UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

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

	For the fiscal year ended December 31, 2013

	or

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

Commission file number 001-35138

PIMI AGRO CLEANTECH, INC.

(Exact name of registrant as specified in its charter)

Delaware		26-4684680
(State or other jurisdiction of		(I.R.S. Employer
Incorporation or organization)		Identification No.)

POBox 360

3601201 Kiryat Tivon, Israel

(Address of principal executive offices)

+972 72 2116144

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 Par Value Per Share

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

Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes o No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

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

Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company x

As of February 1, 2014, the aggregate market value of the issued and outstanding common stock held by non-affiliates of the registrant, computed by reference to the price at which the common equity was last sold of $0.80 was approximately $3,538,565. For purposes of the above statement only, all directors, executive officers and 10% shareholders are assumed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for any other purpose.

Number of shares of common stock outstanding as of February 15, 2014 was 9,336,487.

DOCUMENTS INCORPORATED BY REFERENCE – Not applicable

FORM 10-K

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2013

INDEX

		Page
	PART I
Item 1	Business	3
Item 1A	Risk Factors	17
Item 1B	Unresolved Staff Comments	22
Item 2	Properties	22
Item 3	Legal Proceedings	22
Item 4	Reserved	23
	PART II
Item 5	Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities	23
Item 6	Selected Financial Data	24
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 7A	Quantitative and Qualitative Disclosures About Market Risk	29
Item 8	Financial Statements and Supplementary Data	29
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	67
Item 9A	Controls and Procedures	67
Item 9B	Other Information	68
	PART III
Item 10	Directors, Executive Officers, and Corporate Governance	68
Item 11	Executive Compensation	70
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	71
Item 13	Certain Relationships and Related Transactions	73
Item 14	Principal Accountant Fees and Services	75
	PART IV
Item 15	Exhibits and Financial Statement Schedules	75
	Signatures	76
SIGNATURES

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

In this annual report, references to "Pimi Agro Cleantech, Inc.," "Pimi," "the Company," "we," "us," and "our" refer to Pimi Agro Cleantech, Inc. and its subsidiary, Pimi Agro CleanTech, Ltd.

Except for the historical information contained herein, some of the statements in this Report contain forward-looking statements that involve risks and uncertainties. These statements are found in the sections entitled "Business," "Management's Discussion and Analysis of Financial Condition and Results of Operation," and "Risk Factors." They include statements concerning: our business strategy; expectations of market and customer response; liquidity and capital expenditures; future sources of revenues; expansion of our proposed product line; and trends in industry activity generally. In some cases, you can identify forward-looking statements by words such as "may," "will," "should," "expect," "plan," "could," "anticipate," "intend," "believe," "estimate," "predict," "potential," "goal," or "continue" or similar terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including, but not limited to, the risks outlined under "Risk Factors," that may cause our or our industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. For example, assumptions that could cause actual results to vary materially from future results include, but are not limited to: our ability to successfully develop and market our products to customers; our ability to generate customer demand for our products in our target markets; the development of our target markets and market opportunities; our ability to manufacture suitable products at competitive cost; market pricing for our products and for competing products; the extent of increasing competition; technological developments in our target markets and the development of alternate, competing technologies in them; and sales of shares by existing shareholders. Although we believe that the expectations reflected in the forward looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Unless we are required to do so under federal securities laws or other applicable laws, we do not intend to update or revise any forward-looking statements.

PART I

ITEM 1. BUSINESS

Organization

Pimi Agro CleanTech, Inc. is a Delaware Corporation with one operating subsidiary, Pimi Agro CleanTech, Ltd, which is an Israeli Limited Company (“Pimi Israel”). The Company was formed on April 1, 2009, under the laws of the State of Delaware, and its subsidiary Pimi Israel was formed on January 2004 in the State of Israel under the name "Pimi Marion Holdings Ltd.", and has since changed its name to "Pimi Agro Cleantech Ltd.", in October 2008. The Company, through Pimi Israel, owns a patented technology for the pre and post-harvest treatment of fruits and vegetables utilizing environmentally friendly products.

Established in 2004, Pimi Israel's technology platform is based on a unique formulation of environmentally friendly Stabilized Hydrogen Peroxide (STHP) which decomposes into oxygen and water. As part of a sustainable agriculture platform, STHP products have worldwide patent protection and provide a cost-effective solution for consumers who want to reduce residue chemicals in their fruits and vegetables.

On April 27, 2009 we purchased all the issued shares of Pimi Israel from the Pimi Israel shareholders in consideration for 6,313,589 shares of Common Stock of the Company to the Pimi Israel shareholders. As a result, Pimi Israel became a wholly owned subsidiary of the Company.

We are a development stage company and have had limited revenues since our formation. There is currently limited public market for our common stock. The purchase of our shares is highly speculative and involves a high degree of risk, including, but not necessarily limited to, the “Risk Factors” described elsewhere in this report. Any person who cannot afford the loss of their entire investment should not purchase our shares.

The Company’s principal executive offices are located in Kibbutz Alonim, Israel, Our telephone number at our principal offices is 972-72-211-6144 and our local U.S. number is (310) 203-8278.

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Overview

The Company focuses on developing environmentally friendly solutions for extending storability and shelf life of vegetables and fruits. As of the date of this report, the Company is engaged in developing, testing and marketing of four lines of products: (i) products that treat citrus fruits, such as CitruWash™ and Super Clean™, CitrusGuard™ and FreshProtect™; (ii) a product that treats sweet potatoes, SweetGuard™; (iii) a product that treats stored table potatoes SpuDefender™; and (iv) products that provide storage control of fruits and vegetables, including StorGuard™ for treatment of vegetables such as broccoli and cabbage and OnionGuard™ for treatment of onions. We have started the commercialization of five of these products namely: the sanitizer CitrusGuard™, the disinfectant FreshProtect™, the sprout controller SpuDefender™ and the cleansers SweetGuard™ and Super Clean™ (or CitruWash™).

Based on recent statistics, citrus fruits are the most consumed fruits worldwide. The world fresh citrus market is estimated at over 50 million tons per annum. Potatoes are the fourth largest crop worldwide. According to the Food and Agriculture Organization of the United Nations, the total crop of Potatoes in 2012 was approximately 368 million metric tons (see: http://faostat3.fao.org/faostat-gateway/go/to/download/T/TI/E). We estimate that table potatoes, which our solution is currently aimed towards, are 30%-40% of the total world produced potatoes. Sweet potatoes are the seventh largest crop in the world. According to the Food and Agriculture Organization of the United Nations, the total crop of the sweet potatoes during 2012 was approximately 104 million metric tons. According to the National Agricultural Statistics Service, USDA, the United States produced approximately 1.2 million metric tons of sweet potatoes during 2012, with a production value of $500 million.

We intend to provide our customers a comprehensive environmentally friendly solution for post-harvest treatment of fruits and vegetables, commencing with harvest thereof and utilizing our products in different phases of the treatment process until their delivery to distributors. Accordingly, as of the date of this report we are developing cleansers and sanitizers for treatment of fruits and vegetables on packing line, as well as sprout and disease control products for use when storing fruits and vegetables. We are also currently developing a device for preventing decay during shipment of fruits and vegetables.

Industry Overview

The fresh fruits and vegetables industry is constantly seeking technologies and methods to prolong shelf life, reduce product deterioration losses and keep freshness of crops. In most cases the only way to prolong shelf life and reduce quality losses is by using chemicals which leave residues. The processed food industry is also using chemicals which leave residues and contaminate water and livestock. Heavy chemicals which leave residue are used also by the seed industry.

Leading retailers and agricultural regulatory bodies such as European Commission of Health and Consumer Protection the “European Commission" or the " EC") and the US Environment Protection Agency (the "EPA"), are increasingly focusing to reducing the use of residue chemicals in treating fruits, vegetables, seeds and soil in favor of environment-friendly alternatives.

In addition, organic food and organic agriculture is rapidly gaining momentum and is advocating chemical and residue-free use from growth, harvest to storage and maintenance. This is strengthened by the relatively new trend to consume low or non-residue produce, which have risen to 20%-25% of consumed produce in developed countries like Netherlands (see "Reducing Residue Rising up Priority List" 78 FGJ 1 February 2008. at: http://www.bcpcertis.com/Certis.bcp/English/Home/News/page.aspx/565?xf_itemId=522&xf_selectionDatapartId=512).

The Company’s management believes that the trend in the market [as may be exhibited by market leaders such as Wal-Mart (see at: http://www.nytimes.com/2011/01/20/business/20walmart.html), Marks & Spencer, Tesco and Sainsbury in the UK and EDEKA chain in Germany] is to replace, as much as possible, fruits and vegetables treated with chemicals which leave residues with fruits and vegetables with no residue or low residue.

Losses of agricultural produce, as high as 30% in countries such as India (see: http://agricoop.nic.in/sia111213312.pdf) and China (see http://www.ccsenet.org/journal/index.php/ijbm/article/view/19732), due to diseases and lack of correct supply chain, from the field to the stores, are exacerbated by the increasing demand for food produce, especially in developing countries.

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Accordingly, there is a significant need to find alternative solutions to current chemical treatments for pre- and post- harvest treatments of fruits and vegetables that will provide the following benefits:

Reduce spoilage and losses of produce;

Extend shelf-life and improve quality of fruits, vegetables and grains;

Are non-residue and leave no harmful chemical by-products;

Are cost effective; and

Are approved for organically produced crops.

With millions of tons of stored fruits and vegetables annually world-wide, management believes there is an immediate, addressable market for Pimi’s products. Through our extensive communications with retailers, we understand a shortage of fresh goods is a primary concern for these groups – thus the ability to improve storability is critical and valuable.

Our Products and Technology

Treated Produce

Citrus Fruits

Sweet Potatoes

Potatoes

Onions

Sanitizers

CitrusGuard™ (Israel)

—

OnionGuard™

Disinfectant

FreshProtect™ (US)

—

Sprout Controller

SpuDefender™

Cleansers

SuperClean™ (Israel) CitruWash™ (US)

SweetGuard™

—

Citrus Treatment Products

The Citrus Industry- The Need to Replace Imazalil and TBZ

To date, many countries, including the United States and Israel, control green mold on Citruses, by applying the fungicides Ortho-phenyl Phenate (OPP or SOPP), Imazalil, and Thiabendazole (TBZ). Retailers’ demand to reduce the Maximum Residue Levels (MRL) of pesticides in their fresh fruits, has led producers to seek environmentally friendly solutions, such as ours, aimed to reduce levels of pesticide residues while extending shelf life. It was proven that the green mold has already developed resistance to the abovementioned fungicides, especially for Imazalil. Therefore, packers can no longer count only on them to effectively control decay pathogens.

The combination of these two factors created an urgent need to identify an alternative method for controlling green mold. Pimi’s solution may reduce the Imazalil level from today’s MRL of 5 ppm (part per million) to 1 ppm, without adding any fungicide material and while reducing yield losses.

Citrus Sanitizers and -Disinfectants - CitrusGuard™ and FreshProtect™

We have developed CitrusGuard™ (in Israel) and FreshProtect™ (in the US), which are both formulated to sanitize citrus fruits during packaging. These products were developed in order to replace the current residue treatments of fungicides, such as Imazalil. FreshProtect™ is mainly targeted to the U.S. market, while CitrusGuard™ is mainly targeted to the Israeli and other international markets.

On December 14, 2012, we received an unconditional Notice of Registration from the United States Environmental Protection Agency (the “EPA”) for FreshProtect™, which was issued on November 30, 2012 (the “EPA Approval”). On May 29, 2013 we received a certificate of registration for FreshProtect™ from the California Department of Pesticide Regulation (“CDPR”), which enables us to market and sell this product in California. CDPR has recently renewed this registration until December 31, 2014.

FreshProtect™ has been in development since 2009. In January 2011, we successfully concluded a commercial trial on easy peel citrus fruits in cooperation with Sun Pacific Inc. (“Sun Pacific”), one of the biggest suppliers of fruits and vegetables in the United States, leading in citrus and other products. In January-February 2013 we performed large-scale commercial trial with Sun Pacific, utilizing both CitruWash™ and FreshProtect™ in the treatment process on one packing line. The trial also involved Decco ltd., a leading US post-harvest services company, which is considered by our management as a potential distributor of our products. The results of this trial were successful, indicating that our products have prevented decay more efficiently in comparison to other current treatments and materials.

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During the fourth quarter of 2013 our FreshProtect™ and CitruWash™ were commercially implemented by Decco, for the post-harvest treatment of clementines with Sun Pacific in Maricopa CA. Total sales to Decco during the fourth quarter of 2013 amounted to approximately $100,000. Total amount of produce treated with our products amounted to approximately 20,000 tons. Based on the tests conducted by Sun Pacific at the end of clementine season, Sun Pacific has recently expressed its satisfaction of the appearance of the produce which had been treated with FreshProtect™ and CitruWash™, updated us that it desires to implement our products on its clementine packing lines in upcoming clementine season (fourth quarter of 2014) and to further implement our products on lemon. However, Sun Pacific has stated that due to its extremely dry climate conditions, clementine’s 2013 season does not allow Sun Pacific to fully assess the efficacy of FreshProtect™ and CitruWash™, and therefore Sun Pacific intends to keep assessing FreshProtect™ and CitruWash™ performances under tougher climate conditions.

The Company has recently commenced an additional trial with Pace International LLC, another leading US post-harvest services company, which is considered by our management as a potential distributor of our products.

Simultaneously the Company is in negotiations with other post-harvest services companies for conducting efficacy proof tests, successful results of which will lead, as the Company believes, to an increase in sales of FreshProtect™ and CitruWash™.

In October 2011, we concluded a commercial trial on navel oranges with Paramount Inc. (“Paramount”), a leading packaging house based in California. Both trials were successful as they proved significant advantages of utilizing FreshProtect™ on citrus fruits in comparison to other current treatments and materials, while reducing the residue level of pesticides on the fruits to the level of less than 1.5 ppm (part per million), without adversely affecting the shelf life, quality, and quantity of the fruits. Such a significantly low residue level complies with the stringent standards of leading European food chains.

In March and April 2010, we successfully completed small scale trials, as well as commercial trials, applying CitrusGuard™, for the treatment of Mandarins, which is one of the most sensitive and problematic citrus fruits, as well as the treatment of grapefruits. The trials were carried out with Mehadrin Ltd. (“Mehadrin”), the largest packing house in Israel, which exports citrus fruits to the United States and Europe. In these trials, CitrusGuard™ demonstrated superiority in extending shelf life, compared with the current treatment that is being used, which requires almost double the amount of pesticides to reach the required shelf life.

As a result of these commercial trials, Mehadrin has decided to commercially implement CitrusGuard™, in the treatment process utilized in its packing lines. Those lines pack mainly mandarins and grapefruits and small volumes of oranges and lemons. Mehadrin is also implementing Super Clean™ cleanser on its lines, as a part of our model of comprehensive treatment, which utilizes our products in different phases of the cleaning process. During the years 2012 and 2013 Mehadrin purchased our products in total aggregate amounts of approximately 70,000 and 90,000 liters respectively.

The recent results of additional trials that had been performed independently by Mehadrin indicated that our products had prevented decay more effectively in comparison to other current treatment materials utilized by Mehadrin. Accordingly, Mehadrin has recently resolved to replace their current treatment materials with Pimi’s products and have already placed additional orders with us. They have also sent letters of recommendation to their outsourcing packers, who process not only Mehadrin’s produce, but also the produce of their own. Following this recommendation, several additional packing houses in Israel have already commenced utilizing our products and several others entered into negotiations with us.

In addition, Mehadrin, one of our major clients, has recently alleged incurring certain damages, amounting to approximately $100,000, as a result of the unsuitability between the wax material implemented by Mehadrin and our products. However, based on the information and documentation in our possession, we believe that our products were implemented by Mehadrin not in compliance with our application protocol provided to Mehadrin. We have referred an appropriate request to our insurer regarding a possible insurance claim under our product liability policy, and are currently reviewing this matter further. However, our management believes considering the effect of the insurance in place, that the effect of these claims, if any, will not be significant.

Citrus Cleansers - SuperClean™ and CitruWash™

The cleanser SuperClean™ (in Israel) (also known as CitruWash™ in the US) is formulated to clean citrus fruits during packaging. The cleanser was developed to replace soap and Chlorine which are currently used as cleansers. A good cleaning practice reduces surface dirt and soil, which consequently reduces micro flora load prior to spreading the fruits with fungicides that prevents mold contamination.

CitruWash™ is mainly targeted to the US market, while and SuperClean™ is mainly targeted to the Israeli and other international markets; however, the products are identical and named differently for commercial reasons.

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The regulatory agency that is responsible for regulating our products that make cleaning claims on raw agricultural commodities, such as CitruWash™, is the Food and Drug Administration (“FDA”).

Unlike the EPA, the FDA does not approve cleanser products. Instead, all of the ingredients comprising cleansing products must have the appropriate clearance, under the Federal Food, Drug and Cosmetic Act (“FFDCA”), for use on the target food commodities. All of the ingredients in CitruWash™ are compliant with the FFDCA. We have been advised by our regulatory counsel that CitruWash™ is classified as a cleanser under applicable U.S. laws and regulations.

Sweet Potatoes Treatment Products

SweetGuard™

SweetGuard™ is designed to clean the surface of sweet potatoes and improve the appearance of treated sweet potatoes. Cleaning the surface of sweet potatoes reduces decay, which may occur during storage, shipment and shelf life.

In January 2010, we completed our first commercial trial utilizing SweetGuard™ for the treatment of sweet potatoes.

The trials were carried out in two cooperative farms in Israel, having two separate packing houses that export sweet potatoes to Europe. The trials demonstrated SweetGuard’s™ efficacy in various areas of post-harvest treatment of crop coming from different growing soils. We were advised that consumers that were presented with treated and untreated sweet potatoes had preferred those which were cleaned with SweetGuard™.

Based on these trials, the two participating cooperative farms have decided to include SweetGuard™ in their regular packaging. Accordingly, approximately 12,000 and 14,000 tons of sweet potatoes were treated with SweetGuard™ in 2012 and in 2013 respectively.

In 2012 we successfully finalized several on-line commercial tests with leading sweet potato packers located in the U.S., and during 2013 received US purchase orders for SweetGuard™ in an aggregate amount of approximately $12,000.

Potato Treatment Products

The Potato Industry - the Need to Replace CIPC and prolong shelf life

Potatoes are the fourth largest crop in the world. According to the Food and Agriculture Organization of the United Nations, the total crop of Potatoes in 2012 was approximately 368 million metric tons. We estimate that table potatoes are 30%-40% of the total world produced potatoes. In developed countries around one third of the crop is used directly by households (table potatoes) and the rest are processed (and turned into chips/crisps and French fries). In non-developed countries, 80% of the crop is used as table potatoes and the rest as processed potatoes. Therefore we estimate that the annual crop of potatoes is divided between 35% table potatoes and 65% processed potatoes.

Stored potatoes begin sprouting, in most circumstances, after two to three months in storage. Effective sprout control is a major component of managing stored potatoes’ quality. Indeed, if proper sprout control is not maintained, tuber quality significantly decreases and the ability to store potatoes for extended periods of time is diminished. Sprouting causes high yield loss and low quality produce for consumers and for processing. Sprouting is also associated with the conversion of starch to sugars, which is undesirable in the processing industry, due to the darkening effect of fried products. In the table potatoes industry, visible sprouts on potatoes are unacceptable to consumers.

The primary method to control sprouting in storage is through post-harvest application of isopropyl N-(3-chlorphenyl) carbamate ("Chlorpropham" or "CICP") – a synthetic hormone that is used worldwide. For the toxic effects of CIPC see: http://pmep.cce.cornell.edu/profiles/extoxnet/carbaryl-dicrotophos/chlorpropham-ext.html.

Regulators such as the European Commission ("The EC") and United States EPA are advocating for substantial reduction of permitted maximum residues level of CIPC in crops, livestock and water. In 2008, the EU has issued a Directive (196/2008 of January 29, 2008) which sets the MRL of CIPC to 10mg per ton. The UK has recently regulated that potatoes treated with more than 36g of CIPC per ton should only be used for commercial processing. The British Potato Council along with the industry in the UK, have set a maximum of 63.75mg per ton for commercial processing.

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In August 1996, a US EPA issued a federal Registration Eligibility Decision (RED) regarding the continued use of CIPC as sprout inhibitor of harvested stored potatoes. In 2002, EPA reduced the allowable level of CIPC on fresh potatoes from 50ppm to 30ppm per kg. EPA permitted residues as high as 40 ppm on wet peel potatoes, which go to life feed stock. Similar consequences of CIPC reassessment occurred in other potato-growing regions in the world, such as Canada and Australia. In Sweden CIPC has been banned for use since 2005. The aforementioned limitations emphasize the industry’s urgent need of products that will provide proper sprout control without leaving the toxic residues of CIPC. Our products are designed to provide same and meet the limitations introduced by the regulators worldwide.

SpuDefender ™

Pimi is developing the SpuDefender™ to substitute CIPC as a sprout inhibitor, while increasing shelf life and protecting quality. SpuDefender™ is a formulated STHP designed to inhibit sprouting in stored potatoes. SpuDefender™ is patent protected in several countries. It is applied to potatoes stored in storehouses, or on packing lines, by using Pimi’s proprietary storage application protocol which is based on a unique designed system of ultrasonic atomizers to provide maximum results.

SpuDefender™ is an environmental friendly external treatment, and therefore, after washing it leaves no residue. At the end of the application process, the active ingredient of SpuDefender™ decomposes into water and oxygen, unlike existing chemical alternatives, such as Isopropyl N-(3-chlorophenyl) Carbamate ("Chlorpropham" or "CIPC") (see “The Potato Industry - the Need to Replace CIPC and prolong shelf life” elsewhere in this report). As of the date of this report SpuDefender™ has proven to be effective in controlling decay in seed potatoes, while reducing the residue level of pesticides on treated potatoes. Our ability to evenly distribute the product in large storehouses (required to effectively substitute CIPC) is under further development and testing.

Other Fruits and Vegetables Storage Control Line of Products

StorGuard™

StorGuard™ was developed for extending the shelf life of stored fruits and vegetables, by reducing air pathogens in storage rooms. To improve storage conditions, StorGuard™ enriches storage rooms with Oxygen and humidity, which are key factors for good storability. The active ingredient of StorGuard™ is STHP, which has abilities to oxidize air spores [see EPA Hydrogen Peroxide (000595) Federal Register Notices at: http://www.epa.gov/pesticides/biopesticides/ingredients/fr notices/frnotices 000595.htm].

OnionGuard™

As of the date of this report management believes there is no known effective treatment to reduce Botrytis Neck Rot and Aspergillus Black Mold, which are the two main onion diseases. These two diseases can damage up to 40 percent of an onion harvest. In October 2009, we initiated a trial with Idaho State University and McCain Foods Limited (“McCain”) to extend storability of onions by using OnionGuard™ – a formula comprised of our StorGuard™. We ran a trial comparing OnionGuard™ to current storage methods. The trial was performed in cooperation with McCain, which stores onions for its onion rings production line and encountered storability problems. The results received in June 2010 demonstrated a 40% improvement in room temperature storability, as well as in cold temperature storability. Moreover, after six months of storage, defects were reduced from 35 percent to 15 percent. The trial’s results were presented to one of the leading retailers in the US who subsequently ordered a commercial test of 20,000 pounds of onions. Such a test started on October 2010, under the supervision of the Washington State University. Nevertheless, while initial results from January 2011 presented high performance of OnionGuard™, the test was never completed due to the release of the onions to the market prior to the receipt of final results.

Pimi anticipates starting EPA registration of OnionGuard™ once sufficient working capital is available to initiate the process.

Products planned for Research and Development

Pimi plans to extend its line of products in the coming years by investing substantial amounts of R&D in other fields, where we have identified a market need for environmental friendly solutions.

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SeedGuard ™

Potatoes are susceptible to a variety of diseases that lower yields and tuber potentially causing significant losses in the quantities and quality of crops. Pathogens accumulate in successive cloning of tubers and in the soil used to grow them. Hence, sustainable potatoes production depends on a constantly renewed supply of disease-free planting material. According to numerous international regulations, seeds of all types must be disinfected to prevent the transfer of diseases between countries, between seeds, from seeds to soil, and between seeds and crop.

Tuber disinfection treatments are used to reduce seed borne diseases. Nevertheless, the use of organic mercury for this purpose was banned and the alternative treatments are ineffective against many of the pathogens. Moreover an increasing number of pathogens were found to be unaffected by any of these treatments (see Lea Tsror and al. "Survey of Bacterial and Fungal Seed borne diseases in Imported and Domestic Seed Tubers" (1999) at http://www.pimiagro.com/upload_pdf/1241461817_4.pdf).

Pimi has embarked on an R&D plan for potato-seed applications, hoping to develop an innovative, holistic and ecological solution to treat potato seeds throughout their lifecycle. This plan was approved for the receipt of grants from the Israeli Chief Scientist Office (see "Governmental Support" elsewhere in this report). SeedGuard’s™ long lasting disinfectant effect is designed to benefit seed producers and potato growers and replace existing aggressive chemical treatments which are not environmental friendly solutions.

Pimi’s management estimates that additional substantial R&D is required to tailor SeedGuard™ to specific seeds, which requires several years of work. Therefore, Pimi’s management has decided to postpone the development of this product until its other products are fully commercialized. Accordingly, as of the date of this report, SeedGuard’s™ development is delayed until sufficient funds are raised.

Performic Acid

Pimi has begun researching the field of performic acid-based, eco-friendly solutions (see “Intellectual Property” elsewhere in this report). Additionally, Pimi has consulted a leading global chemical producer for the purpose of exploring and evaluating the possibility of commercial development in this field.

Device for Treatment of Fruits and Vegetables in Transit

We are currently developing a disposable adjustable substance diffuser device, designed to utilize with our products on fruits and vegetables transported in containers. This unique solution shall prolong shelf life, reduce product deterioration losses and keep freshness of transported agriculture goods. Our management anticipates that, once developed, this product will be primarily demanded by those distributors that use long term and long distance maritime transportation methods.

Our Technology

Pimi’s technology for increasing the storability and shelf life of fruits and vegetables is based on a unique proprietary solution using only edible products and a proprietary designed delivery system.

Active Ingredient - Stabilized Hydrogen Peroxide solution (STHP)

Pimi has developed a patented Stabilized Hydrogen Peroxide (H2O2) formula which includes other edible ingredients. Hydrogen Peroxide is widely used in various industrial applications, such as: rocket fuel, wound disinfection, hair coloring and teeth whitening. The formulations were developed by Nimrod Ben Yehuda, Pimi’s co-founder, with the assistance of leading research institutes, which include the Hebrew University of Jerusalem, the Volcani Institute of Agricultural Research and the Technion – Israel Institute of Technology.

Fogging delivery system

By harnessing the advanced fogging technology of ultrasonic micro Droplets (which was developed by third parties and was upgraded by Pimi's management) and the special distribution method developed by the Company, Pimi's Technology is capable of distributing a lower than 10 micron droplet cloud in the storage room. This ultrasonic droplet diameter and the application method generate “Dry Fog”, forms a highly effective vehicle for distributing Pimi’s products. An added benefit comes with the ability to raise relative humidity to a very high level of 99% without causing the devastating effects of a condensation event. The system is fully automated, thus enabling a cost-effective implementation for customers, reducing many hours of labor and minimizing user intervention.

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Manufacturing Process Supply of Raw Material

Pimi’s products are currently produced by Seeler Industries, Inc., in their plant located in Joliet, Illinois ("Seeler") and also by Zohar Dalia Ltd. in Israel.

Transportation and Storage of our Products

Hydrogen Peroxide is a common chemical sold and transported worldwide in 50% concentrations. Transported Hydrogen Peroxide in such concentrations is defined as dangerous goods by the industry.

We have decided to supply our products with stable Hydrogen Peroxide and at low concentration levels of only 4%-8%%, which is graded as low product risk. At this grade of risk the product should be transported by certified truck drivers, and the truck should be marked with special signs. The product should be transported together with Material Safety Data Sheets (MSDS) which show the dangers related to the product and the safety procedures, including how the product should be handled.

Hydrogen Peroxide is an aggressive oxidizer and will corrode many materials. Hydrogen Peroxide should be stored in a cool, dry, well-ventilated area and away from any flammable or combustible substances. It should be transported in special tanks and vehicles and should be stored in a container composed of non-reactive materials.

Pimi is carefully and diligently following the above rules and regulations in handling its products in transportation and storage.

Governmental Support

Pimi Israel has received grants from the Israeli Chief Scientist under a program of investment in research and development for a solution for disinfection of potato seeds (SeedGuard™) under a 6-stage method. The approval of the Chief Scientist was extended and changed in order to enable certain expenses to be recognized for the grant. Pimi has received from the Chief Scientist the sum of $121,753 (484,429 NIS) as grant under this program.

Pimi is obligated to pay the grant back to the Chief Scientist in the form of royalties. In the first 3 years of sales we shall pay 3% out of the sales of the product which was developed under the R&D program. In the fourth, fifth and sixth years of sales we shall pay 4% of such sales, and from the seventh year and on we shall pay 5% up to the amount of the grant. If there will be no sales of the product which was developed under the program, Pimi will not be required to pay back the grant.

Under the law and regulations relating to the grant, sale of the IP developed under the program to a foreign entity will require the approval of the Israeli Chief Scientist.

Pimi Israel has been granted certain funding with the International Projects and Tenders Fund under the Israeli Ministry of Industry, Trade and Labor for participation in FreshProtect™ and CitruWash™ US commercialization costs and expenses. Under this grant, we are entitled to reimbursement of certain costs incurred by us amounting to approximately NIS 150,000.

Intellectual Property

We have developed a significant intellectual property portfolio of patents. We believe that our intellectual property portfolio, coupled with our strategic relationships (see "Customers and Partners") and accumulated experience in the field, gives us an advantage over potential competitors.

In 2010 we filed two provisional patents covering new developed products and technologies which we started to implement at the end of 2011. In 2011 we filed an application pursuant to the Patent Cooperation Treaty (“PCT”), covering an environmentally friendly solution, implementing performic acid, for controlling decay of a very wide range of addible matters and for soil disinfection. As of the date of this report, following completion of the international PCT stage, we have started the registration of this patent in Israel, US and EU. In 2012 we filed an additional PCT application, with respect to a product aimed at improving the appearance of foods. As of the date of this report, following completion of the international PCT stage, we have started the process of registration of this patent, currently in Israel only. In 2013 we filed a PCT application for a disposable adjustable substance diffuser device, designed to utilize our products on fruits and vegetables transported in containers. We currently maintain the following patents (for the agreement of the transfer of the rights in the patents and patents applications to us, see "Certain Relations and Related Parties transaction"):

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Country	Patent Register No.	Application No.	Status	Validity Date
U.S.A	6,797,302		Granted	July 2019
U.S.A	6,946,155		Granted	July 2019
U.S.A	7,147,872		Granted	July 2019
U.S.A		12/691,316¹	Pending
Europe		99933105.1	Pending
China	99810112.5		Granted	July 2019
Russia	2262230		Granted	July 2019
Australia	757,181		Granted	July 2019
South Africa	2001/1528		Granted	July 2019
Israel		125520	Pending
Chile		1675-99	Pending
Mexico	230589		Granted	July 2019
Argentina	AR 019937- B1		Granted	July 2019
Bulgaria		105167	Pending
Bolivia		P990103701	Pending
Brazil		PI9912697-4	Pending
Colombia		99047340	Pending
Cuba		22/2001	Pending
Czech Republic		PV 2001-254	Pending
Georgia		AP1999004257	Pending
Guatemala		PI99-01099	Pending
Honduras		PCT/IL99/120	Pending
Latvia	12750		Granted	July 2019
Nicaragua	1441		Granted	July 2019
New Zealand	509566		Granted	July 2019
Peru	3093		Granted	July 2019
Poland	P-348722		Granted	July 2019
Paraguay	4217		Granted	July 2019
Slovenia	9920057-20615		Granted	July 2019
Slovakia		PV97-2001	Pending
Turkey	TR2001-231		Granted	July 2019
Uruguay		025.625	Pending
Serbia		P-51/01	Pending
Norway		20010447	Pending
Romania		A 2001-00090	Pending

1 The application was filed on January 21, 2010 for a continuation patent of patent No. 7,147,872.

Regulatory Approval of Pimi's Products

The following description will relate to the countries in which the Company intends to sell its products:

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Regulatory Process in the United States

Our products are regulated by both the EPA (Environmental Protection Agency) and FDA. The regulatory agency that has jurisdiction for a particular product depends on the claims that are made for the product. Accordingly, EPA is responsible for any of our products that claim microbial control on raw agricultural commodities, such as FreshProtect™. FDA is responsible for regulating any our products that make cleaning claims on raw agricultural commodities, such as CitruWash™.

The EPA registration process is governed by the pesticide statute, Federal Insecticide, Fungicide and Rodenticide Act or “FIFRA”. Under Section 3 of FIFRA, EPA registers or licenses pesticide products. The registration process involves registrants submitting a comprehensive data base of chemistry and safety data so that EPA can make a safety determination. On November 30, 2012, EPA registered FreshProtect™ in accordance with the provisions of Section 3 of FIFRA. In addition to federal registration of pesticides, all states in the U.S. require product registration pursuant to the applicable state laws. On May 29, 2013 we received a certificate of registration for FreshProtect™ from the California Department of Pesticide Regulation (“CDPR”), which enables us to market and sell this product in California. CDPR has recently renewed this registration until December 31, 2014. Finally, EPA in accordance with Section 409 of the Federal Food, Drug and Cosmetic Act or “FFDCA” and through the tolerance or tolerance exemption process is responsible for setting residue levels for pesticides that are applied to raw agricultural commodities. All of the ingredients contained in FreshProtect™ have the appropriate tolerance or tolerance exemption for residues that may result from the use of FreshProtect™.

Unlike EPA, FDA does not approve cleanser products. Instead, all of the ingredients comprising cleanser products must have the appropriate clearance, under the FFDCA, for use on the target food commodities. All of the ingredients in CitruWash™ are compliant with the FFDCA. In accordance with the legal opinion we received, our CitruWash™ is classified as a cleanser under applicable US laws and regulations.

In addition, under Sections 201(s) and 409 of the FFDCA, any substance that is intentionally added to food is a food additive, that is subject to premarket review and approval by FDA, unless the substance is generally recognized, among qualified experts, as having been adequately shown to be safe under the conditions of its intended use, or unless the use of the substance is otherwise excluded from the definition of a food additive. FDA established a notification procedure whereby any person may notify FDA of a determination by that person that a particular use of a substance is “GRAS" (Generally Recognized As Safe). It should be noted that according to applicable law we may market a substance that we determine to be GRAS for a particular use without informing FDA or, if FDA is so informed, while FDA is reviewing that information.

We have received EPA approval for SpuDefender™ as well as approval of the State of Wisconsin, which enables us to sell SpuDefender™ for commercial use in this state.

Our SweetGuard™ is used as a cleaning agent on post-harvest sweet potatoes. As such, SweetGuard™ is regulated under both the Toxic Substances Control Act (“TSCA”) and FFDCA. Under both of these statutes, products are not approved or cleared but the individual components or substances comprising a product must be compliant with the provisions of each statute and their implementing regulations.

Pimi Agro has evaluated each component of SweetGuard and based on this evaluation has concluded that every component is compliant with the abovementioned provisions of TSCA and FFDCA and the corresponding implementing regulations.

Regulatory Process in Israel

SpuDefender™ has been approved by the Israeli Plant Protection Authority for use on potatoes and sweet potatoes in Israel. To the best of our management’s knowledge, CitrusGuard™, SuperClean™ and SweetGuard™ do not require approval by the Israeli Plant Protection Authority under applicable Israeli laws and regulations.

Regulatory Process in Europe

In Europe the authority in charge of the approval of our product is the European Commission. Under the Plant Protection Products Directive 91/414 (the "EU Directive 91/414"), the European Commission requires that we will show that the product is not toxic, has physical and chemical safety properties and is effective (i.e. it achieves the statement under its label). In order to submit the application ("Dossier") we have engaged Redebel S.A from Brussels, Belgium ("Redebel"), who is a specialist in such process.

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We have been advised by Redebel that in order to register our products (mainly FreshProtect™ and SpuDefender™) in the European Community the complete Dossier for inclusion of Hydrogen Peroxide on "Annex I" of EU Directive 91/414 must be approved by the European Commission ("Annex I Listing"). Such file has to include documentation and information concerning the active ingredient (in our case Hydrogen Peroxide). Important elements of such documentation are toxicological and eco-toxicological profile of the molecule and eventual dangers and hazards coming from human exposition. An example of use of this substance in “formulated” product has to be also presented, and the most important element of this part is demonstration of the efficacy – prove of the activity of the product declared on the label.

Normal procedure for efficacy testing is two years of trials. After having the efficacy results we will have to file the product for examination which can last for another 2 years.

Due to this long regulatory process, we have decided that we will concentrate on sales in the US, and other territories outside the EU, prior to finalizing the European file for pesticide. Therefore as of the date of this report we have halted the regulatory process of our products in the EU.

As of the date of this report we are examining whether in accordance with applicable law and regulations SuperClean™ and/or CitruWash™ (which are cleansers) require registration in EU.

Customers and Partners

As a small company with roots in Israel, one method by which Pimi is able to attain, and engage with, potential partners, in particular those having a favorable foot-print in their respective markets and having the ability to educate end-users (i.e. their customers), is by gaining recognition and acceptance of market leaders having the best leverage point to our prospective customers. These companies, being opinion leaders with high sensitivity to environmental-friendly growing demands, are in the best position to influence their suppliers, who are Pimi's potential customers, in testing and ultimately adopting Pimi's technology, as their next generation solution for post-harvest treatment.

We have entered into agreements with several companies specialized in the supply of agriculture products, primarily in the US, as further detailed below.

VegiSafe LLC (Earthbound LLC Group)

In January 2009 Pimi Israel entered into a Joint Venture Agreement ("The Joint Venture") with VegiSafe LLC ("VegiSafe"), an affiliate of Earthbound LLC ("EB"), a group of companies engaged in consulting to mass-market retailers and major supermarket chains in North America. EB has a proven track record in developing private label campaigns (apparel) for Wal-Mart and Target brands.

The Joint Venture intends to market, sell and distribute Pimi's technology throughout the United States, on an exclusive basis, and throughout Canada and Mexico, on a non-exclusive basis. VegiSafe will market and handle the sales activities of the Joint Venture. VegiSafe intends to seek retailers and major distributors in the U.S., which will recommend its producers and suppliers to manufacture and supply CIPC-free potatoes, or CIPC-free potato products. The exclusivity of the Joint Venture is subject to certain milestones of annual sales. We will have 70% of the rights in the Joint Venture and will nominate two of its directors; VegiSafe will have 30% of the rights, and will nominate one director. We will grant a sub-license to the Joint Venture for the use of our patents and technology, relating to the products and to any new product developed by us, for the term of the Joint Venture.

In May 2009, Pimi and VegiSafe mutually agreed on continuation of the Joint Venture. Accordingly, VegiSafe’s exclusivity is subject to certain additional milestones.

As of the date of this report VegiSafe has not complied with the above milestones and we have not taken any actions against VegiSafe with this regard.

VegiSafe has invested in the Joint Venture an aggregate amount of $250,000 which has been used to cover expenses reflected in a budget prepared for the Joint Venture, and approved by VegiSafe and Pimi. The Joint Venture will use the VegiSafe Trade Mark as the trademark for fruits and vegetables, which will be treated by our products and are CIPC free.

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The Joint Venture focused on SpuDefender^TM and therefore on August 9, 2010 we have signed an Addendum to the Agreement dated January 20, 2009 with VegiSafe, expanding JV’s activities to certain vegetables. In addition we have agreed to expand the activity of Joint Venture in the US to citrus fruits, provided that VegiSafe will bear all the costs and expenses, which in our opinion are reasonable for the progress of the distribution and the implementation of our CitrusGuard™ in the US.

In February 2014 we amended the terms and conditions of our cooperation with VegiSafe by expanding their activities for promotion of our STHP based technology worldwide, on an unexclusive basis. VegiSafe shall be entitled to certain percentage of our net revenues generated by a customer introduced by VegiSafe and shall bear certain costs and expenses related to our engagement with such customer.

As of the date of this report, VegiSafe introduced our products and technology to a major retail chain in the U.S. who has, in turn, introduced us to their suppliers of table potatoes, citruses, onions and sweet potatoes, in order for us to present to these suppliers the efficacy of our products. To date, VegiSafe is successfully continuing its promotion activities with this retail chain.

Mehadrin

Mehadrin Ltd.(“Mehadrin”) is the biggest distributor and exporter of Citrus fruits in Israel. Mehadrin is exporting approximately two thirds of the Israeli Citrus crop to Europe, US, Canada and the Far East. Mehadrin has its own orchards and packing houses and they also purchase packed fruits from other farmers and packing houses. We have started to work commercially with Mehadrin on October 2010, implementing our CitrusGuard™ on one packing line of Grapefruits. On January 2011 we have started treating with CitrusGuard™ additional 2 packing lines of Clementine. During the citrus seasons of 2011-2013 we have entered into additional packing lines, implementing also our SuperClean™. During the years 2012 and 2013 Mehadrin purchased our products in total aggregate amounts of approximately 70,000 and 90,000 liters respectively. For additional information please see Citrus Sanitizers section elsewhere in this report.

Sun Pacific Inc.

Sun Pacific is one of the biggest suppliers of fruits and vegetables in the United States, leading in citrus and other products.

Pimi was introduced to Sun Pacific by a significant U.S. retailer, to whom Sun Pacific supplies its produce. From December 2010 through February 2013 we conducted several trials in Sun Pacific’s Mandarins packing house, at Maricopa CA, which is, to management’s best knowledge, the biggest clementine packing house in the U.S. In fourth quarter of 2013 our CitruWash™ and FreshProtect™ were utilized by Sun Pacific in commercial scales on certain of its packing lines. For additional information please see Citrus Sanitizers section elsewhere in this report.

Suppliers

Seeler Industries, Inc.

Seeler Industries, Inc. (“Seeler”), a leading toll manufacturer of food grade formulations supplies our products in the US under our name, in accordance with a toll manufacturing agreement. Seeler is responsible for keeping standards of the products and for supply of the products within specifications and within required shelf life.

Zohar Dalia

Zohar Dalia is the manufacturer of our Products in Israel. It manufactures our products under our name in accordance with an oral agreement. Zohar Dalia follows ISO and GMP quality programs at its site, and is responsible for keeping the standards of the products and to supply our products within specifications and within required shelf life.

Competition

Competition with our SuperClean™ and CitruWash™

As of the date of this report we are not aware of any product which is non-residue and leaves no harmful chemical by-products while providing similar levels of cleaning efficacy as our SuperClean™ and CitruWash™. Chlorine-based cleansers and their manufacturers and distributors are our major competitors in this field. We believe that retailers’ demand to reduce the Maximum Residue Levels (MRL) of pesticides in their fresh fruits, shall lead producers to prefer our environmentally friendly solutions, aimed to reduce levels of pesticide residues.

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Competition with our CitrusGuard™ and FreshProtect™

As of the date of this report we are not aware of any product which is non-residue and leaves no harmful chemical by-products while providing similar level of sanitizing and/or disinfecting efficacy as our CitrusGuard™ and FreshProtect™. The manufacturers and distributors of Imazalil, such as Makhteshim Agan Industries and Janssen Pharmaceutica N.V are our major competitors in this field.

Competition with our SweetGuard™

SweetGuard™ is intended to increase cleaning ability of sweet potatoes and to improve its appearance. As of the date of this report, we are not aware of any competing products with SweetGuard™.

Competition with our SpuDefender™

The manufacturers and distributors of CIPC are large chemical companies such as Cerits Europe B.V, Loxan B.V, Aceto Agriculture Chemical Corporation, United Phosphorous limited, Mirfield Sales Services Limited, Standon Chemicals limited, Atlas Crop Protection Limited and Whyte Agrochemical LTD. These manufacturers have promoted the "CIPC Stewardship Action Plan 2008" for the UK, which was introduced in order to monitor and control the application of the CIPC, in order not to exceed the current EU MRL of 10mg/kg, and at the same time to enable the continued use of CIPC in the UK. We expect significant competition from these manufacturers and distributors of CIPC.

At the same time, there are several products which aim to substitute the CIPC which are in potential competition with our SpuDefender^TM:

·	Greenvale, UK, launched the Ethylene gas solution that may control sprouts at low dosage. It has been used in some storage rooms in Europe. In management’s opinion the Ethylene has some disadvantages: it requires relatively expensive equipment for its distribution and after potatoes are released from storage accelerated sprouting occurs.

·	Certis, Belgium, launched the Caraway oil extract, however, in Management’s opinion, this substitute is not demonstrating an ability to replace CIPC due to fact that it is not palatable and it affects the fry colors.

·	Certis also manufactures Clove oil which, in Management’s opinion, has several disadvantages: the oils affect taste and aroma, as well as cooking and fried taste. To the best of management’s knowledge the Industry banned it due to bad fry colors.

·	Other products are: 1.4-Dimethylnaphthalene (1.4-DMN) and 2,6-Disopropylnaphthalene: this two synthetic hormones are the replication of natural hormones within the potato that induce and prolong its dormancy. This chemicals application in combination with CIPC can control effectively sprouting but has no disinfection capability, to the best of management’s knowledge. The compounds are several years in the US market with no significant presence.

·	There are several other hydrogen peroxide products that claim, as Pimi claims, substantial bacteriologic control abilities. To the best of Management’s knowledge, all of these products are based on HP and Acetic & Peracetic acide. These compounds are used in the food industry for more the 60 years and are very effective as disinfectant but limited in scope; in the niche of fruits and vegetables the application suffers several disadvantages, and in particular they have no long-term effect as disinfectant.

Competition with our StorGuard™

StorGuard™ is used mainly to increase shelf life and storability of crops, such as Cabbage, Broccoli and Onions. As of the date of this report and to Pimi’s best knowledge there are other methods to increase storability as described herein:

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· Ozone – Ozone started to be popular solution to prevent air pathogens in storage rooms. Management believes this solution has health risks, since people may be exposed to carcinogenic residues.

· Chlorine-Dioxide – a strong chlorination detergent which aerosols the room with Chlorine. Chlorine is not welcomed by the industry due to the fact that it may create connections with the surface of the produce, and, to management's knowledge, it may create a carcinogenic compound. This product is aggressive for the workers its and residues stay in the air. This product has significant smell and odor that may remain on the product during its shelf life. Recently, a food treatment solutions vendor has promoted the use of Chlorine in the market and has turned the use thereof into a more common.

Competition with our OnionGuard™

OnionGuard™ is intended to increase storability of the produce. As of the date of this report, we are not aware of any competing products to OnionGuard™.

Price Competition

Management believes that the trend in the markets to use environmentally friendly products, which are residue free, or low residue, and to replace the subsisting chemicals, which are high residue, together with the trend of the regulators, to reduce the usage of high residue chemicals (such as CIPC), will cause farmers and packing houses to prefer Pimi’s solutions. However, this trend will not create a huge price difference from current procedures. Therefore, Pimi products prices are aimed at the same level as current solutions prices.

Strategy

Since the market trend, led primarily by major retailers, is to increase freshness while reducing residue pesticides in consumed goods, we have adopted a strategy to create awareness of our solutions.

After presenting our solutions to market leaders, they usually connect us to their suppliers, so that we may present the suppliers with our solutions. Then usually we will run Beta site trials, and thereafter commercial trials, with these suppliers. Concurrently, we apply to the authorized regulator in order to approve the product, and after such approval is obtained we start selling our product to these suppliers.

Under this strategy we have established our Joint Venture with VegiSafe LLC, whose parent company - Earthbound LLC - is engaged in consulting to mass market retail companies and major supermarket chains in North America, in brand development. Our Joint Venture has contacted already with major citrus’ packers in U.S. See “Customers and Partners.”

We plan to sell Pimi’s products to farmers and growers with large storage houses, to storage providers, and to packing companies. Initially, we will sell our products through local distributors or post-harvest service providers who serve this target market. Once we establish a foothold in the market, we will attempt to establish strategic relations with several large distributors (e.g. large post harvest services providers) who already have a regional distribution network. This will enable us to rapidly increase our global market share and coverage without investing in building a global distribution network. At this stage, based on this model, we will furnish the know-how of our technology to these strategic partners, which will be responsible for ordering the product from our OEM manufacturers and marketing and sales activities, enabling us to focus on developing additional products. The distributors will also be in charge of marketing of our products, and we intend that each distributor will be obligated to minimum sales. We intend to support our distributors with technical support, research and tests results, and professional's publication relating to our products. We will also support our distributors in the education of the market, in regulating of our products and with professional advice.

Pimi’s distributors will purchase our products from us, and we will deliver it to the customers through our OEM producers. The distributors will be trained by our technical team and will be responsible for recommending, training, and optionally also designing and installing the required systems that distribute the products in the storehouses and packing lines. For customers who do not have the required systems, we and our distributors will either provide one at a cost to be determined or alternatively, bundled with a minimum order of goods.

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Employees

As of the date of this report, we employ 4 full-time and 2 part time employees.

Corporate Development

Subject to additional fundraising and regulatory approvals, management plans to expand the Company’s activity to Chile, Turkey, Spain, South Africa and Morocco as the markets for our CitrusGuard™, FreshProtect™, CitruWash™ and SuperClean™, and mainly to the U.S. as our major market.

Dividends

We have not declared any cash dividends on our common stock since our inception and do not anticipate paying such dividends in the foreseeable future. We plan to retain any future earnings for use in our business. Any decisions as to future payments of dividends will depend on our earnings and financial position and such other facts, as our Board of Directors deems relevant.

ITEM 1A. RISK FACTORS

You should carefully consider the following risk factors and the other information included herein as well as the information included in other reports and filings made with the SEC before investing in our common stock. The following factors, as well as other factors affecting our operating results and financial condition, could cause our actual future results and financial condition to differ materially from those projected. The trading price of our common stock could decline due to any of these risks, and you may lose part or all of your investment.

Risks Related to Our Business and Industry

Our independent auditors have expressed doubt about our ability to continue our activities as a going concern, which may hinder our ability to obtain future financing.

Since we have been focused in developing our propriety technology for availability of commercialization, we have suffered recurring losses from operations. The continuation of our company as a going concern is dependent upon our company attaining and maintaining profitable operations and raising additional capital. The financial statements do not include any adjustment relating to the recovery and classification of recorded asset amounts or the amount and classification of liabilities that might be necessary should our company discontinue operations.

Due to the uncertainty of our ability to meet our current operating expenses and the capital expenses noted above, in their report on the annual financial statements for the years ended December 31, 2013, 2012, and 2011 our independent auditors included an explanatory paragraph regarding the doubt about our ability to continue as a going concern. Our financial statements contain additional note disclosures describing the status of the company.

The continuation of our business is dependent upon us raising additional financial support. The issuance of additional equity securities by us could result in a substantial dilution in the equity interests of our current stockholders. Obtaining commercial loans, assuming those loans would be available, will increase our liabilities and future cash commitments. If the Company should fail to continue as a going concern, you may lose the value of your investment in the Company.

We will need significant additional capital, which we may be unable to obtain.

Our capital requirements in connection with our research and development activities and transition to commercial operations have been and will continue to be significant. We will require additional funds to continue research, development and testing of our technologies and products, to obtain intellectual property protection relating to our technologies when appropriate, and to market our products. There can be no assurance that financing will be available in amounts or on terms acceptable to us, if at all. There is no assurance additional funds will be available from any source; or, if available, such funds may not be on terms acceptable to the Company. In either of the aforementioned situations, the Company may not be able to fully implement its growth plans.

In order to continue our operations, without expanding our activities, we estimate that we will need minimum capital in the sum of $500,000 for the period March 1, 2014 through the end of 2014. As of February 1, 2014 we used credit lines in the amount of $26,223 and had unused credit lines in the amount of $33,777. Currently our net burn rate is approximately $25,000 per month (not including delayed payments to executive officers and employees totaling to $25,000 per month). Thus, we need immediate additional investments.

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On January 3, 2014 we filed an S-1 Registration Statement with the Securities and Exchange Commission in connection with an offering of up to $5,000,000 of Common Stock and common stock Class A Warrants, led by Sandlapper Securities as placement agent. The Registration Statement has yet to be declared effective by the Securities and Exchange Commission and is currently under review. This disclosure shall not constitute an offer to sell or a solicitation of an offer to buy the securities, nor shall there by any sale of these securities in any jurisdiction in which an offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of such jurisdiction. Any offer of the securities will be solely by means of the prospectus included in the registration statement and one or more prospectus supplements that will be issued at the time of the offering.

Additional financings that we may require in the future will dilute the percentage ownership interests of our stockholders and may adversely affect our earnings and net book value per share. In addition, we may not be able to secure any such additional financing on terms acceptable to us, if at all. Moreover, if we are unable to obtain such additional capital as discussed above, we will be required to stop our operations, and will resume our activities, only after capital is raised.

We may face significant competition from other companies looking to develop or acquire new alternative environment-friendly solutions for the treatment of fruits and vegetables.

We expect to face significant competition in every aspect of our business, and particularly from other companies that seek to enter our market. As regulators are pushing to move away from current residue chemical solutions, such as Chlorpropham or CIPC (“CIPC”), existing suppliers of these solutions are anxiously looking to develop or acquire new alternative environment-friendly solutions that can sustain their market share and revenue streams, or to enable the continuance of CIPC at current levels in new ways of treatment. Additionally, as market opportunity becomes eminent, competitors and new players will most likely attempt to develop similar or comparable solutions. Although Pimi believes its technology is unique, and will provide it with a significant competitive barrier, it is nevertheless possible that superior or more cost-effective alternative technology will emerge that will achieve greater market acceptance and render Pimi’s products less competitive. Furthermore, existing vendors can cooperate to combat new players by reducing market prices and margins or other competitive initiatives. The future success of Pimi will therefore depend, to a large extent, upon the company’s ability to achieve market acceptance of its innovative solutions as well as develop and introduce new products and enhancements to existing products. No assurance can be given that the Company will be able to compete in such a market place.

We have incurred significant losses to date and expect to continue to incur losses.

During the year ended December 31, 2013, we incurred net losses in the sum of $468,812. Since starting our operation in 2004 and until December 31, 2013 we incurred accumulated losses in the sum of $5,562,047. We expect to continue to incur losses for the fiscal year ended December 31, 2014. Continuing losses will have an adverse impact on our cash flow and may impair our ability to raise additional capital required to continue and expand our operations.

We are dependent upon our Managers for the operating of the Company.

The Company is dependent upon the services of its management to determine and implement the strategy of the Company. Furthermore, the Company is dependent upon the Managers to oversee the operations of Pimi and Pimi Israel. Thus, there can be no assurance that the Managers’ experience will be sufficient to successfully achieve the business objectives of the Company. All decisions regarding the management of the Company’s affairs will be made exclusively by the Officers and Directors of the Company. In the event these persons are ineffective, the Company’s business and results of operation would likely be adversely affected.

Our success is dependent upon our ability to achieve regulatory approvals in the U.S. and abroad.

A critical key to our success and ability to expand our business is our ability to obtain regulatory approvals in United States and in other countries for the use of our products. The regulatory approvals of some of our products are dependent, on trials to show the efficacy or the non-toxicity of our products, and are time and cost consuming. Such registration filling might take longer period than expected, and it might delay obtaining such regulatory approvals, or might cause delay in starting operations on a large scale in these countries and other jurisdictions. We currently have EPA registration for our SpuDefender™ and FreshProtect™ products. We have postponed our efforts to obtain regulatory approvals for EU states.

Our success is dependent upon our ability to achieve market acceptance.

In order to achieve high volume sales, and attain a leading market share and become the new standard of treatment, the Company’s products must not only be approved by the regulators, but also endorsed by the major packers and storage providers, retailer of fruits and vegetables as well as environment organizations. Pimi is aware of this key factor and is focusing on conducting large scale trials with major fruits and vegetables packers and retail suppliers of fresh consumed goods in several countries, in order to show the efficacy of the products and our technology and to receive these recognition of the packers and retailers, but no assurances can be made that we will succeed in such endeavor and how long it will take until we shall receive market recognition.

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Our products and technology are still in development stage and require additional trials and development.

Our products and technology have been tested in numerous trials, in the U.S and in Israel on vegetables and fruits varieties which are grown in hot climate, as well as storage rooms with refrigeration, and also on certain type of processes which are used in these countries. We still need to present efficacy in other climates and other countries with different types of processes than those we have presented performance with our products.

We rely on our Technologies to successfully develop and market new and existing products.

Our product has been tested in multiple commercial and small scale tests. Some of our products are still under evaluation in Beta sites trails in the US with leading vegetables and fruits packers and suppliers. It is possible that the results from these large scale tests may show lower efficacy than tests conducted previously, and may require some product improvements as well as possible changes in the application and usage protocol. These factors may significantly delay our products' introduction to market. Likewise, we cannot be sure these products will be commercially viable, and have no assurances that we will be able to expand upon our current product offerings or that any such expansion will result in revenues to the company.

We rely on rapidly establishing global distributorship network in order to effectively market our products.

The company, through its wholly owned subsidiary, Pimi Israel, has developed initial partnerships with local partners. In order to expand sales and marketing globally, and capture leading market share before any potential reaction from the competitors, the Company will need to rapidly expand geographically and establish a global distribution network. This is likely to put pressure on management, financial and operational resources of the Company. In order to mitigate this factor, once Pimi establishes a significant presence in the market, it will proceed to establish strategic partnerships with some of the leading players in the market, however, there are no assurances that we will succeed in establishing such partnerships, which may harm the marketing of our products and the development of our business.

Our inability to attain and protect our intellectual property rights could reduce the value of our products, services and brand.

Patents and pending patents, trademarks, trade secrets, copyrights and other intellectual property rights may be important assets for us. Various events outside of our control pose a threat to our ability to attain or protect intellectual property rights as well as to our products and services. For example, effective intellectual property protection may not be available in every country in which our products are distributed. Also, the efforts we have taken to protect our proprietary rights may not be sufficient or effective. Any significant impairment of our ability to attain or protect our intellectual property rights could harm our business or our ability to compete. Also, protecting intellectual property rights is costly and time consuming. Any increase in the unauthorized use of our future intellectual property could make it more expensive to do business and harm our operating results.

Our success is dependent upon the acceptance of environment-friendly solutions for fruits and vegetables.

The future of the company is dependent upon the acceptance of environment-friendly, non-residue treatment solutions for fruits and vegetables. Although this appears to be the direction the market is going in the coming years, these trends as well as the future size of this market, and other potential markets for the Company’s products, depend upon a number of factors, many of which are beyond the control of the Company. For example, failure to convince retailers, to bear additional cost for residue free fruit and vegetables, failure to convince the consumers to purchase residue free fruits and vegetables for higher prices, could have adverse effects on Pimi’s business, financial condition, operating results and cash flow going forward.

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Our business and operations may be affected by climate change conditions, which could materially harm our financial results

Our business may be affected from changes in climate conditions as such events would affect the crops and their storability (e.g. potatoes) in those cases where there is unusually warm, dry, humid or cold weather before cropping.

In such instances, we may suffer a decrease in revenues as a result of a smaller storage volume of rooms or shorter storage period. While as of December 31, 2013 climate change events did not influence us materially, we anticipate that once we will increase our operations, and certain territories will experience significant climate change, such as above-common rains, heat waves, dry air conditions, and unusually cold or prolonged cold weather conditions, such events may materially impact our financial results.

Our operating results may fluctuate, which makes our results difficult to predict and could cause our results to fall short of expectations.

Our operating results may fluctuate as a result of a number of factors, many outside of our control. As a result, comparing our operating results on a period-to-period basis may not be meaningful, and you should not rely on our past results as an indication of our future performance. Our quarterly, year-to-date and annual expenses as a percentage of our revenues may differ significantly from our historical or projected rates. Our operating results in future quarters may fall below expectations. Any of these events could cause our stock price to fall. Each of the risk factors listed in the section Risk Factors, and the following factors may affect our operating results:

•		Our ability to attract users for our products.
•		Our ability to generate revenue from our products.
•		The amount and timing, of operating costs and capital expenditures related to the maintenance and expansion of our businesses, and operations.
•		Our focus on long-term goals over short-term results.
•		Global economic situation.
•		Fluctuations in weather conditions.

Our earnings may be subject to seasonal variability.

Our earnings may be affected by seasonal factors, including:

	·	the seasonality of our customers;
	·	the ability to supply our products during critical harvest periods; and
	·	the timing and effects of ripening and perishability.

Our business depends to some extent on international transactions.

As a result of the international nature of Pimi’s business, the company is exposed to risks associated with changes in foreign currency exchange rates. A majority of the company’s revenues and substantially all of its cost of sales are in USD, whilst our management, marketing, sales and R&D costs are in NIS. The Company is therefore exposed to foreign currency risk due to fluctuations in exchange rates. This may result in gains or losses with respect to movements in exchange rates, which may be significant and may also cause fluctuations in reported financial information that are not necessarily related to the Company’s operating results.

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The inherent dangers in production and transportation of Hydrogen Peroxide could cause disruptions and could expose us to potentially significant losses, costs or liabilities.

Pimi's operations are subject to significant hazards and risks inherent in transporting of the active ingredient of our Product- Hydrogen Peroxide. In high concentrations, Hydrogen Peroxide is an aggressive oxidizer and will corrode many materials. We are working with limited low concentration of the product, however in high concentrations of H2O2 it will react violently. Hydrogen Peroxide should be stored in a cool, dry, well-ventilated area and away from any flammable or combustible substances. It should be transported in special tanks and vehicles and should be stored in a container composed of non-reactive materials. These hazards and risks include, but are not limited to, fires, explosions, third-party interference (including terrorism) and mechanical failure of equipment at Pimi’s or third-party facilities. The occurrence of any of these events could result in production and distribution difficulties and disruptions, personal injury or wrongful death claims and other damage to properties.

Risks Related to our Location in Israel

Conditions in Israel may limit our ability to manage and market our products, which would lead to a decrease in revenues.

Because part of our operations is conducted in Israel and our management is located in Israel, our operations are directly affected by economic, political and military conditions affecting Israel. Specifically, we could be adversely affected by:

·	any major hostilities involving Israel;
·	risks associated with outages and disruptions of communications networks due to any hostilities involving Israel; and
·	a significant downturn in the economic or financial conditions in Israel.

As of the date of this report, a major part of our sales is made in Israel.

Political, economic and military conditions in Israel have a direct influence on us because our operations are located there. Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners could materially and adversely affect our operations. Several Arab countries still restrict business with Israeli companies and these restrictions may have an adverse impact on our operating results, financial condition or the expansion of our business. We could be adversely affected by restrictive laws or policies directed towards Israel and Israeli businesses. The establishment in 2006 of a government in the Palestinian Authority by representatives of the Hamas militant group has created additional unrest and uncertainty in the area. In November 2012 and December 2008, Israel was engaged in an armed conflict with Hamas in the Gaza Strip, in the southern region of Israel. These and similar events have at times caused considerable damage to the Israeli economy. As a result of the political and military situation, Israel’s economy has at times suffered considerably. Ongoing or revived hostilities related to Israel may have a material adverse effect on our business and on our share price.

Additionally, boycotts of products, prompted by political, religious or other factors, may affect our financial condition and results of operations. If such boycotts were to become widespread, it could have a significant impact on our revenues.

Furthermore, there are a number of countries that restrict business with Israel or with Israeli companies, which may limit our ability to promote our products and services in those countries.

We may not be able to enforce covenants not-to-compete under current Israeli law that might result in added competition for our products.

We have non-competition agreements with all of our employees, all of which are governed by Israeli law. These agreements prohibit our employees from competing with or working for our competitors, generally during their employment in Pimi and for up to 6 months after termination of their employment. However, Israeli courts are reluctant to enforce non-compete undertakings of former employees and tend, if at all, to enforce those provisions for relatively brief periods of time in restricted geographical areas, and only when the employee has obtained unique value to the employer specific to that employer’s business and not just regarding the professional development of the employee. If we are not able to enforce non-compete covenants, we may be faced with added competition.

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It will be extremely difficult to acquire jurisdiction and enforce liabilities against our officers and directors who are based in Israel.

The majority of our officers and present directors reside outside of the United States and most of our operations at the time of the filing of this report are located outside the United States. As a result, it may not be possible for United States investors to enforce their legal rights, to effect service of process upon our directors or officers or to enforce judgments of United States courts predicated upon civil liabilities and criminal penalties of our directors and officers under Federal securities laws. Moreover, we have been advised that Israel does not have treaties providing for the reciprocal recognition and enforcement of judgments of courts with the United States. Further, it is unclear if extradition treaties now in effect between the United States and Israel would permit effective enforcement of criminal penalties of the Federal securities laws.

Risks Related to Share Prices

The Shares are an illiquid investment as there is presently limited market for our Shares, and transferability of the Shares is subject to significant restriction.

There is presently a limited market for our shares, and we cannot be certain that a public market will become available, or that there will be sufficient liquidity to allow for sale or transferability of the shares within the near future. Therefore, the purchase of our Shares must be considered a long-term investment acceptable only for prospective investors who are willing and can afford to accept and bear the substantial risk of the investment for an indefinite period of time. There is a limited public market for the resale of our Shares. A prospective investor, therefore, may not be able to liquidate its investment, even in the event of an emergency, and Shares may not be acceptable as collateral for a loan.

Because We May Be Subject To The “Penny Stock” Rules, You May Have Difficulty In Selling Our Common Stock.

If market activity develops for our common stock and our stock price is less than $5.00 per share, our stock may be subject to the SEC’s penny stock rules. These rules impose additional sales practice requirements and restrictions on broker-dealers that sell our stock to persons other than established customers and institutional accredited investors. The application of these rules may affect the ability of broker-dealers to sell our common stock and may affect your ability to sell any common stock you may own. According to the SEC, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include:

•	Control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer;
•	Manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases;
•	“Boiler room” practices involving high pressure sales tactics and unrealistic price projections by inexperienced salespersons;
•	Excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and
•	The wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the inevitable collapse of those prices with consequent investor losses.

If we are subject to penny stock rules, you may have difficulty selling your shares of our common stock. For more information about penny stocks, please visit http://www.sec.gov/answers/penny.htm.

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2. PROPERTIES

The Company and its subsidiary currently lease office space at Kibbutz Alonim. The Company currently pays monthly rent of $1,126 (3,908 NIS) plus VAT per month pursuant to a 12 month lease started Jan 1, 2014 until December 31, 2014.

ITEM 3. LEGAL PROCEEDINGS

From time to time, we may be a defendant and plaintiff in various legal proceedings arising in the normal course of our business. We are currently not a party to any material pending legal proceedings or government actions, including any bankruptcy, receivership, or similar proceedings. In addition, management is not aware of any known litigation or liabilities that could affect our operations. Should any liabilities be incurred in the future, they will be accrued based on management’s best estimate of the potential loss. As such, there is no adverse effect on our consolidated financial position, results of operations or cash flow at this time. Furthermore, management does not believe that there are any proceedings to which any director, officer, or affiliate of the Company, any owner of record of the beneficially or more than five percent of the common stock of the Company, or any associate of any such director, officer, affiliate of the Company, or security holder is a party adverse to the Company or has a material interest adverse to the Company.

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In 2012 Pimi Israel opposed an application for a patent, filed by a third party with the Israeli Patent Authority which might interfere with the use of our products when used in certain temperatures. In this opposition Pimi Israel argued that the third party’s patent application lacks novelty and is devoid of inventive step, and also stated the inequitable conduct from the third party’s side while hindering prior art from the IPA examiners. Following certain IPA procedures the third party has recently filed an amendment for its application, narrowing the requested patent coverage. Pimi Israel is requested to file its amended pleading prior to April 10, 2014.

In addition, Mehadrin, one of our major clients, has recently alleged incurring certain damages, amounting to approximately $100,000, as a result of the unsuitability between the wax material implemented by Mehadrin and our products. However, based on the information and documentation in our possession, we believe that our products were implemented by Mehadrin not in compliance with our application protocol provided to Mehadrin. We have referred an appropriate request to our insurer regarding a possible insurance claim under our product liability policy, and are currently reviewing this matter further. However our management believes, considering the effect of the insurance in place, that the effect of these claims, if any, will not be significant.

ITEM 4. RESERVED

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

In February 2010, our common stock began quotation on the OTC Bulletin Board under the symbol "PIMZ.OB".

Holders

As of December 31, 2013, the approximate number of stockholders of record of the Common Stock of the Company was 105.

Dividends

We have never declared or paid cash dividends on our common stock. We currently anticipate that we will retain all future earnings to fund the operation of our business and do not anticipate paying dividends on our common stock in the foreseeable future.

Recent Issuances of Stock

In May 2013, the Company issued convertible notes totaling approximately $94,000 to finance its short-term operations. The loans bear interest of 10% and were issued to seven (7) of Pimi's shareholders, including two controlling shareholders (Alon Carmel; and Omdan Consulting and Instructing Ltd., a company owned by Mr. Eitan Shmueli and his wife Mrs. Vivy Shmueli). Each note is secured by Pimi Israel’s guarantee and a pledge on Pimi Israel’s patents in Israel and the U.S. The notes are repayable on the earlier to occur of: (i) a raise of $1 million financing or (ii) 6 months following the effective date. Each lender is entitled to convert the unpaid principal and the interest accrued into shares of the Company's common stock, at a conversion price of $1.00 per share. In addition, for each dollar, each lender received a two years warrant to purchase a share of the Company's common stock, at an exercise price of $1.00 per share. Further on, the Company and the lenders agreed on extension of the said loans and the interest accrued thereon for additional 6 months.

On March 9, 2013, all shares of our Series A Preferred Stock were automatically converted into the Common Stock and canceled; thereby, 782,500 shares of our Company’s Common Stock have been allocated and issued to former holders of Series A Preferred Stock.

On December 23, 2012, Pimi issued to Umidan Inc., an entity owned by Mr. Uri Sheinbaum, a warrant to purchase 56,250 shares of Pimi’s common stock with an exercise price of $0.80, exercisable until April 11, 2014, in consideration for its services rendered to Pimi. The Company has further extended this warrant until December 31, 2014.

On April 12, 2011 the Company entered into subscription agreements with an individual and two companies all of which are Israeli residents, pursuant to which the company issued 56,250 common stock shares for the total sum of $45,000 at a purchase price of $0.80 per share).

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On March 9, 2012 Pimi closed a private placement in the aggregate amount of $626,000 (the “Private Offering”). The Company issued 62,600 shares of Series A Preferred Stock, par value $0.01 at a purchase price of $10.00 per share to 19 accredited investors and 19 non-accredited investors. Financial West Group, a FINRA registered broker dealer, served as placement agent in connection with the Private Offering. The holders of shares of Series A Preferred Stock shall be entitled to receive dividend cash payments of 9% per annum, payable in quarterly installments, and subject to conversion. Upon the closing of the Company's next round of financing, provided such closing occurs within twelve (12) months following the execution of the Closing in which Subscribers receive the Series A Preferred Stock, and further subject to minimum proceeds of $2,000,000 being raised in such investment (the "Next Round of Financing"), the Series A Preferred Stock shall automatically be converted into fully paid, non-assessable shares of Common Stock, $0.01 par value per share, of the Company (“Common Stock”). In the event that the closing of the Next Round of Financing has not occurred by November 30, 2012, each share of Series A Preferred Stock shall automatically be converted into fully paid, non-assessable shares of Common Stock, reflecting value of $0.80 per Common Stock share. Notwithstanding, the holders of Series A Preferred Stock shall be entitled to convert each share of the Series A Preferred Stock into fully paid, non-assessable share of Common Stock, at a price of $0.80 per share. Initially, all and any shares of Series A Preferred Stock should have been automatically converted into the Common Stock and canceled on November 30, 2012; further, we have agreed with the holders of the Series A Preferred Stock to postpone the automatic conversion date until March 9, 2013.

On March 8, 2012 the company entered into a subscription agreement with one individual residing in Israel for the total sum of $ 10,000 at a purchase price of $0.80 per share, and issued to this investor 12,500 shares of its Common Stock. For each share of Common Stock purchased, the investor or a third party on his behalf received a warrant with an exercise price of $0.80, exercisable until March 2, 2014. The Company has further extended these warrants until December 31, 2014.

On March 2, 2011 the Company entered into subscription agreements with 4 individuals residing in Israel for the total sum of $100,000 at a purchase price of $0.80 per share, and issued to the investors 125,000 shares of its Common Stock. For each share of Common Stock purchased, the investors received a warrant with an exercise price of $0.80, exercisable until March 2, 2013. The Company has further extended these warrants until December 31, 2014.

On January 24, 2011, the Company entered into an agreement with an individual residing in Israel and Israeli private investment company. Pursuant to this agreement, the investor invested a total aggregate sum of US $500,000, at a purchase price of $0.80 per share, and the Company issued to the investor 625,000 shares of its Common Stock. For each share of Common Stock purchased, the investor received a warrant with an exercise price of $0.80, exercisable until December 31, 2012. The Company extended this warrant until December 31, 2013 and further until December 31, 2014.

No advertising or general solicitation was employed in offering the securities. The offerings and sales were made to a limited number of persons, the majority of which were accredited investors, business associates of Pimi or executive officers of Pimi, and transfer was restricted by Pimi in accordance with the requirements of the Securities Act of 1933. In addition to representations by the above-referenced persons, we have made independent determinations regarding the above-referenced persons were accredited or sophisticated investors, and that they were capable of analyzing the merits and risks of their investment, and that they understood the speculative nature of their investment.

On December 28, 2010, the Company entered into an agreement with a California private company (the "Investor"). Pursuant to the agreement, the Investor invested a total aggregate sum of US$150,000, at a purchase price of US$0.80 per share, and the Company issued 187,500 shares of its common stock to the Investor (62,500 shares were issued in January 2011 for US$50,000, 62,500 shares were issued in February 2011 for US$50,000 and 62,500 were issued in March 2011 for US$50,000). For each share of Common Stock purchased, the Investor received a warrant, having an exercise price of US$0.80, exercisable for a period of three years from the date of issuance. On May 20, 2013 the warrants were extended for additional period ending December 31, 2014.

ITEM 6. SELECTED FINANCIAL DATA

Not Applicable

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward Looking Statements

Please see page i of this Annual Report for “Information Regarding Forward Looking Statements” appearing throughout this Annual Report.

Introduction

The following discussion should be read in conjunction with the Financial Statements and Notes thereto. Our fiscal year ends December 31. This document contains certain forward-looking statements including, among others, anticipated trends in our financial condition and results of operations and our business strategy. (See Part I, Item 1A, "Risk Factors"). These forward-looking statements are based largely on our current expectations and are subject to a number of risks and uncertainties. Actual results could differ materially from these forward-looking statements. Important factors to consider in evaluating such forward-looking statements include (i) changes in external factors or in our internal budgeting process which might impact trends in our results of operations; (ii) unanticipated working capital or other cash requirements; (iii) changes in our business strategy or an inability to execute our strategy due to unanticipated changes in the industries in which we operate; and (iv) various competitive market factors that may prevent us from competing successfully in the marketplace.

Company History

Pimi Israel was established in 2004 with a vision towards developing environmentally friendly alternative solutions to current chemical treatments of agricultural harvest, such as fruits, vegetables and grains, thereby improving the well-being of consumers, growers and the environment. Pimi Israel has devoted significant research in developing environmentally friendly solutions for pre and post-harvest treatments of fruits and vegetables. The company's technology is based on unique, patented formulations of Stabilized Hydrogen Peroxide, combined with a controlled distribution system used to apply it.

On April 27, 2009 we purchased all the issued and outstanding shares of Pimi Israel from Pimi Israel’s shareholders in consideration for 6,313,589 shares of our Common Stock. As a result, Pimi Israel became a wholly-owned subsidiary of the Company.

Overview

The Company focuses on developing environmentally friendly solutions for extending storability and shelf life of vegetables and fruits. Currently, the Company is focused on solutions related to fresh citrus fruits, table potatoes and sweet potatoes. As of the date of this report, the Company is engaged in developing, testing and marketing of four lines of products: (i) products that treat citrus fruits, such as CitruWash™ or in its other commercial name, Super Clean™, CitrusGuard™ and FreshProtect™; (ii) a product that treats sweet potatoes, SweetGuard™; (iii) a product that treats stored table ‘ SpuDefender™; and (iv) products that provide storage control of fruits and vegetables, including StorGuard™ for treatment of vegetables such as broccoli and cabbage and OnionGuard™ for treatment of onions. We have started the commercialization of five of these products namely: the sanitizer CitrusGuard™, the disinfectant FreshProtect™, the sprout controller SpuDefender™ and the cleansers SweetGuard™ and Super Clean™ (or CitruWash™).

All of our products are based on Stabilized Hydrogen Peroxide ("STHP"), which has the ability to increase shelf life while reducing residue pesticides in consumed fruits and vegetables.

Critical Accounting Policies

The Securities and Exchange Commission ("SEC") defines "critical accounting policies" as those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Our accounting policies are described in Note 2 to the financial statements appearing elsewhere in this report. Not all of the accounting policies require management to make difficult, subjective or complex judgments or estimates. Our management believes that, as for the financial statements for the periods included in this report, the going concern assessment is viewed as critical accounting policy. However, due to the early stage of operations of the Company, there are no other accounting policies that are considered to be critical accounting policies by our management.

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Going concern uncertainty

The development and commercialization of our product will require substantial expenditures. We have not yet generated sufficient revenues from operations to fund our activities, and therefore dependent upon external sources for financing our operations. There can be no assurance that we will succeed in obtaining the necessary financing to continue our operations. Since inception, we have incurred accumulated losses and cumulative negative operating cash flow. The continuation of our current operations after utilizing the current reserves is dependent upon the generation of additional financial resources either through fund raising or by generating revenues from our products. These factors raise substantial doubt about our ability to continue as a going concern. The consolidated financial statements have been prepared on a going concern basis and do not include any adjustments that might result from the outcome of this uncertainty.

Recently issued accounting pronouncements

1. ASC Topic 220, "Comprehensive Income"

Effective January 1, 2012, the Company adopted retrospectively the provisions of Accounting Standard Update No. 2011-05, “Comprehensive Income (Topic 220) - Presentation of Comprehensive Income” (“ASU 2011-05”). ASU 2011-05 eliminated the option to present the components of other comprehensive income as part of the statement of equity and requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.

The adoption of ASU 2011-05 did not have a material impact on the consolidated financial statements.

2. ASC Topic 210, “Balance Sheet”

In December 2011, the FASB issued 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 will be effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods (fiscal year 2013 for the Company) and should be applied retrospectively to all comparative periods presented.

The Company is currently evaluating the impact that the adoption of ASU 2011-11 would have on its consolidated financial statements, if any.

3. ASU 2013-2

In February 2013, the FASB issued 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.

ASU 2013-02 is effective for public entities prospectively for annual and interim reporting periods beginning after December 15, 2012 (fiscal year 2013 for the Company).

The adoption of ASU 2013-02 is not expected to have a material impact on the financial position or results of operations of the Company, but might result in disclosure of additional information about amounts reclassified out of accumulated other comprehensive income.

Results of Operations for the Year Ended December 31, 2013 compared to Year Ended December 31, 2012

Total Net Sales: Total Net Sales increased $170,705 or 49% to $522,104 in 2013, from $351,399 in 2012. The increase is due to the commencing of sales of our products on small commercial scale in the US.

R&D Expenses: R&D Expenses for 2013 of $714,240 increased $25,170 or 4% from the $689,070 in 2012, due to increase in cost of materials in the amount of 55,354 caused by increase in sales, partially balanced by decrease in cost of labor and professional services in the amount of $2,943, and decrease in travel and other expenses in the amount of $27,241.

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General and Administrative Expenses: General and administrative expenses decreased by $76,523 or 26% in 2013, to $218,532 from $295,055 in 2012, due to decrease in professional fee in the amount of $68,502, and in cost of labor and others in the amount of $8,020.

Loss from Operations: Loss from operations for 2013 of $410,668 was down $222,058 or 35% from the loss from operations in 2012 of $632,726, mainly as a result of the increase in sales $170,705, decrease in G&A expenses $76,523, partially balanced by increase in R&D expenses $25,170.

Financing Expenses: Our total financing expenses in 2013 amounted to $58,144 and were $4,872 lower than our financing expenses of $63,016 in 2012.

Net Loss: Net loss of $468,812 in 2013 was $226,930 or 33% less than the net loss in 2012 of $695,742, mainly as a result of increase in sales $170,705, decrease in G&A expenses $76,523, partially balanced by increase in R&D expenses $25,170.

Results of Operations for the Year Ended December 31, 2012 compared to Year Ended December 31, 2011

Total Net Sales: Total Net Sales decreased $108,690 or 24% to $351,399 in 2012, from $460,089 for 2011. The decrease is due to a focus in 2012 on Pimi’s citrus pilot lines, while in 2011 the Company commenced small scale sales of products treating citrus fruits and potatoes.

R&D Expenses: R&D Expenses for 2012 of $689,070 decreased $9,230 or 1% from the $698,300 in 2011, due to decrease in cost of materials in the amount of $69,465, partially balanced by increase in cost of labor and professional services in the amount of $40,585, and increase in travel and other expenses in the amount of $19,650.

General and Administrative Expenses: General and administrative expenses decreased by $3,925, or 1% in 2012, to $295,055 from $298,980 in 2011, mostly due to decrease in professional fee expenses paid to accounting and legal professionals.

Loss from Operations: Loss of costs from operations for 2012 of $632,726 was up $95,535 or 18% from the loss from operations in 2011 of $537,191, mainly as a result of the decrease in sales ($108,890), partially balanced by decrease in R&D expenses ($9,230) and in G&A expenses ($3,925).

Financing Expenses: Our total financing expenses in 2012 amounted to $63,016 and were $6,659 lower than our financing expenses of $69,675 in 2011. This was mostly a result of decrease in convertible loans interest expenses.

Net Loss: Net loss of $695,742 in 2012 was $88,876, or 15% more than the net loss in 2011 of $606,866, mainly as a result of decrease in sales ($108,690), partially balanced by decrease in R&D expenses ($9,230), in G&A expenses ($3,925), and in financing expenses ($6,659).

Liquidity and Capital Resources

As of December 31, 2013, we had liabilities of $1, 107,365 ($1,199,038 as of December 31, 2012), including $303,266 ($187,177 as of December 31, 2012) of Convertible Bonds and $0 ($571,225 as of December 31, 2012) of convertible preferred stock, $387,462 ($293,261 as of December 31, 2012) of third party liabilities, and $416,637 ($147,375as of December 31, 2012) was due to related parties. The amounts due to related parties are for consulting, services and salaries.

As of December 31, 2013 we used our credit lines in the amount of 43,312 and had cash in the sum of $13,082. As of Feb 1, 2014 we used our credit lines in the amount of $26,223, and had unused credit lines in the amount of $33,777. Our shortage in available cash flow led us to a delay in interest payments on our convertible preferred stock and payments for certain service providers; these payments will be delayed until additional funds are secured. Our executive officers have also agreed to a postponement of salary payments aggregating approximately $22,500 per month. Payments to our executive officers have been postponed since September 2012 in aggregating monthly amount of $12,500, which increased starting April 2013 to $22,500.

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As of the filing date of this report, our net burn rate is approximately $25,000 per month (not including delayed payments to executive officers and employees in the amount of $25,000 per month). Our management is utilizing best efforts to reduce our burn rate and minimize Company expenses.

On January 3, 2014 we filed an S-1 Registration Statement with the Securities and Exchange Commission in connection with a best-efforts offering of up to $5,000,000 of Common Stock and Common Stock Class A Warrants, led by Sandlapper Securities as placement agent. The Registration Statement has yet to be declared effective by the Securities and Exchange Commission and is currently under review. To the extent we raise capital pursuant to such offering, a portion of such capital would be used towards general working capital as more fully described in the use of proceeds section of the registration statement. This disclosure shall not constitute an offer to sell or a solicitation of an offer to buy the securities, nor shall there by any sale of these securities in any jurisdiction in which an offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of such jurisdiction. Any offer of the securities will be solely by means of the prospectus included in the registration statement and one or more prospectus supplements that will be issued at the time of the offering.

Since an unconditional Notice of Registration for FreshProtect^TMhas been obtained from the EPA, as well as from CDPR, and due to successful commercial implementation in Sun Pacific, the Company anticipates that additional customers will begin to buy the Company’s products and technologies in 2014 and thus the Company’s revenues, mainly generated in Israel as of the date of this report, will increase. Realization of revenues is subject to regulatory approval of the relevant regulator, in each country where we intend to deliver, distribute and sell our products, which we currently do not have, except for the State of Israel, and the U.S for our FreshProtect™ and SpuDefender™.

The Company’s management believes that the current trend in the markets to use environmentally friendly products, which are residue free or low residue, and to replace the subsisting chemicals, which leave high residues, together with the trend of the regulators to reduce the usage of high residue chemicals (such as CIPC, Imazalil and TBZ), will cause farmers and packing houses to prefer Pimi’s solutions. The Company has already begun commercial sales of certain of its products in the United States and anticipates that such sales will increase in the future.

The Company has sustained operating losses and its cash needs extend beyond its current resources. In addition, the Company does not have a reliable consistent source of future funding. These factors create an uncertainty about the Company’s ability to continue as a going concern. Moreover, the Company’s auditors report expresses substantial doubt as to the Company’s ability to continue as a going concern. The Company intends to raise additional funds necessary to implement our business plan by means of public offering and to that end has recently filed the draft of S-1registration statement with the SEC. There are no assurances that such additional funds will be obtained by means of public offering.

The Company has not yet generated sufficient revenues from its operations to fund its activities and is therefore dependent upon external sources for financing its operations.

Net Cash Used in Operating Activities for the years 2013 and 2012

Net cash used in operating activities continuing operations was $129,330 and $540,994 for the years ended December 31, 2013 and 2012, respectively. Net cash used in operating activities primarily reflects the net loss for those periods, which was reduced in part by depreciation and amortization, stock-based compensation and changes in operating assets and liabilities.

Net Cash Used in Investing Activities for the years 2013 and 2012

Net cash used in investing activities was $26,611 and $21,016, for the years ended December 31, 2013 and 2012, respectively, which was used primarily to purchase equipment (such as computers, and office equipment), and funds deposit in respect of employees rights upon retirement.

Net Cash Provided by Financing Activities for the years 2013 and 2012

Net cash provided by financing activities was $135,539 and $573,400 for the years ended December 31, 2013 and 2012, respectively, attributable to capital raised and issuance of convertible preferred stock ($93,900), and credit lines ($41,639).

	- 28 -

Net Cash Used in Operating Activities for the years 2012 and 2011

Net cash used in operating activities continuing operations was $540,994 and $660,175 for the years ended December 31, 2012 and 2011, respectively. Net cash used in operating activities primarily reflects the net loss for those periods, which was reduced in part by depreciation and amortization, stock-based compensation and changes in operating assets and liabilities.

Net Cash Used in Investing Activities for the years 2012 and 2011

Net cash used in investing activities was $21,016and $12,865, for the years ended December 31, 2012 and 2011, respectively, which was used primarily to purchase equipment (such as computers, and office equipment), and funds deposit in respect of employees rights upon retirement.

Net Cash Provided by Financing Activities for the years 2012 and 2011

Net cash provided by financing activities was $573,400 and $695,486 for the years ended December 31, 2012 and 2011, respectively, primarily attributable to capital raised and issuance of convertible preferred stock.

Off-Balance Sheet Arrangements

We do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, and results of operations, liquidity or capital expenditures.

Effect of Recently Issued Accounting Pronouncements

N/A

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

	- 29 -

PIMI AGRO CLEANTECH, INC.

(A Development Stage Company)

Consolidated Financial Statements

as of December 31, 2013

	- 30 -

PIMI AGRO CLEANTECH, INC.

(A Development Stage Company)

Consolidated Financial Statements

as of December 31, 2013

Table of Contents

	Page

Report of Independent Registered Public Accounting Firm	31

Consolidated Financial Statements

Balance Sheets	33

Statements of Operations and Comprehensive Loss	34

Statements of Changes in Stockholders’ Deficit	35 – 41

Statements of Cash Flows	42

Notes to Consolidated Financial Statements	43 – 66

	- 31 -

		Fahn Kanne & Co.
		Head Office
		Levinstein Tower
		23 Menachem Begin Road
		Tel-Aviv 66184, ISRAEL
		P.O.B. 36172, 61361
Report of Independent Registered Public Accounting Firm
To the Stockholders of		T +972 3 7106666
PIMI AGRO CLEANTECH, INC.		F +972 3 7106660
(A Development Stage Company)		www.gtfk.co.il

We have audited the accompanying consolidated balance sheets of Pimi Agro Cleantech, Inc. (a development stage company) and subsidiary (hereinafter: the "Company") as of December 31, 2013 and 2012, and the related consolidated statements of operations and comprehensive loss, changes in stockholders’ deficit and cash flows for each of the three years in the period ended December 31, 2013 and for the cumulative period from January 14, 2004 (date of inception) through December 31, 2013. These consolidated financial statements are the responsibility of the Board of Directors and management of the Company. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Pimi Agro Cleantech, Inc. and subsidiary as of December 31, 2013 and 2012, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2013 and for the cumulative period from January 14, 2004 (date of inception) through December 31, 2013, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1, the Company is in the development stage as defined in FASB Accounting Standards Codification (ASC) Topic 915, "Development Stage Entities". It has not yet generated sufficient revenues from its operations to fund its activities and is therefore dependent upon external sources for financing its operations. As of December 31, 2013, the Company has incurred accumulated losses of US$ 5,562,047, stockholders' deficit of US$ 746,708 and cumulative negative operating cash flow of US$ 4,420,452. These factors among others, as discussed in Note 1 to the consolidated financial statements raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regards to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

S/FAHN KANNE & CO. GRANT THORNTON ISRAEL

Certified Public Accountants (Isr.)

Tel-Aviv, Israel

March 10, 2014

Certified Public Accountants

Fahn Kanne & Co. is the Israeli member firm of Grant Thornton International Ltd

	- 32 -

PIMI AGRO CLEANTECH, INC.

(A Development Stage Company)

CONSOLIDATED BALANCE SHEETS

	US dollars (except share data)
	December 31,
	2013	2012
ASSETS
Current Assets
Cash and cash equivalents	13,082	33,484
Accounts receivable	190,199	138,040
Other current assets (Note 3)	18,128	29,409
Total current assets	221,409	200,933

Property and Equipment, Net (Note 4)	34,553	25,633

Funds in Respect of Employee Rights Upon Retirement	104,695	86,270
Total assets	360,657	312,836

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current Liabilities
Short-term loan from banking institution (Note 6)	43,312	-
Accounts payable:
Trade (Note 5A)	120,145	141,078
Other (Note 5B)	534,933	212,854
Convertible Bonds (Note 7)	303,266	187,177
Total current liabilities	1,001,656	541,109

Series A Convertible preferred stock (Note 8)	-	571,225

Liability for employee rights upon retirement	105,709	86,704
Total liabilities	1,107,365	1,199,038

Commitments (Note 9)
Stockholders’ Deficit (Note 10)
Common stocks of US$ 0.01 par value ("Common stocks"):
30,000,000 shares authorized as of December 31, 2013 and 2012; issued and outstanding 9,336,087 shares and 8,553,587 shares as of December 31, 2013 and 2012, respectively	93,360	85,535
Preferred stocks of US$ 0.01 par value ("Preferred stocks"):
600,000 shares authorized as of December 31, 2013 and 2012; issued and outstanding 0 shares as of December 31, 2013 and 2012	-	-
Additional paid in capital	4,809,501	4,100,695
Accumulated other comprehensive loss	(87,522)	(65,015)
Deficit accumulated during the development stage	(5,562,047)	(5,007,417)

Total stockholders' deficit	(746,708)	(886,202)

Total liabilities and stockholders’ deficit	360,657	312,836

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

	- 33 -

PIMI AGRO CLEANTECH, INC.

(A Development Stage Company)

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

	US dollars (except share data)
	Year ended December 31,			Cumulative period from January 14, 2004 (date of inception) through December 31,
	2013	2012	2011	2013(*)

Revenues from sales of products	522,104	351,399	460,089	1,877,385
Research and development expenses (Note 11)	(714,240)	(689,070)	(698,300)	(4,954,126)
General and administrative expenses (Note 12)	(218,532)	(295,055)	(298,980)	(2,044,389)
Operating loss	(410,668)	(632,726)	(537,191)	(5,121,130)
Financing expenses, net	(58,144)	(63,016)	(69,675)	(274,765)
Loss from continuing operation	(468,812)	(695,742)	(606,866)	(5,395,895)
Loss from discontinued operation, net	-	-	-	(80,334)
Loss for the period	(468,812)	(695,742)	(606,866)	(5,476,229)
Other comprehensive income (loss):
Foreign currency translation adjustments	(22,507)	(3,247)	8,114	(87,522)
Comprehensive loss for the period	(491,319)	(698,989)	(598,752)	(5,563,751)

Loss per share (basic and diluted) (Note 14)	(0.06)	(0.08)	(0.07)

(*)

As described in Note 1A, the financial statements were retroactively restated to reflect the historical financial statements of the subsidiary Pimi Agro Cleantech Ltd., which was acquired by the Company from its stockholders on April 27, 2009.

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

	- 34 -

PIMI AGRO CLEANTECH, INC.

(A Development Stage Company)

STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT (*)

	US Dollars (except share data)
						Deficit
				Accumulated		accumulated
	Common stock			other	Receipts on	during the	Total
	Number		Additional	comprehensive	account of	development	stockholders
	of shares	Amount	paid in capital	income (loss)	shares	stage	equity (deficit)
January 14, 2004 (date of inception)	-	-	-	-	-	-	-
120,000 common stock issued for cash of US$ 0.002 per share	120,000	1,200	(932)	-	-	-	268
Balance as of December 31, 2004	120,000	1,200	(932)	-	-	-	268

Loss for the year	-	-	-	-	-	(223,285)	(223,285)
Other comprehensive (loss) income	-	-	-	5,989	-	-	5,989
Receipts on account of shares	-	-	-	-	100,000	-	100,000
Balance as of December 31, 2005	120,000	1,200	(932)	5,989	100,000	(223,285)	(117,028)

Loss for the year	-	-	-	-	-	(831,415)	(831,415)
Other comprehensive (loss) income	-	-	-	(12,748)	-	-	(12,748)
Issuance of 25,200 common stock for cash of US$ 7.50 per share on January 2, 2006	25,200	252	188,748	-	(100,000)	-	89,000
Issuance of 24,000 common stock for cash of US$ 7.56 per share on July 19, 2006	24,000	240	181,293	-	-	-	181,533
Issuance of 72,000 common stock for cash of US$ 7.53 per share on December 28, 2006	72,000	720	541,600	-	-	-	542,320
Issuance of 1,688 common stock for cash of US$ 8.33 per share on December 28, 2006	1,688	17	14,043	-	-	-	14,060
Receipts on account of shares	-	-	-	-	33,644	-	33,644
Balance as of December 31, 2006	242,888	2,429	924,752	(6,759)	33,644	(1,054,700)	(100,634)

(*)

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

	- 35 -

PIMI AGRO CLEANTECH, INC.

(A Development Stage Company)

STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT (*) (cont.)

	US Dollars (except share data)
						Deficit
				Accumulated		accumulated
	Common stock			other	Receipts on	during the	Total
	Number		Additional paid	comprehensive	account of	development	stockholders
	of shares	Amount	in capital	income (loss)	shares	stage	equity (deficit)

Loss for the year	-	-	-	-	-	(341,453)	(341,453)
Other comprehensive (loss) income	-	-	-	(23,206)	-	-	(23,206)
Issuance of 8,708 common stock for cash of US$ 2.37 per share, 30,006 common stock for cash of US$ 3.28 per share, 7,754 common stock for cash of US$ 0.0025 per share and 591 common stock for cash of US$ 3.45 per share in April 2007	47,059	471	119,375	-	(33,644)	-	86,202
Issuance of 6,937 common stock for cash of US$ 4.10 per share in June 2007	6,937	69	28,339	-	-	-	28,408
Issuance of 747,390 common stock for cash of US$ 0.078 per share in July 2007	747,390	7,474	51,061	-	-	-	58,535
Issuance of 996,520 common stock for cash of US$ 0.024 per share in August 2007	996,520	9,965	14,007	-	-	-	23,972
Issuance of 996,520 common stock for cash of US$ 0.024 per share in November 2007	996,520	9,965	15,212	-	-	-	25,177
Issuance of 996,520 common stock for cash of US$ 0.0026 per share in December 2007	996,520	9,965	(7,405)	-	-	-	2,560
Receipts on account of shares	-	-	-	-	100,000	-	100,000
Balance as of December 31, 2007	4,033,834	40,338	1,145,341	(29,965)	100,000	(1,396,153)	(140,439)

(*)

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

	- 36 -

PIMI AGRO CLEANTECH, INC.

(A Development Stage Company)

STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT (*) (cont.)

	US Dollars (except share data)
						Deficit
				Accumulated		accumulated
	Common stock			other	Receipts on	during the	Total
	Number		Additional paid	comprehensive	account of	development	stockholders
	of shares	Amount	in capital	income (loss)	shares	stage	equity (deficit)

Loss for the year	-	-	-	-	-	(602,994)	(602,994)
Other comprehensive (loss) income	-	-	-	109	-	-	109
Issuance of 716,589 common stock for cash of US$ 0.041 per share in February 2008	716,589	7,166	22,370	-	-	-	29,536
Issuance of 235,334 common stock for cash of US$ 0.72 per share in February 2008	235,334	2,353	166,600	-	(100,000)	-	68,953
Issuance of 291,515 common stock for cash of US$ 0.69 per share in June 2008	291,515	2,915	197,085	-	-	-	200,000
Issuance of 310,382 common stock for cash of US$ 0.71 per share in September 2008	310,382	3,104	216,161	-	-	-	219,265
Issuance of 444,004 common stock for cash of US$ 0.74 per share in November 2008	444,004	4,440	323,548	-	-	-	327,988
Stock based compensation	-	-	43,767	-	-	-	43,767
Balance as of December 31, 2008	6,031,658	60,316	2,114,872	(29,856)	-	(1,999,147)	146,185

(*)

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

- 37 -

PIMI AGRO CLEANTECH, INC.

(A Development Stage Company)

STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT (*) (cont.)

	US Dollars (except share data)
						Deficit
				Accumulated		accumulated
	Common stock		Additional	other	Receipts on	during the	Total
	Number		paid in	comprehensive	account of	development	stockholders
	of shares	Amount	capital	income (loss)	shares	stage	equity (deficit)
Loss for the year	-	-	-	-	-	(1,076,624)	(1,076,624)
Other comprehensive (loss) income	-	-	-	(11,810)	-	-	(11,810)
Issuance of 26,399 common stock for cash of US$ 1.33 per share in January 2009	26,399	264	34,721	-	-	-	34,985
Issuance of 3,373 common stock for cash of US$ 1.33 per share in March 2009	3,373	34	24,966	-	-	-	25,000
Issuance of 201,972 common stock for cash of US$ 0.73 per share in March 2009	201,972	2,020	122,980	-	-	-	125,000
Issuance of 45,328 common stock for cash of US$ 1.32 per share in March 2009	45,328	453	59,547	-	-	-	60,000
Issuance of 4,459 common stock for cash of US$ 1.32 per share in April 2009	4,459	45	5,516	-	-	-	5,561
Issuance of 45,328 common stock for cash of US$ 1.32 per share in June 2009	45,328	453	59,547	-	-	-	60,000
Issuance of 40,000 common stock for cash of US$ 1.35 per share in June 2009	40,000	400	53,600	-	-	-	54,000
Issuance of 20,000 common stock for cash of US$ 1.35 per share in August 2009	20,000	200	26,800	-	-	-	27,000
Issuance of 20,000 common stock for cash of US$ 1.35 per share in September 2009	20,000	200	26,800	-	-	-	27,000
Issuance of 35,000 common stock for cash of US$ 1.35 per share in October 2009	35,000	350	46,900	-	-	-	47,250
Issuance of 45,330 common stock for cash of US$ 1.32 per share in October 2009	45,330	453	59,547	-	-	-	60,000
Issuance of 54,263 common stock for cash of US$ 1.35 per share in November 2009	54,263	542	68,193	-	-	-	68,735
Stock based compensation	-	-	91,077	-	-	-	91,077
Balance as of December 31, 2009	6,573,110	65,730	2,795,066	(41,666)	-	(3,075,771)	(256,641)

(*)

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

- 38 -

PIMI AGRO CLEANTECH, INC.

(A Development Stage Company)

STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT (*) (cont.)

	US Dollars (except share data)
						Deficit
				Accumulated		accumulated
	Common stock		Additional	other	Receipts on	during the	Total
	Number		paid in	comprehensive	account of	development	stockholders
	of shares	Amount	capital	income (loss)	shares	stage	equity (deficit)
Loss for the year	-	-	-	-	-	(629,038)	(629,038)
Other comprehensive (loss) income	-	-	-	(28,216)	-	-	(28,216)
Issuance of 3,225 common stock for cash of US$ 1.55 per share in February 2010	3,225	32	4,968	-	-	-	5,000
Issuance of 35,000 common stock for cash of US$ 1.35 per share in February 2010	35,000	350	46,900	-	-	-	47,250
Issuance of common stock and warrants, net of issuance costs in August 2010 (**)	385,108	3,851	197,215	-	-	-	201,066
Issuance of 134,121 common stock for cash of US$ 0.6 per share in December 2010	134,121	1,341	76,118	-	-	-	77,459
Amounts attributed to detachable warrants issued in connection with convertible bonds (***)	-	-	41,208	-	-	-	41,208
Beneficial conversion feature on convertible bonds (***)	-	-	41,207	-	-	-	41,207
Stock based compensation (****)	30,000	300	82,046	-	-	-	82,346
Balance as of December 31, 2010	7,160,564	71,604	3,284,728	(69,882)	-	(3,704,809)	(418,359)

(*)

(**)

See Note 10G.

(***)

See Note 7.

(****)

Including US$ 24,850 with respect to the issuance of 30,000 common stock to a service provider.

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

	- 39 -

PIMI AGRO CLEANTECH, INC.

(A Development Stage Company)

STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT (*) (cont.)

	US Dollars (except share data)
						Deficit
				Accumulated		accumulated
	Common stock		Additional	other	Receipts on	during the	Total
	Number		paid in	comprehensive	account of	development	stockholders
	of shares	Amount	capital	income (loss)	shares	stage	equity (deficit)
Loss for the year	-	-	-	-	-	(606,866)	(606,866)
Other comprehensive income	-	-	-	8,114	-	-	8,114
Issuance of 125,000 common stock and warrants for cash of US$ 0.8 per share in January 2011	125,000	1,250	98,750	-	-	-	100,000
Issuance of 125,000 common stock and warrants for cash of US$ 0.8 per share in February 2011	125,000	1,250	98,750	-	-	-	100,000
Issuance of 250,000 common stock and warrants for cash of US$ 0.8 per share in March 2011	250,000	2,500	197,500	-	-	-	200,000
Issuance of 368,750 common stock and warrants for cash of US$ 0.8 per share in April 2011	368,750	3,688	291,312	-	-	-	295,000
Issuance of 125,000 common stock and warrants for cash of US$ 0.8 per share in May 2011	125,000	1,250	98,750	-	-	-	100,000
Issuance of 12,500 common stock and warrants for cash of US$ 0.8 per share in September 2011	12,500	125	9,875	-	-	-	10,000
Issuance of 62,500 common stock and warrants, and payment of US$ 50,000 in cash to a service provider as equity issuance costs	62,500	625	(50,625)	-	-	-	(50,000)
Exercise of options	311,773	3,118	-	-	-	-	3,118
Stock based compensation	-	-	25,986				25,986
Balance as of December 31, 2011	8,541,087	85,410	4,055,026	(61,768)	-	(4,311,675)	(233,007)

(*)

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

	- 40 -

PIMI AGRO CLEANTECH, INC.

(A Development Stage Company)

STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT (*) (cont.)

	US Dollars (except share data)
						Deficit
				Accumulated		accumulated
	Common stock		Additional	other	Receipts on	during the	Total
	Number		paid in	comprehensive	account	development	stockholders
	of shares	Amount	capital	income (loss)	of shares	stage	equity (deficit)
Loss for the year	-	-	-	-	-	(695,742)	(695,742)
Other comprehensive loss	-	-	-	(3,247)	-	-	(3,247)
Issuance of 12,500 common stock and warrants for cash of US$ 0.8 per share in March 2012	12,500	125	9,875	-	-	-	10,000
Stock based compensation	-	-	35,794	-	-	-	35,794
Balance as of December 31, 2012	8,553,587	85,535	4,100,695	(65,015)	-	(5,007,417)	(886,202)

Loss for the year	-	-	-	-	-	(468,812)	(468,812)
Other comprehensive loss	-	-	-	(22,507)	-	-	(22,507)
Conversion of Series A convertible preferred stock into common shares during March 9, 2013 (**)	782,500	7,825	563,400	-	-	-	571,225
Modification of the conversion terms of warrants (****)	-	-	85,818	-	-	(85,818)	-
Amounts attributed to detachable warrants issued in connection with convertible bonds(***)	-	-	15,518	-	-	-	15,518
Stock based compensation	-	-	44,070	-	-	-	44,070
Balance as of December 31, 2013	9,336,087	93,360	4,809,501	(87,522)	-	(5,562,047)	(746,708)

(*)

	(**)	See Note 8.

	(***)	See Note 7.

	(****)	See Note 2T.

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

	- 41 -

PIMI AGRO CLEANTECH, INC.

(A Development Stage Company)

CONSOLIDATED STATEMENTS OF CASH FLOWS

	US dollars
							Cumulative
							period from
							January 14, 2004
							(date of inception)
							through
	Year ended December 31,						December 31,
	2013		2012		2011		2013^(*)
Cash flows from operating activities:
Loss for the period		(468,812)		(695,742)		(606,866)		(5,476,229)
Adjustments to reconcile net loss for the period to net cash used in operating activities:
Depreciation		8,442		7,368		8,693		55,495
Increase in liability for employee rights upon retirement		11,979		11,169		18,802		96,174
Stock based compensation		44,070		35,794		25,986		323,040
Interest on convertible bonds		37,707		12,821		48,086		140,954
Interest on stockholders loans		-		-		-		(2,409)
Issuance costs of convertible preferred stock		-		62,600		-		62,600
Change in fair value of convertible preferred stock		-		(54,775)		-		(54,775)
Changes in assets and liabilities:
Decrease (increase) in accounts receivable		(40,127)		51,588		(71,796)		(180,952)
Decrease (increase) in other current assets		12,981		(6,198)		29,706		(110,724)
Increase (decrease) in accounts payable – trade		(30,363)		(7,304)		(8,335)		105,780
Increase (decrease) in accounts payable – other		294,793		41,685		(104,451)		540,260
Net cash used in operating activities continuing operations		(129,330)		(540,994)		(660,175)		(4,500,786)
Net cash provided by operating activities discontinued operations		-		-		-		80,334
Net cash used in operating activities		(129,330)		(540,994)		(660,175)		(4,420,452)

Cash flows from investment activities:
Increase in funds in respect of employee rights upon retirement		(11,453)		(16,146)		(11,156)		(94,263)
Purchase of property and equipment		(15,158)		(4,870)		(1,709)		(84,388)
Net cash used in investment activities		(26,611)		(21,016)		(12,865)		(178,651)

Cash flows from financing activities:
Credit from banking institution		-		-		(62,632)		(2,615)
Short-term loan from banking institute		41,639		-		-		41,639
Issuance of convertible preferred stock, net		-		563,400		-		563,400
Proceeds from issuance of common stock and warrants		-		10,000		758,118		3,319,267
Payment on account of shares		-		-		-		233,644
Proceeds from issuance of convertible bonds and warrants, net		93,900		-		-		253,708
Proceeds from loans from stockholders		-		-		-		194,083
Net cash provided by financing activities		135,539		573,400		695,486		4,603,126
Effect of exchange rate changes on cash and cash equivalents		-		(352)		-		9,059
Increase (decrease) in cash and cash equivalents		(20,402)		11,038		22,446		13,082
Cash and cash equivalents at beginning of the period		33,484		22,446		-		-
Cash and cash equivalents at end of the period		13,082		33,484		22,446		13,082

Supplementary information on financing activities not involving cash flows:

On March 9, 2013, all issued and outstanding shares of Series A Preferred Stock in an amount of US$ 571,225, have been automatically converted into 782,500 Common Stock.

(*)

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

	- 42 -

PIMI AGRO CLEANTECH, INC.

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - GENERAL

	A.	Pimi Agro Cleantech, Inc. (the "Company") was incorporated on April 1, 2009, under the laws of the State of Delaware. On April 27, 2009, the Company acquired from its stockholders all of the issued and outstanding shares of Pimi Agro Cleantech Ltd. (hereinafter: "Pimi Israel"), including preferred and ordinary shares. As a consideration for the transaction, the Company issued its stockholders an equal number of its common stock (6,313,589 shares). As a result of the acquisition, Pimi Israel became a wholly-owned subsidiary of the Company. The transaction involved companies under common control, and accordingly, the acquisition has been accounted for at historical cost in a manner similar to a pooling of interests. On this basis, the stockholders’ equity has been retroactively restated to reflect the equivalent number of shares of common stock of the Company issued for the acquisition of Pimi Israel as if such shares were issued at the dates they were issued by Pimi Israel to its stockholders on the basis of 1 common stock for each 1 preferred share or 1 ordinary share of Pimi Israel. The historical financial statements prior to April 27, 2009 were retroactively restated to reflect the activities of Pimi Israel.

		Pimi Israel was incorporated in 2004 and commenced its operations in 2005. Pimi Israel develops, produces and markets products for improving the quality and extending the shelf-life of fruits and vegetables. Since its inception, Pimi Israel has devoted substantially all of its efforts to business planning, research and development and raising capital, and has not yet generated significant revenues. Accordingly, Pimi Israel and the Company (collectively, the "Group") are considered to be in the development stage as defined in FASB Accounting Standards Codification (ASC) Topic 915, "Development Stage Entities".

		In February 2010, the Company's common stock began quotation on the OTC Bulletin Board under the symbol "PIMZ.OB".

Going concern uncertainty

Since its incorporation (April 1, 2009), the Company has not had any operations other than those carried out by Pimi Israel. The development and commercialization of Pimi Israel's products will require substantial expenditures. Pimi Israel and the Company have not yet generated sufficient revenues from their operations to fund the Group activities, and are therefore dependent upon external sources for financing their operations. There can be no assurance that Pimi Israel and the Company will succeed in obtaining the necessary financing to continue their operations. Since inception, the Company (and Pimi Israel) has incurred accumulated losses of US$ 5,562,047, stockholders' deficit of US$ 746,708 and cumulative negative operating cash flow of US$ 4,420,452.

During 2012, the Group raised funds via issuance of Series A convertible preferred stock in a total amount of US$ 563,400 (net of related expenses). As described in Note 8, during March 2013, the preferred stock have been converted into common stock.

The Company will need to secure additional capital in the future in order to meet its anticipated liquidity needs primarily through the sale of additional Common Stock or other equity securities and/or debt financing. Funds from these sources may not be available to the Company on acceptable terms, if at all, and the Company cannot give assurance that it will be successful in securing such additional capital.

The Company focuses its solutions towards vegetables and fruits which are considered the largest in terms of worldwide consumption. Among other things, the Company tries to cooperate with major fruit packing houses in Israel and abroad. As of balance sheet date, the Company had not signed any significant agreements. See also D below.

These factors raise substantial doubt about Pimi Israel and the Company's ability to continue as a going concern.

The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

	- 43 -

PIMI AGRO CLEANTECH, INC.

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)

NOTE 1 - GENERAL (cont.)

Risk factors

The Company and Pimi Israel (collectively, the "Group") face a number of risks, including uncertainties regarding finalization of the development process, demand and market acceptance of the Group's products, the effects of technological changes, competition and the development of products by competitors. Additionally, other risk factors also exist, such as the ability to manage growth and the effect of planned expansion of operations on the Group's future results.

In addition, the Group expects to continue incurring significant operating costs and losses in connection with the development of its products and increased marketing efforts.

As mentioned above, the Group has not yet generated significant revenues from its operations to fund its activities, and therefore the continuance of its activities as a going concern depends on the receipt of additional funding from its current stockholders and investors or from third parties.

On January 3, 2014 the Company filed an S-1 Registration Statement with the Securities and Exchange Commission in connection with an offering of up to $5,000,000 of Common Stock and common stock Class A Warrants, led by a placement agent. The Registration Statement has yet to be declared effective by the Securities and Exchange Commission and is currently under review.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP").

Functional currency and translation to the reporting currency

The functional currency of the Company is the US dollar (“US$”), which is the currency of the primary economic environment in which the operations of the Company are conducted. The functional currency of its foreign subsidiary is the New Israeli Shekel ("NIS").

The financial statements of the subsidiary were translated into US dollars in accordance with the relevant standards of the Financial Accounting Standards Board ("FASB"). Accordingly, assets and liabilities were translated from NIS to US dollars using year-end exchange rates, and income and expense items were translated at average exchange rates during the year.

Gains or losses resulting from translation adjustments are reflected in stockholders' deficit, under “accumulated other comprehensive income (loss)”.

Balances denominated in, or linked to foreign currency are stated on the basis of the exchange rates prevailing at the balance sheet date. For foreign currency transactions included in the statements of operations, the exchange rates applicable on the relevant transaction dates are used. Transaction gains or losses arising from changes in the exchange rates used in the translation of such balances are carried to financing income or expenses.

	Year ended December 31,
	2013	2012	2011
Official exchange rate of NIS 1 to US dollar	0.288	0.268	0.262

Principles of consolidation

The consolidated financial statements include the accounts of the Company and its subsidiary. All significant intercompany balances and transactions have been eliminated on consolidation.

As described in Note 1A above, the acquisition of Pimi Israel has been accounted for in a manner similar to a pooling of interests at historical cost.

	- 44 -

PIMI AGRO CLEANTECH, INC.

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)

Use of estimates in the preparation of financial statements

The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

As applicable to these consolidated financial statements, the most significant estimates and assumptions relate to the going concern assumption.

Cash and cash equivalents

The Group considers all short-term investments, which are highly liquid investments with original maturities of three months or less at the date of purchase, to be cash equivalents.

Property and equipment

	1.	Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. When asset are retired or otherwise disposed of, the related carrying value and accumulated depreciation are removed from the respective accounts and the net difference less any amount realized from disposition is reflected in the statements of operations.

Rates of depreciation:

		%
Computers		33
Furniture and office equipment		7-15
Vehicles		15

Impairment of long-lived assets

The Group's long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. The Group has not recorded any impairment losses in the reported periods.

Income taxes

Deferred income taxes are determined utilizing the asset and liability method based on the estimated future tax effects of differences between the financial accounting and the tax bases of assets and liabilities under the applicable tax law. Deferred tax balances are computed using the tax rates expected to be in effect at the time when these differences reverse. Valuation allowances in respect of the deferred tax assets are provided for if, based upon the weight of available evidence, it is more likely than not that all or a portion of the deferred income tax assets will not be realized.

The Company accounts for uncertain tax positions in accordance with ASC Topic 740-10, which prescribes detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise’s financial statements. According to ASC Topic 740-10, tax positions must meet a more-likely-than-not recognition threshold. The Company’s accounting policy is to classify interest and penalties relating to uncertain tax positions under income taxes. However, the Company did not recognize such items in its financial statements for any of the reported periods and did not recognize any liability with respect to unrecognized tax positions in its balance sheets.

	- 45 -

PIMI AGRO CLEANTECH, INC.

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)

Liability for employee rights upon retirement

Pimi Israel's liability for employee rights upon retirement with respect to its Israeli employees is calculated, pursuant to Israeli severance pay law, based on the most recent salary of each employee multiplied by the number of years of employment, as of the balance sheet date. Employees are entitled to one month's salary for each year of employment, or a portion thereof. Pimi Israel makes monthly deposits to insurance policies and severance pay funds. The liability of the Company is fully provided for.

The deposited funds include profits accumulated up to the balance sheet date. The deposited funds may be withdrawn upon the fulfillment of the obligation pursuant to Israeli severance pay laws or labor agreements. The value of the deposited funds is based on the cash surrender value of these policies, and includes immaterial profits/losses.

Severance expenses for the years ended December 31, 2013, 2012 and 2011, amounted to US$ 11,979, US$ 11,169 and US$ 18,802, respectively.

Revenue recognition

Revenues are recognized when delivery has occurred and there is persuasive evidence of an agreement, the fee is fixed or determinable and collection of the related receivables is reasonably assured and no further obligations exist.

Revenues from sales of products are recognized when title and risk and rewards for the products are transferred to the customer.

Research and development costs

Research and development expenses are charged to operations as incurred. Grants received from the Government of Israel for development of approved projects are recognized as a reduction of expenses when the related costs are incurred (see also K. below).

Royalty-bearing grants

Royalty-bearing grants from the Office of the Chief Scientist of the Ministry of Industry, Trade and Labor of the State of Israel (the "OCS") for funding approved research and development projects are recognized at the time Pimi Israel is entitled to such grants, on the basis of the costs incurred and included as a reduction of research and development costs. The cumulative research and development grants recognized since inception amount to US$ 121,753 as at December 31, 2013.

As of December 31, 2013, the Company has not accrued any royalties, since no revenues were recognized in respect of the funded projects.

Loss per share

Basic loss per share is computed by dividing loss by the weighted average number of common shares outstanding during the year.

In computing diluted loss per share, basic losses per share are adjusted to reflect the potential dilution that could occur upon the exercise of options issued or granted using the treasury stock method and upon the conversion of convertible bonds and Series A Convertible preferred stock using the if-converted method. The effect of such exercise or conversion is considered dilutive in all the reported periods.

	- 46 -

PIMI AGRO CLEANTECH, INC.

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)

Stock-based compensation

Stock based compensation to employees is recognized in the statement of operations as an operating expense, based on the fair value of the award on the date of grant. The fair value of stock-based compensation is estimated using the Black Scholes option-pricing model. The Group has expensed compensation costs, net of estimated forfeitures, applying the accelerated vesting method, over the requisite service period.

Stock based payments awarded to consultants (non-employees) are accounted for in accordance with ASC Topic 505-50, "Equity-Based Payments to Non-Employees".

Fair value of financial instruments

ASC Topic 825-10, "Financial Instruments - overall" defines financial instruments and requires disclosure of the fair value of financial instruments held 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.

As the maturity date of the Convertible bonds has been reached and accordingly, based on their contractual terms such notes they are repayable as of December 31, 2013, and as the exercise price is higher than the estimated fair value of common shares, the carrying amount of the convertible bonds approximate their fair values.

As described in Note 2R below, as of December 31, 2012, the Series A Convertible preferred stock were accounted for as a derivative liability and therefore were measured at fair value (During 2013, such preferred stock were converted into common stock).

Beneficial conversion feature on convertible bonds

The Company has considered the provisions of ASC Topic 815 - 40, "Derivatives and Hedging - Contracts in Entity's Own Equity", and determined that the embedded conversion feature should not be separated from the host instrument because it qualified for equity classification. Furthermore, the Company applied ASC Topic 470 - 20, "Debt - Debt with Conversion and Other Options" which clarifies the accounting for instruments with beneficial conversion features or contingency adjustable conversion ratios.

The beneficial conversion feature has been calculated by allocating the proceeds received in financing transactions to the convertible instrument and to any detachable warrants included in the transaction and by measuring the intrinsic value of the convertible instrument based on the effective conversion price as a result of the allocated proceeds.

The amount of the beneficial conversion feature with respect to convertible bonds was recorded as a discount on the convertible bonds with a corresponding amount credited directly to equity as additional paid-in capital. After the initial recognition, the discount on the convertible bonds was amortized as interest expenses over the term of the bonds.

Other comprehensive income (loss)

Other comprehensive income (loss), presented in stockholders' equity (deficit), includes, in addition to loss, gains and losses from the translation of the results of foreign subsidiary to the reporting currency.

Fair value measurements

The Company applies ASC Topic 820-10 (formerly SFAS 157, “Fair Value Measurements”) which defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and requires disclosures for fair value measurements.

Fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

As of December 31, 2012, the balance of Series A Convertible preferred stock were measured at fair value. The fair value measurement of such financial liability was classified as level 3.

	- 47 -

PIMI AGRO CLEANTECH, INC.

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)

Convertible preferred stock

The Company has considered the provisions of ASC Topic 815, "Derivatives and Hedging", and ASC Topic 470, "Debt" and determined that due to the conversion terms of the convertible preferred stock, they cannot be classified as equity instrument. Accordingly, the convertible preferred stock were classified as a derivative liability and measured at fair value through earnings (During 2013, the preferred stock were converted into common stock). Costs incurred to issue the convertible proffered stock were expensed as incurred. See also Note 8.

Concentrations of credit risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and accounts receivables. Cash and cash equivalents are deposited with major banks in Israel and the United States of America. Management believes that such financial institutions are financially sound and, accordingly, minimal credit risk exists with respect to these financial instruments. The accounts receivables balance consists of a limited number of customers. However, management believe that the credit risk of such balances is insignificant.

The Company has no significant off-balance-sheet concentration of credit risk.

Modification of the conversion terms of warrants

Modification of the conversion terms of warrants with no consideration represent a dividend to warrants holders and therefore was accounted for in a similar manner to a stock dividend. Accordingly, the addition to the fair value of the warrants at the date of modification (i.e. the excess, if any, of the fair value of the warrants based on the modified terms over the fair value of the warrants based on the original terms immediately before the terms were modified) was transferred from "Deficit Accumulated during the development stage" to "Additional paid-in capital". The fair value of the warrants was determined using the Black-Scholes pricing model.

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.

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.

	- 48 -

PIMI AGRO CLEANTECH, INC.

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)

Recently issued accounting pronouncements (cont.)

ASC Topic 830, Foreign "Currency Matters"

In March 2013, the FASB issued Accounting Standards Update 2013-5, Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity ("ASU 2013-5").

ASU 2013-5 clarifies among other things that, when a reporting entity (parent) ceases to have a controlling financial interest in a subsidiary or group of assets that is a business (other than a sale of in-substance real estate or conveyance of oil and gas mineral rights) within a foreign entity, the parent is required to apply the guidance in Subtopic 830-30 to release any related cumulative translation adjustment into net income. Accordingly, the cumulative translation adjustment should be released into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided.

For public companies, the amendments in this Update will be effective prospectively for fiscal years (and interim reporting periods within those years) beginning after December 15, 2013. The amendments should be applied prospectively to derecognition events occurring after the effective date. Prior periods should not be adjusted. Early adoption is permitted. If an entity elects to early adopt the amendments, it should apply them as of the beginning of the entity’s fiscal year of adoption. The adoption of the standard is not expected to have a material impact on the Company's consolidated results of operations and financial condition.

NOTE 3 - OTHER CURRENT ASSETS

	US dollars
	December 31,
	2013	2012

Prepaid expenses	3,804	15,950
Government Institutions	3,278	3,048
Others (*)	11,046	10,411
	18,128	29,409

(*) Related parties	4,998	6,458

	- 49 -

PIMI AGRO CLEANTECH, INC.

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)

NOTE 4 - PROPERTY AND EQUIPMENT, NET

	US dollars
	December 31,
	2013	2012

Computers	24,732	24,732
Furniture and office equipment	52,958	49,071
Vehicles	13,475	-
	91,165	73,803

Less – accumulated depreciation	(56,612)	(48,170)
	34,553	25,633

In the years ended December 31, 2013, 2012 and 2011, depreciation was US$ 8,442, US$ 7,368 and US$ 8,693, respectively, and additional property and equipment were purchased in an amount of US$ 15,158, US$ 4,870 and US$ 1,709, respectively.

NOTE 5 - ACCOUNTS PAYABLE

Trade

	US dollars
	December 31,
	2013	2012

Open accounts	107,768	107,236
Checks payable	12,377	33,842
	120,145	141,078

B. Other

	US dollars
	December 31,
	2013	2012

Employees and related institutions	96,538	48,136
Government Institutions	9,784	9,147
Accrued expenses(*)	428,611	155,571
	534,933	212,854

(*) Related parties	354,162	96,004

	- 50 -

PIMI AGRO CLEANTECH, INC.

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)

NOTE 6 - LINE OF CREDIT

As of December 31, 2013, the Company has an unutilized credit line of approximately NIS 60,000 (US$ 17,286) with an Israeli Bank.

During 2013, the Company received a short-term loan from a banking institution in the amount of NIS 150,000 (US$ 43,215). The loan was guaranteed by certain major shareholders. The annual interest rate is 6.5% and the loan will be repaid in February 2014.

NOTE 7 - CONVERTIBLE BONDS

During 2010, the Company issued convertible bonds in the aggregated amount of US$ 159,808 to certain stockholder's which could be converted to common shares of the Company, at the price of US$ 1.35 per share.

The bonds bear interest of 8% per annum and their original maturity period was between April 29 to May 15 of fiscal year 2011.

In addition, the Company issued to their investor, detachable warrants to purchase 118,376 shares of common stock at an exercise price of US$ 1.35 per share. Such warrants were not exercised and expired during October-November 2011.

As a result of the above issuances, the Company recorded in 2010 a total amount of US$ 41,208 in respect of the detachable warrants and a total amount of US$ 41,207 as beneficial conversion feature in respect of the convertible bonds, as a credit to stockholders' equity (additional paid in capital). The fair value of the Warrants was determined using the Black-Scholes pricing model, assuming a risk free rate of 3%, a volatility factor of 50.00%, dividend yields of 0% and an expected life of 1.5 years.

On June 29, 2011, the holder of convertible bonds notified the Company that he decided not to exercise the conversion rights and asked for repayment of the bonds in cash. As of the date hereof, the Company is negotiating with the bonds holder the terms of repayment of the bonds, which are represented as current liabilities in the balances as of December 31, 2013.

The Company continued to recognize interest expenses based on the terms described above, from the original maturity date until December 31, 2013.

As at Dec. 31, 2013, the balance of the convertible bonds was approximately $200,000. This balance includes the unpaid accumulated interest, which was approximately US$ 40,000.

	B.	In May 2013, the Company issued convertible notes totaling approximately $94,000 to finance their short-term operations. The loans bear interest at 10% and were issued to seven (7) of Pimi's shareholders, including two controlling shareholders (Alon Carmel; and, Omdan Consulting and Instructing Ltd., a company owned by Mr. Eitan Shmueli and his wife Mrs. Vivy Shmueli). Each note is secured by Pimi Israel’s guarantee and a pledge on Pimi Israel’s patents in Israel and in the U.S. Based on their original terms, the notes were repayable on the earlier to occur of: (i) a raise of $1 million financing or (ii) 6 months following the effective date (November 2013). Each lender is entitled to convert the unpaid principal and the interest accrued into shares of the Company's common stock, at a conversion price of $1.00 per share. In addition, for each dollar, each lender received a two years warrant to purchase a share of the Company's common stock, at an exercise price of $1.00 per share. The total consideration received in the issuance was allocated to the convertible notes and detachable warrants based on their relative fair value.

		As a result of the above issuance, the Company recorded in 2013 a total amount of US$ 15,518 in respect of the detachable warrants, as a credit to stockholders’ equity (additional paid in capital). The fair value of the warrants was determined using the Black-Scholes pricing model, assuming a risk free rate of 3% a volatility factor of 50.00%, dividend yields of 0% and an expected life of 2 years.

		The Company negotiates extension for additional 6 months of the convertible loans attained by it from its shareholders and due to be paid in November 2013, in total principal amount of approximately $94,000 and the interest accrued thereon. As of the date hereof, the Company has obtained consents fron all the loans owners.

As of December 31, 2013, the unpaid accumulated interest balance on convertible bonds approximately was US$ 9,400.

- 51 -

PIMI AGRO CLEANTECH, INC.

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)

NOTE 8 - SERIES A CONVERTIBLE PREFERRED STOCK

On December 15, 2011, the Company filed a Certificate of Designation with the Secretary of State of Delaware in connection with the Series A Preferred Stock. The holders of shares of Series A Preferred Stock shall be entitled to receive dividend cash payments of 9% per annum, payable in quarterly installments, and subject to conversion.

On March 9, 2012, the Company completed a closing (the “Closing”) of its private placement (the “Private Offering”) in the aggregate amount of $626,000 (the “Financing”). The Company issued 62,600 shares of convertible preferred stock (“Series A Preferred Stock”) par value $0.01 at a purchase price of $10.00 per share to 19 accredited investors and 19 non-accredited investors (the “Subscribers”). The issuance costs were US$ 62,600 and were paid in cash.

It was determined that upon the closing of the Company's next round of financing, provided such closing occurs within twelve (12) months following the execution of the Closing in which Subscribers receive the Series A Preferred Stock, and further subject to minimum proceeds of $2,000,000 being raised in such investment (the "Next Round of Financing"), the Series A Preferred Stock shall automatically be converted into fully paid, nonasseable shares of Common Stock, $0.01 par value per share, of the Company (“Common Stock”). The number of such Conversion Shares shall be determined by dividing the investment amount of the holder of the Series A Preferred Stock (the "Investment") by either (a) 80% of the closing price per share of the Company's common stock in Next Round of Financing or (b) dividing each holder’s Investment amount by $0.80, whichever is lower. In the event that the closing of the Next Round of Financing has not occurred by November 30, 2012 (see below), each share of Series A Preferred Stock shall automatically be converted into fully paid, nonassesable shares of Common Stock. Notwithstanding, the holders of Series A Preferred Stock were entitled to convert each share of the Series A Preferred Stock into fully paid, nonassesable share of Common Stock, at a price of $0.80 per share at any date before the automatic conversion mentioned above.

The conversion price shall be adjusted for stock dividends, splits, combinations and similar events. In the event of Company's liquidation, dissolution or winding-up, which will occur until conversion, preferred stock holders shall be entitled to the following rights and proceeds: to be paid the original purchase price on each share of the preferred stock plus any dividend cash accrued and unpaid before any amount shall be paid to the holders of the common stock. Thereafter, the preferred stock holders shall participate in proceeds distribution with the common stock holders on an as-converted basis.

Initially all and any shares of Series A Preferred Stock had to be automatically converted to the Common Stock and canceled on November 30, 2012, and, if converted to the Common Stock on an earlier date, the shares so converted had to be canceled on the date of their respective conversion.

However, during late 2012, the Company extended the term of automatic conversion until March 9, 2013 (with all other terms unchanged). On March 9, 2013 all and any shares of Series A Preferred Stock have been automatically converted into the Common Stock and cancelled, thereby, 782,500 shares of the Company’s Common Stock have been allocated and issued to former holders of Series A Preferred Stock.

As of December 31, 2013, the Company has no other Series A Convertible stock issued and outstanding.

NOTE 9 - COMMITMENTS

Pimi Israel is committed to pay royalties to the OCS on the proceeds from sales of products resulting from research and development projects in which the OCS participates by way of grants. In the first 3 years of sales the Company shall pay 3% out of the sales of the product which was developed under the research and development projects. In the fourth, fifth and sixth years of sales, the Company shall pay 4% of such sales and from the seventh year onwards the Company shall pay 5% up to 100% of the amount of grants received plus interest at LIBOR. Pimi Israel was entitled to the grants only upon incurring research and development expenditures. There were no future performance obligations related to the grants received from the OCS. As of December 31, 2013, the contingent liabilities with respect to grants received from the OCS, subject to repayment under these royalty agreements on future sales is NIS 484,429 (US$ 121,753), not including interest.

The Company and its subsidiary currently lease office space at Kibbutz Alonim under a short-term operating lease. During the years 2013, 2012 and 2011, the Company paid an annual rent of US$ 11,516, US$ 11,137 and US$ 9,954, respectively. The operating lease is renewed each year and has been extended until December 31, 2013 and the Company pays monthly rent of US$ 1,000.

Commencing January 1, 2014, the Company extended its operating lease for an additional year and currently pays monthly rent of $1,126 (NIS 3,908) plus VAT per month pursuant to a 12 month lease until December 31, 2014.

Joint venture Agreement with Vegiesafe LLC

In January 2009, Pimi Israel entered in a Joint Venture Agreement ("JV") with Vegiesafe LLC ("Vegiesafe") a Limited Liability Company registered in the USA, which is part of a group of companies engaged in consulting to mass-market retailers and major supermarket chains in North America.

The JV will market, sell and distribute Pimi Israel's products and technology throughout the USA on an exclusive basis, and throughout Canada and Mexico on a non-exclusive basis. Vegiesafe shall seek retailers and/or major distributors in the USA, who will recommend to its producer and/or suppliers to produce and supply the Isopropyl (N-3 – Chlorophenyl) carbamate (CIPC) free potatoes or CIPC free potato products. The exclusivity is subject to milestones of annual sales. Pimi Israel shall have 70% of the rights in the JV and will nominate two of its directors, and Vegiesafe will have 30% of the rights and will nominate one director. In May 2009 Pimi Israel and Vegiesafe mutually agreed on continuation of the Joint Venture. Accordingly, Vegiesafe’s exclusivity was subject to certain additional milestones. As of the date of these financial statements VegiSafe has not complied with the above milestones and the Company has not taken any actions against VegiSafe with this regard.

Vegiesafe invested in the JV an aggregate amount of US$250,000 which was used to cover expenses reflected in a budget prepared for the JV and approved by Vegiesafe and Pimi Israel. On August 9, 2010 Pimi Israel signed with Vegiesafe an Addendum to the Agreement dated January 20, 2009, expanding JV’s activities to certain vegetables. In addition, Pimi Israel has agreed to expand the activities of JV in the USA to citrus fruits, provided that Vegiesafe will bear all the costs and expenses which in Pimi’s opinion are reasonable for distribution and implementation of its product in the US.

Commencing the inception of the JV and until December 31, 2013, the activities of the JV have not been material.

- 53 -

PIMI AGRO CLEANTECH, INC.

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)

NOTE 10 - SHARE CAPITAL

Description of the rights attached to the Shares in the Company

Common stock:

Each share of common stock entitles the holder to one vote, either in person or by proxy, at meetings of stockholders. The holders are not permitted to vote their shares cumulatively. Accordingly, the stockholders of the Company's common stock who hold, in the aggregate, more than fifty percent of the total voting rights can elect all of the directors and, in such event, the holders of the remaining minority shares will not be able to elect any of such directors. The vote of the holders of a majority of the issued and outstanding shares of common stock entitled to vote thereon is sufficient to authorize, affirm, ratify or consent to such act or action, except as otherwise provided by law.

Series A Convertible Preferred stock:

See Note 8 regarding the conversation terms of the Preferred stock.

During 2013, all and any of the Series A Preferred stock have been automatically converted into common stock and as of December 31, 2013, no other Series A Preferred stock are issued and outstanding.

Stock-option plans

In January 2008, Pimi Israel’s Board of Directors ("Pimi Israel's Board") approved a stock option plan for the grant, without consideration ("Pimi Israel's plan"), of up to 623,547 options ("Pimi Israel's Options" or "Plan"), exercisable into 623,547 ordinary shares of NIS 0.01 par value of Pimi Israel to employees officers and directors of Pimi Israel. The exercise price and vesting period for each grantee of Options will be determined by Pimi Israel's Board and specified in such grantee's option agreement. The options will vest over a period of 1-16 quarters based on each grantee's option agreement. Any option not exercised within 10 years after the date of grant thereof expires.

On April 27, 2009, following the acquisition of Pimi Israel, the Company adopted the 2009 Share Incentive Plan (the "2009 Share Incentive Plan"), pursuant to which the Company's Board of Directors is authorized to grant up to 3,000,000 options, exercisable into 3,000,000 shares of the Company. The purpose of the 2009 Share Incentive Plan is to offer an incentive to employees, directors, officers, consultants, advisors, suppliers and any other person or entity whose services are considered valuable to the Company, as well as to replace the Pimi Israel Plan.

Upon the adoption of the 2009 Share Incentive Plan, all options granted under the Pimi Israel Plan were replaced by options with similar terms, subject to the 2009 Share Incentive Plan on a 1 for 1 basis (561,191 options were replaced of which 124,709 options relate to non-employees).

	- 54 -

PIMI AGRO CLEANTECH, INC.

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)

NOTE 10 - SHARE CAPITAL (cont.)

Stock-option plans (cont.)

The fair value of options granted under the plan was estimated at the date of grant using the Black-Scholes option pricing model. The following are the data and assumptions used:

		2009/2010/2011/2012/2013
Dividend yield (%)		0
Expected volatility (%) (*)		50
Risk free interest rate (%) (**)		3
Expected term of options (years) (***)		5-7
Exercise price (US dollars)		0.01/0.72/1.37/0.8/1
Share price (US dollars)		0.2/0.72/1.37/0.73
Fair value (US dollars)		0.19-0.7

(*)

Due to the very limited volume of trade of the Company's shares, the expected volatility was based on the historic volatility of public companies which operate in the same industry sector (agricultural chemical industry).

(**)

The risk free interest rate represented the risk free rate of US$ zero – coupon US Government Bonds.

(***)

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

On May 2012, Mr. Sivan was granted 280,000 options for 280,000 shares of the Company’s common stock, to be vested to him in three years, on each anniversary of commencement of his employment with the Company; 93,333 options annually. The exercise price per each common stock share is $0.8. The total non-compensation of this grant was US$ 98,841. See also Note 15H.

On March 13, 2013, Mr. Shorrer, one of the directors, was granted 48,000 options for 48,000 shares of Common stock to be vested over 12 quarters, 4,000 options each quarter, commencing on March 1, 2013. The exercise price per each common stock share is US$ 1.00. The total fair value estimation of the non-cash compensation of this grant was approximately US$ 5,306.

	- 55 -

PIMI AGRO CLEANTECH, INC.

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)

NOTE 10 - SHARE CAPITAL (cont.)

Stock-option plans (cont.)

The non-cash compensation relating to options granted to employees and directors was US$ 44,070, US$ 35,794 and US$ 5,554 during the years ended December 31, 2013, 2012 and 2011, respectively (of which US$ 30,888, US$ 26,426 and US$ 2,676 was charged to research and development expenses, respectively and US$ 13,182, US$ 9,368 and US$ 2,878 was charged to general and administrative expenses, respectively).

As of December 31, 2013, there are 2,079,633 shares available for future grants under the 2009 Share Incentive Plan.

The following table presents a summary of the status of the grants to employees and directors as of December 31, 2013, 2012 and 2011:

		Weighted average
	Number	exercise price

Year ended December 31,	2013

Balance outstanding at beginning of year	424,195	0.80

Granted	48,000	1.00
Exercised	-	-
Forfeited	(19,486)	0.80
Balance outstanding at end of the year	452,709	0.82

PIMI AGRO CLEANTECH, INC. 10-K