XTL BIOPHARMACEUTICALS LTD.

General and Administrative Expenses. General and administrative expenses increased by $119,000 to $5,576,000 for the year ended
December 31, 2006, as compared to expenses of $5,457,000 for the year ended December 31, 2005. The increase in general and administrative
expenses was due primarily to increased expenses associated with the hiring of our Chief Executive Officer in 2006 and with being a US public
company, offset by a decrease of $649,000 in non-cash compensation costs, related to option grants. In 2005 a market capitalization-based milestone,
associated with certain grants made to our Chairman and to one of our non-executive directors in 2005 (see “Item 6. Directors, Senior Management and
Employees - Employment Agreements”) was achieved; in 2006, no such milestone was achieved, resulting in a decrease in non-cash compensation
expense in 2006 as compared to 2005.
Business Development Costs. Business development costs increased by approximately $414,000 to $641,000 for the year ended December 31,
2006, as compared to expenses of $227,000 for the year ended December 31, 2005. The increase in business developments costs was due primarily to
increased expenses associated with our acquisition and in-licensing program, which included legal and due diligence expenses associated with the
recent in-licensing of Bicifadine.
Financial and Other Income. Financial and other income for the year ended December 31, 2006, increased by $698,000 to $1,141,000, as
compared to financial income of $443,000 for the year ended December 31, 2005. The increase in financial and other income was due primarily to a
higher level of invested funds due to the completion of the private placement that closed in May 2006, as well as due to the general increase in shortterm
market interest rates when compared to the comparable period last year.
Income Taxes. Income tax expense increased by $149,000 to $227,000 for the year ended December 31, 2006, as compared to expenses of
$78,000 for year ended December 31, 2005. Our income tax expense is attributable to taxable income from the continuing operations of our subsidiary
in the US. This income is eliminated upon consolidation of our financial statements.
2005 Restructuring
In 2005, we implemented a restructuring plan designed to focus our resources on the development of our then lead programs, which we refer
to as the 2005 Restructuring, with the goal of moving those programs through to clinical proof of concept. The 2005 Restructuring included a 32
person reduction in our workforce, 31 of whom were in research and development and one of whom was in general and administrative. As part of the
2005 Restructuring, we took a charge in 2005 of $168,000, relating to employee dismissal costs, $163,000 of which was included in research and
development costs and $5,000 of which was included in general and administrative expenses. The 2005 Restructuring was completed in early 2006,
with the $168,000 of dismissal costs paid as of December 31, 2006. In December 2005, as a result of the 2005 Restructuring, and in accordance with
the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” or SFAS 144, we reviewed the carrying value of
certain lab equipment assets, and recorded an impairment charge in research and development costs in an amount of $26,000 in 2005.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which
have been prepared in accordance with US GAAP. The preparation of these financial statements requires us to make estimates and judgments that
affect the reported amount of assets and liabilities and related disclosure of contingent assets and liabilities at the date of our financial statements and
the reported amounts of revenues and expenses during the applicable period. Actual results may differ from these estimates under different assumptions
or conditions.
We define critical accounting policies as those that are reflective of significant judgments and uncertainties and which may potentially result
in materially different results under different assumptions and conditions. In applying these critical accounting policies, our management uses its
judgment to determine the appropriate assumptions to be used in making certain estimates. These estimates are subject to an inherent degree of
uncertainty. Our critical accounting policies include the following:
Stock Compensation. We have granted options to employees, directors and consultants, as well as warrants to other third parties. SFAS No.
123R “Share - Based Payment,” or SFAS 123R, addresses the accounting for share-based payment transactions in which a company obtains employee
services in exchange for (a) equity instruments of a company or (b) liabilities that are based on the fair value of a company’s equity instruments or that
may be settled by the issuance of such equity instruments.
The fair value of stock options granted with service conditions was determined using the Black-Scholes valuation model. Such value is
recognized as an expense over the service period, net of estimated forfeitures, using the straight-line method under SFAS 123R. The fair value of stock
options granted with market conditions was determined using a Monte Carlo Simulation method. Such value is recognized as an expense using the
accelerated method under SFAS 123R.
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