010 - $ 3,541 thousand, 2009 - $ 4,396 thousand) and negative cash flows
from operating activities of $ 226 thousand for 2011 (2010 - $ 898 thousand, 2009 - $ 3,101 thousand).

 

Moreover,
the Company has a working capital deficit totaling $ 13,613 thousand as of December 31, 2011.

 

The Company's
ability to continue as a going concern is contingent on obtaining additional external financial resources and/or reaching a refinancing
agreement with the holders of the Company's debentures. These factors raise significant doubts about the Company's ability to continue
as a going concern. The financial statements do not include any adjustments to the carrying amounts and classifications of assets
and liabilities that would result if the Company was unable to continue as a going concern.

 

In the backdrop
of the financial crisis in the US and the UK, the Company's principal target markets, which severely affected the Company's operations,
the Company took steps to locate potential investors in the Company and reach a refinancing agreement with the holders of the Company's
debentures.

 

On January
10, 2010, a meeting of the holders of the Company's debentures (series A) was convened in which the Company requested to defer
the interest payments on the debentures (series A) whose maturity dates were January 31, 2010, July 31, 2010 and January 31, 2011.
Accordingly, the interest payments were deferred on several occasions and intensive discussions were held in the subject between
the Company, the representatives of the holders of debentures (series A) and shareholders in the Company that hold debentures (series
B) issued by the Company in a private placement of September 2009 in connection with the additional financing agreement regarding
the Company's operating activities.

 

In June-August
2010, the Company received additional financing from the holders of debentures (series B) and began advanced negotiations with
an unrelated third party for an overall transaction for converting the Company's entire debentures into capital and for providing
additional capital to the Company as detailed below.

 

As of the
date of these financial statements, the record date was deferred to March 29, 2012 and the interest payment date was deferred to
April 12, 2012.

 

On June 28,
2010, the Company was informed that an agreement had been signed between some of the holders of debentures (series A) and the entire
holders of debentures (series B) of the Company which consists, among others, of the conversion of both series of debentures of
the Company into shares in the event that an investment is made in the Company, subject to certain business terms and approvals
required by law.

 

    	- 9 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 1:-	GENERAL (Cont.)

 

		e.	Risk factors and the global financial crisis: (Cont.)

 

In view of
said agreement, on June 28, 2010, interested parties in the Company who are also holders of debentures (series B) of the Company
provided the Company a qualifying loan of $ 150,000 (see immediate report of June 29, 2010, TASE reference: 2010-01-537003).
On July 14, 2010, another identical loan was provided (see immediate report of July 14, 2010, TASE reference: 2010-01-555390).

 

On August
22, 2010, the Company announced that it is in advanced negotiations with an unrelated third party ("the potential investor")
for signing a binding MOU between the Company, the potential investor and holders of the Company's debentures (series A and B)
and the providers of the loan described above for entering into an overall transaction which consists of the conversion of all
the series of debentures issued by the Company into shares and the provision of additional capital to the Company, all subject
to the prerequisites determined in the agreement.

 

On March
20, 2011, a motion was filed with the Tel-Aviv-Jaffa District Court ("the Court") for convening meetings of the Company's
shareholders, holders of debentures (series A and B) and the group of lenders for the approval of a composition with creditors
pursuant to section 350 to the Israeli Companies Law, 1999 ("the Companies Law") based on the abovementioned outline
("the arrangement"). In its decision of the same date, the Court approved the motion to convene the meetings for the
approval of the arrangement and to shorten the timeframe for convening the general meeting of shareholders to 14 days from the
date of issuing the notice of the meeting.

 

On April
17, 2011, the meetings of the Company's shareholders, holders of options (series 1) and holders of debentures (series A and B)
approved the arrangement. See immediate reports of April 20, 2011, TASE references: 2011-01-126885, 2011-01-126882, 2011-01-126870
and 2011-01-126867).

 

It should
be noted that the decisions regarding the approval of the arrangement were made with the mandatory majority required by both the
Israel Securities Authority and the Company's viewpoint. See immediate report of April 20, 2011, TASE reference: 2011-01-126879).

 

On April
18, 2011, a motion was filed with the Court for the approval of the arrangement. On May 9, 2011, the Court approved the arrangement.
On June 28, 2011, the Company announced the receipt of an amount of $ 200 thousand from the investors as part of the consideration
of $ 2.6 million stated in the arrangement. The Company also received another advance payment of $ 200 thousand on account
of the consideration.

 

    	- 10 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 1:-	GENERAL (Cont.)

 

		e.	Risk factors and the global financial crisis: (Cont.)

 

On August
21, 2011, the Company announced that despite its requests, the investors have not yet provided it with the outstanding consideration
of $ 2.2 million. Nevertheless, the investors did reaffirm their commitment to deliver the outstanding consideration and complete
the arrangement. The Company also reported that it is currently holding negotiations with the investors and their representatives
in coordination with the representatives of the holders of the Company's debentures and is taking the necessary actions to establish
the date of completion of the arrangement and receipt of the outstanding consideration as above. In parallel, the Company is investigating
alternative financing arrangements.

 

For details
of the transaction underlying the MOU, see immediate reports of August 21, 2010, TASE reference: 2010-01-593244, of September 7,
2010, TASE reference: 2010-01-615075, of September 21, 2010 TASE reference: 2010-01-629247, of October 21, 2010, TASE reference:
2010-01-655239, of November 16, 2010, TASE reference: 2010-01-682368 and of March 20, 2011, TASE references: 2011-01-085461, 2011-01-085497
and 2011-01-085500.

 

It should
be clarified that as of the date of the financial statements, the arrangement has not been completed. The Company believes that
the MOU has been violated and that its chances of being completed are remote. Accordingly, it is studying several investment alternatives
for the arrangement in coordination with the representatives of the holders of the Company's debentures.

 

		NOTE 2:-	SIGNIFICANT ACCOUNTING POLICIES

 

		a.	Statement of compliance with International Financial Reporting Standards (IFRS):

 

The Group's consolidated financial
statements have been prepared in accordance with International Financial Reporting Standards (IFRSs), and the interpretations thereto,
as published by the International Accounting Standards Board (IASB). The significant accounting policies detailed below were applied
consistently to all reporting periods presented in these consolidated financial statements, except for changes in accounting policies
resulting from the application of standards, amendments and interpretations which became effective as of the date of the financial
statements, as detailed in Note 3.

 

		b.	The consolidated financial statements have been prepared in accordance with the Israeli Securities
Regulations (Annual Financial Statements), 2010.

 

The
Board approved the financial statements for publication on March 29, 2012.

 

		c.	Presentation format of the statement of financial position:

 

The Group presents assets and
liabilities in the statement of financial position according to current and non-current items.

 

The Company's operating cycle
period is 12 months.

 

    	- 11 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 2:-	SIGNIFICANT ACCOUNTING POLICIES (Cont.)

 

		d.	Method for analyzing expenses recognized in profit or loss:

 

The Company's expenses in the
statement of comprehensive loss are presented based on the nature of the expense. The Group believes that considering its organizational
structure, the classification of expenses in this manner provides information that is reliable and more relevant.

 

		e.	Functional currency:

 

		1.	Functional currency and presentation currency:

 

The functional currency of
the primary economic environment in which the Group operates is the US dollar. Accordingly, the financial statements are presented
on the historical cost basis in dollars. The Company that operates in Israel maintains its current accounts in nominal NIS and
in dollars. A foreign subsidiary maintains its accounts in dollars. Accordingly, the dollar is the measurement and reporting currency
in these financial statements.

 

The term "cost" in
these financial statements represents cost in dollars unless otherwise indicated.

 

		2.	Translation of transactions that are not in the functional
currency:

 

In preparing the financial
statements of each of the Group's entities, transactions in currencies other than the functional currency of that entity ("foreign
currency") are recorded at the effective exchange rates on the date of the transaction. At the end of each reporting period,
monetary items denominated in foreign currency are translated at the effective exchange rate on that date; non-monetary items measured
at fair value denominated in foreign currency are translated at the exchange rates at the date when the fair value was determined;
non-monetary items at historical cost are translated at the exchange rates in effect at the date of the transaction in respect
of the non-monetary item.

 

Exchange differences in respect
of monetary assets and liabilities are recognized in profit or loss in financing, except those that are in respect of employee
benefits that are taken to salary expenses.

 

		f.	Consolidated financial statements:

 

The Group's consolidated financial
statements include the financial statements of the Company and of entities that are directly controlled by the Company. Control
exists if the Company has the power to govern the financial and operating policies of a subsidiary so as to obtain benefits from
its activities.

 

All intragroup transactions,
balances, revenues and expenses are eliminated in full for the purpose of consolidation.

 

    	- 12 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 2:-	SIGNIFICANT ACCOUNTING POLICIES (Cont.)

 

		g.	Cash and cash equivalents:

 

Cash and cash equivalents include
cash, in dollars and in foreign currency, current balances in banks that can be withdrawn and deposits in banks that can be immediately
withdrawn or that have been deposited in banks for a period of three months or less from the date of investment.

 

		h.	Short-term deposits:

 

Short-term deposits in banks
are deposits with an original maturity of more than three months from the date of investment. The deposits are presented according
to their terms of deposit.

 

		i.	Inventories:

 

Inventory is an asset held
for sale in the ordinary course of business, in the production process for such sale or materials to be consumed in the production
process or in the rendering of services.

 

Inventory is presented at the
lower of cost and net realizable value. The cost of inventory comprises all costs of purchase, direct labor costs, fixed and variable
overheads, and any other costs incurred to bring the inventory to its present location and condition.

 

The net realizable value represents
an estimate of the selling price in the ordinary course of business less the estimated cost of completion and the estimated costs
to make a sale.

 

Cost is determined as follows:

 

Raw materials - using the "first-in,
first-out" method.

 

Finished goods - cost is determined
at direct production cost computed on the basis of accrual production costs.

 

		j.	Property, plant and equipment:

 

Property, plant and equipment
are tangible assets which are held for use in the production or for rental to others and which are expected to be used during more
than one period. The Group presents its items of property, plant and equipment at cost.

 

According to the cost model
- items of property, plant and equipment are presented in the statement of financial position at cost, less accumulated depreciation
and accumulated impairment losses, if any. Cost comprises the purchase price of the asset and any costs directly attributable to
bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management.

 

    	- 13 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 2:-	SIGNIFICANT ACCOUNTING POLICIES (Cont.)

 

		j.	Property, plant and equipment: (Cont.)

 

Each part of an item of property,
plant and equipment with a cost that is significant in relation to the total cost of the item is depreciated separately. The depreciation
is assigned on a systematic basis using the straight-line method over the expected useful life of the components of the item from
the date on which the asset is ready for its intended use while taking into account the expected residual value at the end of the
useful life.

 

The depreciation method and
useful life of an asset are reviewed by the management of the Group companies at each financial year-end. Changes are accounted
for prospectively.

 

Useful life and depreciation
rates used in the computation of depreciation are as follows:

 

	 	 	Useful 
life	 	 	Depreciation 
rates	 	 	 
	 	 	Years	 	 	%	 	 	 
	 	 	 	 	 	 	 	 	 
	Computers and software	 	 	3	 	 	 	33	 	 	 
	Office furniture and equipment	 	 	6 - 17	 	 	 	6 - 17	 	 	mainly 6%
	Machinery and equipment	 	 	5	 	 	 	20	 	 	 
	Leasehold improvements and installation	 	 	5	 	 	 	20	 	 	 

 

Gain or loss from sale or derecognition
of an asset is determined as the difference between the net disposal proceeds and its carrying amount and is recognized in profit
or loss.

 

		k.	Impairment of assets:

 

At the end of each reporting
period, the Group examines the carrying amount of its tangible assets, except inventories, in order to determine whether there
are any indicators of impairment of these assets. If such indicators exist, the recoverable amount of the asset is estimated with
the purpose of determining the amount of the loss created from the impairment, if any. If the recoverable amount of an individual
asset cannot be evaluated, the Group assesses the recoverable amount of the cash-generating unit to which the asset belongs. Corporate
assets are also allocated to the individual cash-generating units if a reasonable and consistent basis can be identified for such
allocation. If corporate assets cannot be allocated to the individual cash-generating units on the above basis, the corporate assets
are attributable to the smallest group of cash-generating units for which reasonable and consistent
basis can be identified. 

 

The recoverable amount of an
asset is the higher of its fair value less costs of sale and its value in use. In estimating value in use, the estimated future
cash flows are discounted to their present value using the pre-tax interest rate that reflects the current market assessments of
the time value of money and the risks specific to the asset for which the future cash flow estimates have not been adjusted.

 

    	- 14 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 2:-	SIGNIFICANT ACCOUNTING POLICIES (Cont.)

 

		k.	Impairment of assets: (Cont.)

 

If the recoverable amount of
an asset is valued less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. Impairment
loss is recognized immediately as an expense in profit or loss.

 

If an impairment loss recognized
in previous periods is reversed, the carrying amount of the asset (or of the cash-generating unit) is increased back to the estimated
recoverable amount but not in excess of the carrying amount of the asset (or of the cash-generating unit) that would have been
determined had no impairment loss been recognized for the asset in previous periods. Reversing an impairment loss is recognized
immediately in profit or loss.

 

		l.	Financial assets:

 

		1.	General:

 

Financial assets are recognized
in the statement of financial position when the Group becomes a party to the contractual conditions of the instrument. Since purchase
or sale of an investment are under a contract whose conditions require delivery of investment within the time frame that is the
convention in the marketplace, the investment is derecognized on the trade date (the date on which the Group has undertaken to
purchase or sell an asset).

 

Investments in financial assets
are initially recognized at fair value plus transaction costs, except those financial assets that are classified in the category
fair value through profit or loss and the costs involved in their purchase are carried to profit or loss.

 

Financial assets are classified
in the categories detailed below. The classification in these categories depends on the nature and holding purpose of the financial
asset and is determined at the time of initial recognition of the financial asset or in subsequent reporting periods if the financial
assets can be reclassified into another category:

 

		·	Financial assets at fair value through profit or loss

		·	Loans and receivables

 

		2.	Financial assets at fair value through profit or loss:

 

Financial assets are classified
as "financial assets at fair value through profit or loss" when these assets are either held for trading or are designated
as at fair value through profit or loss upon initial recognition.

 

    	- 15 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 2:-	SIGNIFICANT ACCOUNTING POLICIES (Cont.)

 

		l.	Financial assets: (Cont.)

 

A financial asset is held for
trading if:

 

		·	It is acquired principally for the purpose of sale in the near term; or

		·	It is part of a portfolio of identified financial instruments that the Group manages together and
has a recent actual pattern of short-term profit-taking; or

		·	It is a derivative that is not designated and effective as a hedging instrument.

 

A financial asset at fair value
through profit or loss is presented at fair value. Any gain or loss arising on remeasurement, including those deriving from exchange
rate fluctuations, is recognized in profit or loss in the period in which the change occurred. The net gain or loss recognized
in profit or loss incorporates any dividend or interest earned on the financial asset.

 

		3.	Loans and receivables:

 

Trade receivables, deposits,
loans and other receivables with fixed or determinable payments that are not quoted in an active market are classified as loans
and receivables. Loans and receivables are measured at amortized cost using the effective interest method less any impairment.
Interest income is recognized by the effective interest method, except for short-term receivables when the effect of discounting
is immaterial.

 

		4.	Impairment of financial assets:

 

Financial assets, other than
those classified as financial assets at fair value through profit or loss, are tested for indicators of impairment at the end of
each reporting period. Impairment as above occurs when there is objective evidence that as a result of one or more events that
occurred after the initial recognition date of the financial asset, the estimated future cash flows of the investment have been
affected.

 

As for investments in equity
instruments classified as available for sale, a significant or prolonged decline in fair value below its cost is considered indicator
of impairment.

 

For all other financial instruments,
indicators of impairment could include:

 

		·	Significant financial difficulties of the issuer or the counterparty;

		·	Default in interest or principal payments;

		·	The probably that the borrower will enter bankruptcy or financial restructuring.

 

    	- 16 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 2:-	SIGNIFICANT ACCOUNTING POLICIES (Cont.)

 

		l.	Financial assets: (Cont.)

 

		4.	Impairment of financial assets: (Cont.)

 

For certain financial assets,
such as trade receivables for which no indicators of impairment have been identified, the Company assesses impairment on a collective
basis based on past experience regarding groups of receivables with similar characteristics, change in the number of delayed payments
and economic changes attributable to the industry and the economic environment in which they operate. As for financial assets carried
at amortized cost, the impairment is recognized as the difference between the carrying amount of the financial assets and the present
value of estimated future cash flows discounted at their original effective interest rate.

 

Except the exception of equity
instruments classified as available for sale, if in a subsequent period the amount of the impairment loss of a financial asset
decreases and that decrease can be related objectively to an event occurring after the impairment was recognized, all or part of
the previously recognized impairment loss is reversed through the statement of profit or loss to the extent that the carrying amount
of the investment at the date the impairment is reversed does not exceed what the amortized cost would have been had the impairment
not been recognized.

 

The carrying amount of a financial
asset is reduced by the impairment loss directly for all financial assets except trade receivables, whose carrying amount is reduced
through the use of an allowance account. If trade receivables are considered uncollectible, they are written off against the allowance
account. Subsequent recoveries of amounts previously written off are credited against the allowance account. Changes in the carrying
amount of the allowance account are recognized in profit or loss.

 

		m.	Financial liabilities and equity instruments issued
by the Group:

 

		1.	Classification as a financial liability or equity instrument:

 

Non-derivative financial instruments
are classified as a financial liability or equity instrument in accordance with the substance of the contractual arrangements.

 

An equity instrument is any
contract that evidences a residual interest in the Group's assets after deducting all of its liabilities. Equity instruments issued
by the Company are recognized as the proceeds received net of expenses that are directly related to the issuance of these instruments.

 

Financial liabilities are presented
and measured based on the following classification:

 

		·	Financial liabilities at fair value through profit or loss

		·	Other financial liabilities

    	- 17 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 2:-	SIGNIFICANT ACCOUNTING POLICIES (Cont.)

 

		m.	Financial liabilities and equity instruments issued
by the Group: (Cont.)

 

		2.	Convertible debentures: (Cont.)

 

		a)	NIS-denominated, Israeli CPI-linked convertible debentures
are a hybrid financial instrument which comprises a debt component and a conversion option. At the date of issuance of debentures,
the issuance consideration is split between the debt component of the debentures and the underlying conversion option.

 

At the date of issuance, the
conversion option is measured at fair value. The remaining consideration of the debentures is attributed to the debt component.
Capital raising costs are assigned between the debt component and the conversion option in proportion to the fair value attributed
to each component on the date of issuance. Part of the capital raising costs that were assigned to the debt component is deducted
from the liability for convertible debentures. Part of the capital raising costs that were assigned to the conversion option is
carried immediately to profit or loss.

 

After the issue of debentures,
the debt component is presented as another financial liability in accordance with the principles described in 2m(6) below. The
conversion option is presented as a derivative and measured at the end of each reporting period at fair value and remeasurements
are carried to profit or loss.

 

As for the issue of IFRS 9,
"Financial Instruments", see Note 3 b(1) below.

 

		b)	Convertible debentures that are denominated in dollars, the Group's functional currency, represent
a compound financial instrument. At the date of issuance of debentures, the components of the convertible debentures are separated.
The liability component is presented in long-term liabilities and the equity component is presented in equity. The fair value of
the liability component is determined on the basis of the prevailing market interest rate for similar non-convertible instruments.
The remaining consideration for convertible debentures is attributed to the underlying conversion component and presented in equity
in the item "equity component of compound financial instruments". This component is recognized and included in equity
and is not remeasured in subsequent periods. Issuance costs are attributed in proportion to the components of the compound financial
instruments according to the allocation of the consideration.

 

    	- 18 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 2:-	SIGNIFICANT ACCOUNTING POLICIES (Cont.)

 

		m.	Financial liabilities and equity instruments issued
by the Group: (Cont.)

 

		3.	Reciprocal holding of convertible debentures:

 

Balances of convertible debentures
which were issued by any of the Group entities and acquired by another Group entity are reversed in the consolidated financial
statements. When a subsidiary acquires the debentures, the difference between the carrying amount of the liability component and
its acquisition cost is carried as a gain or loss. The difference between the carrying amount of the equity component and its acquisition
cost is recognized as a deduction of equity. When the convertible debentures are sold, the difference between the sale consideration
of the convertible debenture components and the carrying amount of the convertible debenture components is carried as stated in
Note 2m(2).

 

		4.	Options to purchase Company's shares:

 

Proceeds in respect of issuance
of options to purchase Company's shares which grant an option to the holder to purchase a fixed amount of Ordinary shares in consideration
of a variable amount of cash, are presented in current liabilities and classified as liabilities at fair value through profit or
loss. In this respect, the exercise amount that is either linked to the Israeli CPI or to foreign currency is considered as a variable
amount.

 

As for the amendment to IAS
32, "Financial Instruments: Presentation" regarding classification of rights to purchase equity instruments that are
stated in a currency that is other than the functional currency in equity (under certain conditions), see Note 3a(3).

 

		5.	Financial liabilities at fair value through profit
or loss:

 

A financial liability is classified
at fair value through profit or loss if it is either held for trading or designated as a financial liability at fair value through
profit or loss.

 

The Group's financial liabilities
that are included in this category comprise options to purchase Company's shares with exercise price in foreign currency.

 

A financial liability is classified
as held for trading if:

 

		·	It was incurred principally for the purpose of repurchasing in the near term; or

		·	It is part of a portfolio of identified financial instruments that the Group manages together and
has a recent actual pattern of short-term profit-taking; or

		·	It is a derivative that is not designated and effective as a hedging instrument.

 

    	- 19 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 2:-	SIGNIFICANT ACCOUNTING POLICIES (Cont.)

 

		m.	Financial liabilities and equity instruments issued
by the Group: (Cont.)

 

		5.	Financial liabilities at fair value through profit
or loss: (Cont.)

 

Financial liabilities at fair
value through profit or loss are presented at fair value. Any gain or loss arising on remeasurement is recognized in profit or
loss. The net gain or loss recognized in the statement of profit or loss incorporates interest paid on the financial liability.
Transaction costs are recognized on the date of initial recognition to profit or loss.

 

As for the issue of IFRS 13,
"Fair Value Measurements", see Note 3b(3).

 

		6.	Other financial liabilities:

 

After the debentures are issued,
the debt component is presented as another financial liability that is initially recognized at fair value net of transaction costs.
After the date of initial recognition, another financial liability is measured at amortized cost using the effective interest method.

 

The effective interest method
is a method of calculating the amortized cost of a financial liability and of allocating interest expense over the relevant period.
The effective interest rate is the rate that exactly discounts the projected flow of future cash flows over the expected life of
the financial liability or, where appropriate, over a shorter period, to the carrying amount.

 

As for accounting for other
financial liabilities that are linked to the Israeli CPI, see Note 2m(9) below.

 

		7.	Assigning the consideration from the issuance of a
unit of securities:

 

The consideration received
from the issuance of a unit of securities is assigned to the different components of the unit. First, the consideration is assigned
to financial liabilities at fair value through profit or loss and to other financial liabilities that are measured at fair value
only upon initial recognition and the balance is assigned to equity instruments. If the unit of securities comprises hybrid financial
instruments, the amount of other financial liabilities recognized is the difference between the fair value of hybrid instrument
as a whole and the fair value of financial liabilities at fair value through profit or loss. If several equity instruments are
issued in the unit of securities, the consideration from the unit is attributed at their relative fair value. The fair value of
each of the components of the unit that is measured at fair value, as above, is determined based on the price of the securities
at the marketplace close after their issuance. Issue costs are assigned to each component in proportion to the value determined
for each issued component. Issue costs that were assigned to financial liabilities at fair value through profit or loss are taken
to profit or loss at the time of issuance. Issuance costs that were assigned to other financial liabilities are deducted from the
liability and taken to profit or loss using the effective interest method. Issue costs that were assigned to equity instruments
are deducted from equity.

 

    	- 20 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 2:-	SIGNIFICANT ACCOUNTING POLICIES (Cont.)

 

		m.	Financial liabilities and equity instruments issued
by the Group: (Cont.)

 

		8.	Derecognition of financial liabilities:

 

A financial liability is derecognized
when, and only when, it is discharged, namely when the obligation defined in the contract is discharged, cancelled or expired.

 

As for the issue of IFRIC 19,
"Extinguishing Financial Liabilities with Equity Instruments", see Note 3a(2).

 

		9.	Financial liabilities that are linked to the Israeli
CPI:

 

The Group has financial liabilities
that are linked to the Israeli CPI ("the Israeli CPI") and that are not measured at fair value through profit or loss.
For these liabilities, the Company determines the effective interest rate as the real rate plus linkage differences according to
the real changes in the Israeli CPI until the end of the reporting period.

 

		n.	Derivative financial instruments:

 

The Group has derivative financial
instruments in respect of convertible debentures in which the exercise price is stated in NIS that is linked to the Israeli CPI.

 

Derivatives that are embedded
in financial instruments or any other host contract are separated from the host contract if their economic characteristics and
risks are not closely related to the economic characteristics and risks of the host contract and the compound instrument as a whole
(including the embedded derivative) is presented as a financial asset or financial liability at fair value through profit or loss.
Remeasurements of separable embedded derivatives are recognized in profit or loss.

 

As for the method of determining
the fair value of embedded derivatives, see Note 9a.

 

		o.	Revenue recognition:

 

Revenue is measured at the
fair value of the consideration received or receivable and/or the consideration that the Group is entitled to receive for revenue
from sale of goods or rendering of services in the ordinary course of business. Revenue is presented net of estimated returns,
discounts etc.

 

    	- 21 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 2:-	SIGNIFICANT ACCOUNTING POLICIES (Cont.)

 

		o.	Revenue recognition: (Cont.)

 

Revenue from the sale of goods
is recognized when all the following conditions are satisfied:

 

		·	The Group transferred to the buyer the significant risks and rewards of ownership of the goods;

		·	The Group retains neither continuing managerial involvement to the degree usually associated with
ownership nor effective control over the goods sold;

		·	The amount of the revenue can be measured reliably;

		·	It is probable that the economic benefits associated with the transaction will flow to the Group;

		·	The costs incurred or to be incurred in respect of the transaction can be measured reliably.

 

		p.	Provisions:

 

		1.	General:

 

Provisions are recognized when
the Group has a legal or constructive obligation as a result of a past event and it is probable that the Group will be required
to settle the obligation using economic sources that can be measured reliably.

 

The amount recognized as a
provision reflects management's best estimate of the amount required to settle the present obligation at the date of the statement
of financial position, taking into account the risks and uncertainties surrounding the obligation. If a provision is measured using
the cash flows estimated to settle the obligation, the carrying amount of the provision is the present value of those cash flows.
Changes in the time value are recorded in profit or loss.

 

If some or all of the amount
required to settle the present obligation is expected to be recovered from a third party, the Group recognizes an asset in respect
of the receivable in the amount of the recognized provision only when and if it is virtually certain that the reimbursement will
be received and the amount receivable can be measured reliably.

 

		2.	Provision for warranty and returns:

 

The provision for warranty
and returns in respect of sold products is computed on the basis of a percentage of sales based on historical experience and it
is carried to the statement of profit or loss.

 

    	- 22 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 2:-	SIGNIFICANT ACCOUNTING POLICIES (Cont.)

 

		q.	Share-based payments:

 

Equity-settled share-based
payments to employees and others providing similar services are measured at the fair value of the equity instruments at the grant
date. The Group measures the fair value of the equity instruments at the grant date using the Black & Scholes model (as for
the way the fair value of share-based payments is measured, see Note 14b(2)). If the equity instruments granted do not vest
until those employees complete the defined service period, comply with the performance conditions or in the occurrence of a defined
market condition, the Company recognizes the share-based payment arrangements in the financial statements over the vesting period
with a corresponding increase in equity under the item "capital reserve for share-based payment". At the end of each
reporting period, the Company revises the number of equity instruments that is expected to vest. Change in estimate compared to
previous periods is recorded in profit or loss over the remaining vesting period.

 

As for cash-settled share-based
payments, the Group measures the goods or services acquired and the liability incurred in respect of cash-settled share-based payments
at the fair value of the liability. Until the liability is settled, the Group remeasures the fair value of the liability at each
reporting date and at the date of settlement and any changes in fair value are recognized in the statement of profit or loss for
the period.

 

		r.	Taxes on income:

 

Considering the tax losses
accumulated in the Company and subsidiaries and since taxable income in the foreseeable future is not expected, the Company and
its subsidiaries do not record deferred taxes receivable in respect of carryforward tax losses and temporary differences in the
value of assets and liabilities between the financial statements and the tax bases.

 

Also, taxes associated with
the sale of investments in subsidiaries are not taken into account because the Group intends to holds the investments and develop
them. Also, deferred taxes associated with distribution of earnings in these companies are not taken into account.

 

		s.	Employee benefits:

 

		1.	Post-employment benefits:

 

The Group's post-employment
benefits comprise: pension and retirement compensation. The Group's post-employment benefits are in part defined contribution plans
and in part defined benefit plans. Expenses relating to the Company's obligation to make payments to defined contribution plan
are recognized in the statement of profit or loss when the employees have rendered the service entitling them to the contributions.
The difference between the amount of the contribution that is payable and total contributions made is presented as an employee
benefit liability.

    	- 23 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 2:-	SIGNIFICANT ACCOUNTING POLICIES (Cont.)

 

		s.	Employee benefits: (Cont.)

 

		1.	Post-employment benefits: (Cont.)

 

If total contribution already
paid exceeds the contribution due for service provided before the date of the statement of financial position, the Group recognizes
an asset to the extent that the prepayment will lead to a reduction in future payments or a refund.

 

Expenses relating to defined
benefit plan are taken to profit or loss using the projected unit credit method, with actuarial valuations carried out at the end
of each reporting period. The present value of the Group's obligations in respect of defined benefit plan is determined by discounting
the expected future cash flows from the plan by market reference to market yields on Government bonds that are stated in the currency
in which the benefits in respect of the plan will be paid and have maturity periods that are consistent with the expected settlement
dates of the plan.

 

Actuarial gains and losses
that exceed 10% of the greater of the present value of the defined benefit obligation and the fair value of the plan assets at
the beginning of the period are recognized over the expected average remaining working lives of the employees participating in
the plan. The Group's liability in respect of defined benefit plan recognized in the Group's statement of financial position represents
the present value of the defined benefit obligation plus (less) actuarial gains (losses) which have not yet been recognized and
less the fair value of plan assets.

 

		2.	Short-term employee benefits:

 

Short-term employee benefits
are benefits that are expected to be used or paid within a period of no more than 12 months after the end of the period in which
the employee render the related service.

 

The Group's short-term employee
benefits comprise the Company's liability for salary, grants and accrued vacation. These benefits are taken to profit or loss when
incurred. The benefits are measured on an undiscounted basis. The difference between the amount of short-term benefits to which
the employee is entitled to and the respective amount contributed is recognized as a liability.

 

		t.	Earnings per share:

 

The Company
computes basic earnings per share amounts for income or loss attributable to stockholders of the Company by dividing the income
or loss attributable to stockholders of the Company by the weighted average number of Ordinary shares outstanding during the period.
For the purpose of computing diluted earnings per share, the Company adjusts the income or loss attributable to stockholders and
the weighted average number of shares outstanding during the period for the effects of all dilutive potential shares.

 

    	- 24 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 2:-	SIGNIFICANT ACCOUNTING POLICIES (Cont.)

 

		u.	Exchange rates and linkage basis:

 

		1.	Balances in or linked to foreign currency are included in the financial statements at the representative
exchange rates published by the Bank of Israel in effect at the end of the reporting period.

 

		2.	Below are data about the exchange rate of the dollar and the Israeli CPI:

 

	 	 	December 31,	 
	 	 	2011	 	 	2010	 	 	2009	 
	 	 	 	 	 	 	 	 	 	 
	Israeli CPI - points *)	 	 	116	 	 	 	113.5	 	 	 	110.6	 
	Exchange rate of dollar - in NIS	 	 	3.821	 	 	 	3.549	 	 	 	3.775	 
	Exchange rate of dollar - in Euro	 	 	0.774	 	 	 	0.749	 	 	 	0.694	 
	Exchange rate of dollar - in Pound	 	 	0.649	 	 	 	0.646	 	 	 	0.618	 

 

		*)	At the average of 2006.

 

	 	 	Year ended December 31,	 
	Change in percentages	 	2011	 	 	2010	 	 	2009	 
	 	 	 	 	 	 	 	 	 	 
	Israeli CPI	 	 	2.2	 	 	 	2.7	 	 	 	3.9	 
	$ 1 per NIS 1	 	 	7.7	 	 	 	(6	)	 	 	(0.7	)
	$ 1 per € 1	 	 	3.7	 	 	 	8	 	 	 	(3.3	)
	$ 1 per £ 1	 	 	(0.5	)	 	 	4.6	 	 	 	(9.9	)

 

		NOTE 3:-	NEW FINANCIAL REPORTING STANDARDS AND INTERPRETATIONS
ISSUED

 

		a.	New standards and interpretations in effect which have no significant impact on the current reporting
period and/or on prior reporting periods but their adoption may affect future periods:

 

		1.	Amendment to IAS 1 (Revised), "Presentation of
Financial Statements" (regarding presentation of the items of other comprehensive income in the statement of changes in equity):

 

The Amendment determines that
the items of other comprehensive income will be presented in the statement of changes in equity or in the notes according to the
Company's accounting policies.

 

    	- 25 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 3:-	NEW FINANCIAL REPORTING STANDARDS AND INTERPRETATIONS
ISSUED (Cont.)

 

		a.	New standards and interpretations in effect which have no significant impact on the current reporting
period and/or on prior reporting periods but their adoption may affect future periods: (Cont.)

 

		2.	IFRIC 19, "Extinguishing Financial Liabilities with Equity Instruments":

 

The Interpretation prescribes
the accounting treatment regarding settlement of financial liabilities by issuing equity instruments. According to the Interpretation,
when such event occurs, the liability is considered settled if the difference between its carrying amount at the date of extinguishment
and the fair value of the consideration paid that is measured in the amount of the fair value of the equity instruments issued
and taken to profit or loss. Currently, the Company's management can not anticipate the effect of the adoption of the Interpretation
on its financial position and operating results.

 

		3.	Amendment to IAS 32, " Financial Instruments: Presentation":

 

The Amendment determines that
derivative instruments that were issued in rights issue to existing shareholders which enable the holder to purchase a fixed amount
of equity instruments in consideration of a fixed amount of cash or another financial asset that is stated in a currency other
than the Company's functional currency, will be classified as equity instruments provided that such rights were issued pro rata
to all of the entity's existing holders of equity instruments. Currently, the Group's management can not anticipate the effect
of the adoption of the Standard on its financial position and operating results.

 

		4.	Amendment to IFRS 7, "Financial Instruments: Disclosures" (the nature and extent of risks
arising from financial instruments):

 

The Amendment encourages the
provision of qualitative disclosures in connection with the quantitative disclosure that is required in order to assist the readers
of the financial statements to create a comprehensive picture of the nature and extent of risks arising from financial instruments.
The Amendment also clarifies the extent of the disclosure that is required in the issue of credit risk and collaterals held and
it provides relief regarding loans whose terms have been renegotiated.

 

Currently, the Company's management
can not anticipate the effect of the adoption of the Amendment on its financial position and operating results.

 

    	- 26 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 3:-	NEW FINANCIAL REPORTING STANDARDS AND INTERPRETATIONS
ISSUED (Cont.)

 

		b.	New standards and interpretations issued but not yet effective, were not early adopted by the Group
and are expected to affect or could affect future periods:

 

		1.	IFRS 9, "Financial Instruments":

 

The Standard outlines the classification
and measurement requirements for financial instruments. The Standard determines that all financial assets will be treated as follows:

 

		·	After initial recognition, debt instruments will be classified and measured at amortized cost or
at fair value through profit or loss. The measurement model will take into account the business model of the entity regarding the
management of financial assets and the characteristics of the contractual cash flows that derive from these financial assets.

		·	A debt instrument which according to the criteria is measured at amortized cost may be designated
at fair value through profit or loss only if doing so eliminates or reduces a recognition and measurement inconsistency that would
arise from measuring asset at amortized cost.

		·	Equity instruments will be measured at fair value through profit or loss.

		·	At the date of initial recognition, equity instruments may be designated at fair value with gains
and losses recognized in other comprehensive income. Instruments designated as above will no longer be subject to impairment testing
and the respective gain or loss will not be carried to profit or loss including upon sale.

		·	Embedded derivatives will not be separated from the host contract within the scope of the Standard.
Instead, compound contracts will be measured in their entirety at amortized cost or fair value based on the business model and
contractual cash flows criteria.

		·	Debt instruments will be reclassified between amortized cost and fair value or vice versa only
if the entity changes its business model for managing financial assets.

		·	Investments in equity instruments which do not have a quoted price in active market, including
derivatives on these instruments, will always be measured at fair value. The measurement option of at cost under certain circumstances
has been eliminated. The Standard indicates that in certain circumstances cost may be an appropriate estimate of fair value.

 

    	- 27 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 3:-	NEW FINANCIAL REPORTING STANDARDS AND INTERPRETATIONS
ISSUED (Cont.)

 

		b.	New standards and interpretations issued but not yet effective, were not early adopted by the Group
and are expected to affect or could affect future periods: (Cont.)

 

		1.	IFRS 9, "Financial Instruments": (Cont.)

 

The Standard also determines
the following provisions regarding financial liabilities:

 

		·	Remeasurement of financial liability that is designated upon initial recognition at fair value
through profit or loss attributable to changes in the credit risk of that liability will be carried directly to other comprehensive
income unless this designation creates or enlarges inconsistency ("accounting mismatch").

		·	If the financial liability is settled or discharged, amounts carried to other comprehensive income
will not be reclassified to profit or loss.

		·	All derivatives, both assets and liabilities, will be measured at fair value including derivative
financial instrument that represent a liability related to an unquoted equity instrument whose fair value cannot be measured reliably.

 

The provisions of the Standard
apply retrospectively, except exceptions as specified in the Standard, for annual reporting periods starting on or after January 1,
2013. Earlier application is permitted. Also, according to the transitional provisions of the Standard, only the provisions regarding
financial assets may be adopted earlier without adopting the above provisions regarding financial liabilities.

 

Currently, the Company's management
can not anticipate the effect of the adoption of the Standard on its financial position and operating results.

 

		2.	IFRS 12, "Disclosure of Interests in Other Entities":

 

The Standard determines disclosure
requirements regarding entity's interests in subsidiaries, joint arrangements, associates and unconsolidated structured entities.
The purpose of the disclosure is to assist in evaluating the nature of and risks associated with interests in these entities and
the effect of these interests on the financial statements of the reporting entity.

 

    	- 28 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 3:-	NEW FINANCIAL REPORTING STANDARDS AND INTERPRETATIONS
ISSUED (Cont.)

 

		b.	New standards and interpretations issued but not yet effective, were not early adopted by the Group
and are expected to affect or could affect future periods: (Cont.)

 

		3.	IFRS 13, "Fair Value Measurement":

 

The Standard replaces the provisions
of fair value measurement in existing IFRS accounting literature with a single standard establishing guidance for fair value measurement.
Accordingly, provisions of fair value measurement were determined for all items that are measured at fair value in the statement
of financial position or for disclosure purposes.

 

According to the Standard,
fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the ordinary course
of business between market participants at the measurement date.

 

The Standard determines the
different approaches in which fair value can be measured and it indicates that valuation techniques that maximize the use of observable
inputs should be applied. As for non-financial assets, it is determined that in order to measure their fair value, the best use
should be evaluated and used to estimate fair value.

 

The Standard applies prospectively
for annual periods beginning on or after January 1, 2013. Earlier application is permitted.

 

The Company's management believes
that the adoption of the Standard will not have a significant impact on the Group's financial statements.

 

		4.	Amendment to IAS 1 (Revised), "Presentation of Financial Statements" (regarding presentation
of items of other comprehensive income in the statement of comprehensive income):

 

The Amendment determines that
items that are included in other comprehensive income will be separated and presented in two categories:

 

Items that may be reclassified
subsequently to profit or loss

Items that will not be reclassified
subsequently to profit or loss

 

Also, the Amendment determines
that if the items of other comprehensive income are presented before tax, the total tax effect will be allocated to each category.
The Amendment applies retrospectively for annual periods beginning on or after January 1, 2013. Earlier application is permitted.

 

Currently, the Company's management
can not anticipate the effect of the adoption of the Amendment on its financial position and operating results.

 

    	- 29 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 3:-	NEW FINANCIAL REPORTING STANDARDS AND INTERPRETATIONS
ISSUED (Cont.)

 

		c.	New standards and interpretations issued but not yet effective, were not early adopted by the Group
and their impact on the financial statements is not expected to be significant:

 

		1.	Amendment to IFRS 7, "Financial Instruments: Disclosures" (disclosures regarding transfers
of financial assets):

 

The Amendment requires the
disclosure of information regarding the entity's exposure to risks of financial asset transfer transactions in which the transferee
retains a certain level of continuing exposure to the asset ("continuing involvement") and regarding financial asset
transfer transactions which were derecognized in their entirety carried out close to the end of the reporting period.

 

		2.	IFRS 10, "Consolidated Financial Statements":

 

The Standard establishes a
new model for determining the existence of control in another entity based on the power of the investor in the investee, the investor's
exposure to variable returns from its involvement with the investee and the investor's ability to use its power to affect the amount
of returns. The Standard does not contain a change in the consolidation procedure of financial statements.

 

		3.	IAS 19 (2011), "Employee Benefits":

 

The Standard modifies the provisions
of IAS 19, "Employee Benefits" in its present format. Accordingly, it is determined that actuarial gains or losses will
be carried to other comprehensive income. Also, it determines that short-term employee benefits will include benefits that are
expected to be settled wholly before 12 months after the end of the year in which the employee renders the related services.

 

		NOTE 4:-	CRITICAL ACCOUNTING JUDGMENTS AND KEY SOURCES OF
ESTIMATION UNCERTAINTY

 

In the application of the Group's
accounting policies, which are described in Note 2 above, the Group management is required, in certain cases, to make broad
accounting judgments regarding estimates and assumptions about the carrying amounts of assets and liabilities that are not readily
apparent from other sources. The estimates and associated assumptions are based on past experience and other factors that are considered
to be relevant. Actual results could differ from these estimates.

 

Management reviews the estimates
and underlying assumptions on an ongoing basis. Changes in accounting estimates are only recognized in the period in which the
estimate is changed if the change affects only that period or in the period of change and future periods if the change affects
both current and future periods.

 

    	- 30 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 4:-	CRITICAL ACCOUNTING JUDGMENTS AND KEY SOURCES OF
ESTIMATION UNCERTAINTY (Cont.)

 

The following relates to critical
judgments, except those involving estimates (see above) that the management has made in the process of applying the Group's accounting
policies and that have the most significant effect on the amounts recognized in the financial statements.

 

Among others, the Company's
management makes critical judgment regarding employee benefits and embedded derivatives.

 

The present value of the Company's
liability for retirement is based on a large number of inputs, which are determined on the basis of an actuarial valuation, while
using a large number of assumptions, including discount rate. Changes in the actuarial assumptions may affect the carrying amount
of the Company's liability for retirement and pension payments. The Company estimates the discount rate once a year, based on the
discount rate of Government bonds. Other key assumptions are determined based on market conditions and the Company's past experience.
For additional information about the assumptions used by the Company, see Note 2(s).

 

As described in Note 2m
above, the conversion option in a compound financial instrument is measured at fair value. For the purpose of the valuation, the
Company's management makes judgment in selecting the appropriate valuation technique of financial liabilities that do not have
a quoted price in active markets. The Company's management uses valuation techniques that market participants would apply. The
fair value of financial liabilities is determined by reference to assumptions that are corroborated by observable prices and levels
of activity in the market. For additional information about the assumptions used by the Company, see Note 8.

 

		NOTE 5:-	ADDITIONAL INFORMATION ABOUT CURRENT ASSETS

 

		a.	Cash and cash equivalents:

 

	 	 	December 31,	 
	 	 	2011	 	 	2010	 
	 	 	US dollars in thousands	 
	 	 	 	 	 	 	 
	Cash and deposits in dollars	 	 	294	 	 	 	187	 
	Cash and deposits in NIS	 	 	11	 	 	 	43	 
	Cash and deposits in Pounds	 	 	-	 	 	 	14	 
	Cash and deposits in Euro	 	 	1	 	 	 	1	 
	 	 	 	 	 	 	 	 	 
	Total cash and cash equivalents	 	 	306	 	 	 	245	 

 

		b.	Short-term deposits:

 

	 	 	December 31,	 
	 	 	2011	 	 	2010	 
	 	 	US dollars in thousands	 
	 	 	 	 	 	 	 	 	 
	Restricted deposit	 	 	9	 	 	 	100	 

 

    	- 31 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 5:-	ADDITIONAL INFORMATION ABOUT CURRENT ASSETS (Cont.)

 

		c.	Trade receivables:

 

		1.	Composition:

 

	 	 	December 31,	 
	 	 	2011	 	 	2010	 
	 	 	US dollars in thousands	 
	 	 	 	 	 	 	 
	Credit card companies	 	 	-	 	 	 	21	 
	Checks receivable	 	 	-	 	 	 	25	 
	Open accounts	 	 	316	 	 	 	458	 
	 	 	 	 	 	 	 	 	 
	 	 	 	316	 	 	 	504	 
	Less - allowance for doubtful accounts	 	 	(96	)	 	 	(38	)
	 	 	 	 	 	 	 	 	 
	 	 	 	220	 	 	 	466	 

 

Company's sales are made directly
to the customer and through distributors and retail chains. Sales directly to customer are charged by credit cards at the time
of order. The credit period on the retail distribution channels varies between 30 and 60 days.

 

The Group's balance of trade
receivables as of December 31, 2011 includes an amount of approximately $ 190 thousand (2010 - $ 194 thousand) that is
past due, however, the Group, based on past experience, has not recognized an allowance for doubtful accounts because it believes
that it is collectible. The Group does not hold collaterals in respect of these debts. The average age of receivables that are
past due as of December 31, 2011 is more than 120 days (2010 - more than 120 days).

 

		2.	Age of receivables that deviate from the credit days determined for them and for which an allowance
for doubtful accounts has not been recognized:

 

	 	 	December 31,	 
	 	 	2011	 	 	2010	 
	 	 	US dollars in thousands	 
	 	 	 	 	 	 	 
	0 - 30 days	 	 	-	 	 	 	-	 
	31 - 60 days	 	 	-	 	 	 	-	 
	61-90 days	 	 	91	 	 	 	2	 
	More than 90 days	 	 	99	 	 	 	192	 
	 	 	 	 	 	 	 	 	 
	Total	 	 	190	 	 	 	194	 

 

    	- 32 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 5:-	ADDITIONAL INFORMATION ABOUT CURRENT ASSETS (Cont.)

 

		c.	Trade receivables: (Cont.)

 

		3.	Movement in the allowance for doubtful accounts:

 

	 	 	December 31,	 
	 	 	2011	 	 	2010	 
	 	 	US dollars in thousands	 
	 	 	 	 	 	 	 
	Balance at the beginning of the year	 	 	38	 	 	 	34	 
	 	 	 	 	 	 	 	 	 
	Doubtful accounts written off	 	 	(12	)	 	 	-	 
	Impairment loss on receivables	 	 	70	 	 	 	4	 
	 	 	 	 	 	 	 	 	 
	Balance at the end of the year	 	 	96	 	 	 	38	 

 

		4.	Age of receivables for which an allowance for doubtful accounts has been recognized:

 

	 	 	December 31,	 
	 	 	2011	 	 	2010	 
	 	 	US dollars in thousands	 
	 	 	 	 	 	 	 
	More than 90 days	 	 	96	 	 	 	38	 
	 	 	 	 	 	 	 	 	 
	Total	 	 	96	 	 	 	38	 

 

		d.	Other accounts receivable:

 

	 	 	December 31,	 
	 	 	2011	 	 	2010	 
	 	 	US dollars in thousands	 
	 	 	 	 	 	 	 
	Advances to suppliers	 	 	38	 	 	 	-	 
	Prepaid expenses	 	 	21	 	 	 	24	 
	Government authorities	 	 	20	 	 	 	12	 
	 	 	 	 	 	 	 	 	 
	 	 	 	79	 	 	 	36	 

 

    	- 33 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 5:-	ADDITIONAL INFORMATION ABOUT CURRENT ASSETS (Cont.)

 

		e.	Inventories:

 

	 	 	December 31,	 
	 	 	2011	 	 	2010	 
	 	 	US dollars in thousands	 
	 	 	 	 	 	 	 
	Raw materials	 	 	8	 	 	 	8	 
	Finished goods	 	 	69	 	 	 	300	 
	 	 	 	 	 	 	 	 	 
	 	 	 	77	 	 	 	308	 
	Merchandise - materials in transit and payments on account	 	 	-	 	 	 	8	 
	 	 	 	 	 	 	 	 	 
	 	 	 	77	 	 	 	316	 

 

		f.	Breakdown by linkage basis:

 

	 	 	December 31,	 
	 	 	2011	 	 	2010	 
	 	 	US dollars in thousands	 
	Monetary items:	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 
	In or linked to the dollar	 	 	414	 	 	 	608	 
	In or linked to the Pound or the Euro	 	 	107	 	 	 	146	 
	In NIS	 	 	15	 	 	 	64	 
	 	 	 	 	 	 	 	 	 
	 	 	 	536	 	 	 	818	 
	Non-monetary items	 	 	155	 	 	 	345	 
	 	 	 	 	 	 	 	 	 
	 	 	 	691	 	 	 	1,163	 

 

		g.	Charges, see Note 12i.

 

		NOTE 6:-	INVESTMENT IN SUBSIDIARIES

 

Subsidiaries:

 

Details
of the Group's subsidiaries:

 

	Name of subsidiary	 	Place of 
incorporation	 	Principal 
place of 
business	 	Proportion of 
ownership 
interests and 
voting rights	 
	 	 	 	 	 	 	 	 
	InterCure Inc.	 	Delaware, USA	 	USA	 	 	100	%
	 	 	 	 	 	 	 	 	 
	InterCure UK Limited	 	UK	 	UK	 	 	100	%

 

    	- 34 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 7:-	PROPERTY, PLANT AND EQUIPMENT, NET

 

Composition
and movement:

 

	 	 	Computers 
and 
software	 	 	Office 
furniture 
and 
equipment	 	 	Production 
molds	 	 	Leasehold 
improvements 
and 
installation	 	 	Total	 
	 	 	US dollars in thousands	 
	Cost:	 		 	 	 		 	 	 		 	 	 		 	 	 		 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance at January 1, 2010	 	 	405	 	 	 	253	 	 	 	167	 	 	 	65	 	 	 	890	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Purchases	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance at December 31, 2010	 	 	405	 	 	 	253	 	 	 	167	 	 	 	65	 	 	 	890	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Purchases	 	 	4	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	4	 
	Disposals	 	 	(276	)	 	 	(69	)	 	 	(4	)	 	 	(4	)	 	 	(353	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance at December 31, 2011	 	 	133	 	 	 	184	 	 	 	163	 	 	 	61	 	 	 	541	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Accumulated depreciation:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance at January 1, 2010	 	 	333	 	 	 	118	 	 	 	123	 	 	 	35	 	 	 	609	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Depreciation expenses	 	 	21	 	 	 	95	 	 	 	12	 	 	 	12	 	 	 	140	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance at December 31, 2010	 	 	354	 	 	 	213	 	 	 	135	 	 	 	47	 	 	 	749	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Depreciation expenses	 	 	44	 	 	 	2	 	 	 	1	 	 	 	12	 	 	 	59	 
	Depreciation expenses on disposals	 	 	(265	)	 	 	(60	)	 	 	(3	)	 	 	(2	)	 	 	(330	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance at December 31, 2011	 	 	133	 	 	 	155	 	 	 	133	 	 	 	57	 	 	 	478	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Depreciated cost:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	At December 31, 2011	 	 	-	 	 	 	29	 	 	 	30	 	 	 	4	 	 	 	63	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	At December 31, 2010	 	 	51	 	 	 	40	 	 	 	32	 	 	 	18	 	 	 	141	 

 

    	- 35 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 8:-	ADDITIONAL INFORMATION ABOUT CURRENT LIABILITIES

 

		a.	Short-term loan:

 

		1.	Interested parties in the Company that are also holders of debentures (series B) of the Company
have provided the Company a qualifying loan totaling $ 150 thousand and have undertaken to provide the Company an additional
identical loan if a substantial investment offer is received. This agreement is not binding to the holders of debentures (series
A) who are not a party to the agreement.

 

The loan
agreement was signed between the lenders and the Company on June 29, 2010. Another qualifying loan of $ 150 thousand was received
by the Company on July 14, 2010 after having received investment offers from potential investors that expressed their interest
in making an investment in the Company based on a corporate value of at least the value determined in the agreement between the
holders of the Company's debentures.

 

The loans
are interest free and will be repaid in the context of the completion of the agreement detailed in Note 12g or any other alternative
reached by the Company.

 

		2.	In October 2010, an amount of $ 200 thousand was received as an advance from a third party
with which the Company is holding negotiations. This advance and another advance in an identical amount received in the reporting
year were both classified in payments on account of shares (see Note 12g).

 

		b.	Trade payables:

 

	 	 	December 31,	 
	 	 	2011	 	 	2010	 
	 	 	US dollars in thousands	 
	 	 	 	 	 	 	 
	Checks payable	 	 	136	 	 	 	98	 
	Open accounts	 	 	651	 	 	 	884	 
	 	 	 	 	 	 	 	 	 
	 	 	 	787	 	 	 	982	 

 

The average
credit period on purchases of goods is 30 to 60 days, in respect of which no interest is charged from the Company.

 

    	- 36 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 8:-	ADDITIONAL INFORMATION ABOUT CURRENT LIABILITIES (Cont.)

 

		c.	Other accounts payable:

 

	 	 	December 31,	 
	 	 	2011	 	 	2010	 
	 	 	US dollars in thousands	 
	 	 	 	 	 	 	 
	Accrued expenses	 	 	208	 	 	 	172	 
	Interest payable **)	 	 	1,966	 	 	 	1,211	 
	Provision for deferred salary *)	 	 	539	 	 	 	435	 
	Short-term employee benefits	 	 	105	 	 	 	108	 
	Customer advances	 	 	28	 	 	 	7	 
	Provision for returns	 	 	27	 	 	 	53	 
	Salary and payroll accruals *)	 	 	21	 	 	 	24	 
	Government authorities	 	 	32	 	 	 	36	 
	 	 	 	 	 	 	 	 	 
	 	 	 	2,926	 	 	 	2,046	 

 

		*)	Including amounts to interested parties, see also Note 21.

 

		**)	Including interest payable to interested parties in the
amount of approximately $ 50 thousand and $ 31 thousand as of December 31, 2011 and 2010, respectively.

 

		d.	Breakdown by linkage basis:

 

	 	 	December 31,	 
	 	 	2011	 	 	2010	 
	 	 	US dollars in thousands	 
	Monetary liabilities:	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 
	In or linked to the dollar	 	 	2,036	 	 	 	1,995	 
	In NIS	 	 	546	 	 	 	685	 
	In NIS linked to the Israeli CPI	 	 	11,511	 	 	 	10,419	 
	In or linked to the Pound or the Euro	 	 	78	 	 	 	75	 
	 	 	 	 	 	 	 	 	 
	 	 	 	14,171	 	 	 	13,174	 
	Non-monetary liabilities	 	 	133	 	 	 	87	 
	 	 	 	 	 	 	 	 	 
	 	 	 	14,304	 	 	 	13,261	 

 

    	- 37 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 8:-	ADDITIONAL
                                         INFORMATION ABOUT CURRENT LIABILITIES (Cont.)

 

		e.	Current provisions:

 

	 	 	December 31,	 
	 	 	2011	 	 	2010	 
	 	 	US dollars in thousands	 
	Composition:	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 
	Accrued vacation	 	 	105	 	 	 	108	 
	Provision for returns	 	 	27	 	 	 	53	 
	 	 	 	 	 	 	 	 	 
	Total provisions	 	 	132	 	 	 	161	 

 

		NOTE 9:-	CONVERTIBLE DEBENTURES

 

		a.	General:

 

		1.	On July 26, 2007, based on a prospectus, the Company issued NIS 41,000,000 par value of convertible
debentures (series A) that bear annual interest of 7.4% and are linked, principal and interest, to the Israeli CPI for June 2007
as well as 500,000 options that are convertible into Ordinary shares of the Company (see also Note 12e) (collectively, "the
unit"). The debentures are convertible until July 15, 2014, excluding between July 16 and July 31 of each of the years 2012-2013,
into registered Ordinary shares of NIS 0.01 par value each at a conversion ratio of NIS 11.85 par value of debentures
(series A) per share (subject to adjustments). Any debentures that are not converted into shares as above will be repayable in
three equal annual installments on July 31 of each of the years 2012-2014 (inclusive). The interest is payable on January 31 and
July 31 of each of the years 2009-2014 (inclusive).

 

The consideration
from the issuance of the unit, less issuance expenses, was split into the unit's components as follows: options (series 1), liability
component and conversion component which represents the option to convert the debentures into the Company's shares. For the purpose
of split, the conversion component was estimated using the Black & Scholes model.

 

As a result
of the split, the Group recognizes finance expenses using an effective interest rate of 18.3%. As of the date of issuance, the
consideration was split into the debenture components as follows:

 

	 	 	US dollars 
in thousands	 
	 	 	 	 
	Consideration for the issuance of a unit, net	 	 	8,742	 
	Options	 	 	(229	)
	Conversion component	 	 	(2,444	)
	 	 	 	 	 
	Financial liability	 	 	6,069	 

 

    	- 38 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 9:-	CONVERTIBLE DEBENTURES (Cont.)

 

		a.	General: (Cont.)

 

		2.	In the year ended December 31, 2008, in a stock market transaction, a subsidiary acquired NIS 2,309
thousand par value of convertible debentures (series A) in consideration of $ 115 thousand. On that date, the Group recognized
a gain of approximately $ 349 thousand in the amount of the difference between the carrying amount of the liability component
and the share of the repurchase cost attributed to it.

 

In the year
ended December 31, 2009, in a stock market transaction, a subsidiary acquired NIS 2,199 thousand par value of convertible
debentures (series A) in consideration of $ 135 thousand. On that date, the Group recognized a gain of approximately $ 282
thousand in the amount of the difference between the carrying amount of the liability component and the share of the repurchase
cost attributed to it.

 

		3.	The outstanding convertible debentures (series A) as of December 31, 2011 amount to NIS 40,727
thousand par value (including NIS 4,508 thousand par value of debentures (series A) held by a subsidiary).

 

		4.	In 2008, NIS 179 thousand par value of convertible debentures (series A) were converted into
15,136 Ordinary shares of NIS 0.01 par value each. In 2007, NIS 94 thousand par value of convertible debentures (series
A) were converted into 7,888 Ordinary shares of NIS 0.01 par value each.

 

		5.	On August 20, 2009, the Company signed a loan agreement with four interested parties ("the
optionees") in an overall amount of $ 1,000 thousand. In return for the loan, the optionees were issued convertible debentures
(series B) of the Company bearing annual interest of Libor + 5% and repayable in three equal annual installments (principal and
interest) on July 31 of each of the years 2012, 2013 and 2014. The debentures (series B) are convertible into Ordinary shares of
the Company of NIS 0.01 par value each in such a manner that the debt amount (principal and accrued interest) is convertible
into Ordinary shares of the Company as above for a conversion price of $ 0.37. The loan reflects annual effective interest
of 57.5%. As of the issuance date, the total conversion component of the debentures (series B) is $ 765 thousand and the total
liability component of the debentures (series B) is $ 235 thousand.

  

    	- 39 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 9:-	CONVERTIBLE DEBENTURES (Cont.)

 

		a.	General: (Cont.)

 

		6.	In 2010, negotiations were held between the representatives of the holders of debentures (series
A), the Company's Board, the holders of debentures (series B) and the Company's management in order to reach an understanding regarding
the deferral of one to three of the interest payments.

 

On June 28,
2010, the Company was informed that an agreement was signed between some of the holders of debentures (series A) and the entire
holders of debentures (series B) of the Company which consists, among others, of an agreement to convert both the series of the
Company's debentures into shares in the event of an investment in the Company and subject to certain business conditions and the
approvals required by law.

 

In the third
quarter of 2010, the Company's Board and audit committee approved the Company's engagement in a memorandum, of understanding ("MOU")
for signing an overall transaction between the holders of the Company's debentures (series A, series B and the owners of the qualifying
loan) and Bridge Capital Fund, an investment fund registered in the Cayman Islands, and a holding company traded in South Korea,
which are both unrelated third parties ("the investor"). According to the MOU, the Company's entire debentures will be
converted into shares and additional capital will be provided to the Company. Also according to the MOU, the investor will provide
the Company a loan for its continued operating activities, all subject to certain prerequisites. However, there is no certainty
that the prerequisites underlying the transaction will be met, in whole or in part, on the dates stipulated in the MOU or that
the parties will ultimately sign a binding agreement. See also Note 12g.

 

As of the
date of these financial statements, the record date was set for March 29, 2012 and the interest payment date was deferred to April
12, 2012.

 

		7.	Starting from 2010, the Company presents the entire outstanding liability in respect of debentures
(series A and B) in current liabilities since it does not hold an unconditional right to defer the settlement of this liability
for at least 12 months after the reporting period.

 

    	- 40 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 9:-	CONVERTIBLE DEBENTURES (Cont.)

 

		b.	Composition:

 

	 	 	December 31,	 
	 	 	2011	 	 	2010	 
	 	 	US dollars in thousands	 
	In current liabilities:	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 
	Liability component of convertible debentures *)	 	 	10,291	 	 	 	9,733	 
	Conversion component of convertible debentures **)	 	 	-	 	 	 	-	 
	 	 	 	 	 	 	 	 	 
	 	 	 	10,291	 	 	 	9,733	 

 

		*)	Including interest payable in respect of debentures (series B) totaling approximately $ 132
thousand and $ 76 thousand as of December 31, 2011 and 2010, respectively.

 

		**)	Less than $ 1 thousand.

 

The fair
value of the conversion component of convertible debentures was calculated using the Black & Scholes model according to the
following inputs:

 

	Share price ($)	 	 	0.001	 
	Exercise increment ($)	 	 	3.77	 
	Expected volatility	 	 	259%	
	Expected life of the liability component of convertible debentures (years)	 	 	0.5-2.5	 
	Risk-free interest rate	 	 	0.73%-0.017%	 
	Expected dividend yield	 	 	0%	

 

		c.	Breakdown by maturity dates as of December 31, 2011:

 

	 	 	US dollars 
 in thousands	 
	 	 	 	 
	2012	 	 	4,041	 
	2013	 	 	4,041	 
	2014	 	 	4,041	 
	 	 	 	 	 
	 	 	 	12,123	 
	Discount on debentures	 	 	(1,832	)
	 	 	 	 	 
	 	 	 	10,291	 

 

The quoted
market price of debentures (series A) on the TASE as of December 31, 2011 is NIS 0.120 ($ 0.031) (December 31, 2010 -
NIS 0.176 ($ 0.05)). The market value of the debentures (series A) on the TASE as of December 31, 2011 is approximately
$ 1,137 thousand.

 

    	- 41 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 10:-	EMPLOYEE BENEFIT LIABILITIES

 

		a.	Composition:

 

	 	 	December 31,	 
	 	 	2011	 	 	2010	 
	 	 	US dollars in thousands	 
	Post-employment benefits under defined benefit plans:	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 
	Accrued severance pay and retirement compensation	 	 	52	 	 	 	89	 
	 	 	 	 	 	 	 	 	 
	Short-term employee benefits:	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 
	Vacation	 	 	105	 	 	 	108	 

 

		b.	Post-employment benefits:

 

		1.	Defined contribution plans:

 

Accrued
severance pay and retirement compensation plans:

 

According
to labor laws and the Severance Pay Law in Israel, the Company and the subsidiaries are required to pay compensation to an employee
upon dismissal or retirement (including employees who quit their job under other specific circumstances). The computation of the
Company's employee benefit liability is made according to the current employment contract based on the employee's latest salary
which establishes the entitlement to receive the compensation.

 

The Company
has received the Ministry of Labor's approval under section 14 to the Severance Pay Law, 1963 pursuant to which the fixed contributions
paid by the Company into pension funds and/or policies of insurance companies release it from any additional liability to employees
for whom said contributions were made. The Group deposits 6.66% of the monthly salary of some of its employees in the defined contribution
plan and the balance in the defined benefit plan. The Group will have no legal or constructive obligation to make any additional
payments if the plan does not hold sufficient assets for paying all the employee benefits relating to the employees' service in
the current period and in previous periods in respect of that number of employees.

 

The overall
amount of expenses recognized in the statement of profit or loss in respect of defined contribution plans in the year ended December
31, 2011 was $ 15 thousand (2010 - $ 2 thousand).

 

    	- 42 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE
10:-EMPLOYEE BENEFIT LIABILITIES (Cont.)

 

		b.	Post-employment benefits: (Cont.)

 

		2.	Defined benefit plans:

 

General:

 

Accrued
severance pay and retirement compensation:

 

According
to labor laws and the Severance Pay Law in Israel, the Company and the subsidiaries are required to pay compensation to an employee
upon dismissal or retirement (including employees who quit their job under other specific circumstances). The computation of the
Company's employee benefit liability is made according to the current employment contract based on the employee's latest salary
and employment term which establish the entitlement to receive the compensation.

 

		c.	Short-term employee benefits:

 

Additional
information: 

 

		1.	Paid annual leave:

 

According
to the Annual Leave Law, 1951, the Company's employees are entitled to paid leave days for every work year. According to this law
and an addendum to it as established in an agreement signed between the Company and the employees, the number of paid leave days
to which each employee is entitled is determined based on that employee's seniority.

 

The Company
has two employees. Based on past experience, the Company's management estimates that in the coming 12 months, the employees will
utilize their paid annual leave as accrued as of December 31, 2011.

 

		2.	Bonuses:

 

There is
no fixed bonus policy and bonuses are distributed based on business circumstances.

 

    	- 43 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 11:-	TAXES ON INCOME

 

		a.	Tax laws applicable to the companies:

 

		1.	The provision for taxes is determined according to the provisions of the Income Tax (Inflationary
Adjustments) Law, 1985 according to which the results for tax purposes are measured in real basis based on the increase in the
Israeli CPI. According to the Law, the results for tax purposes are measured after adjustment to the changes in the Israeli CPI.

 

On February
26, 2008, the "Knesset" (Israeli parliament) passed the third reading of the Income Tax (Inflationary Adjustments) (Amendment
20) (Limitation of the Application Period) Law, 2008 ("the Amendment") according to which the application of the Inflationary
Adjustments Law will end in the 2007 tax year and from 2008, the provisions of the Inflationary Adjustments Law will no longer
apply, excluding transitional provisions aimed at preventing tax miscalculations.

 

According
to the Amendment, from the 2008 tax year and thereafter, the adjustment of income for tax purposes will no longer be calculated
on a real basis. Moreover, the linkage to the Israeli CPI of amounts of depreciation on property, plant and equipment and carryforward
tax losses will discontinue so that these amounts will be adjusted to the Israeli CPI only until the end of the 2007 tax year and
their linkage to the Israeli CPI will cease from that date onward.

 

		2.	The subsidiary is assessed according to the tax laws in the United States (see also c(2) below).

 

		b.	Benefits by virtue of the Law for the Encouragement of Capital Investments:

 

In August
1999, the Company received a letter of approval for an approved enterprise status. In July 2005, the Company received a final performance
approval for investments totaling approximately $ 189 thousand.

 

In January
2005, the Company received an approval for the expansion of its investment plan. In July 2009, the Company received a final performance
approval for investments totaling approximately $ 68 thousand (NIS 256 thousand).

 

Pursuant
to the Law for the Encouragement of Capital Investments, 1959, the Company is entitled to various tax benefits by virtue of the
"approved enterprise" status granted to some of its production facilities under the alternative track. These tax benefits
include tax exemption for a period of two years and reduced tax for an additional period of five years from the beginning of the
benefit period in respect of the part of the taxable income generated by the approved enterprise recognized by the Investment Center.
In the context of the letter of approval, the Company will be entitled to tax benefits as discussed above in respect of its income
generated by the approved enterprise. In respect of property, plant and equipment used by the approved enterprise, the Company
is entitled to deduct accelerated depreciation.

 

    	- 44 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 11:-	TAXES ON INCOME (Cont.)

 

		b.	Benefits by virtue of the Law for the Encouragement of Capital Investments: (Cont.)

 

The benefit
period is limited to the earlier of 14 years from the date of filing the application or 12 years from the date of receipt of the
letter of approval.

 

The above
benefits are conditional upon the fulfillment of the conditions stipulated by the Law, regulations published thereunder and the
letters of approval for the investment in the approved enterprises. Non-compliance with the conditions may cancel all or part of
the benefits and refund of the amount of the benefits including interest.

 

		c.	The tax rates applicable to the Group:

 

		1.	The Company:

 

Pursuant
to Amendment 147 to the Israeli Income Tax Ordinance, 2005, the corporate tax rate of 34% was gradually reduced from 2006 (31%)
to 2010 (25%) (the corporate tax rates in 2007, 2008 and 2009 were 29%, 27% and 26%, respectively).

 

On July 23,
2009, the Economic Efficiency (Legislative Amendments for Adopting the Economic Plan for 2009 and 2010), 2009 Law was issued ("the
Arrangement Law"). According to the Arrangement Law, the corporate tax rates applicable in 2009 and 2010 will be gradually
reduced from 26% and 25%, respectively, to 24% in 2011 through 18% in the 2016 tax year.

 

On September
26, 2011, the recommendations of the Committee for Socio-Economic Change headed by Prof. Manuel Trachtenberg were made public.
On December 6, 2011, the Law for Tax Burden Reform (Legislative Amendments), 2011 was issued, based on the Trachtenberg Committee's
tax recommendations and after having been approved by a third reading of the Israeli Parliament a day earlier.

 

The Key changes
enacted in the new Law regarding corporate taxation are as follows:

 

		a)	Cancellation of the reductions in income tax and corporate tax scheduled for the coming years effective
from 2012.

 

		b)	Increase of the corporate tax rate in 2012 to 25%.

 

		c)	Increase of the capital gains tax and betterment tax rates as detailed in 2 above.

 

    	- 45 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 11:-	TAXES ON INCOME (Cont.)

 

		c.	The tax rates applicable to the Group: (Cont.)

 

		2.	The subsidiaries:

 

The tax rates
applicable to InterCure Inc. which was incorporated in the United States include progressive corporate tax of up to 35% and State
tax and local tax at the rates determined in each State and city in which the Company conducts its business activities.

 

InterCure
UK Limited has not yet commenced operation.

 

		d.	Losses carried forward:

 

The Company's
losses for tax purposes which can be carried forward to future years indefinitely amount to approximately $ 29.7 million,
$ 24.8 million and $ 22 million as of December 31, 2011, 2010 and 2009, respectively.

 

The subsidiary's
losses which amount to approximately $ 24.1 million, $ 23.5 million and $ 22.8 million as of December 31, 2011,
2010 and 2009, respectively, pursuant to tax laws in the United States can be carried forward progressively until 2030.

 

Due to the
uncertainty of the existence of taxable income in the foreseeable future, no deferred taxes were created in respect of said carryforward
losses. According to Israeli tax laws, there is no expiration date for the utilization of the Company's carryforward losses for
tax purposes or deductible temporary differences.

 

		e.	Amounts for which no deferred tax was recognized:

 

The Company
did not recognize deferred tax amounts totaling $ 7.5 million in respect of 2011 (2010 - $ 4.6 million, 2009 - $ 4.1
million), the majority of which relate to carryforward losses and the balance to research and development expenses and the provision
for employee benefits.

 

		f.	Theoretical tax:

 

The difference
between the tax amount calculated on the loss according to regular tax rates and the amount of the provision for taxes is explained
by the fact that the Company did not create any deferred taxes, as discussed in Note 2r, and due to permanent differences and non-deductible
expenses.

 

		g.	Tax assessments:

 

The assessments
of the Company are deemed final through the 2006 tax year.

 

The subsidiaries
have not been assessed since their incorporation.

 

    	- 46 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 12:-	COMMITMENTS, CHARGES AND CONTINGENT LIABILITIES

 

		a.	The Company received the Chief Scientist's approval for participation in certain of the Company's
research and development expenses based on the Chief Scientist's budget approved.

 

In respect
of the first program for developing a non-medicinal device for treating hypertension, the Company received a grant in the amount
of approximately $ 280 thousand. As of the date of the financial statements, the Company has paid the Chief Scientist the
entire royalties in respect of the grant.

 

On January
15, 2004, the Company received a letter of approval for developing a device for treating CHF patients and a grant of approximately
$ 200 thousand.

 

According
to the provisions of Chief Scientist's grants, the Company is required to pay royalties at a rate of 3%-5% of sales of products
which were developed using the Chief Scientist's grants up to the full amount of the grants that have been or will be received,
linked to the exchange rate of the dollar with the addition of Libor interest.

 

As of December
31, 2011, the Company has not yet begun making any sales of products that combine the CHF therapy technology and therefore has
not yet paid any royalties in respect of this technology.

 

		b.	On April 18, 2008, the Company signed a distribution agreement for the RESPeRATE device with Lloyds
Pharmacy Ltd. ("Lloyds"), the second largest chain of pharmacies in the UK and the first to sell the device in May 2008.
As of the date of the financial statements, Lloyds has completed the sales of the inventory of the old model of the RESPeRATE and
has begun offering a competing product.

 

		c.	On November 25, 2008, the Company signed a distribution agreement for the RESPeRATE device with
Boots UK Limited ("Boots"). Effective from November 2009, the Company's product is sold in some 600 Boots pharmacies,
including Boots Alliance stores which carry electronic medical devices.

 

		d.	On August 24, 2009, the Company and Rite-Aid Corporation ("Rite-Aid") signed an agreement
for expanding the distribution of the RESPeRATE device for treating hypertension in keeping with the trial distribution that was
initiated in February 2009. In the first quarter of 2009, Rite-Aid began selling the device in its West Coast chain of pharmacies
and later in the Greater New York area by consignment. As part of the change in the section distribution mix, the Company decided
to terminate the engagement with Rite-Aid. The decision followed significant late payments made by Rite-Aid for devices actually
sold and a high turnover of pharmacists which required increased awareness related budgets which the Company could not sustain.
The payment of past debts has been settled as well as the process of recovering the remaining inventory of products from the stores.

 

    	- 47 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 12:-	COMMITMENTS, CHARGES AND CONTINGENT LIABILITIES (Cont.)

 

		e.	In April 2008 and May 2008, the Company's Board and general meeting respectively approved the amendment
of the CEO's employment terms to an annual salary of $ 250 thousand. This update was effective retroactively from February
2008. If the Company's product sales are offered in at least 1,000 stores by the same retail chain, the CEO's annual salary will
be increased to $ 300 thousand, which occurred in May 2008. In addition, the CEO will be entitled to an annual bonus of up to 50%
of his base salary at the Board's discretion. As of the balance sheet date, the Company did not record a provision for a bonus
since the Board did not approve such bonus.

 

		f.	On February 12, 2010, InterCure Inc. ("the subsidiary") entered into a marketing collaboration
agreement ("the agreement") with Omron Healthcare Inc., a US marketing and sales subsidiary of Omron Healthcare Group
headquartered in Japan ("Omron"), one of the world's leading manufacturer of home blood pressure monitors. According
to the agreement, Omron and the subsidiary will co-develop joint consumer marketing and medical plans for increasing sales of the
RESPeRATE for the non-medicinal non-invasive treatment of hypertension and home blood pressure monitors. The agreement includes
a clause which grants Omron a right of first offer to acquire the Company's operations if an offer is made by a third party.

 

		g.	On August 22, 2010, the Company announced that it is in advanced negotiations with an unrelated
third party ("the investor") according to which the Company, the investor and the holders of the Company's debentures
(series A and B) and the owners of the loan granted to the Company on June 29, 2010 will enter into a binding MOU for an overall
transaction in which the entire debentures issued by the Company will be converted into shares and additional capital will be provided
to the Company subject to the fulfillment of the prerequisites stipulated in the agreement ("the agreement"). The MOU
was signed by all the parties on September 21, 2010. According to the MOU, the investor will provide the Company an advance of
$ 200 thousand in the form of a first degree secured loan ("the advance"). The advance will bear monthly interest
of 2% to be paid on the date of repayment of the advance. If a binding agreement is signed and approved by the Court in accordance
with section 350 of the Companies Law, the advance will become part of the consideration for the shares as defined below and will
not accrue any interest as described above. To secure the advance, the Company will record a first degree floating charge in favor
of the investor on all its assets and rights and a first degree fixed charge on its entire existing IP, as well as, if and to the
extent possible, on the Company's shell corporation, all up to an amount of $ 212 thousand ("the charges on the advance").
The parties also agreed that if the Company violates the provisions of the MOU, the advance will be placed for immediate repayment
with the addition of accrued interest.

 

In addition,
it was agreed that based on the investor's exclusive discretion and with the Company's consent, the investor will be able to increase
the amount of the advance up to an aggregate amount of $ 1,000,000 until the date of consummation of the agreement and such
increase will be subject to the same conditions as applicable to the advance ("the advance increase"). An amount of $ 200
thousand was received by the Company as the advance in October 2010.

 

    	- 48 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE
12:-COMMITMENTS, CHARGES AND CONTINGENT LIABILITIES (Cont.)

 

		g.	(Cont.)

 

The parties
agreed to several prerequisites for the consummation of the transaction, including, among others, converting the entire series
of the Company's debentures into shares and the allocation of additional shares, obtaining various approvals, including of the
Company's general meeting for amending the Company's articles of association, obtaining a pre-ruling from the Israeli tax authorities
for the agreement, obtaining an exemption from issuing a prospectus, executing the debt refinancing agreement with the credit providers
and obtaining the TASE's approval for listing the Company's Ordinary shares after receiving the final approval of the petition
("the prerequisites"). The outline of the agreement is as follows:

 

The investor
will invest an amount of $ 500,000 in the Company less the advance and less any amount transferred on account of the advance
increase up to a total of $ 500,000 in return for the allocation of 3,433,724 new Ordinary shares of the Company with no par
value each which will represent about 8.87% of the Company's share capital on a fully diluted basis.

 

In return
for 76.09% of the par value of debentures (series A) (NIS 27,560,533), the investor will pay the holders a cash amount of
$ 2,100,000 ("debentures (series A) held by the investor"). Debentures (series A) held by the investor will be converted
into 20,073,120 new Ordinary shares of the Company with no par value each which will represent about 51.84% of the Company's share
capital on a fully diluted basis.

 

In return
for 23.91% of the par value of debentures (series A) (NIS 8,658,660), the holders of debentures (series A) will be allocated
the following shares: 6,306,349 new Ordinary shares of the Company with no par value each which will represent about 16.29% of
the Company's share capital on a fully diluted basis. In addition, 1,489,264 new Ordinary shares of the Company with no par value
each which will represent about 3.85% of the Company's share capital on a fully diluted basis will be allocated pro rata to the
holders of debentures (series A) who held such debentures (series A) on the record date of the agreement.

 

In addition,
the investor will be able to invest an additional amount of up to $ 1,500,000 in the Company in return for the allocation
of up to 9,534,171 new Ordinary shares of the Company with no par value each ("the investment option"). The investment
option will be in effect for a period of six months from the date of consummation of the agreement.

 

It was also
agreed that on the date of consummation of the agreement, the holders of debentures (series A) on the record date of the agreement
will be allocated, at no consideration and pro rata to their interests, an unquoted option to purchase 767,000 new Ordinary shares
of the Company with no par value each which will be exercisable only if at the end of six months from the date of consummation
of the agreement the investor partially exercises the investment option, namely invests $ 750,000 or less of the investment
option.

 

    	- 49 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 12:-	COMMITMENTS, CHARGES AND CONTINGENT LIABILITIES (Cont.)

 

		g.	(Cont.)

 

Conversion
of debentures (series B) into the Company's shares:

 

An amount
of $ 1,000,000 par value of debentures (series B) will be converted into 4,351,607 new Ordinary shares of the Company with
no par value each which will represent about 11.24% of the Company's share capital on a fully diluted basis.

 

The conversion
of "a qualifying loan" into the Company's shares:

 

The group
of lenders will convert the qualifying loan into 2,495,048 new Ordinary shares of the Company with no par value each which will
represent about 6.44% of the Company's share capital on a fully diluted basis.

 

Waiver
and conversion of amounts payable to the Company's management:

 

As of January
31, 2011, amounts payable to debtors from the Company's management in respect of salaries, consulting fees and directors' fees
total $ 500,590 ("debt to management").

 

On the date
of completion of the agreement, the debt to management will be settled as follows:

 

The
debtors from the Company's management will sign a letter of waiver in which they will waive an aggregate amount of
$ 70,000 out of the debt to management. Another amount of $ 100,000 of the debt to management will be converted
into 550,513 new Ordinary shares of the Company with no par value each which will represent about 1.42% of the Company's
issued and outstanding share capital on a fully diluted basis and allocated to the debtors from the Company's management. An
aggregate amount of $ 330,590 payable to debtors from the Company's management will be paid to them after the
consummation of the agreement, as agreed between the Company, the investor and each of the managers. These amounts will not
bear any interest and/or linkage until they are repaid.

 

Issuance
of unquoted options underlying the additional investment option:

 

On the date
of consummation of the agreement and subject to the TASE's approval, the Company will issue to the investor, to holders of debentures
(series A), to holders of debentures (series B) and to the group of lenders, pro rata to their fully diluted interests, unquoted
options for making an additional investment of up to $ 3,000,000 in the Company's share capital ("the additional investment
options").

 

The value
of the Company for the purpose of exercising the additional investment option will be derived from the date of exercise. If the
exercise takes place before eight months have elapsed from the date of grant of the options, the Company's value for the purpose
of the additional investment option will be $ 8,000,000. If, however, the exercise takes place from the beginning of the ninth
month through the end of the eighteenth month from the date of consummation of the agreement, the Company's value for the purpose
of the additional investment option will be $ 10,000,000.

 

    	- 50 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 12:-	COMMITMENTS, CHARGES AND CONTINGENT LIABILITIES (Cont.)

 

		g.	(Cont.)

 

If the investor
delivers to the Company a written demand, the Company undertakes that subject to the TASE's articles and its guidelines, it will
make the best efforts to have the shares arising from the exercise of the additional investment options listed for trade on the
TASE.

 

Subject to
the consummation of the agreement, the holders of debentures (series A and B) and the holders of the qualifying loan will not be
entitled to any additional principal and/or interest payments (other than those paid to them in the past) in respect of the underlying
debentures and/or loans.

 

The Company,
the trustee and the TASE will establish a record date for holding the debentures (series A) with respect to the steps that need
to be taken before the agreement is consummated ("the agreement's record date"). The Company will provide an immediate
report on the agreement's record date. After the agreement's record date, no more trade will be executed in the debentures (series
A) and no transfer of debentures (series A) outside the TASE will be allowed. It should be clarified that the agreement's record
date will apply after all the prerequisites detailed above have been fulfilled.

 

Simultaneously
with the consummation of the agreement, the debentures (series A) will no longer be outstanding, will be delisted from trade on
the TASE and will become null and void. The debentures (series B) and the qualifying loan will also become null and void and the
parties shall act to have any charge recorded for their security removed as described below:

 

If the agreement
is consummated, the following changes will be effected to the Company's share capital and accordingly to the Company's articles
of association:

 

The shares
will have no par value and the share capital will be consolidated and increased. Prior to the date of consummation of the agreement,
the Company's authorized share capital consists of 100,000,000 shares of NIS 0.01 par value each and the Company's issued
share capital consists of 24,703,164 shares of NIS 0.01 par value each. In order to complete the agreement, the number of
shares that should be allocated on the date of consummation of the agreement is 38,699,625,206 shares of NIS 0.01 par value
each.

 

On April
18, 2011, a petition was filed with the Court for the approval of the agreement. On May 9, 2011, the Court granted its approval.
On June 28, 2011, the Company announced that it had received an amount of $ 200 thousand from the investors as part of the
consideration stated in the agreement in a total of $ 2.6 million. This amount is added to another advance that was received
in the Company in a total of $ 200 thousand on account of the consideration in the agreement.

 

    	- 51 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 12:-	COMMITMENTS, CHARGES AND CONTINGENT LIABILITIES (Cont.)

 

		g.	(Cont.)

 

On August
21, 2011, the Company announced that despite its appeals, the investors had not yet transferred the remaining consideration stated
in the agreement in a total of $ 2.2 million. However, the investors reaffirmed to the Company their commitment to deliver
the remaining consideration and complete the agreement. The Company also stated that it is holding negotiations with the investors
and their representatives in coordination with the representatives of the holders of the Company's debentures and is taking the
necessary steps to schedule the date of completion of the agreement and receive the remaining consideration as above. Simultaneously,
the Company is studying certain alternatives. The advances totaling $ 400 thousand were recorded in the financial statements
as payments on account of shares.

 

It should
be clarified that as of the date of the financial statements, the agreement has not been completed and the Company believes that
the MOU has been violated and that its chances of completion are remote. Accordingly, the Company is examining several alternative
investments in coordination with the representatives of the holders of the Company's debentures.

 

		h.	Lease:

 

Between December
2010 and July 2011, the Company subleased its offices for a monthly fee of approximately $ 2.1 thousand (NIS 7,500),
including VAT. In July 2011, the sublease agreement was terminated. As of the date of the financial statements, the Company does
not lease any office spaces.

 

In May 2007,
InterCure Inc. signed a lease contract with an uninterested third party for an area of 450 sq. m. in an office building on the
eighth avenue of Manhattan, New York. The monthly lease and management fees approximate $ 13,542. The lease fees will be increased
by 3% every year. The agreement is for a period of five years.

 

In May 2010,
InterCure Inc. signed a new lease contract for its offices. The monthly lease and management fees approximate $ 4,400. The
lease fees will be increased by 3% every year. The agreement is for a period of three years.

 

		i.	Charges:

 

		1.	As of December 31, 2011, the Company has a deposit in a total of $ 9 thousand that is pledged
in favor of a bank to secure payment to a supplier (December 31, 2010 - $ 100 thousand).

 

		2.	In August 2009, the Company recorded a floating charge on all its assets and rights to existing
and future tangible and intangible assets owned by it and on any right, contingent or absolute, in favor of four of its shareholders
in the context of a loan agreement according to which the Company received loans in an aggregate amount of $ 1,000 thousand
in return for the allocation of debentures (series B).

 

    	- 52 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 12:-	COMMITMENTS, CHARGES AND CONTINGENT LIABILITIES (Cont.)

 

		i.	Charges: (Cont.)

 

		3.	According to the MOU described in paragraph 12g above, the investor (as defined therein) will provide
the Company an advance of $ 200 thousand in the form of a first degree secured loan bearing monthly interest of 2% to be paid
upon the repayment of the advance. To secure said advance, the Company undertook to record a first degree floating charge in favor
of the investor on all its assets and rights and a first degree fixed charge on its entire existing IP and, to the extent possible,
on its shell corporation, in a total amount of up to $ 212 thousand. The MOU also states that if the agreement is not completed,
the advance will not be repaid and the charge will not be exercised. As of the date of the financial statements, the Company believes
that the MOU has been violated, the agreement has not been completed and that its chances of completion are remote, see details
in Note 12g above. The above charge was not recorded and the Company believes that the investor has no right to exercise it.

 

		j.	On May 8, 2007, the Company's Board approved the liability to indemnify the Company's officers
for any liability or expense imposed on them due to an action committed by them in their capacity as officers in the Company provided
that the liability for monetary indemnification is restricted to the events detailed in the prospectus and as long as they are
performed by virtue of the beneficiary's position. The indemnification amount will constitute about 33% of the Company's share
capital following the issuance. Also on May 8, 2007, the Company's Board approved the grant of quittance to the Company's officers,
subject to the provisions of the Companies Law, from any accountability towards the Company due to damages caused to it by the
breach of duty of care of any of the officers in their capacity as officers in the Company provided that they act in good faith.
This quittance shall not apply to the liability of officers acting as directors in the Company due to the breach of duty of care
upon distributions, as defined in the Companies Law.

 

		k.	In November 2008 and on January 12, 2009, the Company's Board and general meeting respectively
approved the purchase of an officers' and directors' liability insurance policy after the expiration of the previous policy and
subject to the following cumulative conditions: (1) the policies will be purchased for several insurance periods that do not exceed
five years from the end of expiration of the previous policy on a cumulative basis; (2) the policy's liability limits will not
be lower than $ 5 million and will not exceed $ 10 million per claim and on a cumulative basis and the annual premium
will not exceed $ 20 thousand. According to the general meeting's decision, the Company signed the officers' and directors'
liability insurance policy which is in effect from May 1, 2011 through April 30, 2012 with a liability limit of $ 5 million.
The Company paid an annual premium of $ 12.5 thousand.

 

    	- 53 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 12:-	COMMITMENTS, CHARGES AND CONTINGENT LIABILITIES (Cont.)

 

		l.	In July 2009, the Company entered into an agreement with Dr. Benjamin Gavish who serves as the
Company's chief scientist and a director therein ("the buyer") according to which the Company will provide the buyer
its rights in a patent which it had decided to abandon and not make any commercial use of for business purposes or for future developments
of devices. In return for the patent rights, the buyer paid the Company a total of $ 18 thousand, of which an amount of $ 8
thousand reflects the Company's costs in connection with the registration of its patent rights.

 

		m.	Alongside the steps being taken to complete the agreement described in Note 12g above, the Company
has examined several alternatives, including entering into a line of credit agreement for receiving a credit facility from Yazmonit
Ltd. (a company controlled by Dr. Benjamin Gavish, a director and interested party in the Company) ("the LC agreement"
and "Yazmonit", respectively). According to the LC agreement, Yazmonit granted the third party which manufactures the
product a credit facility totaling $ 72,120 for a period of 40 days ("the LC term"). According to the LC agreement,
at the end of the LC term, the Company will pay the third party an amount of $ 72,120 or provide that third party an alternative
line of credit. As collateral in favor of Yazmonit and should the third party exercise all or part of said line of credit, the
products (or part thereof, based on the actual payment made by the Company) will be transferred by the third party to Yazmonit's
exclusive ownership and the latter will be able to sell them.

 

On October
6, 2011, the Company's audit committee and Board approved the Company's engagement in the LC agreement as a qualifying transaction
owing to the Company's credit distress and low inventory levels and in order to allow the Company's continued operating activities.

 

According
to the LC agreement, the LC term may be extended to a period of up to 90 days subject to the approval of the Company's engagement
in a license agreement with Yazmonit ("the license agreement"). According to the license agreement, subject to obtaining
the approval of the Israeli Office of the Chief Scientist (if such approval is required), the Company will grant Yazmonit an indefinite
and exclusive license to use the technology and patent rights underlying an unutilized part of the Company's IP ("the license")
and a right to use the Company's RESPeRATE trademark for an overall consideration of $ 25,000.

 

The license
consists of any future product and applications that require an external computer unit (including smart phones) and are not indicated
for treating hypertension. The license agreement also clarifies that the license will not include any products and/or applications
for treating hypertension in any form whatsoever or any stand-alone products developed by the Company for any future field or indication.
In addition, according to the license agreement, if Yazmonit requires the components made by or for the Company, the Company will
sell Yazmonit said components for cost plus a 5% margin. Moreover, for a period of four months from the effective date of the license
agreement, the Company will be entitled to repurchase the license from Yazmonit for a total of $ 75,000 and all the rights
by virtue of the license, excluding rights to future receipts from third parties, will be recovered to the Company. In the event
of the Company's bankruptcy, liquidation, insolvency or discontinuance of business operations, the Company's right to repurchase
the license from Yazmonit will expire.

 

    	- 54 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 12:-	COMMITMENTS, CHARGES AND CONTINGENT LIABILITIES (Cont.)

 

		m.	(Cont.)

 

On October
25, 2011, the meeting of holders of the Company's debentures (series A) decided not to object to the Company's engagement in the
license agreement. On November 7, 2011, the Company announced that it had received the approval of the holders of the Company's
debentures (series B) for entering into the license agreement. In view of the above, on November 7, 2011, the Company's audit committee
and Board approved the Company's engagement in the license agreement. On October 12, 2011, Yazmonit initiated the credit facility
and on November 13, 2011 provided the consideration for the license agreement.

 

On January
4, 2012, the Company reported the extension of the LC agreement to May 30, 2012 under the same terms, as a qualifying transaction,
owing to the Company's credit distress and low inventory levels and in order to allow the Company's continued operating activities.

  

		NOTE 13:-	EQUITY

 

		a.	Composition of share capital:

 

	 	 	December 31, 2011	 	 	December 31, 2010	 
	 	 	Authorized	 	 	Issued and
 paid-up	 	 	Authorized	 	 	Issued and
 paid-up	 
	 	 	Number of shares	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Ordinary shares of NIS 0.01 par value each	 	 	100,000,000	 	 	 	24,703,164	 	 	 	100,000,000	 	 	 	24,703,164	 

 

As for
movements in the share capital, see c below.

 

Each share
confers its holder the right to participate and vote at the general meeting (each share confers one vote) and the right to receive
dividend and/or bonus shares.

 

		b.	On July 29, 2007, the Company announced the coming into effect of the consolidation of the Company's
share capital prior to the listing of its securities for trade on the TASE. As a result of the capital consolidation, the Company's
authorized share capital amounts to NIS 1,000,000, consisting of 100,000,000 Ordinary shares of NIS 0.01 par value each,
of which 23,902,852 fully paid-up as of that date. Consequently, the entire options for Preferred C shares granted by the Company
will become convertible into Ordinary shares.

 

The quoted
market price of the Company's share on the TASE as of December 31, 2011 is NIS 0.03 ($ 0.0078) (December 31, 2010 - NIS 0.21
($ 0.059)).

 

    	- 55 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 13:-	EQUITY (Cont.)

 

		c.	Movements in the share capital:

 

In March
2005, the Company signed an investment agreement with several investors, including existing shareholders in the Company, whereby
the Company allocated 1,698,754 Preferred C shares in return for an investment of $ 3 million (NIS 13.2 million), namely
a price of $ 1.766 per Preferred C share. In addition, a total of $ 2.65 million (NIS 11.4 million) which had been
granted to the Company by its shareholders as bridge loans in July 2002 and January 2004 was converted into 2,955,433 Preferred
C shares (converted at a price of $ 0.883 per share excluding for one shareholder for whom the price was $ 1.4128 per
share). Anyone who was allocated shares in said transaction also received options to purchase Preferred C shares at a number equivalent
to 15% of the total shares allocated in the transaction (excluding said shareholder whose price per share was $ 1.4128 for
whom options that had been granted in the past will become convertible into Preferred C shares according to this agreement at a
number equivalent to 25% of the total shares allocated in the agreement). The entire options granted for the investment and conversion
of the loans as above (including the options of said shareholder with a share price of $ 1.4128), representing 706,017 options,
are exercisable for a price of $ 1.766 each over an exercise period which ends at the earlier of: (1) March 21, 2008, (2)
a qualified IPO as defined in the Company's articles of association (raising a net amount of $ 20 million for the Company
with a pre-IPO value of at least $ 100 million), or (3) merger, consolidation, reorganization, liquidation or sale of the
majority of the Company's shares. In March 2008, 396,995 unquoted options were exercised for approximately $ 701 thousand
(approximately NIS 2,384 thousand) and the remaining options expired.

 

In July 2005,
in the context of a deferred closing of the investment round, an investor invested a total of $ 0.5 million (NIS 2.2
million) against the allocation of 283,125 Preferred C shares and options to purchase 42,468 Preferred C shares for an exercise
price of $ 1.766 per share. The exercise period ends at the earlier of: (1) July 29, 2008, (2) a qualified IPO as defined
above for the remaining options allocated in the investment round, or (3) merger, consolidation, reorganization, liquidation or
sale of the majority of the Company's shares. In March 2008, the options were exercised.

 

In the context
of the transaction, service agreements were signed with two of the investors (one of which an interested party in the Company)
according to which, in return for various services, the Company granted each of these investors options to purchase 84,938 Preferred
C shares (collectively - 169,876 options) which are exercisable for a price of $ 1.766 (approximately NIS 7.3) per share.
The options are exercisable immediately upon grant and over a period of 18 months. The options expired in January 2007 but in May
2007, the Company's Board decided to have the life of the options extended until the earlier of: (1) 12 months from the date of
amendment, or (2) 30 days from the date of the Company's prospectus. In August 2007, the options were exercised into 21,900 Ordinary
shares of NIS 0.01 par value each of the Company.

 

    	- 56 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 13:-	EQUITY (Cont.)

 

		c.	Movements in the share capital: (Cont.)

 

Moreover,
two entities that provided brokerage services to the Company in the context of the investment were granted options to purchase
Preferred C shares. The first entity received 56,625 options that are exercisable for a price of $ 1.766 (approximately NIS 7.67)
per share over an exercise period that ends at the earlier of: (1) March 20, 2009, (2) a qualified IPO as defined above for the
remaining options allocated in the investment round, or (3) merger, consolidation, reorganization, liquidation or sale of the majority
of the Company's shares. The second entity received 84,937 options pursuant to the 2005 option plan.

 

In February
2006, the Company signed an addendum to the investment agreement of March 2005 whereby it allocated to two investors a total of
679,502 Preferred C shares and 101,925 options to purchase shares in return for an investment of $ 1.2 million (NIS 5.6
million), namely for a price of $ 1.766 per share.

 

In July 2007,
some of the shareholders that provided a convertible loan to the Company converted their options into 319,968 Ordinary shares and
106,656 options (series 1).

 

In July 2007,
the Company's shares were listed for trade on the TASE as follows:

 

		1.	On July 26, 2007, the Company completed an IPO on the TASE in which it issued to the public 3,000,000
registered Ordinary shares of NIS 0.01 par value each, NIS 41,000,000 par value of registered debentures (series A) and
1,500,000 registered options (series 1) offered to the public in two separate tenders as follows:

 

The first
tender:

 

100,000 units
by tender on the unit price according to the following unit composition and minimum price:

 

	30 Ordinary shares at $ 2.06
    (NIS 8.8) per share and a total of 10 options (series 1)	 	$	61.8	 
		 	 	No consideration	 
	 	 	 	 	 
	Total minimum price per unit	 	$	61.8	 

 

The price
per unit in the IPO was $ 62 (NIS 266).

 

    	- 57 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 13:-	EQUITY (Cont.)

 

		c.	Movements in the share capital: (Cont.)

 

The second
tender:

 

100,000 units
by tender on the unit price according to the following unit composition and minimum price:

 

	$ 96 (NIS 410) par value of
    debentures (series A) at par value 5 options (series 1)	 	$	96	 
		 	 	No consideration	 
	 	 	 	 	 
	Total price per unit	 	$	96	 

 

The price
per unit in the IPO was $ 96 (NIS 410).

 

The total
immediate (gross) proceeds generated by the Company from the IPO approximated $ 15,813 thousand (approximately NIS 67,600
thousand).

 

The net proceeds
(less issuance expenses) amounted to approximately $ 14,428 thousand (approximately NIS 61,630 thousand) and were allocated
to each of the instruments that were issued in both the above tenders according to an average value of each of the instruments
issued in the first three trading days in such a manner that an amount of $ 5,227 thousand (approximately NIS 22,291
thousand) was allocated to shares, an amount of $ 6,069 thousand (approximately NIS 25,951 thousand) was allocated to
debentures and an amount of $ 3,132 thousand (approximately NIS 13,388 thousand) was assigned to the options and the
conversion option.

 

		2.	The debentures are repayable in three equal annual installments on July 31 of each of the years
2012 through 2014 (inclusive), bear annual interest of 7.4% to be paid on January 31 and July 31 of each of the years 2008 through
2014 (inclusive). The debentures' principal and interest are linked to the Israeli CPI published for June 2007. The debentures
(series A) are convertible during each trading day beginning from the date of their listing for trade on the TASE through July
15, 2014, except on July 16 through July 31 of each of the years 2012 and 2013, in such a manner that each NIS 11.85 ($ 3.11)
par value of debentures (series A) is convertible into one new Ordinary share of NIS 0.01 par value of the Company. The effective
interest calculated in the context of the bifurcation of the unit components is 18.3%.

 

		3.	Quoted options - each option is exercisable into one Ordinary share of NIS 0.01 par value
of the Company for a cash exercise price of NIS 12 ($ 3.16), subject to adjustments, until July 12, 2011 (inclusive).
Any option that is not exercised by that date will become null and void and will not confer upon its holders any rights in the
Company whatsoever.

 

    	- 58 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 13:-	EQUITY (Cont.)

 

		c.	Movements in the share capital: (Cont.)

 

In December
2007, some of the holders of convertible debentures converted approximately NIS 94 thousand par value into 7,888 Ordinary
shares of NIS 0.01 par value each.

 

In March
2008, 396,995 unquoted options granted according to the investment agreement of 2005 were exercised into 396,995 Ordinary shares
of NIS 0.01 par value each in consideration of approximately $ 701 thousand (approximately NIS 2,384 thousand) and
the remaining options expired.

 

In April
2008, 91,667 unregistered options were exercised into 38,425 Ordinary shares of NIS 0.01 par value each through a cashless
exercise mechanism. 3,333 unregistered options pursuant to the option plan expired.

 

In 2008,
NIS 179,362 par value of debentures were converted into 15,136 Ordinary shares of NIS 0.01 par value each.

 

		d.	Balance of fully paid-up share capital:

 

	 	 	Number of 

Ordinary	 	 	Share

 capital	 	 	Premium	 
	 	 	shares	 	 	US dollars in thousands	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance as of December 31, 2009, 2010 and 2011	 	 	24,703,164	 	 	 	60	 	 	 	28,346	 

 

		e.	Options:

 

On July 26,
2007, according to a prospectus, the Company issued 1,500,000 options (series 1) which are exercisable into registered Ordinary
shares of NIS 0.01 par value each for an exercise increment of NIS 12 per option. A total of $ 688 thousand (NIS 2,940
thousand) was allocated as net consideration for the options on the issuance date. In July 2011, all options (series 1) expired.

 

    	- 59 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 14:-	CAPITAL RESERVE FOR SHARE-BASED PAYMENT

 

		a.	Movement:

 

	 	 	December 31,	 
	 	 	2011	 	 	2010	 
	 	 	US dollars in thousands	 
	 	 	 	 	 	 	 
	Balance at the beginning of the year	 	 	1,724	 	 	 	1,664	 
	 	 	 	 	 	 	 	 	 
	Cost of share-based payment to employees	 	 	(169	)	 	 	60	 
	Expiration of options	 	 	(832	)	 	 	-	 
	 	 	 	 	 	 	 	 	 
	Balance at the end of the year	 	 	723	 	 	 	1,724	 

 

The capital
reserve for share based payment derives from grant of options to employees under a remuneration plan to Company's employees. For
additional information about share-based payments, see Note 2q.

 

		b.	Details of plans for the allocation of options to officers in the Company:

 

		1.	Option plans:

 

In March
2001, the Company adopted the option plan for Israeli employees and other Israeli non-employees for 2001 and the option plan for
US employees and other non-employees for 2001 ("the 2001 plans"). According to the 2001 plans, the Company may grant
options for the purchase of Ordinary shares of the Company to employees, directors and consultants of the Company or its subsidiaries
for the exercise price determined in each of the grant agreements. The 2001 plans will expire in 2011 unless the Company's Board
decides to terminate them earlier. The options are exercisable until the earlier of ten years from the date of grant or as stipulated
in the option agreement.

 

As of December
31, 2011, pursuant to the 2001 plans, the Company granted options at no consideration for 523,606 Ordinary shares (160,000 to employees,
283,606 to directors and 80,000 to consultants) for exercise prices ranging between NIS 6.856 and NIS 7.98 per share.
The options have fully vested.

 

In May 2005,
the Company adopted the 2005 stock plan ("the 2005 plan") according to which it may grant options for the purchase of
Ordinary shares of the Company to employees, directors and consultants of the Company or its subsidiaries for the exercise price
determined in each of the grant agreements. The 2005 plan will expire in 2015 unless the Company's Board decides to terminate it
earlier. The options are exercisable until the earlier of ten years from the date of grant or as stipulated in the option agreement.

 

    	- 60 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 14:-	CAPITAL RESERVE FOR SHARE-BASED PAYMENT (Cont.)

 

		b.	Details of plans for the allocation of options to officers in the Company: (Cont.)

 

		1.	Option plans: (Cont.)

 

In April
2007, the Company's Board approved the grant of an option for the purchase of 220,000 Ordinary shares of the Company for an exercise
price of $ 1.1 (approximately NIS 4.6) per share to the Chairman of the Company's Board. These options had fully vested
by December 31, 2007. The Company's Board also approved the grant of an option for the purchase of 355,000 Ordinary shares of the
Company to employees and consultants for an exercise price of $ 1.1 (approximately NIS 4.6) per share. The options will
vest over a period of up to three years. The options are exercisable until the earlier of ten years from the date of grant or as
stipulated in the option agreement.

 

In September
2007, the Company's Board approved the grant of an option for the purchase of 60,000 Ordinary shares to two external directors
of the Company for an exercise price of NIS 10, linked to the US dollar. Half of the options will vest at the end of 18 months
and the other half will vest at the end of 36 months from the date of grant. The exercise period is 18 months from the vesting
date.

 

In January
2008, the Company's Board approved the grant of an option for the purchase of 602,000 Ordinary shares of the Company to employees
for an exercise price of $ 1.9 (NIS 7.11) per share. The options vest over a period of up to four years. The options
are exercisable until the earlier of ten years from the date of grant or as stipulated in the option agreement.

 

The value
of the benefit underlying the grant of the above option was estimated at approximately $ 511 thousand. This amount will be
amortized to profit and loss over the vesting period of the options.

 

In April
2008 and May 2008, the Company's Board and general meeting respectively approved the grant of an option for the purchase of 120,000
Ordinary shares of the Company to directors in the Company for an exercise price of NIS 10 per share, linked to changes in
the exchange rate of the US dollar compared to the representative exchange rate as of October 25, 2007 ($ 2.496 per share).
Half of the options will vest at the end of 18 months from October 2007 and the other half will vest at the end of 36 months from
October 2007. The exercise period is 18 months from the vesting date.

 

The value
of the benefit underlying the grant of the above option was estimated at approximately $ 32 thousand. This amount will be
amortized to profit and loss over the vesting period of the options.

 

As of December
31, 2011, pursuant to the 2005 plan, the Company granted options at no consideration for 1,458,937 Ordinary shares (939,000 to
employees, 435,000 to directors and 84,937 to consultants) for exercise prices ranging between $ 1.1 (approximately NIS 4.13)
and $ 2.479 (approximately NIS 10.0) per share. The options have fully vested.

 

    	- 61 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 14:-	CAPITAL RESERVE FOR SHARE-BASED PAYMENT (Cont.)

 

		2.	Estimated value of each option:

 

The fair
value of the options granted as described above was calculated using the Black & Scholes option pricing model. The Company
did not take into account the effect of the vesting terms, excluding the effect of market terms on the fair value of the granted
equity instruments.

 

The inputs
used in the adoption of the model are as follows:

 

	Share prices ($)	 	 	1.766-2.186	 	 	 
	Exercise increment prices ($)	 	 	1.1-2.496	 	 	 
	Expected volatility	 	 	25%-70%	 	 	 
	Expected life of the options (years)	 	 	3-7	 	 	Based on management's forecast of the holding period of the options
	Risk-free interest rate	 	 	4%-5.15%	 	 	 
	Expected dividend yield	 	 	0%		 	 

 

		c.	Additional details regarding option plans:

 

	 	 	2011	 	 	2010	 
	 	 	Number of 

options	 	 	Weighted 

average

 exercise

 price	 	 	Number of 

options	 	 	Weighted 

average

 exercise

 price	 
	 	 	 	 	 	$	 	 	 	 	 	$	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Options outstanding at the beginning of the year	 	 	1,542,543	 	 	 	1.61	 	 	 	2,306,754	 	 	 	1.51	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Granted during the year	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 
	Forfeited during the year	 	 	(235,000	)	 	 	1.66	 	 	 	-	 	 	 	-	 
	Expired during the year	 	 	(641,167	)	 	 	1.66	 	 	 	(764,511	)	 	 	1.36	 
	Exercised during the year	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Options outstanding at the end of the year	 	 	666,376	 	 	 	1.48	 	 	 	1,542,543	 	 	 	1.61	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Options exercisable at end of year	 	 	632,876	 	 	 	1.44	 	 	 	1,395,543	 	 	 	1.57	 

 

    	- 62 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 14:-	CAPITAL RESERVE FOR SHARE-BASED PAYMENT (Cont.)

 

	December 31, 2011
	Range of 
 exercise prices	 	Number of
 options	 	 	Weighted
 average
 remaining life
 of options	 	 	Weighted
 average
 exercise price	 	 	Number of
 options
 exercisable	 	 	Weighted
 average
 exercise price	 
	$	 	 	 	 	(In years)	 	 	$	 	 	 	 	 	$	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	11.1	 	 	265,000	 	 	 	3.853	 	 	 	1.1	 	 	 	265,000	 	 	 	1.1	 
	1.766	 	 	169,876	 	 	 	5.348	 	 	 	1.766	 	 	 	169,876	 	 	 	1.766	 
	1.899	 	 	141,500	 	 	 	6.044	 	 	 	1.899	 	 	 	108,000	 	 	 	1.899	 
	2.218	 	 	60,000	 	 	 	5.732	 	 	 	2.218	 	 	 	60,000	 	 	 	2.218	 
	2.496	 	 	30,000	 	 	 	6.293	 	 	 	2.496	 	 	 	30,000	 	 	 	2.496	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	666,376	 	 	 	 	 	 	 	1.603	 	 	 	632,876	 	 	 	1.587	 

 

		NOTE 15:-	ADDITIONAL INFORMATION ABOUT EXPENSES

 

		 		 	Year ended December 31,	 
	 	 	 	 	2011	 	 	2010	 	 	2009	 
	 	 	 	 	US dollars in thousands	 
	a.	 	Cost of sales:	 	 		 	 	 		 	 	 		 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Subcontractor - main supplier	 	 	310	 	 	 	487	 	 	 	623	 
	 	 	Storage and delivery	 	 	170	 	 	 	237	 	 	 	318	 
	 	 	Changes in inventories	 	 	239	 	 	 	107	 	 	 	214	 
	 	 	Commissions	 	 	53	 	 	 	51	 	 	 	72	 
	 	 	Other	 	 	-	 	 	 	-	 	 	 	108	 
	 	 	Salaries and related expenses	 	 	-	 	 	 	-	 	 	 	6	 
	 	 	Stock-based compensation expenses	 	 	(12	)	 	 	-	 	 	 	-	 
	 	 	Vehicle expenses	 		-	 	 	 	-	 	 	 	3	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	760	 	 	 	882	 	 	 	1,344	 
	b.	 	Research and development expenses:	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Salaries and related expenses	 	 	204	 	 	 	244	 	 	 	337	 
	 	 	Vehicle expenses	 	 	30	 	 	 	30	 	 	 	43	 
	 	 	Stock-based compensation expenses	 	 	(22	)	 	 	9	 	 	 	28	 
	 	 	Other	 	 	8	 	 	 	3	 	 	 	9	 
	 	 	Materials and equipment maintenance	 	 	1	 	 	 	2	 	 	 	3	 
	 	 	Business trips	 	 	1	 	 	 	2	 	 	 	3	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	222	 	 	 	290	 	 	 	423	 

 

    	- 63 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 15:-	ADDITIONAL INFORMATION ABOUT EXPENSES (Cont.)

 

	 	 	 	 	Year ended December 31,	 
	 	 	 	 	2011	 	 	2010	 	 	2009	 
		 		 	US dollars in thousands	 
	c.	 	Selling and marketing expenses:	 	 		 	 	 		 	 			 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Advertising and public relation	 	 	1,172	 	 	 	1,402	 	 	 	2,104	 
	 	 	Salaries and related expenses	 	 	523	 	 	 	715	 	 	 	1,350	 
	 	 	Rent and maintenance	 	 	191	 	 	 	223	 	 	 	363	 
	 	 	Stock-based compensation expenses	 	 	(80	)	 	 	23	 	 	 	68	 
	 	 	Business trips	 	 	-	 	 	 	-	 	 	 	39	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	1,806	 	 	 	2,363	 	 	 	3,924	 
	d.	 	General and administrative expenses:	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Salaries and related expenses	 	 	386	 	 	 	681	 	 	 	733	 
	 	 	Professional expenses	 	 	134	 	 	 	317	 	 	 	160	 
	 	 	Depreciation and amortization	 	 	59	 	 	 	140	 	 	 	128	 
	 	 	Consulting *)	 	 	111	 	 	 	116	 	 	 	130	 
	 	 	Insurance	 	 	17	 	 	 	30	 	 	 	88	 
	 	 	Patent	 	 	45	 	 	 	76	 	 	 	107	 
	 	 	Stock-based compensation expenses	 	 	(55	)	 	 	28	 	 	 	49	 
	 	 	Vehicle expenses and business trips	 	 	24	 	 	 	23	 	 	 	70	 
	 	 	Rent, communication and maintenance	 	 	56	 	 	 	147	 	 	 	82	 
	 	 	Allowance for doubtful accounts	 	 	70	 	 	 	4	 	 	 	14	 
	 	 	Other	 	 	5	 	 	 	41	 	 	 	-	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	852	 	 	 	1,603	 	 	 	1,561	 
	e.	 	Expenses relating to employee benefits:	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Salaries and related expenses	 	 	1,136	 	 	 	1,608	 	 	 	2,409	 
	 	 	Stock-based compensation transactions	 	 	(169	)	 	 	60	 	 	 	145	 
	 	 	Expenses (income) relating to defined benefit plan	 	 	(38	)	 	 	28	 	 	 	14	 
	 	 	Expenses relating to defined contribution plan	 	 	15	 	 	 	2	 	 	 	2	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	1,131	 	 	 	1,698	 	 	 	2,570	 
	f.	 	Depreciation and amortization:	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Depreciation of property, plant and equipment	 	 	59	 	 	 	140	 	 	 	128	 

 

*)Including
amounts to interested parties, see also Note 21.

 

    	- 64 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 16:-	FINANCE INCOME

 

	 	 	 	 	Year ended December 31,	 
	 	 	 	 	2011	 	 	2010	 	 	2009	 
		 	 	 	US dollars in thousands	 
	a.	 	Interest income: *)	 	 		 	 	 		 	 	 		 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Interest income on short-term bank deposits	 	 	-	 	 	 	1	 	 	 	6	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Total interest income	 	 	-	 	 	 	1	 	 	 	6	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	b.	 	Other:	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Gain from early redemption	 	 	-	 	 	 	-	 	 	 	282	 
	 	 	Exchange differences	 	 	576	 	 	 	-	 	 	 	42	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Total finance income	 	 	576	 	 	 	-	 	 	 	324	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	c.	 	Net gain from financial liabilities by categories:	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Erosion of financial liabilities designated at fair value through profit or loss	 	 	-	 	 	 	433	 	 	 	-	 

 

*)Including
amounts to interested parties, see also Note 21.

 

		NOTE 17:-	FINANCE EXPENSES

 

	 	 	 	 	Year ended December 31,	 
	 	 	 	 	2011	 	 	2010	 	 	2009	 
		 	 	 	US dollars in thousands	 
	a.	 	Interest expenses: *)	 	 		 	 	 		 	 	 		 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Interest expenses, discount and linkage differences on convertible debentures	 	 	1,860	 	 	 	2,483	 	 	 	1,575	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Total interest expenses	 	 	1,860	 	 	 	2,483	 	 	 	1,575	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	b.	 	Other:	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Commissions expense	 	 	18	 	 	 	27	 	 	 	32	 
	 	 	Exchange differences	 	 	-	 	 	 	42	 	 	 	54	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Total finance expenses	 	 	18	 	 	 	69	 	 	 	86	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	c.	 	Net loss from financial liabilities by categories:	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Appreciation of financial liabilities designated at fair value through profit or loss	 	 	-	 	 	 	-	 	 	 	87	 

 

*)Including
amounts to interested parties, see also Note 21.

 

    	- 65 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 18:-	LOSS PER SHARE

 

		a.	Details of the number of shares and loss used in the computation of loss per share:

 

	 	 	Year
    ended December 31,	 
	 	 	2011	 	 	2010	 	 	2009	 
	 	 	Number
    of
 shares	 	 	Loss	 	 	Number
    of
 shares	 	 	Loss	 	 	Number
    of
 shares	 	 	Loss	 
	 	 	 	 	 	US
    dollars
  in thousands	 	 	 	 	 	US
    dollars
  in thousands	 	 	 	 	 	US
    dollars
  in thousands	 
	Number
    of shares and loss according to the statement of profit or loss for the computation of basic and diluted loss	 	 	24,703,164	 	 	 	(1,787	)	 	 	24,703,164	 	 	 	(3,541	)	 	 	24,703,164	 	 	 	(4,396	)

 

		b.	Diluted loss per share is identical to basic loss per share because the potential Ordinary shares
have anti-dilutive effect.

 

		NOTE 19:-	FINANCIAL INSTRUMENTS

 

		a.	Financial risks factors:

 

The Group's
activities expose it to various financial risks such as market risks (foreign exchange risk, Israeli CPI risk and interest risk),
credit risk and liquidity risk. The Group's comprehensive risk management plan focuses on activities that reduce to a minimum any
possible adverse effects on the Group's financial performance.

 

Risk management
is performed by the Company's CEO and CFO based on the policy approved by the Board. The Company's CEO and CFO identify, assess
and define financial risks.

 

		b.	Categories of financial instruments:

 

	 	 	December 31,	 
	 	 	2011	 	 	2010	 
	 	 	US dollars in thousands	 
	Financial assets:	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 
	Trade receivables, other accounts receivable, cash and cash equivalents and short-term deposits	 	 	536	 	 	 	818	 
	 	 	 	 	 	 	 	 	 
	Financial liabilities:	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 
	Trade payables, other accounts payable, short-term loans and financial liabilities measured at amortized cost	 	 	14,171	 	 	 	13,174	 

 

    	- 66 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 19:-	FINANCIAL INSTRUMENTS (Cont.)

 

		b.	Categories of financial instruments: (Cont.)

 

As of the
reporting date there are no significant concentrations of credit risk regarding trade and other receivables that are designated
at fair value through profit and loss. The carrying amount presented above represents the Group's maximum exposure to credit risk
regarding loans and receivables.

 

		c.	Financial risk management objectives:

 

The Group's
finance department provides services for the business activity, allows access to local and international financial markets, supervises
and manages the financial risks underlying the Group's activities through internal reports that analyze the level of exposure to
risks based on their level and intensity. These risks consist of market risks (including foreign currency risk, Israeli CPI risk
and interest risk), credit risk and liquidity risk.

 

		d.	Market risk:

 

		1.	Foreign currency risk:

 

The majority
of the Company's expenses are stated in US dollars, excluding liabilities in respect of CPI-linked NIS debentures, which exposes
the Company to foreign currency risk arising from the exchange rate of the NIS in relation to the dollar. The Company acts to minimize
the currency risk by keeping liquid means in the form of short-term NIS and dollar deposits. Moreover, in view of the Company's
UK activities, there is exposure to changes in the dollar-Pound exchange rate.

 

The Company's
Board decided to invest the majority of the Company's cash balances in dollar deposits and the remaining cash in NIS deposits.
In making this decision, the Board took into consideration long-term convertible debentures issued by the Company that are repayable
in 2012-2014 and the fact that in the coming years, most of the Company's sales and expenses are expected to be linked to the dollar.
The significant NIS-linked current expenses consist of current interest payments to holders of convertible debentures issued by
the Company.

 

In 2011,
there was no change in the foreign currency exposure or in the Group's risk management and measurement policies.

 

    	- 67 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 19:-	FINANCIAL INSTRUMENTS (Cont.)

 

		d.	Market risk: (Cont.)

 

		1.	Foreign currency risk: (Cont.)

 

The carrying
amount of the Group's monetary assets and liabilities stated in foreign currency are as follows:

 

	 	 	Liabilities	 	 	Assets	 
	 	 	December 31,	 	 	December 31,	 
	 	 	2011	 	 	2010	 	 	2011	 	 	2010	 
	 	 	US dollars in thousands	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	NIS	 	 	12,057	 	 	 	11,105	 	 	 	15	 	 	 	64	 
	Pound	 	 	64	 	 	 	63	 	 	 	92	 	 	 	121	 
	Euro	 	 	14	 	 	 	12	 	 	 	15	 	 	 	25	 

 

Sensitivity
analysis of foreign currency:

 

As stated
above, the Group is mainly exposed to exchange rate changes in the NIS and the Pound in relation to the dollar. The following table
presents the sensitivity to a 10% increase or decrease in the relevant exchange rate. 10% is the sensitivity rate that represents
management's assessments of reasonable potential fluctuations in exchange rates. The sensitivity analysis includes existing balances
of monetary items stated in foreign currency and adjusts their translation at the end of the period to a 10% change in exchange
rates.

 

The sensitivity
analysis includes outside loans as well as loans to foreign operations in the Group that are stated in a currency other than the
lender's or the borrower's currency.

 

The Company
estimates that the exposure to Euro is immaterial.

 

    	- 68 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 19:-	FINANCIAL INSTRUMENTS (Cont.)

 

		d.	Market risk: (Cont.)

 

		1.	Foreign currency risk: (Cont.)

 

	 	 	Effect of NIS (1)	 	 	Effect of Pound (2)	 
	 	 	December 31,	 	 	December 31,	 
	 	 	2011	 	 	2010	 	 	2011	 	 	2010	 
	 	 	US dollars in thousands	 
	Effect of 10% increase in the dollar exchange rate in relation to other currencies before taxes:	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Net income (loss)	 	 	1,095	 	 	 	1,004	 	 	 	(3	)	 	 	(5	)
	Deficit	 	 	1,095	 	 	 	1,004	 	 	 	(3	)	 	 	(5	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Effect of 10% decrease in the dollar exchange rate in relation to other currencies before taxes:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Net income (loss)	 	 	(1,338	)	 	 	(1,227	)	 	 	3	 	 	 	7	 
	Deficit	 	 	(1,338	)	 	 	(1,227	)	 	 	3	 	 	 	7	 

 

		(1)	Mainly arises from exposure to existing balance of debentures in NIS at year end.

 

		(2)	Mainly arises from exposure to existing balances of receivables in Pound at year end.

 

		2.	Israeli CPI risk:

 

In July 2007,
in the context of a prospectus, the Company issued NIS debentures that are linked to the known Israeli CPI (principal and interest).
The Company is exposed to an increase in the CPI.

 

    	- 69 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 19:-	FINANCIAL INSTRUMENTS (Cont.)

 

		d.	Market risk: (Cont.)

 

		2.	Israeli CPI risk: (Cont.)

 

Analysis
of sensitivity to changes in Israeli CPI:

 

An increase
in the Israeli CPI affects equity and profit or loss in the amounts presented below. This analysis was performed assuming that
all other variables remain constant.

 

	 	 	Effect on loss	 	 	Effect on deficit	 
	 	 	December 31,	 	 	December 31,	 
	 	 	2011	 	 	2010	 	 	2011	 	 	2010	 
	 	 	US dollars in thousands	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	5% increase in the Israeli CPI	 	 	(576	)	 	 	(521	)	 	 	(576	)	 	 	(521	)

 

A decrease
in the Israeli CPI at the same rate as of December 31, 2011 and 2010 has the same effect only at the opposite direction, assuming
that all other variables remain constant.

 

		e.	Interest risk:

 

The Group's
exposure to interest rates on financial assets and liabilities is described in paragraph g below regarding liquidity risk management.

 

		f.	Credit risk management:

 

Credit risk
may arise from exposure to a single debtor or to a group of debtors with the same features whose ability to meet their obligations
may be similarly affected by changes in economic or other conditions. Features that are likely to cause concentration of risk include
the nature of the debtors' activities, the industry in which they operate, the geographical location of their activities and the
level of their financial stability.

 

The Company
performs ongoing evaluations of the credit extended to its customers while inspecting the financial conditions of their environment.

 

The Company
holds cash and cash equivalents in various financial institutions. These financial institutions are mostly located in Israel and
the United States. According to the Company's policy, ongoing tests are carried out of the proportionate credit strength of the
various financial institutions.

 

Financial
assets in arrears total $ 168 thousand as of the balance sheet date.

 

    	- 70 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 19:-	FINANCIAL INSTRUMENTS (Cont.)

 

		g.	Liquidity risk management:

 

The ultimate
responsibility for liquidity risk management lies with the Board which has established an appropriate liquidity risk management
work plan that responds to management's short-term, mid-term and long-term financing and cash requirements. The Group manages liquidity
risk by holding bank and borrowing means, constantly supervising actual and expected cash flows and adapting the vesting features
of financial assets and liabilities.

 

Interest
and liquidity risks:

 

		1.	Financial liabilities that are not used as derivative financial instruments:

 

The following
tables specify the Group's remaining contractual maturity dates of financial liabilities that are not used as derivative financial
instruments. The tables were prepared on the basis of the undiscounted cash flows of the financial liabilities based on the earliest
maturity date which the Group might be required to meet. The tables include cash flows in respect of both interest and principal.

 

	 	 	Average
 effective
 interest
 rate	 	 	3 months-
 one year	 	 	1 to 5 
 years	 	 	Over 5 
 years	 	 	Total	 
	 	 	%	 	 	US dollars in thousands	 
	2011:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Interest free	 	 	 	 	 	 	3,887	 	 	 	-	 	 	 	-	 	 	 	3,887	 
	Fixed interest	 	 	18.4	 	 	 	10,982	 	 	 	-	 	 	 	-	 	 	 	10,982	 
	Variable interest	 	 	57.5	 	 	 	1,000	 	 	 	-	 	 	 	-	 	 	 	1,000	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	15,869	 	 	 	-	 	 	 	-	 	 	 	15,869	 
	2010:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Interest free	 	 	 	 	 	 	3,404	 	 	 	-	 	 	 	-	 	 	 	3,404	 
	Fixed interest	 	 	18.4	 	 	 	200	 	 	 	11,529	 	 	 	-	 	 	 	11,729	 
	Variable interest	 	 	57.5	 	 	 	-	 	 	 	1,000	 	 	 	-	 	 	 	1,000	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	3,604	 	 	 	12,529	 	 	 	-	 	 	 	16,133	 

 

    	- 71 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 19:-	FINANCIAL INSTRUMENTS (Cont.)

 

		g.	Liquidity risk management: (Cont.)

 

		2.	Non-derivative financial assets:

 

The following
tables specify the Group's expected maturity dates of non-derivative financial assets. The tables were prepared on the basis of
the undiscounted contractual maturity dates of the financial assets including the interest earned on these assets, excluding cases
in which the Group anticipates the cash flows to be generated in another period.

 

	 	 	Average
 effective
 interest
 rate	 	 	Less than 
 one year	 	 	1 to 5 
 years	 	 	Over 5 
 years	 	 	Total	 
	 	 	%	 	 	US dollars in thousands	 
	2011:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Interest free	 	 	-	 	 	 	209	 	 	 	-	 	 	 	-	 	 	 	209	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	2010:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Interest free	 	 	-	 	 	 	473	 	 	 	-	 	 	 	-	 	 	 	473	 

 

The Group
estimates that it needs additional financing in order to meet its current liabilities. See details of the deferral of debenture
interest payments in Note 9a above.

 

The fair
value of financial assets and liabilities was determined as follows:

 

The fair
value of financial assets and liabilities with standard terms that are traded in active markets is determined with reference to
quoted market prices based on Level 1.

 

Other than
as presented in the following table, the Group believes that the carrying amount of financial assets and liabilities presented
at amortized cost approximates their fair value.

 

	 	 	Carrying amount	 	 	Fair value *)	 
	 	 	December 31,	 	 	December 31,	 
	 	 	2011	 	 	2010	 	 	2011	 	 	2010	 
	 	 	US dollars in thousands	 
	Financial liabilities:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Convertible debentures	 	 	9,545	 	 	 	9,208	 	 	 	1,137	 	 	 	1,796	 

 

		*)	The fair value is based on quoted prices in an active market at the end of the reporting period.

 

    	- 72 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE
19:-FINANCIAL INSTRUMENTS (Cont.)

 

		g.	Liquidity risk management: (Cont.)

 

		3.	Financial instruments presented in the statement of financial position at fair value:

 

For the purpose
of measuring the fair value of its financial instruments, the Group classifies the financial instruments presented in the statement
of financial position at fair value according to the fair value hierarchy which consists of the following three levels:

 

	 	Level 1	-	quoted prices (unadjusted) in active markets for identical assets or liabilities.
	 	 	 	 
	 	Level 2	-	inputs other than quoted prices included within Level 1 that are observable either directly (prices) or indirectly (inputs derived from prices) with respect to financial assets and liabilities.
	 	 	 	 
	 	Level 3	-	inputs with respect to financial assets and liabilities that are not based on observable market data.

 

The classification
of the financial instruments measured at fair value is based on the lowest level that was materially used for measuring the fair
value of the instrument as a whole.

 

The Group's
financial instruments measured at fair value are presented in the financial statements in an amount that is lower than $ 1
thousand. See Note 8b regarding the calculation of value.

 

    	- 73 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 20:-	SEGMENT REPORTING

 

The Group
companies operate in a single business segment and in several different geographic operating segments. Below is data by geographic
segments:

 

	 	 	US	 	 	UK	 	 	Other
 countries	 	 	Adjustments	 	 	Total	 
	 	 	US dollars in thousands	 
	Year ended December 31, 2011	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Revenues:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	From external entities	 	 	2,643	 	 	 	394	 	 	 	134	 	 	 	-	 	 	 	3,171	 
	Inter-segment	 	 	-	 	 	 	-	 	 	 	761	 	 	 	(761	)	 	 	-	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	2,643	 	 	 	394	 	 	 	895	 	 	 	(761	)	 	 	3,171	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Segment results	 	 	170	 	 	 	(150	)	 	 	48	 	 	 	 	 	 	 	68	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Total segment expenses	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	(537	)
	Operating loss in the consolidated statement	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	(469	)
	Finance expenses, net	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	(1,302	)
	Other expenses	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	(5	)
	Tax expenses	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	(11	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Loss for the year	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	(1,787	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Segment assets	 	 	122	 	 	 	130	 	 	 	18	 	 	 	 	 	 	 	270	 
	Unallocated assets	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	497	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Total assets in the consolidated statement	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	767	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Segment liabilities	 	 	585	 	 	 	63	 	 	 	-	 	 	 	 	 	 	 	648	 
	Unallocated liabilities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	13,687	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Total liabilities in the consolidated statement	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	14,335	 

 

    	- 74 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 20:-	SEGMENT REPORTING (Cont.)

 

	 	 	US	 	 	UK	 	 	Other

 countries	 	 	Adjustments	 	 	Total	 
	 	 	US dollars in thousands	 
	Year ended December 31, 2010	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Revenues:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	From external entities	 	 	3,002	 	 	 	565	 	 	 	161	 	 	 	-	 	 	 	3,728	 
	Inter-segment	 	 	-	 	 	 	-	 	 	 	1,128	 	 	 	(1,128	)	 	 	-	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	3,002	 	 	 	565	 	 	 	1,289	 	 	 	(1,128	)	 	 	3,728	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Segment results	 	 	62	 	 	 	(320	)	 	 	138	 	 	 	 	 	 	 	(120	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Total segment expenses	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	(1,290	)
	Operating loss in the consolidated statement	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	(1,410	)
	Finance expenses, net	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	(2,118	)
	Other income	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	-	 
	Tax expenses	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	(13	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Loss for the year	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	(3,541	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Segment assets	 	 	350	 	 	 	107	 	 	 	38	 	 	 	 	 	 	 	495	 
	Unallocated assets	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	822	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Total assets in the consolidated statement	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	1,317	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Segment liabilities	 	 	645	 	 	 	63	 	 	 	-	 	 	 	 	 	 	 	708	 
	Unallocated liabilities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	12,642	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Total liabilities in the consolidated statement	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	13,350	 

 

    	- 75 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 20:-	SEGMENT REPORTING (Cont.)

 

	 	 	US	 	 	UK	 	 	Other
 countries	 	 	Adjustments	 	 	Total	 
	 	 	US dollars in thousands	 
	Year ended December 31, 2009	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Revenues:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	From external entities	 	 	3,558	 	 	 	570	 	 	 	135	 	 	 	-	 	 	 	4,263	 
	Inter-segment	 	 	-	 	 	 	-	 	 	 	1,749	 	 	 	(1,749	)	 	 	-	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	3,558	 	 	 	570	 	 	 	1,884	 	 	 	(1,749	)	 	 	4,263	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Segment results	 	 	(1,094	)	 	 	(538	)	 	 	1	 	 	 	 	 	 	 	(1,631	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Total segment expenses	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	(1,358	)
	Operating loss in the consolidated statement	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	(2,989	)
	Finance expenses	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	(1,748	)
	Finance income	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	330	 
	Other income	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	18	 
	Tax income	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	(7	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Loss for the year	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	(4,396	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Segment assets	 	 	524	 	 	 	167	 	 	 	48	 	 	 	 	 	 	 	739	 
	Unallocated assets	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	1,490	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Total assets in the consolidated statement	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	2,229	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Segment liabilities	 	 	623	 	 	 	66	 	 	 	-	 	 	 	 	 	 	 	689	 
	Unallocated liabilities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	10,092	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Total liabilities in the consolidated statement	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	10,781	 

 

		NOTE 21:-	TRANSACTIONS WITH INTERESTED AND RELATED PARTIES

 

		a.	Key management personnel compensation:

 

	 	 	Year ended December 31,	 
	 	 	2011	 	 	2010	 	 	2009	 
	 	 	US dollars in thousands	 
	 	 	 	 	 	 	 	 	 	 
	Short-term benefits *)	 	 	485	 	 	 	833	 	 	 	1,338	 
	Retirement compensation	 	 	-	 	 	 	1	 	 	 	3	 
	Share-based payment	 	 	(43	)	 	 	21	 	 	 	65	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	442	 	 	 	855	 	 	 	1,406	 

 

		*)	Including unpaid deferred salary to in the amount of $ 104 thousand and $ 436 thousand
in 2011 and 2010, respectively.
	 	 	 

    	- 76 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 21:-	TRANSACTIONS WITH INTERESTED AND RELATED PARTIES (Cont.)

 

		b.	Benefits granted to interested parties:

 

	 	 	Year ended December 31,	 
	 	 	2011	 	 	2010	 	 	2009	 
	 	 	US dollars in thousands	 
	 	 	 	 	 	 	 	 	 	 
	Salaries and related expenses to interested parties employed by the Company *)	 	 	358	 	 	 	372	 	 	 	382	 
	Number of people to whom the benefit relates	 	 	3	 	 	 	3	 	 	 	3	 
	Expenses in respect of consulting and commissions to interested parties employed by the Company	 	 	143	 	 	 	179	 	 	 	169	 
	Number of people to whom the benefit relates	 	 	2	 	 	 	2	 	 	 	2	 
	Fees of directors not employed by the Company **)	 	 	26	 	 	 	41	 	 	 	96	 
	Number of people to whom the benefit relates	 	 	6	 	 	 	6	 	 	 	6	 

 

		*)	Including deferred salary to the CEO in the amount of $ 60 thousand in 2011 and 2010.

 

		**)	Including benefit in respect of options totaling $ 27 thousand in 2010.

 

The general
meeting of shareholders held on May 29, 2008 approved, among others, the employment terms of the Company's CEO and its chief scientist
retroactively from February 1, 2008. The CEO's employment terms include an annual salary of $ 250 thousand effective from
February 1, 2008 and an annual salary of $ 300 thousand if the Company's products are offered for sale in at least 1,000 stores
of a single retail chain, which occurred in May 2008. The chief scientist's employment terms include a monthly salary of approximately
$ 1 thousand and a fee of approximately $ 12 thousand that will be paid on a monthly basis in return for consulting services.
The general meeting also approved the remuneration of four directors in the Company in the amount prescribed in the Second Addendum
to the Israeli Companies Regulations (Rules of Remuneration and Expenses to External Directors), 2000.

 

On March
29, 2011, the Company's general meeting approved the extension of the employment agreement of the Company's CEO, Mr. Erez Gavish,
until the earlier of six months or 60 days from the date of completion of the agreement detailed in Note 12g above. On October
9, 2011, the Company's general meeting approved another extension of the CEO's employment agreement to the earlier of six months
or 60 days from the date of completion of said agreement.

 

    	- 77 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 21:-	TRANSACTIONS WITH INTERESTED AND RELATED PARTIES (Cont.)

 

		c.	Balances with interested and related parties:

 

	 	 	December 31,	 
	 	 	2011	 	 	2010	 
	 	 	US dollars in thousands	 
	Other interested and related parties:	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 
	In current liabilities - other accounts payable:	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 
	In dollars	 	 	297	 	 	 	233	 
	Unlinked	 	 	221	 	 	 	152	 
	 	 	 	 	 	 	 	 	 
	 	 	 	518	 	 	 	385	 
	 	 	 	 	 	 	 	 	 
	Short-term loans	 	 	300	 	 	 	300	 
	 	 	 	 	 	 	 	 	 
	In non-current liabilities:	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 
	In dollars	 	 	26	 	 	 	26	 
	Unlinked	 	 	-	 	 	 	15	 
	 	 	 	 	 	 	 	 	 
	 	 	 	26	 	 	 	41	 
	 	 	 	 	 	 	 	 	 
	 	 	 	844	 	 	 	726	 

 

Also, interested
parties hold about 2.25% of convertible debentures (series A) and 100% of convertible debentures (series B).

 

	 	 	Year ended December 31,	 
	 	 	2011	 	 	2010	 	 	2009	 
	 	 	US dollars in thousands	 
	Other interested and related parties:	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	In income:	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Finance	 	 	-	 	 	 	-	 	 	 	(5	)
	 	 	 	 	 	 	 	 	 	 	 	 	 
	In expenses:	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Finance	 	 	263	 	 	 	260	 	 	 	52	 

 

    	- 78 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 22:-	EVENTS AFTER THE REPORTING DATE

 

		a.	Receipt of insurance reimbursement approval in the UK:

 

The Company
filed an application for insurance reimbursement from the UK Department of Health in the context of the British Drug Tariff. On
November 17, 2011, the Company announced that the UK Department of Health had approved its application for insurance reimbursement
for its product as part of the British Drug Tariff. Consequently, the Company signed several distribution agreements in the UK.
On February 1, 2012, the Company began selling its product in the UK whereby patients who had been previously required to pay an
amount of approximately £ 200 for the device were now able to receive the device free of charge or for a nominal amount
by presenting a signed physician's prescription. In order to allow the beginning of sales under the British Drug Tariff's coverage,
the Company has been preparing for the last few months to adopt a plan that will translate the approval into increased device sales
given the Company's limited resources. The plan consists of preparing an inventory of the device, setting up appropriate device
distribution logistic channels and investing in a public relations and advertising campaign to enhance awareness to the possibility
of purchasing the device under insurance reimbursement.

 

In the context
of the Company's marketing efforts, it hired a public relations organization that specializes in the medical field in the UK and
contacted the relevant local associations.

 

		b.	Cessation of sales by Costco:

 

On March
4, 2012, the Company announced that in keeping with the details provided in the Company's interim report for the third quarter
of 2011 regarding its business relations with Costco Wholesale Corporation in the US ("Costco US") and the discontinuance
of the Company's participation in special sales promotion offers in Costco's Connection magazine (as a result of the decrease in
the Company's advertising budgets which was estimated as jeopardizing the business relations with Costco), the Company received
Costco US' notice of the cessation of sales and distribution of the Company's product by Costco US. Nevertheless, the Company will
continue to sell the product in the context of Costco Canada, which is a distinct entity.

 

Since Costco
US is the Company's single largest customer in the US which accounts for about 8%-9% of the Company's total revenues, the Company
estimates that the cessation of sales as discussed above will have an adverse effect on the Company's financial position.

 

    	- 79 -

    	 

    

 

	INTERCURE LTD.
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 22:-	EVENTS AFTER THE REPORTING DATE (Cont.)

 

		c.	Extension of the Company's CEO's employment agreement:

 

On March
4, 2012, the Company's audit committee and Board approved the extension of the employment agreement of the Company's CEO, Mr. Erez
Gavish, which was in effect until March 31, 2012, until the earlier of six months or 60 days from April 1, 2012, the date of completion
of the agreement detailed in Note 12g above.

 

		d.	As for the license agreement, see Note 12m.

 

- - -
- - - - - - - -

 

    	- 80 -

    	 

    

 

INTERCURE LTD.

 

CONDENSED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS 

 

AS OF JUNE 30, 2012

 

UNAUDITED

 

INDEX

 

	 	Page
	 	 
	Condensed Interim Consolidated Financial Statements (Unaudited):	 
	 	 
	Condensed Interim Consolidated Statement of Financial Position  	1
	 	 
	Condensed Interim Consolidated Statements of Comprehensive Loss	2
	 	 
	Condensed Interim Consolidated Statements of Changes in Shareholders’ Deficiency	3 - 4
	 	 
	Condensed Interim Consolidated Statements of Cash Flows 	5 - 6
	 	 
	Notes to the Condensed Interim Consolidated Financial Statements	7 - 17

  

- - -
- - - - - - - -

 

    	 

    	 

    

 

INTERCURE LTD.

 

	CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION  

 

	 	 	June 30,	 	 	December 31,	 
	 	 	2012	 	 	2011	 	 	2011	 
	 	 	Unaudited	 	 	Audited	 
	 	 	US dollars in thousands	 
	ASSETS	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	CURRENT ASSETS:	 	 	 	 	 	 	 	 	 	 	 	 
	Cash and cash equivalents	 	 	116	 	 	 	372	 	 	 	306	 
	Short-term restricted deposits	 	 	1	 	 	 	100	 	 	 	9	 
	Trade receivables	 	 	68	 	 	 	345	 	 	 	220	 
	Other accounts receivable	 	 	39	 	 	 	30	 	 	 	79	 
	Inventories	 	 	124	 	 	 	198	 	 	 	77	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	348	 	 	 	1,045	 	 	 	691	 
	NON-CURRENT ASSETS:	 	 	 	 	 	 	 	 	 	 	 	 
	Prepaid expenses and long-term deposits	 	 	13	 	 	 	13	 	 	 	13	 
	Property, plant and equipment, net	 	 	50	 	 	 	104	 	 	 	63	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	63	 	 	 	117	 	 	 	76	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Total assets	 	 	411	 	 	 	1,162	 	 	 	767	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	LIABILITIES AND DEFICIT	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	CURRENT LIABILITIES:	 	 	 	 	 	 	 	 	 	 	 	 
	Short-term loans	 	 	322	 	 	 	300	 	 	 	300	 
	Trade payables	 	 	644	 	 	 	900	 	 	 	787	 
	Other accounts payable	 	 	3,265	 	 	 	2,678	 	 	 	2,926	 
	Convertible debentures	 	 	10,698	 	 	 	10,772	 	 	 	10,291	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	14,929	 	 	 	14,650	 	 	 	14,304	 
	NON-CURRENT LIABILITIES:	 	 	 	 	 	 	 	 	 	 	 	 
	Employee benefit liabilities	 	 	60	 	 	 	91	 	 	 	52	 
	Liability for share options	 	 	-	 	 	 	*)   -	 	 	 	-	 
	Financial liabilities for conversion component	 	 	*)   -	 	 	 	*)   -	 	 	 	*)   -	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	60	 	 	 	91	 	 	 	52	 
	SHAREHOLDERS’ DEFICIENCY:	 	 	 	 	 	 	 	 	 	 	 	 
	Share capital	 	 	60	 	 	 	60	 	 	 	60	 
	Additional paid-in capital	 	 	28,621	 	 	 	27,514	 	 	 	28,346	 
	Payments on account of shares	 	 	400	 	 	 	400	 	 	 	400	 
	Capital reserve for share-based payment	 	 	448	 	 	 	1,734	 	 	 	723	 
	Equity component of the Company's compound financial instruments	 	 	765	 	 	 	765	 	 	 	765	 
	Accumulated deficit	 	 	(44,872	)	 	 	(44,052	)	 	 	(43,883	)
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Total shareholders’ deficiency	 	 	(14,578	)	 	 	(13,579	)	 	 	(13,589	)
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Total liabilities and shareholders’ deficiency	 	 	411	 	 	 	1,162	 	 	 	767	 

 

		*)	Less than $ 1 thousand.

 

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

 

	August 30, 2012	 	 	 	 	 	 
	Date of approval of the financial statements	 	
        Amit Yonay

        Chairman of the Board
	 	
        Erez Gavish

        Chief Executive Officer
	 	
        Uri Ben-Or

        Chief Financial Officer

 

    	1

    	 

    

 

INTERCURE LTD.

 

	CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

 

	 	 	Six months ended 
June 30,	 	 	Three months ended 
June 30,	 	 	Year ended 
December 31,	 
	 	 	2012	 	 	2011	 	 	2012	 	 	2011	 	 	2011	 
	 	 	Unaudited	 	 	Audited	 
	 	 	US dollars in thousands	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Revenues from sales	 	 	1,204	 	 	 	1,908	 	 	 	559	 	 	 	804	 	 	 	3,171	 
	Cost of sales	 	 	(283	)	 	 	(476	)	 	 	(143	)	 	 	(203	)	 	 	(760	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Gross profit	 	 	921	 	 	 	1,432	 	 	 	416	 	 	 	601	 	 	 	2,411	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Research and development expenses	 	 	(74	)	 	 	(132	)	 	 	(36	)	 	 	(70	)	 	 	(222	)
	Selling and marketing expenses	 	 	(691	)	 	 	(1,139	)	 	 	(275	)	 	 	(493	)	 	 	*)(1,806	)
	General and administrative expenses	 	 	(383	)	 	 	(506	)	 	 	(251	)	 	 	(219	)	 	 	*)(852	)
	Other expenses	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	(5	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Operating loss	 	 	(227	)	 	 	(345	)	 	 	(146	)	 	 	(181	)	 	 	(474	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Finance income	 	 	751	 	 	 	-	 	 	 	751	 	 	 	-	 	 	 	576	 
	Finance expenses	 	 	(1,520	)	 	 	(1,604	)	 	 	(697	)	 	 	(814	)	 	 	(1,878	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Total finance income (expenses), net	 	 	(769	)	 	 	(1,604	)	 	 	54	 	 	 	(814	)	 	 	(1,302	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Loss before taxes on income	 	 	(996	)	 	 	(1,949	)	 	 	(92	)	 	 	(995	)	 	 	(1,776	)
	Taxes on income (tax expenses)	 	 	7	 	 	 	(7	)	 	 	(3	)	 	 	(7	)	 	 	(11	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Loss for the period attributable to stockholders of the Company	 	 	(989	)	 	 	(1,956	)	 	 	(95	)	 	 	(1,002	)	 	 	(1,787	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Total comprehensive loss for the period attributable to stockholders of the Company	 	 	(989	)	 	 	(1,956	)	 	 	(95	)	 	 	(1,002	)	 	 	(1,787	)

 

	 	 	US dollars	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Basic and diluted loss per Ordinary share with no par value **)	 	 	(80.1	)	 	 	(158.4	)	 	 	(7.69	)	 	 	(81.1	)	 	 	(144.7	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Weighted average share capital used in the computation of basic and diluted loss per share **)	 	 	12,352	 	 	 	12,352	 	 	 	12,352	 	 	 	12,352	 	 	 	12,352	 

 

		*)	Reclassified.

		**)	Adjusted retroactively for the consolidation of shares made on July 25, 2012 at the ratio
of 1:2000 following arrangement with creditors.

 

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

 

    	2

    	 

    

 

INTERCURE LTD.

 

	CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIENCY

 

	 	 	Six months ended June 30, 2012	 
	 	 	Share

    capital	 	 	Additional

    paid-in
 capital	 	 	Payments

    on account
 of shares	 	 	Capital

    reserve for
 share-based
 payment	 	 	Equity

    component of
 the Company's
 compound
 financial
 instruments	 	 	Accumulated

    deficit	 	 	Total	 
	 	 	Unaudited	 
	 	 	US
    dollars in thousands	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance at
    January 1, 2012	 	 	60	 	 	 	28,346	 	 	 	400	 	 	 	723	 	 	 	765	 	 	 	(43,883	)	 	 	(13,589	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Loss
    for the period	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	(989	)	 	 	(989	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance
    at June 30, 2012	 	 	60	 	 	 	28,346	 	 	 	400	 	 	 	723	 	 	 	765	 	 	 	(44,872	)	 	 	(14,578	)

 

	 	 	Six months ended June 30, 2011	 
	 	 	Share

    capital	 	 	Additional

    paid-in
 capital	 	 	Payments

    on account
 of shares	 	 	Capital

    reserve for
 share-based
 payment	 	 	Equity

    component of
 the Company's
 compound
 financial
 instruments	 	 	Accumulated

    deficit	 	 	Total	 
	 	 	Unaudited	 
	 	 	US
    dollars in thousands	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance at
    January 1, 2011	 	 	60	 	 	 	27,514	 	 	 	-	 	 	 	1,724	 	 	 	765	 	 	 	(42,096	)	 	 	(12,033	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Payments on account of
    shares	 	 	-	 	 	 	-	 	 	 	400	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	400	 
	Cost of stock-based compensation	 	 	-	 	 	 	-	 	 	 	-	 	 	 	10	 	 	 	-	 	 	 	-	 	 	 	10	 
	Loss
    for the period	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	(1,956	)	 	 	(1,956	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance
    at June 30, 2011	 	 	60	 	 	 	27,514	 	 	 	400	 	 	 	1,734	 	 	 	765	 	 	 	(44,052	)	 	 	(13,579	)

 

	 	 	Three months ended June 30, 2012	 
	 	 	Share

    capital	 	 	Additional

    paid-in
 capital	 	 	Payments

    on account
 of shares	 	 	Capital

    reserve for
 share-based
 payment	 	 	Equity

    component of
 the Company's
 compound
 financial
 instruments	 	 	Accumulated

    deficit	 	 	Total	 
	 	 	Unaudited	 
	 	 	US
    dollars in thousands	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance at
    April 1, 2012	 	 	60	 	 	 	28,346	 	 	 	400	 	 	 	723	 	 	 	765	 	 	 	(44,777	)	 	 	(14,483	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Loss
    for the period	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	(95	)	 	 	(95	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance
    at June 30, 2012	 	 	60	 	 	 	28,346	 	 	 	400	 	 	 	723	 	 	 	765	 	 	 	(44,872	)	 	 	(14,578	)

 

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

 

    	3

    	 

    

 

INTERCURE LTD.

 

	CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIENCY

 

	 	 	Three months ended June 30, 2011	 
	 	 	Share
 capital	 	 	Additional
 paid-in
 capital	 	 	Payments
 on account
 of shares	 	 	Capital
 reserve for
 share-based
 payment	 	 	Equity
 component of
 the Company's
 compound
 financial
 instruments	 	 	Accumulated
 deficit	 	 	Total	 
	 	 	Unaudited	 
	 	 	US dollars in thousands	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance at April 1, 2011	 	 	60	 	 	 	27,514	 	 	 	-	 	 	 	1,729	 	 	 	765	 	 	 	(43,050	)	 	 	(12,982	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Payments on account of shares	 	 	-	 	 	 	-	 	 	 	400	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	400	 
	Cost of stock-based compensation	 	 	-	 	 	 	-	 	 	 	-	 	 	 	5	 	 	 	-	 	 	 	-	 	 	 	5	 
	Loss for the period	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	(1,002	)	 	 	(1,002	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance at June 30, 2011	 	 	60	 	 	 	27,514	 	 	 	400	 	 	 	1,734	 	 	 	765	 	 	 	(44,052	)	 	 	(13,579	)

 

	 	 	Year ended December 31, 2011	 
	 	 	Share 
capital	 	 	Additional 

paid-in 

capital	 	 	Payments 
on account 
of shares	 	 	Capital

 reserve for 

share-based

 payment	 	 	Equity 

component of 

the Company's 

compound 

financial

instruments	 	 	Accumulated 

deficit	 	 	Total	 
	 	 	Audited	 
	 	 	US dollars in thousands	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance at January 1, 2011	 	 	60	 	 	 	27,514	 	 	 	-	 	 	 	1,724	 	 	 	765	 	 	 	(42,096	)	 	 	(12,033	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Cost of stock-based compensation	 	 	-	 	 	 	-	 	 	 	-	 	 	 	(169	)	 	 	-	 	 	 	-	 	 	 	(169	)
	Payments on account of shares	 	 	-	 	 	 	-	 	 	 	400	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	400	 
	Expiration of options	 	 	-	 	 	 	832	 	 	 	-	 	 	 	(832	)	 	 	-	 	 	 	-	 	 	 	-	 
	Loss for the year	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	(1,787	)	 	 	(1,787	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance at December 31, 2011	 	 	60	 	 	 	28,346	 	 	 	400	 	 	 	723	 	 	 	765	 	 	 	(43,883	)	 	 	(13,589	)

 

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

 

    	4

    	 

    

 

INTERCURE LTD.

 

	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

	 	 	Six months ended 
June 30,	 	 	Three months ended 
June 30,	 	 	Year ended 
December 31,	 
	 	 	2012	 	 	2011	 	 	2012	 	 	2011	 	 	2011	 
	 	 	Unaudited	 	 	Audited	 
	 	 	US dollars in thousands	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Cash flows from operating activities:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Loss for the period	 	 	(989	)	 	 	(1,956	)	 	 	(95	)	 	 	(1,002	)	 	 	(1,787	)
	Adjustments to reconcile loss to net cash used in operating activities (a)	 	 	769	 	 	 	1,887	 	 	 	23	 	 	 	816	 	 	 	1,561	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Net cash used in operating activities	 	 	(220	)	 	 	(69	)	 	 	(72	)	 	 	(186	)	 	 	(226	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Cash flows from investing activities:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Withdrawal of short-term deposit, net	 	 	8	 	 	 	-	 	 	 	16	 	 	 	-	 	 	 	91	 
	Purchase of property, plant and equipment	 	 	-	 	 	 	(4	)	 	 	-	 	 	 	-	 	 	 	(4	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Net cash provided by (used in) investing activities	 	 	8	 	 	 	(4	)	 	 	16	 	 	 	-	 	 	 	87	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Cash flows from financing activities:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Receipt of short-term loans	 	 	22	 	 	 	-	 	 	 	22	 	 	 	-	 	 	 	-	 
	Payments on account of shares	 	 	-	 	 	 	200	 	 	 	-	 	 	 	200	 	 	 	200	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Net cash provided by financing activities	 	 	22	 	 	 	200	 	 	 	22	 	 	 	200	 	 	 	200	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Increase (decrease) in cash and cash equivalents	 	 	(190	)	 	 	127	 	 	 	(34	)	 	 	14	 	 	 	61	 
	Cash and cash equivalents at the beginning of the period	 	 	306	 	 	 	245	 	 	 	150	 	 	 	358	 	 	 	245	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Cash and cash equivalents at the end of the period	 	 	116	 	 	 	372	 	 	 	116	 	 	 	372	 	 	 	306	 

 

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

 

    	5

    	 

    

 

INTERCURE LTD.

 

	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

	 	 	 	 	Six months ended 
June 30,	 	 	Three months ended 
June 30,	 	 	Year ended 
December 31,	 
	 	 	 	 	2012	 	 	2011	 	 	2012	 	 	2011	 	 	2011	 
	 	 	 	 	Unaudited	 	 	Audited	 
	 	 	 	 	US dollars in thousands	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	(a)	 	Adjustments to reconcile loss to net cash used in operating activities:	 	 		 	 	 		 	 	 		 	 	 		 	 	 		 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Expenses (income) not involving cash flows:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Depreciation and amortization	 	 	13	 	 	 	41	 	 	 	6	 	 	 	10	 	 	 	59	 
	 	 	Capital loss from disposal of fixed assets	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	23	 
	 	 	Increase (decrease) in employee benefit assets	 	 	8	 	 	 	2	 	 	 	(2	)	 	 	2	 	 	 	(37	)
	 	 	Non-cash finance expenses	 	 	826	 	 	 	925	 	 	 	337	 	 	 	472	 	 	 	2,008	 
	 	 	Cost of stock-based compensation	 	 	-	 	 	 	10	 	 	 	-	 	 	 	5	 	 	 	(169	)
	 	 	Revaluation of derivative financial liabilities	 	 	(32	)	 	 	638	 	 	 	(365	)	 	 	331	 	 	 	(695	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	815	 	 	 	1,616	 	 	 	(24	)	 	 	820	 	 	 	1,189	 
	 	 	Changes in assets and liabilities:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Decrease in trade receivables	 	 	152	 	 	 	121	 	 	 	144	 	 	 	143	 	 	 	246	 
	 	 	Decrease (increase) in inventories	 	 	(47	)	 	 	118	 	 	 	(49	)	 	 	22	 	 	 	239	 
	 	 	Decrease (increase) in other accounts receivable	 	 	40	 	 	 	6	 	 	 	6	 	 	 	3	 	 	 	(43	)
	 	 	Increase (decrease) in trade payable	 	 	(143	)	 	 	255	 	 	 	(46	)	 	 	166	 	 	 	*)  (195	)
	 	 	Increase (decrease) in other accounts payable	 	 	(48	)	 	 	(229	)	 	 	(8	)	 	 	(338	)	 	 	*)   125	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	(46	)	 	 	271	 	 	 	47	 	 	 	(4	)	 	 	372	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	769	 	 	 	1,887	 	 	 	23	 	 	 	816	 	 	 	1,561	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	(b)	 	Interest and taxes in cash:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Taxes received (paid) during the period	 	 	7	 	 	 	(8	)	 	 	-	 	 	 	(8	)	 	 	(11	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Non-cash activity:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Conversion of short-term loan into payments on account of shares	 	 	-	 	 	 	200	 	 	 	-	 	 	 	200	 	 	 	-	 

 

		*)	Reclassified.

 

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

 

    	6

    	 

    

 

INTERCURE LTD.

 

	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 1:-	GENERAL

 

		a.	InterCure Ltd. ("the Company") was incorporated in Israel and commenced its operations
in November 1994. Since its establishment, the Company has been engaged in the research, development, marketing and sale of non-drug
and non-invasive personal therapeutic devices for treating various diseases such as hypertension, cardiovascular diseases, insomnia
and stress.

 

		b.	In February 2000, the Company founded InterCure Inc., a private company registered in Delaware,
USA, engaged in marketing and distributing the Company's products in the US. The Company holds 100% of the shares of InterCure
Inc.

 

		c.	In May 2008, the Company founded InterCure UK Limited, a private company registered in the UK which
is yet inactive. The Company holds 100% of the shares of InterCure UK Limited.

 

		d.	These condensed interim consolidated financial statements should be read in conjunction with the
Company's annual financial statements as of December 31, 2011 and for the year then ended and the accompanying notes.

 

		e.	Definitions in the financial statements:

 

	The Company	-	InterCure Ltd. 
	 	 	 
	The Group	-	The Company and its subsidiaries.
	 	 	 
	Related parties	-	As defined in IAS 24. 
	 	 	 
	Interested parties	-	As defined in the Israeli Securities Regulations (Annual Financial Statements), 2010.
	 	 	 
	Controlling shareholders	-	As defined in the Israeli Securities Regulations (Annual Financial Statements), 2010.
	 	 	 
	Israeli CPI	-	Israeli Consumer Price Index as published by the Israel Central Bureau of Statistics.
	 	 	 
	Dollar or $	-	US dollar.
	 	 	 
	Euro or €	-	The currency used by the European Union.
	 	 	 
	British Pound or £	-	The currency used by the UK.
	 	 	 
	NIS	-	New Israeli Shekel.
	 	 	 
	Subsidiaries	-	Companies that are directly or indirectly controlled by the Company (as defined in IAS 27) and whose accounts are consolidated with those of the Company.
	 	 	 
	Investee	-	Subsidiary. 

 

    	- 7 -

    	 

    

 

INTERCURE LTD.

 

	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 1:-	GENERAL (Cont.)

 

		f.	The Company's financial statements as of June 30, 2012 reflect a deficit of $ 14,578 thousand
(as of December 31, 2011 - $ 13,589 thousand), losses totaling $ 989 thousand and $ 95 thousand (2011 - $ 1,787
thousand) and negative cash flows from operating activities totaling $ 220 thousand and $ 72 thousand (2011 - $ 226
thousand) for the six and three months then ended, respectively.

 

Moreover,
the Company has a working capital deficit totaling $ 14,581 thousand as of June 30, 2012.

 

In July 2012,
the Company's creditors and shareholders signed a arrangement with creditors pursuant to section 350 to the Israeli Companies Law,
1999, which was ratified by a court of law. As a result of the arrangement with creditors, the majority of the Company's liabilities
were converted into equity. See also Note 5a below.

 

		NOTE 2:-	SIGNIFICANT ACCOUNTING POLICIES

 

		a.	Basis of preparation of the financial statements:

 

The condensed interim consolidated
financial statements ("interim financial statements") of the Group have been prepared in accordance with IAS 34, "Interim
Financial Reporting" ("IAS 34").

 

In preparing these interim
financial statements, the Group has applied accounting policies, presentation principles and calculation methods identical to those
applied in preparing its financial statements as of December 31, 2011 and for the year then ended, except changes in accounting
policies which resulted from the adoption of new standards, amendments to standards and interpretations which became effective
as of the date of the financial statements, as elaborated in Note 3.

 

		b.	The condensed consolidated financial statements have been prepared in accordance with the disclosure
requirements of Chapter D of the Securities Regulations (Periodic and Immediate Reports), 1970.

 

		c.	Exchange rates and linkage basis:

 

		1.	The Company's functional currency is the US dollar. Balances
in or linked to foreign currency are presented in the financial statements according to the representative exchange rates published
by the Bank of Israel in effect at the end of the reporting period.

 

		2.	Balances linked to the Israeli CPI are presented according to the last known Israeli CPI at the
end of the reporting period (the Israeli CPI for the month prior to financial reporting month) or according to the Israeli CPI
at the last month of the reporting period (the Israeli CPI for the month prior of the financial reporting month), according to
the terms of the transaction.

 

    	- 8 -

    	 

    

 

INTERCURE LTD.

 

	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 2:-	SIGNIFICANT ACCOUNTING POLICIES (Cont.)

 

		3.	Below are data about the exchange rate of the dollar and the Israeli CPI:

 

	 	 	Representative exchange rate of	 	 	Israeli CPI	 
	 	 	US dollar	 	 	Euro	 	 	Pound	 	 	for	 
	 	 	NIS 1 per $ 1	 	 	$ 1 per € 1	 	 	$ 1 per £ 1	 	 	In points *)	 
	Date of financial statements:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	June 30, 2012	 	 	3.923	 	 	 	0.795	 	 	 	0.639	 	 	 	111.4	 
	June 30, 2011	 	 	3.415	 	 	 	0.689	 	 	 	0.622	 	 	 	110.3	 
	December 31, 2011	 	 	3.821	 	 	 	0.774	 	 	 	0.649	 	 	 	110.3	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Change	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Six months period ended:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	June 30, 2012	 	 	2.7	 	 	 	2.7	 	 	 	(1.5	)	 	 	1.0	 
	June 30, 2011	 	 	(3.8	)	 	 	(7.8	)	 	 	(3.3	)	 	 	2.2	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Three months period ended:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	June 30, 2012	 	 	5.6	 	 	 	6.0	 	 	 	2.2	 	 	 	0.6	 
	June 30, 2011	 	 	(1.9	)	 	 	(1.7	)	 	 	0.5	 	 	 	1.5	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Year ended December 31, 2011	 	 	7.7	 	 	 	3.3	 	 	 	0.4	 	 	 	2.2	 

 

		*)	At the average of 2008.

 

		NOTE 3:-	SIGNIFICANT NEW FINANCIAL REPORTING STANDARDS AND
INTERPRETATIONS ISSUED

 

		a.	New standards, amendments to standards and interpretations in effect which have no significant
impact on the current reporting period and/or on prior reporting periods but their adoption may affect future periods:

 

For information concerning
the standards, amendments to standards and interpretations detailed below, see Note 3a to the annual financial statements of the
Company for the year ended December 31, 2011:

 

		·	Amendment to IFRS 7, "Financial Instruments: Disclosures" (disclosures regarding transfers
of financial assets).

 

    	- 9 -

    	 

    

 

INTERCURE LTD.

 

	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 3:-	SIGNIFICANT NEW FINANCIAL REPORTING STANDARDS AND
INTERPRETATIONS ISSUED (Cont.)

 

		b.	New standards, amendments to standards and interpretations issued but not yet effective, were not
adopted by the Group and are expected to affect or could affect future periods:

 

For information concerning
the effective dates, transitional provisions and expected impact of the standards, amendments to standards and interpretations
detailed below, see Note 3b to the annual financial statements of the Company as of December 31, 2011 and for the year then ended:

 

		·	IFRS 9, "Financial Instruments"

		·	IFRS 12, "Disclosure of Interests in Other Entities"

		·	IFRS 13, "Fair Value Measurement"

		·	Amendment to IAS 1 (Revised), "Presentation of Financial Statements" (regarding presentation
of items of other comprehensive income in the statement of comprehensive income)

 

		c.	New standards and interpretations issued but not yet effective, were not adopted by the Group and
their impact on the financial statements is not expected to be significant:

 

		1.	Amendment to IAS 32, "Financial Instruments: Presentation"
(offsetting financial assets and financial liabilities):

 

The Amendment determines that
in order to meet the condition of offsetting an asset and financial liability, the right of set-off can not be contingent on a
future event and it must be enforceable in the normal course of business and in the event of bankruptcy, insolvency or default.
Also, the net settlement condition may occur even if actually the settlement is in gross if does not leave significant credit risk
or liquidity risk and if the amounts due and amounts payable are part of a single settlement process. The Amendment is effective
retrospectively for annual reporting periods beginning on or after January 1, 2014. Earlier adoption is permitted. Currently
the Company's management can not assess the effect of the application of the Amendment on its financial position and operating
results.

 

		2.	For information concerning the effective dates, transitional provisions of the standards, amendments
to standards and interpretations detailed below, see Note 3c to the annual financial statements of the Company as of December 31,
2011 and for the year then ended:

 

		·	IFRS 10, "Consolidated Financial Statements"

		·	IAS 19 (2011), "Employee Benefits"

		·	Amendment to IFRS 7, "Financial Instruments: Disclosures" (offsetting financial assets
and financial liabilities)

 

    	- 10 -

    	 

    

 

INTERCURE LTD.

 

	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 4:-	SIGNIFICANT EVENTS DURING THE REPORTING PERIOD

 

		a.	Receipt of insurance reimbursement approval in the UK:

 

The Company
filed an application for insurance reimbursement from the UK Department of Health in the context of the British Drug Tariff. On
November 17, 2011, the Company announced that the UK Department of Health had approved its application for insurance reimbursement
for its product as part of the British Drug Tariff. Consequently, the Company signed several distribution agreements in the UK.
On February 1, 2012, the Company began selling its product in the UK whereby patients who had been previously required to pay an
amount of approximately £ 200 for the device were now able to receive the device free of charge or for a nominal amount
by presenting a signed physician's prescription. At this stage, sales to patients eligible for insurance reimbursement represent
an insignificant portion of Company sales.

 

		b.	Cessation of sales by Costco Wholesale Corporation ("Costco US"):

 

On March
4, 2012, the Company announced that as a result of the decrease in the Company's advertising budgets and the discontinuance of
the Company's participation in special sales promotion offers in Costco's Connection magazine, the Company received Costco US's
notice of the cessation of product sales and distribution by Costco US. Nevertheless, the Company will continue to sell the product
in the context of Costco Canada, which is a distinct entity.

 

Since Costco
US is the Company's single largest distributor in the US which accounts for about 8%-9% of the Company's total revenues, the Company
estimates that the cessation of sales as discussed above will have an adverse effect on the Company's financial position.

 

		c.	License agreement:

 

Simultaneously
with the steps being taken to complete the arrangement with creditors or to locate alternative investors, the Company examined
an alternative according to which it will enter into a letter of credit agreement for receiving a credit facility from Yazmonit
Ltd. (a company controlled by Dr. Benjamin Gavish, a director and interested party in the Company) ("the LC agreement"
and "Yazmonit", respectively). According to the LC agreement, Yazmonit granted the third party which manufactures the
product a credit facility totaling $ 72,120 for a period of 40 days ("the LC term"). According to the LC agreement,
at the end of the LC term, the Company will pay the third party an amount of $ 72,120 or provide that third party an alternative
line of credit. As collateral in favor of Yazmonit and should the third party exercise all or part of said line of credit, the
products (or part thereof, based on the actual payment made by the Company) will be transferred by the third party to Yazmonit's
exclusive ownership and the latter will be able to sell them.

 

    	- 11 -

    	 

    

 

INTERCURE LTD.

 

	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 4:-	SIGNIFICANT EVENTS DURING THE REPORTING PERIOD (Cont.)

 

On October
6, 2011, the Company's audit committee and Board approved the Company's engagement in the LC agreement as a qualifying transaction
owing to the Company's credit distress and low inventory levels and in order to allow the Company's continued operating activities.

 

According
to the LC agreement, the LC term may be extended to a period of up to 90 days subject to the approval of the Company's engagement
in a license agreement with Yazmonit ("the license agreement"). According to the license agreement, subject to obtaining
the approval of the Israeli Office of the Chief Scientist (if such approval is required), the Company will grant Yazmonit an indefinite
and exclusive license to use the technology and patent rights underlying an unutilized part of the Company's IP ("the license")
and a right to use the Company's RESPeRATE trademark for an overall consideration of $ 25,000. The consideration was transferred
to the Company by Yazmonit in the fourth quarter of 2011.

 

The license
consists of any future product and applications that require an external computer unit (including smart phones) and are not indicated
for treating hypertension. The license agreement also clarifies that the license will not include any products and/or applications
for treating hypertension in any form whatsoever or any stand-alone products developed by the Company for any future field or indication.
In addition, according to the license agreement, if Yazmonit requires the components made by or for the Company, the Company will
sell Yazmonit said components for cost plus a 5% margin. Moreover, for a period of four months from the effective date of the license
agreement, the Company will be entitled to repurchase the license from Yazmonit for a total of $ 75,000 and all the rights
by virtue of the license, excluding rights to future receipts from third parties will be recovered to the Company. In the event
of the Company's bankruptcy, liquidation, insolvency or discontinuance of business operations, the Company's right to repurchase
the license from Yazmonit will expire. As of the date of the financial statements, the above four-month period has ended.

 

On October
25, 2011, the meeting of holders of the Company's debentures (series A) decided not to object to the Company's engagement in the
license agreement. On November 7, 2011, the Company announced that it had received the approval of the holders of the Company's
debentures (series B) for entering into the license agreement. In view of the above, on November 7, 2011, the Company's audit committee
and Board approved the Company's engagement in the license agreement. On October 12, 2011, Yazmonit initiated the credit facility
and on November 13, 2011 provided the consideration for the license agreement.

 

On January
4, 2012, the Company reported the extension of the LC agreement to May 30, 2012 under the same terms, as a qualifying transaction,
owing to the Company's credit distress and low inventory levels and in order to allow the Company's continued operating activities.
On May 22, 2012, the Company reported another extension of the LC agreement to December 31, 2012. The LC agreement was terminated
on July 31, 2012.

 

    	- 12 -

    	 

    

 

INTERCURE LTD.

 

	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 4:-	SIGNIFICANT EVENTS DURING THE REPORTING PERIOD (Cont.)

 

		d.	On May 2, 2012, a special general meeting of the Company's shareholders approved the extension
of the employment agreement of the Company's CEO and director, Mr. Erez Gavish, until the shorter of: (1) six months from April
1, 2012 or (2) 60 days from the date of completion of the arrangement with creditors. See also note 5a.

 

		NOTE 5:-	SIGNIFICANT EVENTS AFTER THE REPORTING PERIOD

 

		a.	Arrangement with creditors:

 

On July 25,
2012, following the signing of a memorandum of understandings between the Company, XTL Biopharmaceuticals Ltd. ("XTL")
and Medica Fund, an interested party in the Company, the Company completed a new arrangement with creditors ("the arrangement")
according to which XTL purchased the control over the Company and the Company's debentures and debts were converted into Company
shares. On July 13, 2012, the Company executed a capital consolidation (following the approval of the general meeting of July 12,
2012) in which each 2,000 Ordinary shares of the Company were converted into one Ordinary share of the Company without par value.
The arrangement was approved by the meeting of holders of the Company's debentures (series B), the creditors' meeting and the shareholders'
meeting. Moreover, the arrangement was approved by the Court on July 23, 2012.

 

The principal
points of the arrangement are as follows:

 

The holders
of the Company's debentures (series A) converted the entire debentures held by them into 7,177,035 Ordinary shares of the Company
in the context of an amendment to the conversion ratio of said debentures. In addition, the debentures (series A) held by the Company's
subsidiary were transferred to the Company and delisted from trade on the effective date of the arrangement.

 

The holders
of the Company's debentures (series B) converted a debt of the Company totaling $ 1,147 thousand into 3,254,651 Ordinary shares
of the Company in the context of an amendment to the conversion ratio according to the arrangement. In addition, a loan that had
been previously provided by holders of the Company's debentures (series B) to the Company in a total of $ 300 thousand was
converted into 851,260 Ordinary shares of the Company.

 

Moreover,
the Company's debts to other creditors (including the Company's management) totaling $ 1,075 thousand were converted into
1,255,055 Ordinary shares of the Company.

 

    	- 13 -

    	 

    

 

INTERCURE LTD.

 

	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

According
to the arrangement, XTL was issued 16,839,532 Ordinary shares of the Company against an investment of $ 2,350 thousand on
the date of completion of the arrangement (it should be clarified that the investment consists of the transfer of an amount of
$ 2,200 thousand in Ordinary shares of XTL to the Company representing the XTL share price as of the date the arrangement
was signed and the transfer of an amount of $ 150 thousand in cash). As a result of the issuance of shares, XTL became the
controlling shareholder in the Company. In addition, Medica Fund, an interested party in the Company prior to the arrangement,
was allocated 3,284,937 Ordinary shares of the Company against a cash investment in the Company in the amount of $ 460 thousand
transferred to the Company on the date of completion of the arrangement. Medica Fund remained an interested party in the Company
after the completion of the arrangement.

 

Also in the
context of the arrangement, the Company's CEO, Mr. Erez Gavish, will be granted 1,484,551 options which are convertible into 1,484,551
shares, based on a share option plan pursuant to section 102 to the Income Tax Ordinance. The grant was carried out on July 25,
2012 (as detailed below).

 

It was also
agreed that on the date of completion of the agreement, XTL and Medica Fund will each provide the Company a cash loan of $ 330
thousand and $ 170 thousand, respectively, which will be convertible for a period of 10 months from the date of completion of the
arrangement into up to 7,620,695 and 3,925,812 Ordinary shares of the Company, respectively. The convertible loans were provided
in the context of the undertakings of XTL and Medica Fund according to a management and operating service agreement to bear overall
costs of $ 500,000 on behalf of the Company in order to finance its management and operations immediately after the completion
of the arrangement. XTL and Medica Fund have the right to demand the repayment of the loan at cost with a margin of 15%. On July
26, 2012, the Company completed the arrangement. On August 6, 2012, Medica Fund informed the Company of its intention to convert
said loan into shares of the Company, and as a result the Company issued 3,925, 812 Ordinary shares of the Company without par
value to Medica Fund.

 

		b.	Private placement of options:

 

On July 25,
2012, the Company issued an immediate report regarding the private placement of 1,484,551 options that are exercisable into 1,484,551
Ordinary shares of the Company with no par value to Mr. Erez Gavish, the Company's CEO, based on the provisions of the arrangement.
The exercise price of each option is NIS 0.54 per Ordinary share based on the price of the Company's shares determined in
the arrangement. The options vest over a period of three years in equal quarterly installments and expire at the end of ten years
from the date of allocation. The fair value of each option on the grant date according to the Black and Scholes model according
to IFRS2 was approximately $132 thousand.

 

    	- 14 -

    	 

    

 

INTERCURE LTD.

 

	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

Also on July
25, 2012, based on the approval of the employment agreement with the Company's Deputy CEO, CPA Ronen Twito, by Company's Board,
the Company issued an immediate report regarding the private placement of 1,000,000 options that are exercisable into Ordinary
shares of the Company with no par value each. The exercise price of each option is NIS 0.54 per Ordinary share based on the
price of the Company's shares determined in the arrangement. The options vest over a period of three years in equal quarterly installments
and expire at the end of ten years from the date of allocation. . The fair value of each option on the grant date according to
the Black and Scholes model according to IFRS2 was approximately $88 thousand.

 

The fair
value of the options granted as described above was estimated using the Black & Scholes option pricing model under the following
inputs:

 

	Share price ($)	 	 	0.12	 
	Exercise increment ($)	 	 	0.13	 
	Expected volatility	 	 	90.76	%
	Expected life of the options (years)	 	 	5-6.5	 
	Risk-free interest rate	 	 	3.39%-3.68	%
	Expected dividend yield	 	 	0	%

 

		c.	Market makers' agreement:

 

On July 26,
2012, the Company announced the signing of a market makers' agreement with Clal Finances Batucha Investment Management Ltd. for
a period of one year, to be automatically extended by additional one-year periods each.

 

		d.	On July 26, 2012, the Company convened a special general meeting of shareholders for September
3, 2012 with the agenda of appointing an external director in the Company, Ms. Yaniva Popel-Weitz, allocating 75,000 options that
are exercisable into Ordinary shares of the Company with no par value each to Messrs. Yoav Wizer, David Grossman, Moshe Misgav
and Amit Yonay who serve as directors in the Company for an exercise increment of NIS 0.54 per option, approving the grant
of letters of indemnity and quittance to each of said directors and including them in a directors' and officers' liability insurance
policy to be purchased by the Company and approving a master decision whereby the Company will be entitled to enter into directors'
and officers' liability insurance policies from time to time. The insurance coverage underlying said master decision will be in
an amount of at least $ 5 million per event and period and will not exceed $ 10 million per case and period for all the
Company's officers and directors. Moreover, the annual premium will not exceed $ 20,000 for a one-year period.

 

    	- 15 -

    	 

    

 

INTERCURE LTD.

 

	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 6:-	SEGMENT REPORTING

 

		a.	General:

 

The Group
companies operate in a single business segment and in several different geographic operating segments. Below is data by geographic
segments:

 

	 	 	US	 	 	UK	 	 	Other 

countries	 	 	Adjustments	 	 	Total	 
	 	 	US dollars in thousands	 
	Six months ended June 30, 2012 (unaudited):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Revenues:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	From external entities	 	 	1,008	 	 	 	190	 	 	 	6	 	 	 	-	 	 	 	1,204	 
	Inter-segment	 	 	-	 	 	 	-	 	 	 	172	 	 	 	(172	)	 	 	-	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	1,008	 	 	 	190	 	 	 	178	 	 	 	(172	)	 	 	1,204	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Segment results	 	 	123	 	 	 	8	 	 	 	3	 	 	 	-	 	 	 	134	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Six months ended June 30, 2011 (unaudited):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Revenues:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	From external entities	 	 	1,570	 	 	 	221	 	 	 	117	 	 	 	-	 	 	 	1,908	 
	Inter-segment	 	 	-	 	 	 	-	 	 	 	535	 	 	 	(535	)	 	 	-	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	1,570	 	 	 	221	 	 	 	652	 	 	 	(535	)	 	 	1,908	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Segment results	 	 	82	 	 	 	(49	)	 	 	35	 	 	 	-	 	 	 	68	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Three months ended June 30, 2012 (unaudited):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Revenues:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	From external entities	 	 	457	 	 	 	102	 	 	 	-	 	 	 	-	 	 	 	559	 
	Inter-segment	 	 	-	 	 	 	-	 	 	 	17	 	 	 	(17	)	 	 	-	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	457	 	 	 	102	 	 	 	17	 	 	 	(17	)	 	 	559	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Segment results	 	 	92	 	 	 	34	 	 	 	(2	)	 	 	-	 	 	 	124	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Three months ended June 30, 2011 (unaudited):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Revenues:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	From external entities	 	 	598	 	 	 	100	 	 	 	106	 	 	 	-	 	 	 	804	 
	Inter-segment	 	 	-	 	 	 	-	 	 	 	354	 	 	 	(354	)	 	 	-	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	598	 	 	 	100	 	 	 	460	 	 	 	(354	)	 	 	804	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Segment results	 	 	(10	)	 	 	(15	)	 	 	27	 	 	 	-	 	 	 	2	 

 

    	- 16 -

    	 

    

 

INTERCURE LTD.

 

	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 6:-	SEGMENT REPORTING (Cont.)

 

	 	 	US	 	 	UK	 	 	Other countries	 	 	Adjustments	 	 	Total	 
	 	 	US dollars in thousands	 
	Year ended December 31, 2011 (audited):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Revenues:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	From external entities	 	 	2,643	 	 	 	394	 	 	 	134	 	 	 	-	 	 	 	3,171	 
	Inter-segment	 	 	-	 	 	 	-	 	 	 	761	 	 	 	(761	)	 	 	-	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	2,643	 	 	 	394	 	 	 	895	 	 	 	(761	)	 	 	3,171	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Segment results	 	 	170	 	 	 	(150	)	 	 	48	 	 	 	-	 	 	 	68	 

 

		b.	Reconciliation between the segment results and income
(loss) before tax:

 

	 	 	Six months ended 
June 30,	 	 	Three months ended 
June 30,	 	 	Year ended 
December 31,	 
	 	 	2012	 	 	2011	 	 	2012	 	 	2011	 	 	2011	 
	 	 	Unaudited	 	 	Audited	 
	 	 	US dollars in thousands	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Total results of reportable segments	 	 	134	 	 	 	68	 	 	 	124	 	 	 	2	 	 	 	68	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	General, administrative and other costs not attributable to segments	 	 	93	 	 	 	277	 	 	 	22	 	 	 	179	 	 	 	406	 
	Finance expenses	 	 	769	 	 	 	1,604	 	 	 	(54	)	 	 	814	 	 	 	1,302	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Loss before tax	 	 	996	 	 	 	1,949	 	 	 	92	 	 	 	995	 	 	 	1,776	 

 

- - -
- - - - - - - -

 

    	- 17 -

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