NOTE 2

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements.

In the opinion of management, the unaudited interim financial statements furnished herein include all adjustments necessary (consisting of normal recurring adjustments) for a fair presentation of the Company's financial position at June 30, 2013 and the results of its operations and cash flow for each of the six and three month periods then ended.

Interim financial statements are prepared on a basis consistent with the Company's annual financial statements. For a description of the significant accounting policies, other than the additional policies described in paragraphs C-E below, which policies applied to reflect transactions that occurred in the current six month interim period ended June 30, 2013, refer to the Company's annual report on Form 10-K for the year ended December 31, 2012. Results of operations for the six and three month periods ended June 30, 2013 are not necessarily indicative of the operating results that may be expected for the year ending December 31, 2013.

The consolidated balance sheet as of December 31, 2012 was derived from the audited financial statements as of that date but does not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. For further information, refer to the consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2012.

Fair value of financial instruments

ASC Topic 825-10, "Financial Instruments" defines financial instruments and requires disclosure of the fair value of financial instruments held or issued by the Company. The Company considers the carrying amount of cash and cash equivalents, accounts receivable, other current assets, accounts payable and other current liabilities balances, to approximate their fair values because of the short period of time between the origination of such instruments and their expected realization. The warrants with "down-round" protection represent a derivative liability and therefore are measured and presented in the balance sheets at fair value. The fair value measurement of such financial liability is classified as level 3.

The Company did not estimate the fair value of the long-term loans from stockholders which do not bear any interest, since the repayment schedule has not been determined.

Temporary equity

As more fully described in Note 3, in March 2013 the Company issued convertible Preferred Stock which provide a liquidation preference for the benefit of the holders of such Preferred Stock upon the occurrence of certain events, some of which are not within the Company's control. Accordingly, the convertible Preferred Stock is presented as temporary equity.

Upon initial recognition, the Preferred Stock was measured based on the "residual approach". Accordingly, the amount allocated to the Preferred Stock was based on the gross proceeds (including the gross proceeds to the Company from the issuance of Common Stock that was subsequently replaced with Units - See Note 3), net of the fair value of the detachable warrants and net of the direct issuance expenses that were allocated to the Preferred Stock.

As the exercise price of the conversion feature (based on the effective conversion rate of the Preferred Stock into Common Stock) was higher than the estimated fair value of the Company's Common Stock, it was determined that the conversion feature was not beneficial.

On each balance sheet date, the Company's management will assess the probability of redemption of the Preferred Stock. In the event that management determines such redemption to be probable as of an applicable balance sheet date, the Company will recognize a liability in an amount equal to the aggregate redemption price of the Preferred Stock. In addition, upon such determination, the difference between the amount that was allocated to the Preferred Stock (after deduction of issuance expenses) and such redemption amount will be accreted over the period from the date that it becomes probable that the instrument will become redeemable to the earliest redemption date.

As of March 31, 2013, the amount allocated to the Preferred Stock that was presented as temporary equity, and to the detachable warrants (presented as a derivative liability) that were included in the Units and their respective issuance costs were calculated based on a provisional allocation. During the second quarter of fiscal year 2013, the Company completed the allocation and recorded an adjustment to the amounts previously presented.

Fair Value Assumptions Used in Accounting for Derivative Warrant Liability

The Company has determined its derivative warrant liability to be a Level 3 fair value measurement and has used the Black-Scholes pricing model to calculate the fair value as of June 30, 2013. The Black-Scholes model requires six basic data inputs: the exercise or strike price, the time to expiration, the risk free interest rate, the current stock price, the estimated volatility of the stock price in the future, and the dividend rate. Because the warrants contain a price protection feature see Note 2D and Note 3), the probability that the exercise price of the warrants would decrease as the stock price decreased was incorporated into the valuation calculations. The key inputs used in the June 30, 2013 fair value calculations were as follows:

	June 30, 2013
Dividend yield (%)		1
Expected volatility (%) (*)		96.66
Risk free interest rate (%)		0.9
Expected term of options (years) (**)		5
Exercise price (US dollars)		6.96
Common Stock Share price (US dollars) (***)		2.77
Fair value of Preferred Share (US dollars)		4.27
Fair value of Detachable Warrant		1.53

(*)

Due to the low trading volume of the Company's Common Stock, the expected volatility was based on the historic volatility of public companies which operate in the same industry sector.

(**)

Due to the fact that the Company does not have sufficient historical exercise data, the expected term was determined based on the "simplified method" in accordance with Staff Accounting Bulletin No. 110.

(***)

The fair value per share of the Company's Common Stock was based on an external appraisal of the Common Stock.

Warrants with "down-round" protection

The Company considered the provisions of ASC 815-40, "Derivatives and Hedging: Contracts in Entity's Own Equity", with respect to the detachable warrants that were issued to the Unit Purchasers, as described in Note 3, and determined that as a result of the "down round" protection that would adjust the exercise price of the warrants to the price at which the Company subsequently issues shares or other equity-linked financial instruments, if that price is less than the original exercise price of the warrants, such warrants cannot be considered as indexed to the Company's own stock. Accordingly, the warrants were recognized as derivative liability at their fair value on initial recognition. In subsequent periods, the warrants are marked to market with the changes in fair value recognized as financing expense or income in the consolidated statement of operations. The direct issuance expenses that were allocated to the detachable warrants were expensed as incurred. (See Note 2C above).

Loss per share

Basic loss per share is computed by dividing loss for the period by the weighted average number of common shares outstanding during the period. Securities that may participate in dividends with the Common Stock (such as the convertible Preferred Stock) are included in the computation of basic earnings per share (EPS) using the two-class method. However, in periods of net loss such participating securities are not included since the holders of such securities do not have a contractual obligation to share in the losses of the company.

In computing diluted earnings per share, basic earnings per share are adjusted to reflect the potential dilution that could occur upon the exercise of options or warrants issued or granted using the "treasury stock method" and upon the conversion of convertible notes or convertible preferred stock using the "if-converted method," if their effect is dilutive.

Recently issued accounting pronouncements

ASC Topic 220, "Comprehensive Income"

Effective January 1, 2013, the Company adopted Accounting Standard Update No. 2013-02 "Comprehensive Income (Topic 220) - Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income" (ASU 2013-02). ASU 2013-02 requires an entity to provide information about amounts reclassified out of accumulated other comprehensive income.

According to ASU 2013-02, significant items that are required under U.S. GAAP to be reclassified to net income in their entirety shall be presented by the respective line items of net income either on the face of the financial statements or in the footnotes. Items that are not required under U.S. GAAP to be reclassified to net income in their entirety, will be required to be cross-referenced to other disclosures required under U.S. GAAP that provide additional detail about those amounts. The standard became effective, prospectively, for interim and annual periods beginning after December 15, 2012.

The adoption of ASU 2013-02 did not have a material impact on the financial position or results of operations of the Company.

ASC Topic 210, "Balance Sheet"

Effective January 1, 2013, the Company adopted Accounting Standard Update (ASU) 2011-11, "Balance Sheet (Topic 210) - Disclosures about Offsetting Assets and Liabilities" (ASU 2011-11). ASU 2011-11 enhances disclosures about financial instruments and derivative instruments that are either offset in accordance with the Accounting Standards Codification or are subject to an enforceable master netting arrangement or similar agreement.

The amended guidance became effective, in a retrospective manner to all comparative periods presented, for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods.

The adoption of ASU 2011-11 did not have a material impact on the financial position or results of operations of the Company.