Document:

Exhibit 10.60

CONSULTING
AGREEMENT

 

This agreement
(the "Agreement") is being made and entered into as of March 21, 2013 (the “Agreement”) by
and between InterCure Ltd, an Israeli publicly traded company, with its principal offices at 16 Hatidhar St. P.O. Box 4131
Raanana, 43665, Israel, Israel (the "Company") and Prof. Reuven Zimlichman, I.D. number 60592334
of 53 David Hamelech Str. Herzlia, 46661Herzliya (the “Consultant”). Each of the Company and Consultant
shall be referred to as a "Party", and collectively the "Parties".

 

WHEREAS,
The Company is engaged in the business of manufacturing and marketing products and services in the field of medical devices based
on a proprietary technology of rhythmical biological modulation (the "Field")

 

WHEREAS, the
Consultant has the necessary know-how, qualifications and experience in the Field required in order to provide the Services (as
defined below);

 

WHEREAS, the
Company desires to appoint the Consultant as the Company's Medical Director, and the Consultant desires to be so appointed by the
Company and to provide to the Company with consulting services, as detailed in Schedule A attached hereto to this
Agreement (the "Services");

 

NOW THEREFORE, in consideration
of the mutual undertakings and promises herein contained, the parties hereby agree as follows:

 

		1	THE SERVICES

 

		1.1	During the Term of Agreement (as defined below), the Consultant shall provide the Company with
consulting services as set out in Schedule A attached hereto (the “Consulting Services”), all
subject to and in accordance with the terms and conditions set forth in this Agreement.

 

		1.2	The Consultant undertakes that: (i) the Services shall be performed in a professional and workmanlike
manner consistent with applicable standards for the performance of the same or similar services; (ii) the necessary resources shall
be devoted to the performance of the Services; and (iii) that in the rendering of the Services, the Consultant will not make use
of any confidential or proprietary information belonging to any third party and shall avoid operating and/or performing any Services
in a manner which infringes or is likely to infringe the rights of any third party

 

		1.3	The Consultant shall provide the Services under the supervision of the Chief Executive Officer
of the Company, or any such person designated by the Chief Executive Officer of the Company at his sole discretion (the Chief Executive
Officer of the Company or the said designated person: the "Designee").

 

		1.4	Consultant will devote up to 20 hours each month to the rendering of the Services, as shall be
requested by the Company.

 

		1.5	During the Term of Agreement (as defined below) the Consultant shall keep the Company, through
the Designee, or such person designated by the Designee, currently informed as to his activities hereunder and shall, each month
or upon the request of the Company, provide the Company with written itemized reports detailing the rendered Services.

 

    	 

    	 

    

 

		1.6	Without derogating from any other provision of this Agreement, the Consultant acknowledges and
agrees that the Company retain the Consultant on a non-exclusive basis, and that the Company is entitled, at its own and absolute
discretion and at any time, to appoint other consultants, agents or employees to perform the Services.

 

		2	COMPENSATION

 

		2.1	In consideration for the rendered Services, the Company shall compensate the Consultant as follows:

 

		2.1.1	The Consultant shall be entitled to a monthly consulting fee of US$ 1,500 (one thousand five hundred
US Dollars) (the "Consulting Fee"). Such fee shall not include VAT, which shall be added, in accordance with applicable
law, to each payment of the Consulting Fee.

 

		2.1.2	Subject to the approval of the Company's Board of Directors and any approvals required by applicable
law, the Company shall grant to the Consultant 130,000 options exercisable to 130,000 ordinary shares of the Company with no par
value each, under the Company’s ESOP (as defined below) (the “Options") subject to the following conditions:

 

		(1)	The Options shall vest over three
(3) years in 12 equal quarterly installments (commencing on the date of the grant of the Options).

 

		(2)	The Options shall be granted in accordance with the provisions of the Company’s ESOP and
under Section 102 of the Income Tax Ordinance, 1961. If applicable

 

		(3)	The exercise price of each Option shall be NIS 0.54

 

		(3)	The Options shall be granted in accordance with the provisions of a grant letter to be signed between
the Consultant and the Company and shall be at all times subject to the terms of the Company's Employee Share Option Plan (“ESOP”).

 

		(4)	Any tax liability in connection with the Options (including with respect to the grant, exercise,
sell of the Option or the shares receivable upon their exercise) shall be borne solely by the Consultant.

 

		(5)	Upon the closing of transaction between the Company and
one of Israel`s medical institutions such as Sick Funds (Kupat Holim), hospitals, clinic etc. resulting in the sale of one of
the Company`s products through such institution of over US$ 175,000), thirty percent (30%) of all the unvested Options at the
time of the closing of such transaction shall immediately vest and be exercisable by the Consultant.

 

		2.2	In addition to the grant of Options, consultant shall be entitled to receive a one-time bonus in
the event of one of the following:

 

		(1)	Upon a closing of a transaction (lead by the consultant) between the Company and one of Israel`s
medical institution such as Sick Funds (Kupat Holim), hospitals, clinic etc., resulting in the sale of one of the Company`s products
through such institution of over US$ 100,000 a one-time bonus shall be paid to Consultant in the sum equal to US$ 4,000.

 

    	 

    	 

    

 

		(2)	Upon a closing of a transaction (lead by the consultant) between the Company and one of Israel`s
medical institution such as Sick Funds (Kupat Holim), hospitals, clinic etc., resulting in the sale of one of the Company`s products
through such institution of over US$ 200,000 a one-time bonus shall be paid to Consultant in the sum equal to US$ 10,000.

 

		(3)	Upon a closing of a transaction (lead by the consultant) between the Company and one of Israel`s
medical institution such as Sick Funds (Kupat Holim), hospitals, clinic etc., resulting in the sale of one of the Company`s products
through such institution of over US$ 300,000) a one-time bonus shall be paid to Consultant in the sum equal to US$ 15,000

 

		(4)	Upon the publication of no less than two articles authored by the Consultant focusing on the Company
and its technology and products in a leading medical journal in US or the EU, a one-time bonus shall be paid to Consultant in the
sum equal to US$ 4,000. Without derogating from the aforesaid, such bonus shall be subject to the approval of the Board of Directors
of the Company, and any other approvals required in accordance to applicable law.

 

		(5)	Upon the successful completion of a clinical trial conducted by the Company in connection with
a product of the Company, supervised, designed and directed by the Consultant, a one-time bonus shall be paid to Consultant in
the sum equal to US$ 8,000. Without derogating from the aforesaid, such bonus shall be subject to the approval of the Board of
Directors of the Company, and any other approvals required in accordance to applicable law.

 

		2.3	The Company shall pay the Consulting Fee against a monthly invoice provided by Consultant to the
Company. The Consulting Fee shall be paid to Consultant within a period of 30 days commencing on the end of the calendar month
of which the Service were rendered.

 

		2.4	In addition to the Consulting Fee, the Company shall reimburse the Consultant for any reasonable
expenses incurred by Consultant, which are to be approved in advance by the Company, including transportation expenses in Israel
and abroad (the "Approved Expenses"). Consultant shall submit, in writing, in the proper format as defined
by the Company from time to time, an expense report in connection with the Approved Expenses, to which written receipts and/or
invoices evidencing such expenses shall be attached. Where expenses have been incurred by means of installment payments or on credit,
Consultant shall not be reimbursed for such expenses until he had actually paid them, i.e., his account has been debited for each
installment. Consultant hereby acknowledges that once reimbursement has been received for goods purchased by Consultant on behalf
of the Company, such goods shall become the sole property of the Company.

 

		2.5	The payments provided by this Agreement shall be made to the Consultant after deduction of all
taxes and deductions at source required by applicable law.

 

		2.6	The parties hereto agree that all taxes, including but not limited to social insurance payments,
pension payments, health insurance and any other such payments, if existing, shall be borne solely by the Consultant. The Company
shall not pay nor be liable to pay any taxes upon the payment to the Consultant of any compensation as set forth in this Agreement.
Consultant hereby undertakes to indemnify and reimburse the Company for any amounts claimed or levied on the Company due to taxes,
social insurance payments, pension payments, health insurance and any other such payments resulting from any payment made by the
Company to the Consultant under this Agreement.

 

    	 

    	 

    

 

		2.7	The Company shall not undertake any social insurance premiums, pension payment and health insurance
on the name of the Consultant.

 

		2.8	The Consultant shall purchase, at his own expense, sufficient insurance policy covering the events
of illness, injuries and/or damages incurred by him in connection of his rendering of the Services to the Company.

 

		3	INDEPENDENT CONTRACTOR

 

		3.1	The Consultant warrants that he is aware that this Agreement is an agreement for the provision
of consulting services only, does not create employer-employee relations between him and the Company and does not confer upon him
any rights save for those set forth herein.

 

		3.2	The Consultant is not deemed to be an agent or a representative of the Company and therefore does
not possess any authority, whether actual or apparent, to represent the Company or to contractually commit the Company in any way
or manner, unless approved to do so in writing and in advance by the Company.

 

		3.3	Without prejudice to the generality of the foregoing, it is hereby agreed that the Consultant shall
not be entitled to receive from the Company severance pay or any other payment or consideration deriving from employee-employer
relations and/or the termination thereof, including, but not limited to, social benefits, managers' insurance fund, education fund,
or the like. The Consultant further undertakes that he shall not bring a claim against the Company with any cause of action based
on employee-employer relations between him and the Company, and undertakes to indemnify the Company, upon its first demand, for
all reasonable expenses that may be occasioned to it in respect of or in connection with any claim in connection with such employee-employer
relations. The Consultant declares that the Consulting Fee is 30% higher than the salary that he would have received should he
has been employed as an employee of the Company.

 

		3.4	If, for any reason whatsoever, any competent authority, including a judicial entity, determines
that the Consultant is to be regarded as an employee of the Company, or entitled to any amounts that are derived from employee-employer
relationships, then in lieu of the Consulting Fee that was paid to the Consultant by the Company as of the February 3, 2013, the
Consultant shall be deemed to be entitled to a reduced consideration which equals to 70% of the Consulting Fee (the “Reduced
Compensation”). The Consultant's entitlement to the Reduced Compensation shall be regarded as gross compensation and
shall apply retroactively as of February 3, 2013, and the Consultant shall immediately refund to the Company any amount paid on
account of the Consulting Fee by the Company as of February 3, 2013in excess of the Reduced Compensation.

 

		4	NONDISCLOSURE AND COMPETITIVE ACTIVITY

 

		4.1	As a condition to Consultant’s rights under this Agreement, Consultant will execute and deliver
to the Company the Secrecy, Non Competition and Proprietary Information agreement in the form attached hereto as Schedule
B. Consultant’s obligations under the said secrecy agreement will survive any termination of this Agreement.

 

    	 

    	 

    

 

		4.2	If Consultant breaches any or all of the covenants set forth in Schedule B hereto,
the Company shall be entitled to the following remedies: (i) damages from Consultant and (ii) in addition to its right to damages
and any other rights it may have, to obtain injunctive or other equitable relief to restrain any breach or threatened breach or
otherwise to specifically enforce the provisions of Schedule B attached hereto, it is agreed that money damages alone
would be inadequate to compensate the Company and would be an inadequate remedy for such breach.

 

		4.3	The rights and remedies of the parties to this Agreement are cumulative and not alternative.

 

		5	TERM AND TERMINATION

 

		5.1	The Term of the Agreement shall be a period of 12 months commencing on February 3, 2013.

 

		5.2	The Agreement shall be automatically renewed for consecutive periods of twelve (12) months (each
an "Additional Term"). In the Event that a Party provides written notice to the other Party two (2) months prior
to the expiry of the Initial Term or any Additional Term, as applicable, of its desire not to renew this Agreement, the Agreement
shall expire at the end of the Initial term or Additional term, as applicable (the Initial Term together with any Additional Term(s)
shall be referred to as the "Term of Agreement").

 

		5.3	Each Party shall be entitled to terminate this Agreement at any time upon a 60 days prior written
notice, without the obligation to provide any reason.

 

		5.4	Without prejudice to the provision of Sections 5.1 and 5.2 above:

 

		5.4.1	The Company shall have the right to terminate this Agreement (during the Initial Period and at
any time thereafter) for “just cause”, at any time, by giving the Consultant notice of termination for the just cause,
stating the reasons constituting the just cause. In such event, this Agreement shall be terminated within ten (10) days from the
time of delivery of the said notice. Any of the following actions or omissions by the Consultant shall constitute a "just
cause" under this Section 5.4.1: (i) a breach by Consultant of any of the covenants set forth in Schedule B
attached hereto; (ii) a material breach by Consultant of any provision of this Agreement other than Schedule B attached
hereto which is not cured by Consultant within five (5) days after his receipt of notice thereof from the Company containing a
description of the breach or breaches alleged to have occurred; (iii) habitual neglect by Consultant or gross failure by Consultant
to adequately perform his services and duties hereunder, or (iv) any act (or failure to act) of moral turpitude by Consultant or
action (or omission) by Consultant to harm the Company.

 

		5.4.2	The Consultant shall have the right to terminate this Agreement for “just cause”, at
any time, by giving to the Company notice of termination for the cause, stating specifically the reasons constituting the cause.
In such event, this Agreement shall be terminated as of the time of delivery of the said notice. Any of the following actions or
omissions by the Consultant shall constitute a "just cause" under this Section 5.4.2: (i) any action by the Company to
intentionally harm Consultant, or (ii) the Company becoming bankrupt or insolvent or ceasing or threatening to cease to carry on
business or being unable to pay its debts as they fall due or a receiver or other encumbrances being appointed to the undertaking
and assets, or any material part thereof of the Company.

 

    	 

    	 

    

 

		5.5	Upon termination of this Agreement, the Consultant shall be entitled to receive the Consulting
Fee accrued but unpaid (together with any expenses payable to Consultant pursuant to Section 2.4 above) as of the date of termination.
The Company shall be entitled to deduct and offset any amount owed by the Consultant to the Company, including but not limited,
to equipment and property belonging to the Company and not returned by the Consultant, from the payments made by the Company to
the Consultant upon such termination.

 

		5.6	Following notice of termination by any Party for any reason, other than upon termination by Consultant
for “just cause”, to the extent requested by the Company, the Consultant shall cooperate with the Company and use his
best efforts to assist the integration into the Company's organization of the person or persons who will assume the Consultant's
responsibilities hereunder. At the sole discretion of the Company, the Consultant shall during such period either continue the
rendering of the Consulting Services or cease such service.

 

		5.7	In the event of any termination of this Agreement, whether or not for "just cause" and
whatever the reason, the Consultant will promptly deliver to the Company all documents, data, records and other information pertaining
to the Consulting Services provided by it and any other equipment belonging to the Company in the Consultant’s possession,
and the Consultant will not take with him any documents or data, or any reproduction or excerpt of any documents or data, containing
or pertaining to the Consulting Services provided by it to the Company.

 

		6	REPRESENTATIONS BY THE CONSULTANT

 

			The Consultant hereby undertakes, represents and warrants as follows:

 

		6.1	There is no limitation and/or restriction in any agreement to which he is party, or by which he
is bound, on his ability to enter into this Agreement and/or to enter into a business relationship with the Company in accordance
with the provisions of this Agreement (including, without limitation, in any prior employment and/or consulting agreement entered
into by Consultant).

 

		6.2	The Consultant will exercise reasonable care and diligence to prevent, and will not take, any action
which could result in a conflict with, or be prejudicial to, the interests of the Company.

 

		6.3	Unless specifically authorized by the Designee, the Consultant is not granted and shall not exercise
the right or authority to assume or create any obligation or responsibility on behalf of or in the name of the Company, including
without limitation, contractual obligations and obligations based on warranties or guarantees.

 

		6.4	Consultant shall not, during the Term of Agreement and at any time thereafter, contact or communicate
any of the Companies employees, consultants, advisors, officers or any other personnel of the Company, without the prior written
consent of the Designee. Any contact or communication by Consultant shall only be made through Designee.

 

    	 

    	 

    

 

		7	MISCELLANEOUS

 

		7.1	This Agreement shall be subject to the laws of the state of Israel, excluding its conflict of law
provisions, and the competent courts of the Tel-Aviv District, Israel shall have exclusive jurisdiction over any dispute arising
there-from.

 

		7.2	This Agreement is the entire agreement between the parties with respect to the subject matter hereof,
and supersedes all prior understandings, agreements and discussions between them, either written or oral, with respect to such
subject matter.

 

		7.3	No alteration of or modification to any of the provisions of this Agreement shall be valid unless
made in writing and signed by both parties.

 

		7.4	The failure of either Party hereto to enforce at any time or for any period any provision of this
Agreement shall not be construed as a waiver of such right or provision and such party shall be entitled to enforce such right
or provision at any time as it shall see fit.

 

		7.5	Any notice required or permitted thereunder shall be given in writing and shall be deemed given
if sent by facsimile transmission or registered airmail to the address of the party.

 

		7.6	This Agreement may not be assigned without the written consent of the other party.

 

IN WITNESS WHEREOF, the parties hereto
have executed this Agreement as of the day and year first above written.

 

	InterCure Ltd. 	 	Consultant: 
	 	 	 
	By:	/s/ Ronen Twito	 	Signature: 	/s/ Reuven Zimlichman
	 	 	 	
	Name and Title:  Ronen Twito, CEO	 	Name: Prof. Reuven Zimlichman
	 	 	
	Date:  March 21 ,2013	 	Date:   March 21 ,2013

 

    	 

    	 

    

 

SCHEDULE A

 

The Consulting Services

 

Consultant shall provide the Company with the following consulting
services relating to Consultant's area of expertise:

 

		1.	Manage the clinical, regulatory and patent aspects of the Company's.

		2.	Advise and consult on new medical technologies.

		3.	Research and development

		4.	Manage the regulatory affairs of the company

		5.	Engage in extending the scope of the patents of the Company including extension of the term of the Companies patents.

 

    	 

    	 

    

 

SCHEDULE B

 

SECRECY,
NON-COMPETITION AND PROPRIETARY INFORMATION AGREEMENT

 

This Secrecy, Non-Competition and Proprietary
Information Agreement (the “Agreement”) is made as of March 21, 2013 by and between InterCure Ltd., an
Israeli publicly traded Company, with its principal offices at 16 Hatidhar St. P.O. Box 4131 Raanana, 43665, Israel, Israel (the
"Company") and Prof. Reuven Zimlichman, I.D. number 60592334
of 53 David Hamelech Str. Herzlia, 46661 Herzliya, Israel (“Consultant”).

 

WHEREAS   the
Consultant has entered an Consulting Agreement with the Company (the “Consulting Agreement”); and

 

WHEREAS   the Consultant
agreed to enter into this Undertaking;

 

NOW, THEREFORE, the Consultant undertakes
and warrants towards the Company and any subsidiary and parent company of the Company as follows: 

 

		1.	Confidential
Information

 

		1.1	In the course of providing services to the Company hereunder, the Consultant may have access to,
and become familiar with, “Confidential Information” of the Company (as hereinafter defined). The Consultant shall
at all times hereinafter maintain in the strictest confidence all such Confidential Information and shall not divulge any Confidential
Information to any person, firm or corporation without the prior written consent of the Company. For purposes hereof, “Confidential
Information” shall mean all information in any and all medium which is confidential by its nature, including, without
limitation, data, technology, know-how, inventions, ideas, discoveries, designs, processes, formulations, samples, compositions,
methods, models, and/or trade and business secrets relating to any line of business in which the Company is involved. Confidential
Information will also include the Company’s development, marketing and business plans relating to current, planned, old or
future products.

 

		1.2	The Consultant shall not use Confidential Information for, or in connection with, the development,
manufacture or the use of any product or for any other purpose whatsoever except as and to the extent provided in this Agreement
or in any other subsequent agreement between the parties.

 

		1.3	Notwithstanding the foregoing, Confidential Information shall not include information which the
Consultant can evidence to the Company by appropriate documentation: (i) is in, or enters the public domain otherwise than by reason
of a breach hereof by the Consultant; (ii) is known by the Consultant at the time of disclosure thereof by the Company; (iii) is
independently developed by the Consultant without recourse to Confidential Information; or (iv) is rightfully transmitted or disclosed
to the Consultant by a third party which owes an obligation of confidentiality with respect to such information.

 

		1.4	All Confidential Information made available to, or received by, the Consultant shall remain the
property of the company, and no license or other rights in or to the Confidential Information is granted hereby, the obligation
of the Consultant is not to use any Confidential Information disclosed pursuant to this Agreement except as provided in this Agreement,
shall remain in effect indefinitely, and the Consultant shall be prohibited from disclosing any such Confidential Information during
the term of this Agreement thereafter.

 

    	 

    	 

    

 

		1.5	All files, records, documents, drawings, specifications, equipment and similar items relating to
the business of the Company, whether prepared by the Consultant or otherwise coming into his possession, and whether classified
as Confidential Information or not, shall remain the exclusive property of the Company. Upon termination or expiration of this
Agreement, or upon request by the Company, the Consultant shall promptly turn over to the Company all such files, records, reports
analysis, documents and other material of any kind concerning the Company, which the Consultant obtained, received or prepared
pursuant to this Agreement.

 

		1.6	Except with prior written authorization by the Board of Directors of the Company (“BOD”),
the Consultant agrees not to disclose or publish any of the Confidential Information or material of the Company, its clients, partners,
shareholders or suppliers, or any other party to whom the Company owes an obligation of confidence, at any time during or after
his engagement with the Company.

 

		1.7	The Consultant agrees, during his engagement with the Company, not to improperly use or disclose
any proprietary information or trade secrets of any former or concurrent employer or other person or entity and that he will not
bring onto the premises of the Company any unpublished document or proprietary information belonging to any such employer, person
or entity unless consented to in writing by such employer, person or entity.

 

		1.8	The Consultant recognizes that the Company has received and in the future will receive from third
parties their confidential or proprietary information subject to a duty on the Company's part to maintain the confidentiality of
such information and to use it only for certain limited purposes. The Consultant agrees to hold all such confidential or proprietary
information in the strictest confidence and not to disclose it to any person, firm or corporation or to use it except as necessary
in carrying out such Consultant's work for the Company consistent with the Company's agreement with such third party.

 

		2.	Non-Competition

 

		2.1	The Consultant shall not at any time during the term of this Agreement and (a) in the event that
the Consultant’s engagement with the Company is terminated by the Company, other than for “just cause” under
Section 5.4.1. of the Consulting Agreement - for six (6) months thereafter, or (b) in the event that the Consultant’s engagement
with the Company is terminated by the Consultant or by the Company for “just cause” under Section 5.4.1. of the Consulting
Agreement - for twelve (12) months thereafter; directly or indirectly, engage in (as owner, stockholder, partner, director, officer,
employee, consultant or otherwise, except as an investor in a corporation whose stock is publicly traded and in which he holds
less than 5% of the outstanding shares) any business in the Field.

 

		2.2	Notwithstanding the aforesaid, the Consultant may, at any time during the term of this Agreement,
continue to perform academic research related to the activities and business of the Company, provided that any such academic research
shall not result in any way in a breach of any term of this Agreement and shall not be for any commercial activity.

 

		2.2	The Consultant shall not, directly or indirectly, either for himself or for the benefit of any
other Person or entity, at any time during the term of this Agreement and for Twelve (12) months thereafter, (A) induce or
attempt to induce any employee of the Company to leave the employ of the Company, (B) in any way interfere with the relationship
between the Company and any employee of the Company, (C) employ, or otherwise engage as an employee, independent contractor,
or otherwise, any employee of the Company, or (D) solicit any employee, customer, or supplier of the Company to cease or change
its legal or business relationship with the Company.

 

    	 

    	 

    

 

		2.3	In the event of a breach by the Consultant of any covenant set forth in Section 6 of this
Agreement, the term of such covenant will be extended by the period of the duration of such breach.

 

		3.	INVENTIONS.

 

		3.1	The Consultant has attached hereto, as Exhibit A, a list describing all inventions,
original works of authorship, developments, improvements, and trade secrets which were made by the Consultant prior to his engagement
with the Company (collectively referred to as "Prior Inventions"), which belong to the Consultant, which relate
to the Company's proposed business, products or research and development, and which are not assigned to the Company
hereunder; or, if no such list is attached, the Consultant represents that there are no such Prior Inventions. If in the course
of this Agreement with the Company, the Consultant incorporates into a product, process or machine of the Company, a Prior Invention
owned by the Consultant or in which the Consultant has an interest, the Company is hereby granted and shall have a non-exclusive,
royalty-free, irrevocable, perpetual, worldwide license to make, have made, modify, use and sell such Prior Invention as part of
or in connection with such product, process or machine.

 

		3.2	The Consultant will disclose and deliver to the Company for the exclusive use and benefit of the
Company any Inventions (which in this paragraph shall mean any discovery, technique, design, formula, method of manufacture, inventions,
secret process, improvements, and modifications (whether or not capable of protection by rights in the nature of intellectual property)
which the Consultant alone or with one or more others has made or discovered during the Term of this Agreement and which pertain
to or result from any work which the Consultant has done or may hereafter do for the Company), promptly upon the making, devising,
or discovering of the same, and will give all information and data in his possession as to the exact mode of working, producing,
and using the same and also all such explanations and instructions as may in the view of the Company be necessary to enable the
full and effectual working, production, or use of the same and will at the expense of the Company furnish it with all necessary
plans, drawings, formulae, and models.

 

		3.3	The Consultant, during the term of this Agreement, will without charge to but at the expense of
the Company execute and do all acts, matters, documents, and things to enable the Company or its nominee to apply for and obtain
protection for the Inventions in any or all countries and to vest title in the Company or such nominee absolutely.

 

		3.4	The Consultant hereby irrevocably appoints the Company to be his attorney in his name and on his
behalf to execute and do such acts, matters, documents, and things as aforesaid and generally to use his name for the purpose of
giving to the Company (or its nominee) the full benefit of the provisions of this section. In favor of any third party a certificate
signed by any director or the secretary of the Company that an instrument or act falls within the authority hereby conferred shall
be conclusive evidence that such is the case.

 

		3.5	During the term of this Agreement and at all times thereafter the Consultant will (whether by omission
or commission) do nothing to affect or imperil the validity of the protection for the Inventions obtained or applied for by the
Company or its nominee pursuant to this paragraph. The Consultant will at the direction and expense of the Company render all assistance
within his power to obtain and maintain such protection or application or any extension thereof.

 

    	 

    	 

    

 

		3.6	Nothing in this Agreement shall oblige the Company to seek patent or other protection for any Invention
nor to exploit any Invention.

 

		3.7	The Consultant shall promptly disclose to the Company all copyright works or designs originated,
conceived, written, or made by him alone or with others (except only those works originated, conceived, written, or made by him
prior to being engaged by the Company or on his own time and not derived from or related to the work done by him to the Company)
and shall, until such rights shall be fully and absolutely vested in the Company, hold them in trust for the Company.

 

		3.8	The Consultant hereby assigns to the Company by way of future assignment all copyright, design
right, and other proprietary rights, if any, for the full terms thereof throughout the world in respect of all copyright works
and designs originated, conceived, written, or made by the Consultant (except only those works or designs originated, conceived,
written, or made by the Consultant wholly outside his normal working hours with the Company and wholly unconnected with the services
he renders to the Company) during the period of his Agreement hereunder and during all previous periods of engagement with the
Company engagement.

 

		3.9	The Consultant will, at the request and expense of the Company, do all things necessary or desirable
to substantiate the rights of the Company under Section 3.8, and hereby acknowledges and agrees that the provisions of this
paragraph shall survive any termination of this Agreement.

 

		3.10	For the removal of any doubt, it is hereby clarified that the provisions contained in Sections 3.2
and 3.8 above will apply also to any "Service Inventions" as defined in the Israeli Patent Law, 1967 (the "Patent
Law"). However, in no event will such Service Invention become the property of the Consultant and the provisions contained
in Section 132(b) of the Patent Law shall not apply unless the Company provides in writing otherwise. The Consultant will
not be entitled to royalties or other payment with regard to any Prior Inventions, Service Inventions or any of the intellectual
property rights set forth above, including any commercialization of such Prior Inventions, Service Inventions or other intellectual
property rights.

 

		3.11	In the event that following the termination of his Agreement with the Company, the Consultant is
requested to assist the Company on any matter related to this Section 3, the Company will be required to pay the Consultant the
standard fee the Consultant may charge at that time for consulting or advising other third parties as remuneration for the Consultant’s
efforts hereunder.

 

IN WITNESS WHEREOF, the parties hereto have executed this Secrecy,
Non-Competition and Proprietary Information Undertaking as of the day and year first above written.

 

	InterCure Ltd.	 	Prof. Reuven Zimlichman
	 	 	 
	By: Ronen Twito, CEO	 	
	 	 	 
	Signature: 	/s/ Ronen Twito	 	Signature: 	/s/ Reuven Zimlichman

 

    	 

    	 

    

 

Exhibit A 

 

to the SECRECY, NON-COMPETITION AND
PROPRIETARY INFORMATION AGREEMENT

 

List of Prior InventionsExhibit 10.61

 

PROTEOLOGICS LTD 2012 FINANCIAL STATEMENTS

(XTL's ACQUIRED EQUITY
INVESTEE)

 

PURSUANT TO RULE 3-09 OF REGULATION S-X

 

    	 

    	 

    

 

PROTEOLOGICS LTD.

 

FINANCIAL STATEMENTS 

 

AS OF DECEMBER 31, 2012

 

INDEX

 

	 	Page
	 	 
	Report of Independent Registered Public Accounting Firm	2
	 	 
	Financial Statements - in NIS:	 
	 	 
	Statements of Financial Position	3 - 4
	 	 
	Statements of Comprehensive Loss	5
	 	 
	Statements of Changes in Equity (in Capital Deficiency)	6
	 	 
	Statements of Cash Flows	7 - 8
	 	 
	Notes to Financial Statements	9 - 56

 

- - - - -
- - - - - -

 

    	 

    	 

    

 

 

Report of Independent Registered Public
Accounting Firm

 

To the Shareholders of

 

PROTEOLOGICS LTD.

 

We have audited the statement of financial
position of Proteologics Ltd. ("the Company") as of December 31, 2012, and the related statement of comprehensive loss,
changes in equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's board
of directors and management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with
generally accepted auditing standards in Israel, including those prescribed by the Auditors' Regulations (Auditor's Mode of Performance),
1973, and in accordance with the standards of the Public Company Accounting Oversight Board (United States of America). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant estimates made by the Company's board of directors
and management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.

 

In
our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the
Company as of December 31, 2012, and the results of its operations, changes in its equity and cash flows for the year then
ended, in conformity with International Financial Reporting Standards ("IFRS"), as issued by the International
Accounting Standards Board ("IASB") and with the provisions of
the Israeli Securities Regulations (Annual Financial Statements), 2010.

 

	Tel-Aviv, Israel	/s/	Kesselman & Kesselman
	March 7, 2013	 	Certified Public Accountants (lsr.)
	 	 	A member firm of PricewaterhouseCoopers International Limited

 

Kesselman & Kesselman, Trade Tower, 25 Hamered Street, Tel-Aviv 6812508, Israel,

 P.O Box 50005 Tel-Aviv 6150001 Telephone: +972 -3- 7954555, Fax:+972 -3- 7954556, www.pwc.com/il

 

    	2

    	 

    

 

PROTEOLOGICS LTD.

STATEMENTS OF FINANCIAL POSITION

 

	 	 	 	 	December 31,	 
	 	 	 	 	2012	 	 	2011	 
	 	 	 	 	 	 	 	(Unaudited)	 
	 	 	Note	 	NIS in thousands	 
	ASSETS	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 
	CURRENT ASSETS:	 	 	 	 	 	 	 	 	 	 
	Cash and cash equivalents	 	5a	 	 	10,437	 	 	 	9,192	 
	Restricted bank deposits	 	12h	 	 	364	 	 	 	330	 
	Financial assets at fair value through profit or loss	 	5b	 	 	22,421	 	 	 	38,230	 
	Accounts receivable	 	6	 	 	416	 	 	 	799	 
	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	33,638	 	 	 	48,551	 
	 	 	 	 	 	 	 	 	 	 	 
	NON-CURRENT ASSETS:	 	 	 	 	 	 	 	 	 	 
	Property, plant and equipment	 	7	 	 	1,966	 	 	 	2,182	 
	Intangible assets	 	8	 	 	166	 	 	 	360	 
	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	2,132	 	 	 	2,542	 
	 	 	 	 	 	 	 	 	 	 	 
	Total assets	 	 	 	 	35,770	 	 	 	51,093	 

 

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

 

    	3

    	 

    

 

PROTEOLOGICS LTD.

 

STATEMENTS OF FINANCIAL POSITION

 

	 	 	 	 	 	December 31,	 
	 	 	 	 	 	2012	 	 	2011	 
	 	 	 	 	 	 	 	 	(Unaudited)	 
	 	 	Note	 	 	NIS in thousands	 
	LIABILITIES AND EQUITY	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	CURRENT LIABILITIES:	 	 	 	 	 	 	 	 	 	 	 	 
	Accounts payable:	 	 	 	 	 	 	 	 	 	 	 	 
	Trade payables	 	 	9a		 	 	517	 	 	 	1,084	 
	Other	 	 	9b		 	 	2,013	 	 	 	2,425	 
	Income received in advance	 	 	9c		 	 	2,068	 	 	 	8,775	 
	Provisions	 	 	12b(2)		 	 	-	 	 	 	143	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	4,598	 	 	 	12,427	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	NON-CURRENT LIABILITIES:	 	 	 	 	 	 	 	 	 	 	 	 
	Liabilities for employee  rights upon retirements, net	 	 	11	 	 	 	218	 	 	 	80	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Total liabilities	 	 	 	 	 	 	4,816	 	 	 	12,507	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	COMMITMENTS AND CONTINGENT LIABILITIES	 	 	12	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	EQUITY:	 	 	14	 	 	 	 	 	 	 	 	 
	Ordinary share capital	 	 	 	 	 	 	14,788	 	 	 	14,658	 
	Share premium	 	 	 	 	 	 	64,268	 	 	 	60,985	 
	Capital reserve	 	 	 	 	 	 	26,384	 	 	 	26,384	 
	Warrants	 	 	 	 	 	 	11,117	 	 	 	14,400	 
	Accumulated deficit	 	 	 	 	 	 	(85,603	)	 	 	(77,841	)
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Total equity	 	 	 	 	 	 	30,954	 	 	 	38,586	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Total liabilities and equity	 	 	 	 	 	 	35,770	 	 	 	51,093	 

 

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

 

	March 7, 2013	 	 	 	 	 	 
	Date of approval of the financial statements	 	
        /s/ Efraim Argaman

        Chairman of the Board
	 	
        /s/ Josh Levine

        CEO
	 	
        /s/ Esther Hayun

        CFO

 

    	4

    	 

    

  

PROTEOLOGICS LTD.

 

STATEMENTS OF COMPREHENSIVE LOSS

 

	 	 	 	 	 	Year ended December 31,	 
	 	 	 	 	 	2012	 	 	2011	 	 	2010	 
	 	 	 	 	 	 	 	 	(Unaudited)	 
	 	 	Note	 	 	NIS in thousands	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Revenues from Research & Development  services provided	 	 	12	b	 	 	13,436	 	 	 	9,927	 	 	 	4,564	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Cost of revenues from Research & Development  services provided	 	 	15	a	 	 	(10,716	)	 	 	(9,652	)	 	 	(5,584	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Research & Development  expenses, net	 	 	15	b	 	 	(6,946	)	 	 	(5,916	)	 	 	(7,739	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	General and administrative expenses	 	 	16	 	 	 	(5,645	)	 	 	(5,544	)	 	 	(5,203	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Capital gain (loss)	 	 	 	 	 	 	1	 	 	 	(6	)	 	 	(1	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Operating loss	 	 	 	 	 	 	(9,870	)	 	 	(11,191	)	 	 	(13,963	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Finance income	 	 	17	 	 	 	1,464	 	 	 	2,831	 	 	 	677	 
	Finance expenses	 	 	17	 	 	 	(429	)	 	 	(70	)	 	 	(2,378	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Finance income (expenses), net	 	 	 	 	 	 	1,035	 	 	 	2,761	 	 	 	(1,701	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Loss and comprehensive loss for the year	 	 	 	 	 	 	(8,835	)	 	 	(8,430	)	 	 	(15,664	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Loss per share in NIS - basic and diluted	 	 	18	 	 	 	(0.60	)	 	 	(0.58	)	 	 	(1.18	)

 

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

 

    	5

    	 

    

 

PROTEOLOGICS LTD.

 

STATEMENTS OF CHANGES IN EQUITY
(IN CAPITAL DEFICIENCY)

	 	 	Ordinary

    share
 capital	 	 	Share

    premium	 	 	Capital

    reserve	 	 	Warrants	 	 	Accumulated

    deficit	 	 	Total
    Equity
 (Capital
 deficiency)	 
	 	 	NIS
    in thousands	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance at December 31, 2009
    (Unaudited)	 	 	1	 	 	 	-	 	 	 	25,135	 	 	 	-	 	 	 	(56,599	)	 	 	(31,463	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Changes in the year ended
    December 31, 2010 (Unaudited):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Comprehensive loss for
    the year	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	(15,664	)	 	 	(15,664	)
	Exercise of options into shares	 	 	89	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	(13	)	 	 	76	 
	Conversion of loans from
    the former parent company into share capital	 	 	1	 	 	 	39,924	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	39,925	 
	Distribution of bonus shares	 	 	9,998	 	 	 	(9,998	)	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 
	Proceeds from issuance
    of shares and warrants, net of issuance expenses	 	 	4,569	 	 	 	31,059	 	 	 	-	 	 	 	14,400	 	 	 	-	 	 	 	50,028	 
	Share based payment to
    employees and service providers	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	1,201	 	 	 	1,201	 
	Interest
    benefit inherent in loans from the former parent company	 	 	-	 	 	 	-	 	 	 	1,249	 	 	 	-	 	 	 	-	 	 	 	1,249	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance at December 31, 2010 (Unaudited)	 	 	14,658	 	 	 	60,985	 	 	 	26,384	 	 	 	14,400	 	 	 	(71,075	)	 	 	45,352	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Changes in the year ended
    December 31, 2011 (Unaudited):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Comprehensive loss for
    the year	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	(8,430	)	 	 	(8,430	)
	Share
    based payment to employees and service providers	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	1,664	 	 	 	1,664	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance at December 31, 2011(Unaudited)	 	 	14,658	 	 	 	60,985	 	 	 	26,384	 	 	 	14,400	 	 	 	(77,841	)	 	 	38,586	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Changes in the year ended
    December 31, 2012:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Expiration of warrants	 	 	-	 	 	 	3,283	 	 	 	-	 	 	 	(3,283	)	 	 	-	 	 	 	-	 
	Exercise of options into shares	 	 	130	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	(18	)	 	 	112	 
	Comprehensive loss for
    the year	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	(8,835	)	 	 	(8,835	)
	Share
    based payment to employees and service providers	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	1,091	 	 	 	1,091	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance at December
    31, 2012	 	 	14,788	 	 	 	64,268	 	 	 	26,384	 	 	 	11,117	 	 	 	(85,603	)	 	 	30,954	 

  

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

 

    	6

    	 

    

 

PROTEOLOGICS LTD.

 

STATEMENTS OF CASH FLOWS

 

	 	 	Year ended December 31,	 
	 	 	2012	 	 	2011	 	 	2010	 
	 	 	 	 	 	(Unaudited)	 
	 	 	NIS in thousands	 
	Cash flows from operating activities:	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Loss for the year	 	 	(8,835	)	 	 	(8,430	)	 	 	(15,664	)
	Adjustments to reconcile loss to net cash provided by (used in) operating activities (a)	 	 	(5,458	)	 	 	(4,623	)	 	 	21,050	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Net cash provided by (used in) operating activities	 	 	(14,293	)	 	 	(13,053	)	 	 	5,386	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Cash flows from investing activities:	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Purchase of property, plant and equipment	 	 	(356	)	 	 	(1,021	)	 	 	(1,271	)
	Purchase of intangible assets	 	 	(30	)	 	 	 	 	 	 	(1,305	)
	Proceeds from sale of property, plant and equipment	 	 	3	 	 	 	45	 	 	 	2	 
	Purchase of financial assets at fair value through profit or loss	 	 	(5,687	)	 	 	(51,797	)	 	 	(52,738	)
	Proceeds from sale of financial assets at fair value through profit or loss	 	 	21,741	 	 	 	55,418	 	 	 	12,885	 
	Restricted bank deposits, net	 	 	(34	)	 	 	(12	)	 	 	(5	)
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Net cash provided by (used in) investing activities	 	 	15,637	 	 	 	2,633	 	 	 	(42,432	)
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Cash flows from financing activities:	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Proceeds from issuance of shares and warrants, net of issuance expenses	 	 	-	 	 	 	-	 	 	 	50,028	 
	Exercise of options into shares	 	 	112	 	 	 	-	 	 	 	76	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Net cash provided by financing activities	 	 	112	 	 	 	-	 	 	 	50,104	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Increase (decrease) in cash and cash equivalents	 	 	1,456	 	 	 	(10,420	)	 	 	13,058	 
	Cash and cash equivalents at the beginning of the year	 	 	9,192	 	 	 	19,124	 	 	 	7,222	 
	Exchange rate differences on cash and cash equivalents	 	 	(211	)	 	 	488	 	 	 	(1,156	)
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Cash and cash equivalents at the end of the year	 	 	10,437	 	 	 	9,192	 	 	 	19,124	 

 

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

 

    	7

    	 

    

  

PROTEOLOGICS LTD.

 

STATEMENTS OF CASH FLOWS

 

	 	 	 	 	Year ended December 31,	 
	 	 	 	 	2012	 	 	2011	 	 	2010	 
	 	 	 	 	 	 	 	(Unaudited)	 
	 	 	 	 	NIS in thousands	 
	(a)	 	Adjustments to
    reconcile loss to net cash provided by (used in)  operating activities:	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Income and expenses not involving cash flows:	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Gain from change in fair value of financial assets through profit or loss	 	 	(245	)	 	 	(1,413	)	 	 	(585	)
	 	 	Depreciation and amortization	 	 	794	 	 	 	1,125	 	 	 	1,001	 
	 	 	Liabilities for employee rights upon retirements, net	 	 	138	 	 	 	(65	)	 	 	88	 
	 	 	Exchange rate differences on cash and cash equivalents	 	 	211	 	 	 	(488	)	 	 	1,156	 
	 	 	Exchange rate differences on loans from the former parent company	 	 	-	 	 	 	-	 	 	 	(74	)
	 	 	Capital loss (gain) from sale of property, plant and equipment, net	 	 	(1	)	 	 	6	 	 	 	1	 
	 	 	Interest benefit inherent in loans from the former parent company	 	 	-	 	 	 	-	 	 	 	1,249	 
	 	 	Share based payment to employees and service providers	 	 	1,091	 	 	 	1,664	 	 	 	1,201	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	1,988	 	 	 	829	 	 	 	4,037	 
	 	 	Changes in operating asset and liability items:	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Decrease in accounts receivable	 	 	383	 	 	 	32	 	 	 	509	 
	 	 	Increase (decrease) in accounts payable:	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Trade payables	 	 	(567	)	 	 	157	 	 	 	452	 
	 	 	Provisions and others	 	 	(555	)	 	 	(420	)	 	 	2,056	 
	 	 	Income received in advance	 	 	(6,707	)	 	 	(5,221	)	 	 	13,996	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	(7,446	)	 	 	(5,452	)	 	 	17,013	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	(5,458	)	 	 	(4,623	)	 	 	21,050	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	(b)	 	Information on investing
    and financing activities not involving cash flows:	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Conversion of loans from the former parent company into share capital	 	 	 	 	 	 	 	 	 	 	39,925	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	(c)	 	Additional cash flow information:	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Cash paid during the year for taxes on income	 	 	21	 	 	 	15	 	 	 	15	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Cash received during the year for interest	 	 	1,305	 	 	 	880	 	 	 	61	 

 

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

 

    	8

    	 

    

 

PROTEOLOGICS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 1:-	GENERAL

 

Proteologics Ltd. ("the
Company") was incorporated in Israel on May 19, 1999 as a private company under the name of Lismon (Israel) Ltd. In May 2000,
the Company's name was changed to its present name. Until 2010, the Company was wholly owned by Proteologics Inc., a company registered
in Delaware, USA ("the former parent company"). In 2010, the Company executed an IPO of its shares and warrants (see
Note 14a(4) below). Also in 2010, the former parent company decided on a voluntarily liquidation effective immediately and its
interests in the Company were transferred to the former parent company's shareholders. As of December 31, 2012, the Company's major
shareholders are: XTL Biopharmaceuticals Ltd. (about 31.24% of the share capital), Aurum Ventures MKI Ltd. (about
16.84% of the share capital) and GlaxoSmithKline LLC ("GSK") (about 5.20% of the share capital). The Company's registered
domicile is 2 Holtzman Street, Science Park, Rehovot, Israel.

 

The Company is engaged in the
research and development of drugs targeting various diseases. The Company possesses knowhow and expertise of the ubiquitin system
and focuses its efforts on discovering new drugs that target different components of the ubiquitin system. The ubiquitin system
regulates almost all aspects of eukaryotic cellular function. The ubiquitin protein labels and tags other proteins as a signal
for the occurrence of cellular biological processes such as protein disintegration, metabolism and so on. Ubiquitin system dysfunction
might lead to a series of diseases, including metabolic disorders, neurological disorders, malignant diseases, muscular atrophy
and viral diseases.

 

The Company is in research and
development stages and has yet to generate significant revenues. Therefore, it is unable to determine with certainty whether and
when it will be able to generate profits.

 

As for development agreements
signed with Teva Pharmaceutical Industries Ltd. ("Teva"), including Teva's announcement of their cancellation on December
26, 2012, see Note 12b(1) below.

 

As for a development agreement
signed with GSK, see Note 12b(2) below.

 

The Company's strategy consists
of conducting ubiquitin related R&D programs in collaboration with pharma companies as well as self financed programs. As detailed
in Note 12b below, on March 7, 2013, GSK and the Company agreed to extend the collaboration period by another year focusing on
a single program. In addition, the agreement with Teva was cancelled in late 2012.

 

In view of the above, on March
7, 2013, the Company's Board decided to make the necessary adjustments to the Company's personnel in order to meet the required
activity scope by retaining the personnel and the resources needed to preserve the Company's unique ubiquitin related knowhow and
allow future collaborations in this field. This decision signifies cutbacks of ten positions representing about 40% of the Company's
current personnel at the end of the first quarter of 2013.

 

    	9

    	 

    

 

PROTEOLOGICS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 1:-	GENERAL (Cont.)

 

In view of strategic discussions
held by the Company's Board, changes may be carried out in the Company's R&D activity to include new non-ubiquitin related
activities by prioritizing assets in clinical development stages. Simultaneously, the Company will continue to finance projects
out of its own resources and exercise business development efforts to achieve additional collaborations in the ubiquitin field.

 

		NOTE 2:-	SIGNIFICANT ACCOUNTING POLICIES

 

		a.	Basis of presentation of the financial statements:

 

The financial statements of
the Company as of December 31, 2012 and 2011 and for each of the three years in the period ended December 31, 2012 have been prepared
in accordance with International Financial Reporting Standards ("IFRS") which are standards and interpretations issued
by the International Accounting Standards Board ("IASB") and include the additional disclosure required in accordance
with the Israeli Securities Regulations (Annual Financial Statements), 2010.

 

		1.	The significant accounting policies described below are consistent with those of all years presented,
unless it is indicated otherwise.

 

			The financial statements have been prepared under the historical cost convention, subject to adjustments
in respect of the revaluation of severance pay fund assets and financial assets which are presented at fair value.

 

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

 

		2.	The Company analyzes the expenses recognized in profit or loss by classification based on the function
of expense.

 

		3.	The Company's operating cycle is 12 months.

 

		b.	Translation of foreign currency balances and transactions:

 

		1.	Functional currency and presentation currency:

 

Items included
in the financial statements of the Company are measured using the currency of the primary economic environment in which the Company
operates ("the functional currency"). The financial statements are presented in NIS, which is the Company's functional
currency and presentation currency.

 

    	10

    	 

    

 

PROTEOLOGICS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 2:-	SIGNIFICANT ACCOUNTING POLICIES (Cont.)

 

		2.	Transactions and balances:

 

Transactions
in a currency other than the functional currency ("foreign currency") are translated into the functional currency using
the exchange rates at the dates of the transactions. Exchange rate differences arising from the settling of transactions as above
and from the translation of monetary assets and liabilities denominated in foreign currency based on the exchange rates at the
end of the period are recognized in profit or loss in financial income or expenses.

 

		3.	Below are the changes in the reporting periods in the exchange rate of the U.S. dollar ("the
dollar") and in the Israeli Consumer Price Index ("CPI") in relation to the NIS:

 

	 	 	Exchange rate
 of U.S. $ 1	 	 	Israeli 
 CPI	 
	Year ended	 	%	 	 	%	 
	 	 	 	 	 	 	 
	December 31, 2012	 	 	(2.3	)	 	 	1.6	 
	December 31, 2011	 	 	7.7	 	 	 	2.2	 
	December 31, 2010	 	 	(6.0	)	 	 	2.7	 

 

			The U.S. dollar exchange rate as of December 31, 2012 was: U.S. $ 1 = NIS 3.733.

 

		c.	Property, plant and equipment:

 

Property,
plant and equipment are initially included at cost of purchase. Subsequent costs are included at the asset's carrying amount or
recognized as a separate asset, as applicable, only when the future economic benefits attributable to the item are expected to
flow to the Company and the item's costs can be measured reliably. An item of property, plant and equipment which is replaced is
derecognized from the books. All other costs of repairs and maintenance are carried to profit or loss over the reporting period
in which they are incurred.

 

Items of
property, plant and equipment are presented at cost less accumulated depreciation and accumulated impairment losses which are carried
to profit or loss.

 

Depreciation of property, plant
and equipment is calculated on a straight-line basis to reduce their cost to their residual value over their useful life as follows:

 

	 	 	Years
	 	 	 
	Computers and peripheral equipment	 	3
	Lab equipment	 	7 - 10
	Office furniture and equipment	 	7 - 15

 

Leasehold
improvements are depreciated on a straight-line basis over the shorter of the lease term or the expected life of the improvement.

 

    	11

    	 

    

 

PROTEOLOGICS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 2:-	SIGNIFICANT ACCOUNTING POLICIES (Cont.)

 

The residual
value, depreciation method and useful life of an asset are reviewed and updated at least each year.

 

An asset's
carrying amount is written down immediately to its recoverable amount if the asset's carrying amount is greater than its estimated
recoverable amount (see e below).

 

Gains or
losses from the disposal of assets are determined by comparing the consideration received to the carrying amount and are recognized
in the statements of income under capital gain (loss).

 

The Company
has lab equipment which is used in the research and development process. This equipment is used by the Company for longer than
one reporting period (7-10 years) and is therefore recorded as property, plant and equipment in the financial statements and depreciated
using the straight-line method over its estimated useful life.

 

		d.	Intangible assets:

 

		1.	Knowhow:

 

Acquired
knowhow is presented at historical cost less accumulated amortization. Knowhow is amortized using the straight-line method over
its useful life and tested for impairment regularly. Management has determined that the useful life of knowhow is 2-5 years.

 

		2.	Research and development:

 

Research
expenditure is recognized in the statements of income as an expense when incurred. Costs arising from development projects (relating
to the design and examination of new or upgraded products) are recognized as intangible assets when the following criteria are
met:

 

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

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

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

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

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

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

 

Other development
expenditures that do not meet these criteria are recognized as an expense when incurred. Development costs that were previously
recognized as an expense are not recognized as an asset in a later period.

 

    	12

    	 

    

 

PROTEOLOGICS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 2:-	SIGNIFICANT ACCOUNTING POLICIES (Cont.)

  

Until December
31, 2012, the Company did not meet the conditions underlying the capitalization of development costs as an intangible asset and
accordingly did not recognize any asset in respect of these costs in the financial statements by December 31, 2012.

 

		3.	Computer software:

 

Acquired
licenses to use computer software are capitalized based on costs incurred in acquiring the specific software and preparing it for
use. These costs are amortized using the straight-line method over the estimated useful life (three years).

 

		e.	Impairment of non-financial assets:

 

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

 

		f.	Government grants:

 

Government
grants are recognized at fair value when there is reasonable assurance that the grants will be received and the Company will comply
with the attached conditions. A forgivable government loan is treated as a government grant when there is reasonable assurance
that the Company will meet the loan's forgiveness conditions.

 

Government
grants referring to costs are recognized in profit or loss on a systematic basis over the periods in which the Company recognizes
the respective costs (which the grants are intended to compensate) as expenses.

 

Government
grants received from the Office of the Chief Scientist in Israel ("OCS") as participation in research and development
performed by the Company ("OCS grants") are accounted for as forgivable loans in accordance with IAS 20, Accounting
for Government Grants and Disclosure of Government Assistance ("IAS 20").

 

    	13

    	 

    

 

PROTEOLOGICS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 2:-	SIGNIFICANT ACCOUNTING POLICIES
(Cont.)

 

Grants received
from the OCS after January 1, 2009 are accounted for in accordance with the provisions of IFRS 9 (as applicable) if on the date
of the entitlement to an OCS grant ("the entitlement date") management concludes that there is no reasonable assurance
that the OCS grant to which the Company is eligible ("grant received") will not be refunded in which case on that date
the Company recognizes a financial liability accounted for in accordance with the provisions of IFRS 9 regarding financial liabilities
measured at amortized cost. The gap between the OCS grant received and the fair value of the financial liability on the date of
its initial recognition is accounted for as a government grant which is carried to profit or loss as a reduction of research and
development expenses.

 

In the event
that on the entitlement date the Company's management concludes that there is reasonable assurance that the OCS grant received
will not be refunded, on that date the grant is carried to profit or loss as a reduction of research and development expenses.
To the extent that in a subsequent period management first concludes that there is no reasonable assurance that the OCS grant received
will not be refunded, the Company then recognizes a financial liability against profit or loss. The financial liability is accounted
for in accordance with the provisions of IFRS 9 regarding financial liabilities measured at amortized cost.

 

As for OCS
grants received up to December 31, 2008, if on the entitlement date the Company concludes that there is reasonable assurance that
the OCS grant received will not be refunded and accordingly as of that date it is carried to profit or loss and in subsequent periods
it first becomes more likely than not that the project will be a success and royalties will be paid to the Chief Scientist, then
the Company recognizes a provision against profit or loss, measured according to the guidelines of IAS 37, Provisions, Contingent
Liabilities and Contingent Assets.

 

		g.	Financial assets:

 

The Company
has early adopted IFRS 9, Financial Instruments ("IFRS 9") effective from January 1, 2011.

 

According
to IFRS 9, upon initial recognition, all the financial assets (including hybrid instruments where the host contract is a financial
asset) are measured at fair value. In subsequent periods, debt instruments can be measured at amortized cost only if both of the
following two conditions are met:

 

		-	the asset is held within a business model whose objective is to hold assets in order to collect
the contractual cash flows.

 

		-	the contractual terms of the financial asset give rise on specified dates to cash flows that are
solely payments of principal and interest on the principal amount outstanding.

 

Subsequent
measurement of all other debt instruments and financial assets should be at fair value.

 

    	14

    	 

    

 

PROTEOLOGICS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 2:-	SIGNIFICANT ACCOUNTING POLICIES
(Cont.)

 

If the Company
changes its business model for managing financial assets, it shall reclassify all affected financial assets. In all other circumstances,
reclassification of financial instruments is not permitted.

 

Financial
assets are derecognized when the rights to receive cash flows from the financial investments expire or are transferred and the
Company has transferred substantially all the risks and rewards in respect of the ownership of the financial assets.

 

Financial
assets are initially recognized at fair value plus directly attributable transaction costs, for all financial assets that are not
measured at fair value through profit or loss. Financial assets that are measured at fair value through profit or loss are initially
recognized at fair value and the transaction costs are carried to profit or loss.

 

Gains or
losses arising from changes in the fair value of debt instruments measured at fair value through profit or loss are recognized
in profit or loss and presented under financial income (expenses) in the period in which they are incurred. Gains or losses from
debt instruments measured at amortized cost are recognized in profit or loss when the financial assets are derecognized or when
impairment is recorded in their respect and in the process of their amortization using the effective interest method.

 

The adoption
of IFRS 9 had no effect on the Company's financial statements.

 

Before the
adoption of IFRS 9 as described above, the Company classified its financial assets into the following categories: financial assets
at fair value through profit or loss and loans and receivables. The classification was determined based on the purpose for which
the financial assets were acquired. The Company's management determined the classification of its financial assets upon initial
recognition.

 

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

 

This category
contains financial assets designated by management at fair value through profit or loss. Assets in this category are classified
as current assets if it is probable that they will be disposed of within one year after the date of the statement of financial
position. Otherwise, they are classified as non-current assets.

 

		2.	Loans and receivables:

 

Loans and
receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They
are included in current assets, except for maturities greater than 12 months after the date of the statement of financial position.
These maturities are classified as non-current assets. The Company's loans and receivables are included in the line items: "accounts
receivable", "cash and cash equivalents" and "restricted bank deposits" in the statement of financial
position (see also h below).

 

    	15

    	 

    

 

PROTEOLOGICS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 2:-	SIGNIFICANT ACCOUNTING POLICIES
(Cont.)

 

Regular purchases
and sales of financial assets are recognized in the Company's books on the trade date which is the date on which the asset is transferred
to the Company or transferred by the Company. Investments are initially recognized at fair value plus transaction costs for all
financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or loss
are initially recognized at fair value, and transaction costs are carried to profit or loss. Financial assets are derecognized
when the rights to receive cash flows from the investments have expired or have been transferred and the Company has transferred
substantially all risks and rewards of ownership. Financial assets at fair value through profit or loss are presented in subsequent
periods at fair value. Loans and receivables are presented at amortized cost using the effective interest method.

 

Gains or
losses arising from changes in the fair value of financial assets at fair value through profit or loss are recognized in profit
or loss under financial income (expenses) in the period in which they are incurred. Dividend income from financial assets at fair
value through profit or loss is recognized in profit or loss as part of financial income once the Company's entitlement to the
payments is established.

 

As for the
fair value measurement of the Company's financial instruments, see Note 4 below.

 

		h.	Cash and cash equivalents:

 

Cash and
cash equivalents include cash in hand and short-term bank deposits that are not restricted to use and with original maturities
of three months or less.

 

		i.	Share capital:

 

The Company's
ordinary shares are classified as share capital. Incremental costs directly attributable to the issuance of new shares or options
are shown in equity as a deduction from the issuance proceeds.

 

		j.	Trade payables:

 

Trade payables
are the Company's obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers.
Accounts payable are initially measured at fair value and subsequently measured at amortized cost using the effective interest
method.

 

		k.	Loans from the former parent company:

 

Loans are
initially recognized at fair value less transaction costs. In subsequent periods, loans are presented at amortized cost. Any difference
between the consideration (less transaction costs) and the redemption value is recognized in the statements of income over the
period of the loan using the effective interest method.

 

    	16

    	 

    

 

PROTEOLOGICS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 2:-	SIGNIFICANT ACCOUNTING POLICIES
(Cont.)

 

Loans received
from the former parent company did not bear interest at market rates which reflect the variety of the Company's risks. Therefore,
the Company carried the interest benefit inherent in the loan terms in relation to the market interest on loans with similar risks
to profit or loss as additional financial expenses against a capital reserve.

 

In February
2010, the loans were converted into capital, see Note 14a(3)(b).

 

		l.	Employee benefits:

 

		1.	Liability for employee rights upon retirement:

 

According
to the labor laws and employment agreements in Israel, the Company is obligated to pay compensation to employees who are dismissed
and, under certain circumstances, to employees who retire. The Company's liability to pay retirement compensation for certain employees
is accounted for as a defined benefit plan.

 

According
to the Company's liability to employees, the amounts of the benefits to be received by employees eligible for compensation upon
retirement are based on the number of years of employment and latest salary.

 

The total
accrued severance pay presented in the statement of financial position is the present value of the defined benefit liability as
of the statement of financial position date, less the fair value of the plan assets. The defined benefit liability is measured
on an annual basis by an independent actuary using the Projected Unit Credit Method.

 

The present
value of the liability is determined by discounting the expected future cash flows (after taking into account expected salary increase
rates), based on interest rates of Government bonds denominated in the currency in which the benefits will be paid and whose maturity
period approximates the accrued severance pay period.

 

According
to IAS 19, Employee Benefits, the discount rate used to calculate the actuarial obligation is determined by using market
returns of high quality corporate debentures on the statement of financial position date. However, according to IAS 19, in countries
which do not have a deep market for such debentures, the market returns of Government bonds on the statement of financial position
date will be used instead.

 

As discussed
above, the interest rate used by the Company to discount the expected future cash flows in order to calculate the actuarial liability
was determined based on the interest rates on high yield NIS Government bonds since the Company's management believes that Israel
does not have a deep market for corporate debentures.

 

    	17

    	 

    

 

PROTEOLOGICS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 2:-	SIGNIFICANT ACCOUNTING POLICIES
(Cont.)

 

The Company
carries actuarial gains or losses arising from changes in actuarial assumptions and consequently from changes between past assumptions
and actual results to profit or loss in the period in which they are incurred.

 

The severance
pay fund is measured at fair value and forms the plan assets as defined in IAS 19 which is offset from the accrued severance pay
for purposes of presentation in the statement of financial position.

 

		2.	Vacation and recreation pay:

 

According
to the Law, an employee is entitled to paid vacation and recreation days on an annual basis. The entitlement is based on
the number of years of service. The Company recognizes an obligation and expense for paid vacation and recreation based on the
benefit accumulated for each employee.

 

		m.	Share-based payment:

 

The Company operates an equity-settled
share-based payment plan for the Company's employees and service providers. In this framework, from time to time, the Company grants
employees and service providers, at its election, options to purchase Company shares. The fair value of services received from
employees and service providers in return for the grant of options is recognized as an expense in profit or loss and correspondingly
carried to equity. The total amount recognized as an expense over the vesting term of the options (the term over which all pre-established
vesting conditions are expected to be satisfied) is determined by reference to the fair value of the options granted at grant date.
Equity-settled share-based payment transactions with service providers are measured at the fair value of the services received.

 

When the options are exercised,
the Company issues new shares. The receipts are credited to share capital (par value) and share premium.

 

		n.	Revenue recognition:

 

		1.	The Company's revenues are measured at the fair value of the consideration received or receivable
by the Company for the services provided in the Company's ordinary course of business.

 

    	18

    	 

    

 

PROTEOLOGICS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 2:-	SIGNIFICANT ACCOUNTING POLICIES
(Cont.)

 

The Company
recognizes revenues when the amount of the revenues can be measured reliably and the future economic benefits are expected to flow
to the entity. The amount of revenue cannot be measured reliably unless all the conditions underlying the provision of the service
are met. The Company provides research and development services based on fixed price contracts. Revenues from this type of contracts
are recognized by the percentage of completion method whereby revenues are generally recognized based on the services rendered
as a percentage of the entire services that are supposed to be rendered. When the outcome of the contract can be measured reliably
and the contract is expected to yield profits, the revenues are recognized over the contract term. If the total contract costs
are expected to exceed total revenues from the contract, the expected loss is recognized as an immediate expense.

 

		2.	Interest income:

 

Interest
income is recognized as it accrues using the effective interest method.

 

		o.	Leases:

 

Lease agreements in which a
significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments
made under operating leases are charged to profit or loss on a straight-line basis over the period of the lease.

 

		p.	Loss per share:

 

Basic loss per share is based
on the Company's loss, divided by the weighted average number of ordinary shares outstanding during the period, adjusted for bonus
shares issued to existing shareholders until the date of issuance of the financial statements.

 

		q.	Deferred taxes:

 

Deferred tax assets are recognized
using the liability method in respect of temporary differences between the carrying amounts of assets and liabilities in the financial
statements and the amounts attributed for tax purposes. However, deferred taxes are not recognized if the temporary differences
are created upon initial recognition of the asset or liability other than in the context of a business combination which have no
effect on profit or loss on the date of the transaction - whether accounting profit or loss or profit or loss reported for tax
purposes.

 

Deferred taxes assets are recognized
in respect of temporary differences that are deductible for tax purposes within the limits of the difference amounts that can be
utilized in the future against taxable income. Deferred taxes are determined at the tax rates and the tax laws that have been enacted
or substantively enacted by the end of the reporting period and that are expected to apply when the deferred tax asset is realized
or the deferred tax liability is settled.

 

In the absence of expected
taxable income in the future, no deferred tax asset was recorded in the Company's books.

 

    	19

    	 

    

PROTEOLOGICS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 2:-	SIGNIFICANT ACCOUNTING POLICIES
(Cont.)

 

		r.	New and amended IFRS standards and IFRIC interpretations:

 

Standards, amendments to existing
standards and new interpretations that are not yet effective and have not been early adopted by the Company (except as discussed
in paragraph 1 below):

 

		1.	IFRS 13, Fair Value Measurements ("IFRS 13"):

 

			IFRS 13 focuses on improving consistency and reducing complexity of fair value measurement by providing
a precise definition of "fair value" and a single source of fair value measurement and disclosure requirements for use
across IFRSs. The requirements of IFRS 13 do not extend the use of fair value accounting but provide guidance on how it should
be applied where its use is already required or permitted by other standards within IFRS.

 

			IFRS 13 will be first adopted by the Company for the annual period beginning on January 1,
2013. IFRS 13 will be applied prospectively as of the beginning of said annual period. The disclosure requirements of IFRS 13 do
not need to be applied in comparative information for periods before initial application of IFRS 13. The initial adoption of IFRS
13 is not expected to have a material effect on the Company's financial statements.

 

		2.	IAS 19 (Revised 2011), Employee Benefits ("IAS 19R"):

 

IAS 19R introduces significant
changes in the manner of recognizing and measuring defined benefit plans and termination benefits and provides new disclosure requirements
for all types of employees benefits within the scope of IAS 19 as follows:

 

		-	The term "actuarial gains and losses" was replaced by the term "remeasurement of
the net defined benefit liability (asset)" ("remeasurements") which includes, in addition to actuarial gains and
losses, certain components as defined in IAS 19R. Remeasurements will be recognized in other comprehensive income, which cancels
the possibility of recognizing actuarial gains and losses in profit or loss and the possible use of the "corridor" approach.

 

		-	Net interest income/expense will be recognized in respect of the benefit plans underlying the plan
assets, calculated based on the balance of the net employee benefit asset or liability using the discount rate prescribed in IAS
19 in its present format for measuring defined benefit obligations. This accounting treatment will replace the use of interest
cost and expected return on plan assets in IAS 19 in its present format.

 

    	20

    	 

    

 

PROTEOLOGICS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 2:-	SIGNIFICANT ACCOUNTING POLICIES
(Cont.)

 

		-	The distinction between short-term employee benefits and long-term employee benefits for measurement
in the financial statements will be based on the expected settlement date and not on the date on which the payment could be required.

 

		-	The disclosure requirements in IAS 19R in its present format have been expanded.

 

IAS 19R will be applied by
the Company retrospectively in the financial statements for the annual period commencing on January 1, 2013.

 

The Company's current accounting
policy is to carry actuarial gains or losses arising from changes in actuarial assumptions and consequently from the change in
former assumptions and actual results to the income statement in the period in which they are incurred. Following the adoption
of IAS 19R, remeasurements calculated according to the new provisions will be carried to other comprehensive income.

 

The initial adoption of IAS
19R is not expected to have a material impact on the Company's financial statements.

 

		NOTE 3:-	CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS

 

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

 

		a.	Critical accounting estimates:

 

The Company makes estimates
and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual
results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of
assets and liabilities are addressed below.

 

		1.	Revenue recognition:

 

The Company uses the percentage
of completion method in the accounting treatment of research and development collaboration agreements. The use of the percentage
of completion method requires the Company to estimate the services performed as of a certain date as a percentage of the entirety
of services to be performed.

 

    	21

    	 

    

PROTEOLOGICS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 3:-	CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS (Cont.)

 

		2.	Share-based payments:

 

In evaluating the fair value
and the recognition method of share-based payment, the Company's management is required to estimate, among others, different parameters
included in the computation of the fair value of the options and the number of options that will vest. Actual results and estimates
to be made in the future may significantly differ from current estimates. In the period that preceded the Company's IPO, this estimate
was critical given the absence of a quoted market price representing a base asset for this instrument.

 

		b.	Judgments with critical effect on applying of the Company's accounting policies:

 

		1.	Capitalization of development expenses:

 

The Company is required to
exercise judgment in examining the fulfillment of the conditions for recognizing its development expenses as an intangible asset
or the need to continue to carry these expenses to profit or loss. This examination is based on the parameters described in Note
2d(2) above. As of December 31, 2012, the above conditions were not fulfilled and no development expenses have been capitalized.

 

		2.	OCS grants:

 

The Company's management must
examine whether on the date of receipt of the grant it is meeting the conditions for recognizing it as a grant rather than a liability.
In addition, when the grant is carried upon initial recognition to the income statement, the Company's management must examine
whether it is more likely than not that royalties will be paid to the Chief Scientist. The Company's management estimates that
as of December 31, 2012, no liability is expected to be incurred to OCS and therefore no liability in this respect was recorded
in the financial statements (see also Note 12a below).

 

		NOTE 4:-	FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT

 

		a.	Financial risk management:

 

		1.	Financial risk factors:

 

The Company's activities expose
it to a variety of financial risks: market risks (including currency risks), credit risks and liquidity risks. The Company's overall
risk management plan focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the
Company's financial performance.

 

    	22

    	 

    

PROTEOLOGICS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 4:-	FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT
(Cont.)

 

The Company's CFO is in charge
of market risk management in the Company under the guidelines approved by the Board and is also responsible for implementing the
Board's policy regarding the investment of the Company's liquidity reserves.

 

		a)	Market risks:

 

Foreign currency exchange
rate risk:

 

The Company's activities expose
it foreign currency exchange rate risks arising from its investments in short-term dollar deposits and dollar-denominated marketable
securities. Moreover, the Company's revenues are generated in dollars whereas a substantial portion of its expenses are incurred
in NIS and therefore fluctuations in the dollar exchange rate may affect the Company's results.

 

As of December 31, 2012, if
the Company's functional currency had weakened by 3% against the dollar, with all other variables held constant, the loss for the
year ended December 31, 2012 would have been lower by approximately NIS 448 thousand (in 2011 - lower by approximately 
NIS 534 thousand) due to exchange rate losses on balances of cash and cash equivalents.

 

Price risk:

 

The Company is exposed to
risk in respect of holding marketable debt instruments due to investments classified in the statements of financial position as
financial instruments at fair value through profit or loss. The Company varies its investment portfolio in order to manage the
price risk arising from investments in marketable debt instruments. The variation of the investment portfolio is carried out in
accordance with the predetermined investment policy.

 

As of December 31, 2012, if
the value of the financial instruments at fair value through profit or loss had increased/decreased by 3%, with all other variables
held constant, the loss for the year ended December 31, 2012 would have been lower/higher by approximately NIS 673 thousand
(in 2011 - by approximately NIS 1,147 thousand).

 

    	23

    	 

    

PROTEOLOGICS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 4:-	FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT
(Cont.)

 

		b)	Credit risks:

 

Credit risks are accounted
for at the Company's level. Credit risks arise from cash and cash equivalents, bank deposits, financial assets at fair value through
profit or loss and unpaid receivables. The Company's balances of cash and cash equivalents are deposited in a single A rated Israeli
bank. Financial assets at fair value through profit or loss are managed according to the investment policy presented in the Company's
prospectus of February 26, 2010 (see Note 14a(4) below). According to this policy, the funds are invested in solid channels, including
an interest-bearing NIS deposit, at least AA rated debentures or interest-bearing foreign currency linked deposits.

 

		c)	Liquidity risks:

 

Cautious management of liquidity
risks requires the existence of sufficient available cash and credit facilities for financing the activities.

 

The Company's management examines
ongoing forecasts of surplus liquid funds from unutilized credit facilities and cash and cash equivalents, see Note 5 below. The
examination is based on expected cash flows based on the procedures and restrictions determined by the Company.

 

The Company maintains a sufficient
level of cash and cash equivalents based on the forecasted cash flows required to finance its operations in order to minimize its
liquidity risk.

 

The maturity dates of the
Company's financial liabilities as of December 31, 2012 and 2011 are up to one year.

 

		2.	Capital risks management:

 

The Company's objectives when
managing capital risks are to retain the Company's ability to continue operating as a going concern in order to provide returns
on investments for shareholders and to maintain an optimal capital structure to reduce the cost of capital.

 

		3.	Estimated fair value:

 

The
Company measures fair value according to the following fair value hierarchy:

 

	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 or indirectly.
	Level 3	-	inputs that are not based on observable market data (unobservable inputs).

    	24

    	 

    

 

PROTEOLOGICS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 4:-	FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT
(Cont.)

 

The Company's
financial instruments which are measured at fair value in the statement of financial position are financial assets at fair value
through profit or loss (see also Note 5b below) which are traded in an active market. Accordingly, their fair value is based on
their quoted market price as of December 31, 2012 and 2011. A
market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group,
pricing service, or regulatory agency, and those prices represent actual and

regularly occurring market transactions
on an arm’s length basis. These financial assets are included in Level 1.

 

		b.	Financial instruments according to groups:

 

	 	 	December 31,	 
	 	 	2012	 	 	2011	 
	 	 	 	 	 	(Unaudited)	 
	 	 	NIS in thousands	 
	Financial assets measured at amortized cost:	 	 	 	 	 	 	 	 
	Cash and cash equivalents	 	 	10,437	 	 	 	9,192	 
	 	 	 	 	 	 	 	 	 
	Restricted bank deposits	 	 	364	 	 	 	330	 
	 	 	 	 	 	 	 	 	 
	Receivables (excluding prepaid expenses and deposits)	 	 	253	 	 	 	638	 
	 	 	 	 	 	 	 	 	 
	Financial assets at fair value through profit or loss	 	 	22,421	 	 	 	38,230	 
	 	 	 	 	 	 	 	 	 
	Current liabilities - financial liabilities at amortized cost:	 	 	 	 	 	 	 	 
	Trade and other accounts payable (excluding vacation and recreation pay to employees)	 	 	2,255	 	 	 	3,228	 

 

 

    	25

    	 

    

 

PROTEOLOGICS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 5:-	CASH AND
                                                                                     CASH EQUIVALENTS AND FINANCIAL ASSETS AT
                                                                                     FAIR VALUE THROUGH PROFIT OR LOSS

 

		a.	Cash and cash equivalents:

 

	 	 	December 31,	 
	 	 	2012	 	 	2011	 
	 	 	 	 	 	(Unaudited)	 
	 	 	NIS in thousands	 
	 	 	 	 
	Cash in banks and on hand	 	 	3,374	 	 	 	1,842	 
	Short-term bank deposits	 	 	7,063	 	 	 	7,350	 
	 	 	 	 	 	 	 	 	 
	 	 	 	10,437	 	 	 	9,192	 
	 	 	 	 	 	 	 	 	 
	Breakdown according to currency:	 	 	 	 	 	 	 	 
	NIS	 	 	1,519	 	 	 	495	 
	Foreign currency (mainly dollars)	 	 	8,918	 	 	 	8,697	 
	 	 	 	 	 	 	 	 	 
	 	 	 	10,437	 	 	 	9,192	 

 

The carrying amount of cash
and cash equivalents is a reasonable approximation of the fair value because the effect of discounting is immaterial.

 

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

 

	 	 	December 31,	 
	 	 	2012	 	 	2011	 
	 	 	 	 	 	(Unaudited)	 
	 	 	NIS in thousands	 
	 	 	 	 	 	 	 
	Government bonds - unlinked NIS	 	 	8,934	 	 	 	12,972	 
	Government bonds - CPI-linked NIS	 	 	4,435	 	 	 	10,650	 
	Government bonds - dollars	 	 	5,518	 	 	 	6,444	 
	Corporate debentures - CPI-linked NIS	 	 	2,690	 	 	 	3,989	 
	Corporate debentures - unlinked NIS	 	 	343	 	 	 	1,501	 
	Corporate debentures - dollars	 	 	501	 	 	 	701	 
	Mutual funds - dollars	 	 	-	 	 	 	1,973	 
	 	 	 	 	 	 	 	 	 
	 	 	 	22,421	 	 	 	38,230	 

 

The maximum exposure to credit
risks as of the date of the statement of financial position in respect of the balances of financial assets at fair value through
profit or loss is their fair value.

 

    	26

    	 

    

PROTEOLOGICS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

		NOTE 6:-	ACCOUNTS
                                                                                     RECEIVABLE

 

	 	 	December 31,	 
	 	 	2012	 	 	2011	 
	 	 	 	 	 	(Unaudited)	 
	 	 	NIS in thousands	 
	 	 	 	 
	Grants receivable from OCS	 	 	71	 	 	 	71	 
	Prepaid expenses	 	 	101	 	 	 	84	 
	Government authorities	 	 	99	 	 	 	392	 
	Deposits	 	 	62	 	 	 	77	 
	Other	 	 	83	 	 	 	175	 
	 	 	 	 	 	 	 	 	 
	 	 	 	416	 	 	 	799	 

 

All the monetary balances are
unlinked NIS.

 

The fair value of accounts receivable
that are financial assets is not materially different from their carrying amount.

 

The maximum exposure to credit
risks as of the date of the statement of financial position in respect of the balances of accounts receivable is the carrying amount
of the entire group of accounts receivable as mentioned above less the non-monetary balances and non-financial assets. The Company
does not hold any securities in respect of these accounts receivable.

 

    	27

    	 

    

 

PROTEOLOGICS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

		NOTE 7:-	PROPERTY, PLANT AND EQUIPMENT

 

Composition of property, plant
and equipment and accumulated depreciation according to main groups and movement therein:

 

Year ended December 31, 2012

 

	 	 	Cost	 	 	Depreciation and accumulated impairment losses	 	 	Depreciated

    balance	 
	 	 	Balance
    at
 beginning of
 year	 	 	Additions

    during the
 year	 	 	Disposals

    during the
 year	 	 	Balance
    at
 end of
 year	 	 	Balance
    at
 beginning of
 year	 	 	Additions

    during the
 year	 	 	Disposals

    during the
 year	 	 	Balance
    at
 end of
 year	 	 	December

    31,
 2012	 
	 	 	NIS
    in thousands	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Office furniture
    and equipment	 	 	161	 	 	 	-	 	 	 	-	 	 	 	161	 	 	 	95	 	 	 	8	 	 	 	-	 	 	 	103	 	 	 	58	 
	Computers and peripheral
    equipment	 	 	552	 	 	 	9	 	 	 	-	 	 	 	561	 	 	 	432	 	 	 	64	 	 	 	-	 	 	 	496	 	 	 	65	 
	Lab equipment	 	 	5,128	 	 	 	331	 	 	 	-	 	 	 	5,459	 	 	 	3,522	 	 	 	282	 	 	 	-	 	 	 	3,804	 	 	 	1,655	 
	Leasehold
    improvements	 	 	1,703	 	 	 	16	 	 	 	3	 	 	 	1,716	 	 	 	1,313	 	 	 	216	 	 	 	1	 	 	 	1,528	 	 	 	188	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	7,544	 	 	 	356	 	 	 	3	 	 	 	7,897	 	 	 	5,362	 	 	 	570	 	 	 	1	 	 	 	5,931	 	 	 	1,966	 

 

Year ended December 31, 2011
(unaudited):

 

	 	 	Cost	 	 	Depreciation
    and accumulated impairment losses	 	 	Depreciated

    balance	 
	 	 	Balance
    at
 beginning of
 year	 	 	Additions

    during the
 year	 	 	Disposals

    during the
 year	 	 	Balance
    at
 end of
 year	 	 	Balance
    at
 beginning of
 year	 	 	Additions

    during the
 year	 	 	Disposals

    during the
 year	 	 	Balance
    at
 end of
 year	 	 	December

    31,
 2011	 
	 	 	NIS
    in thousands	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Office furniture
    and equipment	 	 	142	 	 	 	19	 	 	 	-	 	 	 	161	 	 	 	88	 	 	 	7	 	 	 	-	 	 	 	95	 	 	 	66	 
	Computers and peripheral
    equipment	 	 	500	 	 	 	52	 	 	 	-	 	 	 	552	 	 	 	367	 	 	 	65	 	 	 	-	 	 	 	432	 	 	 	120	 
	Lab equipment	 	 	5,135	 	 	 	643	 	 	 	650	 	 	 	5,128	 	 	 	3,818	 	 	 	305	 	 	 	601	 	 	 	3,522	 	 	 	1,606	 
	Leasehold
    improvements	 	 	1,406	 	 	 	307	 	 	 	10	 	 	 	1,703	 	 	 	1,135	 	 	 	186	 	 	 	8	 	 	 	1,313	 	 	 	390	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	7,183	 	 	 	1,021	 	 	 	660	 	 	 	7,544	 	 	 	5,408	 	 	 	563	 	 	 	609	 	 	 	5,362	 	 	 	2,182	 

 

    	28

    	 

    

 

PROTEOLOGICS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

		NOTE 7:-	PROPERTY, PLANT AND EQUIPMENT (Cont.)

 

Year ended December 31, 2010
(unaudited):

 

	 	 	Cost	 	 	Depreciation
    and accumulated impairment losses	 	 	Depreciated

    balance	 
	 	 	Balance
    at
 beginning of
 year	 	 	Additions
    
 during the
 year	 	 	Disposals

    during the
 year	 	 	Balance
    at 
 end of

year	 	 	Balance
    at
 beginning of
 year	 	 	Additions

    during the
 year	 	 	Disposals

    during the
 year	 	 	Balance
    at

end of

year	 	 	December

    31,
 2010	 
	 	 	NIS
    in thousands	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Office furniture
    and equipment	 	 	123	 	 	 	19	 	 	 	-	 	 	 	142	 	 	 	82	 	 	 	6	 	 	 	-	 	 	 	88	 	 	 	54	 
	Computers and peripheral
    equipment	 	 	380	 	 	 	120	 	 	 	-	 	 	 	500	 	 	 	315	 	 	 	52	 	 	 	-	 	 	 	367	 	 	 	133	 
	Lab equipment	 	 	4,066	 	 	 	1,069	 	 	 	-	 	 	 	5,135	 	 	 	3,509	 	 	 	309	 	 	 	-	 	 	 	3,818	 	 	 	1,317	 
	Leasehold
    improvements	 	 	1,352	 	 	 	63	 	 	 	9	 	 	 	1,406	 	 	 	1,004	 	 	 	137	 	 	 	6	 	 	 	1,135	 	 	 	271	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	5,921	 	 	 	1,271	 	 	 	9	 	 	 	7,183	 	 	 	4,910	 	 	 	504	 	 	 	6	 	 	 	5,408	 	 	 	1,775	 

 

    	29

    	 

    

 

PROTEOLOGICS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

		NOTE 8:-	INTANGIBLE ASSETS

 

		a.	In 2005, the Company acquired from the former parent company knowhow used in the Company's development
processes in consideration of NIS 574 thousand. This consideration represents the knowhow's fair value as of the acquisition
date. The knowhow is presented in the statements of financial position at cost less accumulated amortization.

 

		b.	On February 15, 2010, the Company acquired from the former parent company the remaining patent
rights used in the Company's development processes in consideration of NIS 771 thousand based on the fair value of the rights
acquired. The rights are amortized over a period of two years from the acquisition date.

 

		c.	The movement in intangible assets in the reporting periods is as follows:

 

		1.	Knowhow:

 

	 	 	December 31,	 
	 	 	2012	 	 	2011	 	 	2010	 
	 	 	 	 	 	(Unaudited)	 
	 	 	NIS in thousands	 
	 	 	 	 	 	 	 	 	 	 
	Balance at beginning of year	 	 	46	 	 	 	432	 	 	 	114	 
	Acquisitions during the year	 	 	-	 	 	 	-	 	 	 	771	 
	Amortization during the year	 	 	(46	)	 	 	(386	)	 	 	(453	)
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance at end of year	 	 	-	 	 	 	46	 	 	 	432	 

 

		2.	Computer software and other:

 

	 	 	December 31,	 
	 	 	2012	 	 	2011	 	 	2010	 
	 	 	 	 	 	(Unaudited)	 
	 	 	NIS in thousands	 
	 	 	 	 	 	 	 	 	 	 
	Balance at beginning of year	 	 	314	 	 	 	490	 	 	 	-	 
	Acquisitions during the year	 	 	30	 	 	 	-	 	 	 	534	 
	Amortization during the year	 	 	(178	)	 	 	(176	)	 	 	(44	)
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance at end of year	 	 	166	 	 	 	314	 	 	 	490	 

 

The amortization
of intangible assets is carried to research and development expenses.

 

    	- 30 -

    	 

    

 

PROTEOLOGICS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

		NOTE 9:-	ACCOUNTS PAYABLE

 

		a.	Trade payables:

 

	 	 	December 31,	 
	 	 	2012	 	 	2011	 
	 	 	 	 	 	(Unaudited)	 
	 	 	NIS in thousands	 
	 	 	 	 	 	 	 
	Open debts	 	 	512	 	 	 	755	 
	Checks payable	 	 	5	 	 	 	329	 
	 	 	 	 	 	 	 	 	 
	 	 	 	517	 	 	 	1,084	 
	 	 	 	 	 	 	 	 	 
	Breakdown according to currencies:	 	 	 	 	 	 	 	 
	NIS	 	 	476	 	 	 	769	 
	Foreign currency (mainly dollars)	 	 	41	 	 	 	315	 
	 	 	 	 	 	 	 	 	 
	 	 	 	517	 	 	 	1,084	 

 

		b.	Other:

 

	 	 	December 31,	 
	 	 	2012	 	 	2011	 
	 	 	 	 	 	(Unaudited)	 
	 	 	NIS in thousands	 
	 	 	 	 	 	 	 
	Accrued expenses	 	 	951	 	 	 	1,343	 
	Employees and payroll accruals, including national insurance and other taxes	 	 	787	 	 	 	801	 
	Vacation and recreation pay to employees	 	 	275	 	 	 	281	 
	 	 	 	 	 	 	 	 	 
	 	 	 	2,013	 	 	 	2,425	 

 

The majority of monetary balances
are unlinked NIS (the dollar balances as of December 31, 2012 and 2011 amount to NIS 176 thousand and NIS 794 thousand,
respectively).

 

The fair value of accounts
payable that are financial liabilities is not materially different from their carrying amount.

 

		c.	Income received in advance:

 

On February 17, 2010, the Company
and GSK signed a license and collaboration agreement ("the collaboration agreement") and an investment agreement (see
also Note 12b(2) below) whereby GSK will transfer to the Company quarterly installments over a period of three years for financing
research and development activities in a total of $ 5.4 million with a possible extension of the research period for an additional
year for an additional amount of up to $ 1.7 million.

 

    	- 31 -

    	 

    

 

PROTEOLOGICS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

		NOTE 9:-	ACCOUNTS PAYABLE (Cont.)

 

Until December
31, 2012, as part of the collaboration agreement, GSK paid the Company an immediate first installment of $ 3 million as upfront
payment as well as other quarterly installments on account of development in a total of $ 4.975 million ($ 7.975 million
in total, approximately NIS 29,995 thousand).

 

The Company
recognizes revenue from the agreement according to the percentage of completion method. As of December 31, 2012, the Company has
recognized revenue totaling NIS 27,927 thousand. The remaining receipts as of December 31, 2012 were recorded as income received
in advance.

 

		NOTE 10:-	LOANS
FROM THE FORMER PARENT COMPANY

 

		a.	The loans were interest free, with no maturity date, classified as current liabilities since the
lender was able to demand the repayment of the loans at any time.

 

		b.	As for interest expenses carried by the Company against a capital reserve at interest rates for
similar loans, see Note 17 below. The annual interest rate on similar loans in the year ended December 31, 2010 was 24%.

 

		c.	As for the conversion of the Company's liability to the former parent company into the Company's
share capital in February 2010, see Note 14a below.

 

		NOTE 11:-	LIABILITIES FOR EMPLOYEE RIGHTS UPON RETIREMENT

 

		a.	According to the effective labor laws and employment agreements in Israel, the Company is obligated
to pay compensation to employees who are dismissed and, under certain circumstances, to employees who retire.

 

		b.	The Company's obligation for compensation payments to employees represents a defined benefit plan.
In respect of this obligation, the Company has executive insurance policies in which it deposits funds. The amount of the net liability
in the statements of financial position as of December 31, 2012 and 2011 reflects the difference between the accrued severance
pay and the severance pay fund, as detailed in c below.

 

    	- 32 -

    	 

    

 

PROTEOLOGICS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

		NOTE 11:-	LIABILITIES FOR EMPLOYEE RIGHTS UPON RETIREMENT (Cont.)

 

		c.	Liability in respect of retirement compensation in the context of a defined benefit plan: The amounts
presented in the statements of financial position determined as follows:

 

	 	 	December 31,	 
	 	 	2012	 	 	2011	 
	 	 	 	 	 	(Unaudited)	 
	 	 	NIS in thousands	 
	 	 	 	 	 	 	 
	Present value of liabilities for which deposits have been made	 	 	1,718	 	 	 	1,620	 
	Fair value of plan assets	 	 	(1,500	)	 	 	(1,540	)
	 	 	 	 	 	 	 	 	 
	Outstanding liability in the statement of financial position	 	 	218	 	 	 	80	 

 

The movement
in the liability in respect of accrued severance pay representing a defined benefit plan in the reporting periods is as follows:

 

	 	 	2012	 	 	2011	 	 	2010	 
	 	 	 	 	 	(Unaudited)	 
	 	 	NIS in thousands	 
	 	 	 	 	 	 	 	 	 	 
	Balance at beginning of year	 	 	1,620	 	 	 	1,680	 	 	 	1,281	 
	Current service cost	 	 	496	 	 	 	321	 	 	 	253	 
	Interest cost	 	 	68	 	 	 	79	 	 	 	73	 
	Actuarial losses(gains)	 	 	107	 	 	 	(81	)	 	 	152	 
	Benefits paid	 	 	(573	)	 	 	(379	)	 	 	(79	)
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance at end of year	 	 	1,718	 	 	 	1,620	 	 	 	1,680	 

 

The movement
in the fair value of the plan assets in the reporting periods is as follows:

 

	 	 	2012	 	 	2011	 	 	2010	 
	 	 	 	 	 	(Unaudited)	 
	 	 	NIS in thousands	 
	 	 	 	 	 	 	 	 	 	 
	Balance at beginning of year	 	 	1,540	 	 	 	1,535	 	 	 	1,224	 
	Expected return on plan assets	 	 	54	 	 	 	79	 	 	 	77	 
	Actuarial gains	 	 	38	 	 	 	17	 	 	 	40	 
	Employer's contributions	 	 	443	 	 	 	301	 	 	 	273	 
	Benefits paid	 	 	(573	)	 	 	(379	)	 	 	(79	)
	Other	 	 	-	 	 	 	(13	)	 	 	-	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance at end of year	 	 	1,500	 	 	 	1,540	 	 	 	1,535	 

 

    	- 33 -

    	 

    

 

PROTEOLOGICS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

		NOTE 11:-	LIABILITIES FOR EMPLOYEE RIGHTS UPON RETIREMENT (Cont.)

 

The amounts
carried to profit or loss in the reporting periods are as follows:

 

	 	 	2012	 	 	2011	 	 	2010	 
	 	 	 	 	 	(Unaudited)	 
	 	 	NIS in thousands	 
	 	 	 	 	 	 	 	 	 	 
	Current service cost	 	 	496	 	 	 	321	 	 	 	253	 
	Interest cost	 	 	68	 	 	 	79	 	 	 	73	 
	Expected return on plan assets	 	 	(54	)	 	 	(79	)	 	 	(77	)
	Net actuarial losses (gains) recognized in the year	 	 	69	 	 	 	(98	)	 	 	112	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Total included in salary expenses	 	 	579	 	 	 	223	 	 	 	361	 

 

The actual
return on the plan assets in 2012, 2011 and 2010 totaled a gain of NIS 92 thousand, NIS 83 thousand and NIS 117
thousand, respectively.

 

The principal
actuarial assumptions underlying the defined benefit plan:

 

	 	 	2012	 	 	2011	 	 	2010	 
	 	 	 	 	 	(Unaudited)	 
	 	 	%	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Discount rate	 	 	4.6	 	 	 	5	 	 	 	5.3	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Rate of increase in the Israeli CPI	 	 	2.6	 	 	 	2.5	 	 	 	2.7	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Expected rate of return on plan assets	 	 	5.1	 	 	 	5.2	 	 	 	5.8	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Expected rate of retirement	 	 	5-10	 	 	 	5-10	 	 	 	5-10	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Expected salary increases	 	 	4.7	 	 	 	4.5	 	 	 	4.8	 

  

The expected
return on the plan assets is determined by taking into account available projected returns of the assets underlying the current
investment policy. Assumptions regarding future mortality rates are determined based on published statistics and accumulated experience
in Israel.

 

The projected
contributions in post-retirement benefit plans for the year ended December 31, 2013 amount to approximately NIS 415 thousand.

 

    	- 34 -

    	 

    

 

PROTEOLOGICS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

		NOTE 12:-	COMMITMENTS AND CONTINGENT LIABILITIES

 

		a.	Commitment to pay royalties to the Government of Israel:

 

The Company has a commitment
to pay royalties to the Government of Israel. The royalties are calculated as a percentage of the proceeds from the sale of products
developed with the Government's participation by way of grants.

 

According to the participation
terms, the Government is entitled to royalties at a rate of 3% of total sales of products developed with the Government's participation
in the first three years from the date of commencing the repayments, 4% in the next three years and 5% starting from the seventh
year until 100% of total grant are repaid, linked to the dollar, bearing annual interest of Libor. The breakdown of royalties payable
by the Company (without interest and linkage) as of December 31, 2012 according to projects is as follows:

 

	 	 	NIS in

 thousands	 
	 	 	 	 	 
	PRT0467	 	 	3,574	 
	PRT4165	 	 	1,321	 
	PRT9564	 	 	518	 
	POSH	 	 	3,240	 
	 	 	 	 	 
	 	 	 	8,653	 

 

As of December 31, 2012, the
Company's management estimates that it is probable that the Company will not pay any royalties to the Government of Israel in respect
of the research and development funded by the Government and therefore no liability in this respect was recorded in the financial
statements.

 

On May 17, 2011, the Company
received a notice from the Office of the Chief Scientist at the Ministry of Industry Trade and Labor ("the Chief Scientist")
whereby according to the professional examination conducted on behalf of the Chief Scientist, the Company is required to pay royalties
out of its entire income, including income from the agreement signed between the Company and GSK. The notice does not specify the
legal basis or background for said requirement and on June 14, 2011, the Company notified the Chief Scientist that it is disputing
the requirement.

 

The Company also received a
letter demanding that it pay an amount of NIS 250,515 to the Chief Scientist's Tmura Fund. In April 2012, the Company responded
to the letter through its representative and utterly disputed the existence of any royalty debt to the Tmura Fund.

 

    	- 35 -

    	 

    

 

PROTEOLOGICS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

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

 

On June 22, 2011, the Company's
representative received a notice from the Deputy Chief Scientist whereby the agreement with GSK includes the Company's knowhow
supported by the Chief Scientist subject to the provisions of the Law for the Encouragement of Industrial Research and Development,
1984 ("the R&D Law"). The Company was asked to respond to the claim that the signing of the agreement with GSK and
the collaboration described therein represent an alleged violation of the R&D Law. The Company rejected the Deputy Chief Scientist's
claims. This point was also clarified in the meeting held with the Chief Scientist's representatives in April 2012.

 

In the meeting, the Chief Scientist's
verbally responded to the Company's representatives that the Chief Scientist no longer claims that the collaboration between the
Company and GSK represents an alleged violation of the R&D Law and that the dispute focuses on the Chief Scientist's demand
that the Company pay royalties on the income from said collaboration. It was also agreed that the Company and the Chief Scientist
should continue their negotiations and that the Company will produce to the Chief Scientist's representatives data addressing the
Company's patents, which has been accomplished. In keeping with an additional correspondence between the parties, currently, all
mutual proceedings have been put on hold to allow the dispute to be settled amicably.

 

The scope of the Company's
maximum exposure is 3%-4% of the Company's total revenues from GSK (according to periods), ranging between NIS 838 thousand
and NIS 1,117 thousand in respect of revenues recognized by the Company to date and between NIS 110 thousand and NIS 146
thousand in respect of unrecognized anticipated revenues from the GSK agreement.

 

At this stage, the Company
is unable to assess the expected effects of the abovementioned on the Company. Accordingly and given the Company's arguments, no
provision has been recorded in the Company's financial statements.

 

		b.	Development agreements with pharmaceutical companies:

 

		1.	Development agreements with Teva Pharmaceutical Industries Ltd. ("Teva"):

 

On March 2, 2005, the Company
and former parent company signed an agreement with Teva ("the first agreement") for financing a feasibility study of
two cancer related programs. According to the first agreement, after completing the first part of the feasibility study designed
to define a valid target, Teva will have an option in each program that is the subject of the agreement to continue financing the
study to detect a prototype molecule. If Teva agrees to exercise this option, it will be able to sign a binding license agreement.

 

After the first part of the
study had been completed, Teva chose to exercise its option in the first agreement and entered into a binding license agreement
with the Company.

 

    	- 36 -

    	 

    

 

PROTEOLOGICS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

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

 

On July 31, 2008, the Company
and Teva signed a license agreement ("the second agreement" or "the license agreement") for three programs.
According to the second agreement, the Company undertakes to continue the research and development activities until a lead molecule
is achieved (in the first agreement, the Company was supposed to achieve a prototype molecule only). According to the license agreement,
the Company granted Teva an exclusive global license for using the Company's existing and future accumulated knowhow and IP underlying
the prototype/lead molecules as well as an exclusive global license for using the Company's existing and future accumulated knowhow
and IP underlying any molecules developed in the context of the antiviral research. The Company will be entitled to receive receipts
based on milestones, royalties and sublicense fees on Teva's future sales as detailed in the agreement. As of the date of the financial
statements, income in an aggregate amount of NIS 13,542 thousand has been recorded in the financial statements in respect
of said agreements (the income recorded through 2008).

 

On December 26, 2012, Teva
informed the Company that the license agreement was cancelled, in effect from January 5, 2013. Following the license agreement's
cancellation, the Company will be entitled to develop and commercialize the research programs.

 

		2.	Development agreements with GSK:

 

On February 17, 2010, the Company
and GSK signed a license and collaboration agreement ("the collaboration agreement") and an investment agreement. The
agreements were subject to the consummation of the Company's IPO on the TASE by March 7, 2010 in which the Company raises a gross
amount of at least $ 7.5 million ($ 6.5 million, net of issuance expenses). The issuance was consummated on March 2,
2010 in which amounts exceeding said amounts were raised and therefore the agreements came into effect.

 

According to the investment
agreement, GSK has undertaken to invest $ 2.5 million in the Company's share capital shortly after the IPO is completed and
under the same terms as the IPO. Accordingly, the Company issued to GSK 769,700 shares, 230,910 warrants (series 1) and 615,760
warrants (series 2). The proceeds from the issuance to GSK totaled approximately NIS 9.5 million. 230,910 warrants (series
1) expired on February 28, 2012.

 

According to the collaboration
agreement, the companies commenced collaborating on six R&D programs for six different targets.

 

The Company granted GSK an
exclusive global license to use the Company's accumulated knowhow and IP underlying the molecules to be developed in the context
of the collaboration between the companies. GSK was also granted a non-exclusive license to use the Company's R&D technology
as needed for the performance of the agreement.

 

    	- 37 -

    	 

    

 

PROTEOLOGICS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

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

 

According to the agreement,
GSK will provide the Company an immediate first payment of $ 3 million and quarterly installments over a period of three years
in a total of $ 5.4 million ($ 8.4 million in total) for financing the research and development with a possibility of
extending the research and development period by another year for an additional up to $ 1.7 million ("the extended period").
In addition, the Company will be entitled to receive receipts based on milestones and royalties on future sales by GSK as detailed
in the agreement.

 

The Company recognizes income
from this agreement using the percentage of completion method.

 

The Company incurred actual
costs totaling NIS 25,952 thousand as of December 31, 2012 in respect of this project (including an amount of NIS 868
thousand in respect of the benefit component for options to employees) and concurrently recognized income totaling NIS 27,927
thousand.

 

According to the decision of
the Company's Board, the Company's employees are entitled to 2% of the proceeds received from GSK for the investment in share capital
and for the immediate payment (the former CEO was entitled to 0.75% and the other employees to 1.25%). An expense of NIS 412
thousand was recorded in 2010.

 

On March 7, 2013, GSK and the
Company agreed to extend the collaboration period by another year focusing on a single program.

 

GSK's budget for the continued
collaboration will be determined after a hearing is held at the joint committee based on the results of the trials that are currently
being conducted by the Company but will not exceed $ 1.7 million which is the maximum budget amount set in the GSK agreement
for the extended period.

 

		c.	Agreement for a Network of Excellence Consortium:

 

On January 26, 2006, the Company
entered into an Agreement for a Network of Excellence Consortium with several research institutions, universities and R&D companies
from Europe and Israel. The agreement was signed in the backdrop of several resolutions passed by the European community for encouraging
research, entrepreneurship and excellence and arranges financing for activities in these areas.

 

The parties to the agreement
undertook to collaborate on a project, "the Role of Ubiquitin and Ubiquitin-like Modifiers in Cellular Regulation" ("the
RUBICON project").

 

    	- 38 -

    	 

    

 

PROTEOLOGICS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

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

 

The agreement provides for
full financing for the RUBICON project's research activity for enhancing scientific and technological knowhow that is not directly
related to industrial or commercial targets and is used to develop products, processes or services (including material improvements
of existing ones), advanced training for researchers and other key personnel such as development officers and potential users of
the knowhow which is the result of the RUBICON project. The members of the RUBICON project had limited access rights to the knowhow
and IP developed in the project by the other project members.

 

The sponsored costs consisted
of direct project costs and overheads for the entire direct costs at a rate of 20%, which was supposed to cover all the project's
indirect costs. The Company's budget totaled approximately € 407 thousand to be used over a period of 5.5 years. Every
year, the Company produced annual financial and technological reports evidencing that the budget had only been used for implementing
the research project. The Company was not required to meet any other targets or requirements.

 

On June 30, 2011, the RUBICON
project was concluded. Total receipts from the project amounted to approximately NIS 2,167 thousand.

 

		d.	Other agreements:

 

From time to time, the Company
enters into agreements with various institutes around the globe and with various advisors in connection with joint R&D programs.
According to those agreements, the Company receives research services from those institutes and/or advisors in return for fees.
It should be noted that the results of the services and all rights arising from the agreements, including IP rights, are exclusively
owned by the Company and no rights are conferred to the service providers.

 

		e.	Employment agreements:

 

		1.	Employment agreement with the Company's former CEO:

 

Over the years, the terms of
employment of the Company's former CEO were updated on several occasions. In addition, the Company bore salary related costs and
provided the former CEO a vehicle. According to these employment terms, the former CEO also received options exercisable into ordinary
shares of the former parent company.

 

In March 2008, the Company
and the former parent company agreed with the former CEO that if his holdings are diluted below 2% of the former parent company's
share capital , then he will be allocated with additional options to secure his 2% holdings of the share capital
of the former parent company, on a fully diluted basis, all up to an overall investment of $ 10.75 million (not including
Teva's investment up to that date in a total of $ 4.25 million).

 

In January 2009, the former
CEO received 475,440 options that are exercisable into ordinary shares of the former parent company. Each option is exercisable
into one ordinary share of the former parent company for an exercise price of $ 0.1 per share.

 

    	- 39 -

    	 

    

 

PROTEOLOGICS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

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

 

As for the swap of said options
into options exercisable into Company shares, see Note 14c(1).

 

On January 31, 2010, the Company's
Board approved a salary increment for the former CEO in the event that the negotiations with GSK yielded a binding agreement. In
March 2010, the transaction with GSK was closed and the former CEO's salary was updated to NIS 40 thousand a month.

 

Following the IPO and the issuance
of shares to GSK (see b(1) above and Note 14a(4) below), the former CEO's holdings dropped to below 2% on a fully diluted basis
and, as per the agreement, the Company was obligated to grant the former CEO 83,512 options.

 

The economic value of each
option on the grant date is calculated according to the Black & Scholes model at NIS 8.15 (the total benefit approximates
NIS 680 thousand). This value is based on the following assumptions: an expected dividend rate of 0%, expected standard deviation
rate of 75%, risk-free interest rate of 2.62% and expected exercise term of about five years.

 

As for the expenses carried
in the Company's books for the former CEO, see Note 20 below.

 

In September 2010, the former
CEO resigned from office, in effect from January 2011.

 

On January 2, 2011, the Company's
Board decided to approve the new employment terms of the former CEO as follows: the former CEO terminated his term as CEO on January
9, 2011 and began providing services to the Company as an external advisor effective from January 10, 2011 based on an agreement
signed with him and the Company ("the consulting agreement").

 

According to the consulting
agreement, the former CEO will serve as the Company's external advisor for a period of seven months ("the initial period")
and the agreement will later be automatically renewed until it is concluded by either party by providing an advance notice of 90
days ("the consulting period").

 

The former CEO will provide
the Company consulting services at an average scope of about ten hours a week and will not be entitled to any other form of remuneration
except the one stated in the agreement, even if he invests in practice more hours in providing the services to the Company. In
return for the consulting services, the former CEO is entitled to a monthly fee of NIS 17,000 plus VAT. He is also entitled
to the following bonuses:

 

    	- 40 -

    	 

    

 

PROTEOLOGICS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

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

 

A bonus of $ 100,000 but
not more than 7% of the advance and/or investment paid in the context of a future commercial collaboration agreement signed, if
signed, with a leading pharma company. This bonus shall be paid only if such collaboration agreement is signed by the later of:
(1) six months from the end of the consulting period or (2) three months from the date of signing an MOU or letter of intent based
on which a binding collaboration agreement will be signed, provided that such MOU or letter of intent is signed within six months
from the end of the consulting period.

 

A bonus of 0.75% up to a maximum
of $ 75,000 of the advances and/or investments paid in the context of future commercial collaboration agreements signed, if
signed, with other pharma companies provided that such collaboration agreements are signed by the later of: (1) six months from
the end of the consulting period or (2) three months from the date of signing an MOU or letter of intent based on which a binding
collaboration agreement will be signed, provided that such MOU or letter of intent is signed within six months from the end of
the consulting period.

 

The former CEO is also entitled
to the continued vesting of the options granted to him in the past on a consecutive basis throughout his employment term and consulting
term.

 

The options granted to the
former CEO in the context of his employment as CEO will continue to vest based on the original option plan and option agreement
throughout the consulting period (including any advance notice period) and for a period of 90 days thereafter. The options that
have vested, whether during the former CEO's employment term or during the consulting period, will be exercisable accordingly subject
to the provisions of the option plan throughout the consulting period and for a period of 90 days after it is terminated by either
the Company or the former CEO.

 

In the event of merger or acquisition
during the consulting period, all the options held by the former CEO will vest immediately.

 

		2.	Employment agreement with the Company's CEO:

 

On November 15, 2010, the Company's
Board decided to approve the appointment and employment terms of the Company's CEO. According to the agreement, the CEO will commence
his term on January 9, 2011. The CEO had previously served as the Chairman of the Company's Board until November 14, 2010. In return
for his service, the CEO is entitled to a monthly gross salary of NIS 46,000, linked to the cost of living index. The CEO
is also covered by officers' insurance and indemnity arrangements as customary in the Company.

 

    	- 41 -

    	 

    

 

PROTEOLOGICS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

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

 

According to the employment
agreement, the CEO is entitled to the following bonuses: an annual grant for compliance with annual targets as determined by the
Board in the amount of two monthly salaries, a bonus for any future commercial collaboration agreements signed, if signed, at a
rate of 1% of upfront payments made in the context of the agreement and investment in the Company's share capital up to a maximum
of $ 100,000 per agreement, an annual bonus for retaining existing collaboration agreements and for current payments for future
collaboration agreements at a rate of 1% of annual payments made in the context of the Company's collaboration agreements up to
$ 2,000,000 and 0.5% on all payments in excess of $ 2,000,000 in any given year, all up to the maximum prescribed in
the employment agreement.

 

The employment agreement includes
an advance termination notice period of 90 days.

 

The Company also allocated
to the CEO 441,930 non-traded stock options that are exercisable into 441,930 ordinary shares of the Company of NIS 1 par
value each. If the optionee exercises the entire options into shares, these shares will represent about 2.94% of the Company's
issued and outstanding share capital as of November 15, 2010 and about 2% on a fully diluted basis.

 

The options were allocated
at no consideration as part of the CEO's compensation mechanism. Each option is exercisable into one ordinary share for an exercise
price of NIS 3.38, subject to the vesting dates specified below and to all other terms in the relevant agreements and option
plan. The exercise price was determined as the Company's share's closing price on the date before the Board's decision to appoint
the CEO and make the allocation.

 

The options will vest in 13
installments, the first of which will be at the end of first anniversary of the CEO's term, January 9, 2012 ("the first vesting
date"). On the first vesting date, one quarter of the options - 110,490 options - will vest. Starting from the first vesting
date, the remaining options will vest over 12 consecutive quarters whereby in each quarter an equal number of options will vest.
If prior to the end of all the vesting dates the Company enters into a merger or acquisition transaction, all the options that
have not yet vested will all vest at once on the eve of closing of the merger or acquisition transaction and will all become exercisable.

 

    	- 42 -

    	 

    

 

PROTEOLOGICS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

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

 

The CEO is entitled to exercise
the vested options from the date of vesting until ten years have elapsed from the date of grant ('the exercise period"), unless
the options, or part thereof, expire before the end of the exercise period, subject to the conditions specified below. All options
granted to the optionee that are not exercised by him into Company shares before the end of the exercise period will expire and
will not be exercisable as stated in the agreements and the option plan. If the optionee ceases to be an employee of the Company,
he will have a 90-day period to exercise the options that have vested as of the date of termination of the optionee's service.
The unvested options and unexercised vested options that are not exercised will expire within 90 days from the date of termination
of employment.

 

The economic value of each
option on the grant date is calculated according to the Black & Scholes model at NIS 2.13 (the total benefit approximates
NIS 940 thousand). This value is based on the following assumptions: an expected dividend rate of 0%, expected standard deviation
rate of 80%, average risk-free interest rate of 4.3% and expected average exercise term of about six years.

 

		f.	Agreement for providing services:

 

In January 2005, an engagement
agreement was signed with a director in the Company according to which the director will assist in developing the Company's business
at a scope of up to 10 monthly hours at the Company's request.

 

According to the agreement,
the Company will pay the director a monthly salary of $ 2,000. The director also received 118,065 options that are convertible
into ordinary shares of the former parent company. Each option is exercisable into one ordinary share of the former parent company
for an exercise price of $ 0.1 per share.

 

In January 2009, the director's
monthly salary was updated to $ 3,000. In addition, the director received 182,099 options that are convertible into ordinary
shares of the former parent company. Each option is exercisable into one ordinary share of the former parent company for an exercise
price of $ 0.1 per share.

 

As for the swap of said options
into options exercisable into Company shares, see note 14c(1) below.

 

In March 2011, the Company
granted the director 56,062 options. The value of the options was determined at the fair value of the services received. The options
are exercisable from the vesting date until ten years have elapsed from the date of grant.

 

As for the expenses carried
in the Company's books for said director, see Note 20 below.

 

    	- 43 -

    	 

    

 

PROTEOLOGICS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

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

 

		g.	Lease agreements:

 

		1.	The Company has entered into an operating lease agreement for a building it uses which was extended
on October 31, 2012 for a period of 12 months ending on October 31, 2013. The Company has an option of extending the lease term
by another 12 months beginning at the end of the above lease period.

 

The expected future lease fees
are as follows:

 

	 	 	NIS in

 thousands	 
	 	 	 	 
	2013	 	 	647	 
	2014	 	 	519	 

 

As for a bank guarantee provided
by the Company to a lessor to secure the Company's undertaking under the lease agreement, see h below.

 

		2.	The Company has entered into operating lease agreements for vehicles used by it in effect until
2015. The lease fees for 2013, 2014 and 2015 are NIS 192 thousand, NIS 84 thousand and NIS 16 thousand, respectively.

 

		h.	Guarantee:

 

To secure the Company's undertaking
toward a lessor of a building used by it, the Company provided the lessor a guarantee of NIS 364 thousand. As of December
31, 2012, the Company provided a restricted short-term bank deposit in this amount.

 

		i.	Adoption of the immaterial transaction procedure:

 

On November 20, 2011, the Company's
Board decided to adopt guidelines and rules for classifying transactions as immaterial in accordance with Regulation 41(a)(6)(a)
to the Israeli Securities Regulations (Annual Financial Statements), 2010 and for filing corporate reports pursuant to applicable
laws. These guidelines and rules were set forth, among others, after taking into consideration the Company's business nature as
an R&D company, the nature of transactions performed by it and after studying their cumulative effect on the Company's operations
and results.

 

The Company's Board established
that transactions will be viewed as immaterial if all the following conditions are met therein:

 

		1.	The amount of the transaction does not exceed 1% of the lower of the Company's equity based on
its latest audited financial statements or NIS 250,000, linked to the Israeli CPI of October 2010.

 

		2.	The transaction is not an extraordinary transaction (as defined in the Israeli Companies Law, 1999).

 

    	- 44 -

    	 

    

 

PROTEOLOGICS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

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

 

		3.	The transaction is immaterial both in terms of quality, namely its nature, essence and effect on
the Company, and there are no special circumstantial considerations that indicate that the transaction is material.

 

The criteria and principles
for determining whether a certain transaction is immaterial:

 

		1.	In the event of changes or updates of the R&D work plan based on agreements signed with Teva
(the former controlling shareholder), the materiality of the transaction will be examined based on the effect of the change on
the Company's work plan and budget (for example, whether the change in work plan leads to a change in the Company's overall budget
in excess of the amount mentioned above).

 

		2.	Each transaction will be examined individually but the materiality of combined or contingent transactions
will be examined on an aggregate basis.

 

		3.	In testing the materiality of a future transaction, the likelihood of its occurrence should be
examined, among others.

 

		4.	If there are questions regarding the implementation of the above criteria, the Company's audit
committee will examine the transaction's immateriality based on the objective of the abovementioned reporting regulations and guidelines.

 

		NOTE 13:-	TAXES ON INCOME

 

		a.	The taxation of the Company in Israel:

 

		1.	Starting from 2008 and thereafter, the Company's results for tax purposes are measured in nominal
values. Until the end of the 2007 tax law, the results for tax purposes were adjusted for the changes in the Israeli CPI in accordance
with the Income Tax (Inflationary Adjustments) Law, 1985.

 

		2.	Tax rates:

 

The income
of the Company in Israel is subject to corporate tax at the regular rate; the guidance of the amendment to the Income Tax Ordinance,
2005 from August 2005 and the provisions of the Law for Economic Efficiency (Amended Legislation for Implementing the Economic
Plan for 2009 and 2010) of July 2009 prescribe a gradual reduction in the corporate tax rates and the resulting corporate tax rates
starting from the 2010 tax year and thereafter are as follows: 2010 - 25%, 2011 - 24%, 2012 - 23%, 2013 - 22%, 2014 - 21%, 2015
- 20%, 2016 and thereafter - 18%.

 

    	- 45 -

    	 

    

 

PROTEOLOGICS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

		NOTE 13:-	TAXES ON INCOME (Cont.)

 

On December 6,
2011, the Law for Tax Burden Reform (Legislative Amendments), 2011 was published in the records ("the 2011 amendment"),
which prescribes a halt in the scheduled reduction in the corporate tax rate as above and an increase in the corporate tax rate
to 25% in 2012 and thereafter.

 

		b.	Carryforward losses for tax purposes:

 

Deferred
tax assets for carryforward tax losses are recognized to the extent that the realization of the related tax benefit through future
taxable income is probable.

 

The Company's
balance of carryforward losses as of December 31, 2012 and 2011 totals approximately NIS 66 million and NIS 56.5 million,
respectively. The Company did not recognize deferred taxes for these tax losses because their utilization in the foreseeable future
is not probable.

 

		c.	Tax assessments:

 

The Company
has final tax assessments through the 2007 tax year. A self assessment filed by the Company for the 2008 tax year is deemed final.

 

		NOTE 14:-	EQUITY AND CAPITAL RESERVES

 

		a.	Share capital:

 

		1.	Composition:

 

			Share capital comprises ordinary shares of NIS 1 par value each as follows:

 

	 	 	Number of shares 
 and amount in NIS	 
	 	 	December 31,	 
	 	 	2012	 	 	2011	 
	 	 	 	 	 	(Unaudited)	 
	 	 	 	 	 	 	 
	Authorized share capital	 	 	100,000,000	 	 	 	50,000,000	 
	 	 	 	 	 	 	 	 	 
	Issued and outstanding share capital	 	 	14,788,673	 	 	 	14,658,174	 

 

			Starting from March 2010, the shares are traded on the TASE (see 4 below). As of December 31, 2012,
the quoted market price of an ordinary share of NIS 1 par value is NIS 0.844.

 

		2.	The ordinary shares confer upon their holders the right to participate and vote in the shareholders'
meetings, the right to receive profits and the right to participate in surplus assets in the event of the Company's liquidation.

 

    	- 46 -

    	 

    

 

PROTEOLOGICS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

		NOTE 14:-	EQUITY AND CAPITAL RESERVES (Cont.)

 

		3.	As part of the Company's preparations for the IPO on the TASE, the Company effected the following
changes in the Company's capital structure in February 2010:

 

		a)	The authorized share capital was increased to 50 million ordinary shares of NIS 1 par value
each.

 

		b)	It was decided that subject to the IPO, on the eve of the IPO the loans received from the former
parent company would be converted into capital. Accordingly, the amount of the loans converted approximated NIS 40 million,
which represents the outstanding loans from the former parent company on the date of the Board's conversion decision. The conversion
was carried out against the issuance of 668 shares of NIS 1 par value each of the Company.

 

		c)	It was decided that subject to the IPO, on the eve of the IPO 9,998,330 ordinary shares of NIS 1
par value each would be distributed as bonus shares to the former parent company.

 

		4.	IPO of shares and warrants:

 

Pursuant to the prospectus
of February 26, 2010, on March 2, 2010, the Company completed an IPO of 3,799,700 ordinary shares of NIS 1 par value each,
1,139,910 warrants (series 1) that are exercisable into ordinary shares of the Company and 3,039,760 warrants (series 2) that are
exercisable into ordinary shares of the Company. The shares that were issued and will be issued as a result of the exercise of
said warrants have the same rights as the Company's existing shares.

 

The gross issuance proceeds
totaled approximately NIS 46.7 million net of issuance costs of approximately NIS 6.1 million (not including 675,000
warrants (series 2) to underwriters and an issuance consultant totaling NIS 1.9 million) was deducted from the IPO proceeds.

 

The warrants (series 1) are
exercisable into ordinary shares of NIS 1 par value each of the Company on each trading day on the TASE in such a manner that
each warrant is exercisable into one ordinary share of NIS 1 par value (subject to adjustments) in return for an exercise
price of NIS 12. Any warrants (series 1) that are not exercised by February 28, 2012 will expire.

 

The warrants (series 2) are
exercisable into ordinary shares of NIS 1 par value each of the Company on each trading day on the TASE in such a manner that
each warrant is exercisable into one ordinary share of NIS 1 par value (subject to adjustments) in return for an exercise
price of NIS 14. Any warrants (series 2) that are not exercised by February 28, 2014 will expire.

 

    	- 47 -

    	 

    

 

PROTEOLOGICS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

		NOTE 14:-	EQUITY AND CAPITAL RESERVES (Cont.)

 

		5.	As for the issuance of shares and warrants to GSK, see Note 12b(2) above.

 

		6.	On February 28, 2012, unexercised warrants (series 1) expired.

 

		7.	On May 28, 2012, the Company's authorized share capital was increased to 100 million ordinary shares
of NIS 1 par value each.

 

		b.	Capital reserve:

 

The capital reserve was created
in respect of the interest benefit inherent in loans extended by the former parent company, see Note 10 above.

 

		c.	Option plan to Company employees and service providers:

 

		1.	Through the end of 2009, the former parent company granted the Company's employees options in accordance
with an option plan approved by the Board.

 

On January 7, 2010, the Company's
Board approved an option plan for options that are exercisable into Company shares ("the 2010 plan"). The maximum number
of options allocated under the 2010 plan represents 12.5% of the Company's share capital on a fully diluted basis. The allocation
of options under the 2010 plan was subject to the completion of the IPO.

 

In addition, on February 16,
2010, the Company's Board approved the swap of the options granted to the Company's employees and service providers through the
end of 2009 (which were exercisable into shares of the former parent company) with options that are exercisable into the Company's
shares under the 2010 plan ("the swapped options"). The swap above was subject to the completion of the IPO.

 

The terms of the swapped options
are identical to the terms of the options allocated under the previous option plan.

 

The ratio of the number of
swapped options to the number of original options granted in the past to each employee or service provider will be identical to
the ratio of the number of the Company's issued and outstanding shares to the number of the former parent company's issued and
outstanding shares.

 

The conversion ratio as of
the date of option swap was determined such that each 2.3043 options for the former parent company's shares will be swapped for
one Company share option. Following the swap, the number of outstanding options was 1,300,348.

 

    	- 48 -

    	 

    

 

PROTEOLOGICS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

		NOTE 14:-	EQUITY AND CAPITAL RESERVES (Cont.)

 

Furthermore, the exercise price
was converted at the same ratio and translated into NIS using the exchange rate as of the swap date - NIS 3.744 per dollar
(the exercise price under the previous plan was in dollars and is in NIS under the 2010 plan) and therefore for each dollar of
exercise price on the former parent company's share option, the exercise price for the Company's share is NIS 0.863.

 

The fair value of the swapped
options does not materially differ from the fair value of the options before the swap and therefore the option swap had no effect
on the Company's financial statements.

 

As for the economic value of
options granted to the former CEO in 2010, see note 12e(1) above.

 

As stated in paragraph a(4)
above, the IPO had been effected and consequently, the option swap was also carried out.

 

The swapped options are subject
to the provisions of Section 102 to the Israeli Income Tax Ordinance under the capital gain track, including their placement with
a trustee. The Company is not entitled to claim amounts carried as a benefit to employees as an expense for tax purposes. The swapped
options granted to the Company's service providers are subject to the provisions of Section 3(i) to the Israeli Income Tax Ordinance.

 

Any ordinary shares issued
according to the 2010 plan will have the same rights as the Company's other ordinary shares immediately upon issuance.

 

As for options granted to the
Company's CEO as per the Board's decision of November 15, 2010, see Note 12e(2) above.

 

On March 7, 2011, the Company's
Board approved the allocation, at no consideration, of 667,033 options to the Company's employees, service providers and senior
officers and the extension of the capital reserve to 1,481,747 options. Each option is exercisable into one ordinary share of the
Company of NIS 1 par value for an exercise price of NIS 3.79 (unlinked) which was the share's quoted market price on
the day preceding the date of the Board's approval. The options will vest over a period of four years with a quarter of the granted
options vesting at the end of one year from the date of grant and the other options vesting over the remaining three years in 12
equal quarterly portions.

 

    	- 49 -

    	 

    

 

PROTEOLOGICS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

		NOTE 14:-	EQUITY AND CAPITAL RESERVES (Cont.)

 

According to the Board's approval
as described above, on April 7, 2011, 554,909 options were allocated to employees. The average economic value of each option on
the date of grant is calculated according to the Black & Scholes model at NIS 2.24 (the total benefit approximates NIS 1.2
million). This value is based on the following assumptions: an expected dividend rate of 0%, expected standard deviation of 75%,
an average risk-free interest rate of 4.8% and an expected average life until exercise of about six years. The options are exercisable
from the date of vesting until ten years have elapsed from the date of grant.

 

As for an addition grant of
56,062 options to a service providing director in the Company in 2011, see Note 12f above.

 

On May 3, 2011, the Company
granted 56,062 options to a service provider of the Company. The value of the options was determined based on the fair value of
the services received.

 

On July 24, 2011, the Company
granted 238,034 options to the Company's VP of R&D. Each option is exercisable into one ordinary share of the Company of NIS 1
par value for an exercise price of NIS 2.95 (unlinked) which was the share's quoted market price on the day preceding the
date of the Board's approval. The options will vest over a period of four years with a quarter of the granted options vesting at
the end of one year from the date of grant and the other options vesting over the remaining three years in 12 equal quarterly installments.

 

The average economic value
of each option on the date of grant is calculated according to the Black & Scholes model at NIS 1.64 (the total benefit
approximates NIS 390 thousand). This value is based on the following assumptions: an expected dividend rate of 0%, expected
standard deviation of 75%, an average risk-free interest rate of 4.9% and an expected average life until exercise of about six
years. The options are exercisable from the date of vesting until ten years have elapsed from the date of grant.

 

The options are subject to
the provisions of Section 102 to the Israeli Income Tax Ordinance under the capital gain track, including their placement with
a trustee. The options granted to the Company's service providers are subject to the provisions of Section 3(i) to the Israeli
Income Tax Ordinance.

 

		2.	Expenses recognized in profit or loss for options granted to employees and service providers are
as follows:

  

	Year ended December 31,	 
	2012	 	 	2011	 	 	2010	 
	 	 	 	(Unaudited)	 
	NIS in thousands	 
	 	1,091	 	 	 	1,664	 	 	 	1,201	 

    	- 50 -

    	 

    

 

PROTEOLOGICS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

		NOTE 14:-	EQUITY AND CAPITAL RESERVES (Cont.)

 

		3.	As of December 31, 2012, the statements of comprehensive loss include expenses of approximately
NIS 10,873 thousand. Expenses of approximately NIS 431 thousand and NIS 209 thousand are expected to be recorded in 2013
and 2014, respectively.

 

		4.	Movements in the number of share options and their related weighted average exercise prices are
as follows:

 

	 	 	Year ended December 31,	 
	 	 	2012	 	 	2011	 	 	2010	 
	 	 	Number of
 options	 	 	Weighted
 average
 exercise
 price	 	 	Number of
 options	 	 	Weighted
 average
 exercise
 price	 	 	Number of
 options	 	 	Weighted
 average
 exercise
 price	 
	 	 	 	 	 	 	 	 	(Unaudited)	 
	Outstanding at beginning of year	 	 	2,642,083	 	 	 	2.2	 	 	 	1,295,086	 	 	 	0.863	 	 	 	-	 	 	 	-	 
	Arising from option swap (see (1) above)	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	1,300,348	 	 	 	0.863	 
	Granted	 	 	-	 	 	 	-	 	 	 	1,346,997	 	 	 	3.5	 	 	 	83,512	 	 	 	0.863	 
	Exercised *)	 	 	(130,499	)	 	 	0.863	 	 	 	-	 	 	 	-	 	 	 	(88,774	)	 	 	0.863	 
	Expired	 	 	(66,374	)	 	 	2.615	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Outstanding at end of year	 	 	2,445,210	 	 	 	2.428	 	 	 	2,642,083	 	 	 	2.2	 	 	 	1,295,086	 	 	 	0.863	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Exercisable at end of year	 	 	1,680,149	 	 	 	1.72	 	 	 	1,017,198	 	 	 	0.863	 	 	 	791,346	 	 	 	0.863	 

 

 

		*)	Total proceeds received from the exercises of options aggregated NIS 112 thousand in the year
ended December 31, 2012 (2010 - NIS 76 thousand).

 

		5.	After the reporting period, 173,185 options were exercised into shares, with aggregate exercise
proceeds approximating NIS 149 thousand. In addition, 75,442 options expired.

 

    	- 51 -

    	 

    

 

PROTEOLOGICS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

		NOTE 15:-	COST OF REVENUES FROM RESEARCH AND DEVELOPMENT
SERVICES PROVIDED AND RESEARCH AND DEVELOPMENT EXPENSES

 

		a.	Cost of revenues from R&D services provided:

 

	 	 	Year ended December 31,	 
	 	 	2012	 	 	2011	 	 	2010	 
	 	 	 	 	 	(Unaudited)	 
	 	 	NIS in thousands	 
	 	 	 	 	 	 	 	 	 	 
	Salaries and related expenses	 	 	4,273	 	 	 	3,924	 	 	 	2,043	 
	Materials and subcontractors	 	 	5,199	 	 	 	5,247	 	 	 	2,671	 
	Benefit component in grant of options to employees	 	 	383	 	 	 	485	 	 	 	-	 
	Other	 	 	1,004	 	 	 	722	 	 	 	-	 
	Change in provision for loss from GSK project (see Note 12b(2) above)	 	 	(143	)	 	 	(726	)	 	 	870	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	10,716	 	 	 	9,652	 	 	 	5,584	 

 

		b.	Research and development expenses, net:

 

	 	 	Year ended December 31,	 
	 	 	2012	 	 	2011	 	 	2010	 
	 	 	 	 	 	(Unaudited)	 
	 	 	NIS in thousands	 
	 	 	 	 	 	 	 	 	 	 
	Salaries and related expenses	 	 	1,429	 	 	 	640	 	 	 	1,412	 
	Materials and subcontractors	 	 	2,127	 	 	 	2,126	 	 	 	3,407	 
	Professional services	 	 	604	 	 	 	446	 	 	 	493	 
	Maintenance and lease fees	 	 	590	 	 	 	933	 	 	 	1,173	 
	Vehicles	 	 	356	 	 	 	348	 	 	 	257	 
	Depreciation and amortization	 	 	680	 	 	 	1,013	 	 	 	901	 
	Benefit component in grant of options to employees and service providers	 	 	308	 	 	 	322	 	 	 	434	 
	Other	 	 	852	 	 	 	304	 	 	 	571	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	6,946	 	 	 	6,132	 	 	 	8,648	 
	Less - participation in R&D expenses from the RUBICON fund, see Note 12 c above	 	 	-	 	 	 	(113	)	 	 	(358	)
	Less - participation in R&D expenses from the OCS, see Note 12a above	 	 	-	 	 	 	(103	)	 	 	(551	)
	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	6,946	 	 	 	5,916	 	 	 	7,739	 

 

    	- 52 -

    	 

    

 

PROTEOLOGICS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

		NOTE 16:-	GENERAL AND ADMINISTRATIVE EXPENSES

 

	 	 	Year ended December 31,	 
	 	 	2012	 	 	2011	 	 	2010	 
	 	 	 	 	 	(Unaudited)	 
	 	 	NIS in thousands	 
	 	 	 	 	 	 	 	 	 	 
	Salaries and related expenses	 	 	2,027	 	 	 	1,918	 	 	 	1,609	 
	Maintenance and lease fees	 	 	307	 	 	 	273	 	 	 	271	 
	Professional services	 	 	2,069	 	 	 	1,687	 	 	 	1,944	 
	Vehicles	 	 	141	 	 	 	134	 	 	 	106	 
	Depreciation	 	 	114	 	 	 	112	 	 	 	100	 
	Benefit component in grant of options to employees and service providers	 	 	400	 	 	 	857	 	 	 	767	 
	Other	 	 	587	 	 	 	563	 	 	 	406	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	5,645	 	 	 	5,544	 	 	 	5,203	 

 

		NOTE 17:-	FINANCIAL INCOME (EXPENSES)

 

	 	 	Year ended December 31,	 
	 	 	2012	 	 	2011	 	 	2010	 
	 	 	 	 	 	(Unaudited)	 
	 	 	NIS in thousands	 
	 	 	 	 	 	 	 	 	 	 
	Financial expenses:	 	 	 	 	 	 	 	 	 	 	 	 
	Interest benefit inherent in loans extended by the former parent company	 	 	-	 	 	 	-	 	 	 	1,249	 
	Exchange rate losses, net	 	 	393	 	 	 	-	 	 	 	1,060	 
	Other	 	 	36	 	 	 	70	 	 	 	69	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Total financial expenses	 	 	429	 	 	 	70	 	 	 	2,378	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Financial income:	 	 	 	 	 	 	 	 	 	 	 	 
	Interest income, including on marketable securities	 	 	1,283	 	 	 	1,000	 	 	 	61	 
	Exchange rate gains, net	 	 	-	 	 	 	574	 	 	 	-	 
	Gain from financial assets at fair value through profit or loss, net	 	 	181	 	 	 	1,257	 	 	 	616	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Total financial income	 	 	1,464	 	 	 	2,831	 	 	 	677	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Financial income (expenses), net	 	 	1,035	 	 	 	2,761	 	 	 	(1,701	)

 

    	- 53 -

    	 

    

 

PROTEOLOGICS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

		NOTE 18:-	LOSS PER SHARE

 

Basic loss per share is calculated
by dividing the loss attributable to equity holders of the Company by the weighted average number of issued ordinary shares, after
retroactively taking into account bonus shares distributed in February 2010, see Note 14a(3) above.

 

	 	 	Year ended December 31,	 
	 	 	2012	 	 	2011	 	 	2010	 
	 	 	 	 	 	(Unaudited)	 
	 	 	NIS in thousands	 
	Loss for the year according to the statements of comprehensive loss (in NIS in thousands)	 	 	8,835	 	 	 	8,430	 	 	 	15,664	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Weighted average number of ordinary shares in issue	 	 	14,724,919	 	 	 	14,658,174	 	 	 	13,309,387	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Basic and diluted loss per share (in NIS)	 	 	0.60	 	 	 	0.58	 	 	 	1.18	 

 

The Company
has no convertible instruments which have a dilutive effect (increasing the loss per share) and therefore the basic loss per share
is identical to the diluted loss per share.

 

		NOTE 19:-	EXPENSES IN RESPECT OF EMPLOYEE BENEFITS

 

	 	 	Year ended December 31,	 
	 	 	2012	 	 	2011	 	 	2010	 
	 	 	 	 	 	(Unaudited)	 
	 	 	NIS in thousands	 
	 	 	 	 	 	 	 	 	 	 
	Wages and salaries	 	 	6,561	 	 	 	5,616	 	 	 	4,360	 
	National insurance	 	 	314	 	 	 	281	 	 	 	177	 
	Benefit component in grant of options to employees	 	 	879	 	 	 	1,463	 	 	 	971	 
	Post-employment benefits - defined benefit plan	 	 	579	 	 	 	223	 	 	 	361	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	8,333	 	 	 	7,583	 	 	 	5,869	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Number of employees to whom the benefit is related	 	 	28	 	 	 	29	 	 	 	22	 

 

    	- 54 -

    	 

    

 

PROTEOLOGICS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

		NOTE 20:-	TRANSACTIONS AND BALANCES WITH INTERESTED AND RELATED
PARTIES

 

"Interested party"
- as the term is defined in the Israeli Securities Regulations (Annual Financial Statements), 2010.

 

"Related party" -
as the term is defined in IAS 24, Related Party Disclosures ("IAS 24").

 

The Company's key management
personnel who are included, along with others, in the definition of "related parties" in IAS 24, include members of the
executive board.

 

		a.	Transactions and compensation to interested and related parties:

 

		1.	Compensation to interested parties:

 

	 	 	Year ended December 31,	 
	 	 	2012	 	 	2011	 	 	2010	 
	 	 	 	 	 	(Unaudited)	 
	 	 	NIS in thousands	 
	 	 	 	 	 	 	 	 	 	 
	CEO's salary	 	 	1,004	 	 	 	1,020	 	 	 	 	 
	Benefit component in options granted to the CEO, see Note 12e above	 	 	251	 	 	 	527	 	 	 	 	 
	Former CEO's salary, see Note 12e above	 	 	-	 	 	 	184	 	 	 	1,001	 
	Benefit component in options granted to the former CEO, see Note 12e above	 	 	-	 	 	 	186	 	 	 	723	 
	Director's salary and benefit component of options granted to the director, see Note 12f above	 	 	298	 	 	 	265	 	 	 	243	 
	Other directors' fees *)	 	 	419	 	 	 	338	 	 	 	234	 

 

		*)	Relating to six directors in 2012, five directors in 2011 and six directors in 2010.

 

		2.	Transactions with interested parties:

 

		a)	As for revenues from the provision of R&D services to GSK, see Note 12b(2) above.

 

		a)	As for the employment agreement signed with the Company's CEO in effect from January 9, 2011, see
Note 12e(2) above.

 

		a)	As for interest expenses on loans from the former parent company, see Note 10 above.

 

    	- 55 -

    	 

    

 

PROTEOLOGICS LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

		NOTE 20:-	TRANSACTIONS AND BALANCES WITH INTERESTED AND RELATED
PARTIES (Cont.)

 

		b.	Balances with interested and related parties:

 

	 	 	December 31,	 
	 	 	2012	 	 	2011	 
	 	 	 	 	 	(Unaudited)	 
	 	 	NIS in thousands	 
	 	 	 	 	 	 	 
	In respect of salaries and related expenses and additional benefits:	 	 	 	 	 	 	 	 
	Balance presented in accounts payable under current liabilities	 	 	203	 	 	 	212	 

 

		c.	Compensation to key management personnel:

 

The compensation to the VP
of R&D and to the CFO who are both classified as key management personnel who are not interested parties in the Company for
labor services provided to the Company is as follows:

 

	 	 	Year ended December 31,	 
	 	 	2012	 	 	2011	 	 	2010	 
	 	 	 	 	 	(Unaudited)	 
	 	 	NIS in thousands	 
	 	 	 	 	 	 	 	 	 	 
	Salaries and other benefits	 	 	1,513	 	 	 	1,448	 	 	 	1,169	 
	Benefit component in respect of grant of options	 	 	239	 	 	 	256	 	 	 	87	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	1,752	 	 	 	1,704	 	 	 	1,256	 

  

		NOTE 21:-	EVENTS AFTER THE END OF THE REPORTING PERIOD

 

		a.	As for the exercise and expiry of non-marketable options, see Note 14c above.

 

		b.	As for the extension of the development agreement with GSK, see Note 12b(2) above.

 

		c.	As for the Board's decision of March 7, 2013, see Note 1 above.

 

- - - - - - - - - - -

 

    	- 56 -

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