ORGANITECH USA, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
IN U.S. DOLLARS
Period from
inception
Nine months Three months (July 1, 1999)
ended September 30, ended September 30, through
------------------------------ ------------------------------ September 30,
2006 2005 2006 2005 2006
------------ ------------ ------------ ------------ ------------
Unaudited Unaudited Unaudited
------------------------------ ------------------------------ ------------
Revenues $ 2,463,062 $ 289,380 $ 1,171,146 $ 289,380 $ 4,522,183
Cost of revenues 2,059,953 323,211 998,069 313,705 4,158,183
------------ ------------ ------------ ------------ ------------
Gross profit (loss) 403,109 (33,831) 173,077 (24,325) 364,000
------------ ------------ ------------ ------------ ------------
Research and development expenses,
net 347,261 103,691 119,973 62,503 3,671,413
Selling and marketing expenses 663,798 147,455 196,393 30,594 2,232,099
General and administrative expenses 499,540 252,828 154,469 86,603 3,309,951
------------ ------------ ------------ ------------ ------------
Total operating expenses 1,510,599 503,974 470,835 179,700 9,213,463
------------ ------------ ------------ ------------ ------------
Operating loss (1,107,490) (537,805) (297,758) (204,025) (8,849,463)
Financing income (expenses), net 23,339 (132,632) (20,796) (14,107) (263,608)
Other expenses, net - (179) - - (50,308)
------------ ------------ ------------ ------------ ------------
Net loss $ (1,084,151) $ (670,616) $ (318,554) $ (218,132) $ (9,163,379)
============ ============ ============ ============ ============
Basic and diluted net loss
per common share $ (0.04) $ (0.03) $ (0.01) $ (0.01)
============ ============ ============ ============
Weighted average number of common
shares outstanding used in basic and
diluted net loss per share
calculation 25,998,198 20,877,821 26,632,642 22,123,552
============ ============ ============ ============
F - 4
ORGANITECH USA, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED INTERIM STATEMENTS OF SHAREHOLDERS' DEFICIENCY
- --------------------------------------------------------------------------------
IN U.S. DOLLARS
PREFERRED SHARES COMMON SHARES
--------------------------- ----------------------------- DEFICIT TOTAL
NUMBER OF PREFERRED NUMBER OF COMMON ADDITIONAL ACCUMULATED SHARE HOLDERS'
PREFERRED SHARES OUTSTANDING SHARES PAID IN DEFERRED DURING THE EQUITY
SHARES CAPITAL COMMON SHARES CAPITAL CAPITAL (1) COMPENSATION DEVELOPMENT STAGE (DEFICIENCY)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
IN THOUSANDS IN THOUSANDS
----------- -----------
Balance as of July 1, 1999: - $ - - $ - $ - $ - $ - $ -
Common shares ($0.00004) issued in July - - 4,790 4,790 (4,621) - - 169
Common shares ($0.03) issued in October - - 684 684 20,316 - - 21,000
Common shares ($0.19) issued in October - - 489 489 92,951 - - 93,440
Deferred stock-based compensation related to
employee option grants - - - - 481,485 (481,485) - -
Amortization of deferred stock-based compensation - - - - - 15,715 - 15,715
Net loss - - - - - - (80,680) (80,680)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance as of December 31, 1999 - - 5,963 5,963 590,131 (465,770) (80,680) 49,644
Common shares ($0.08) issued in April - - 684 684 54,860 - - 55,544
Preferred shares ($1.14) issued in June 853 2,088 - - 971,362 - - 973,450
Amortization of deferred stock-based compensation - - - - - 299,598 - 299,598
Net loss - - - - - - (1,406,644) (1,406,644)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance as of December 31, 2000 853 2,088 6,647 6,647 1,616,353 (166,172) (1,487,324) (28,408)
Common shares ($0.51) issued in January (853) (2,088) 4,453 4,453 2,263,149 - - 2,265,514
Amortization of deferred stock-based compensation - - - - - 111,016 - 111,016
Treasury stock - - (100) - - - - -
Net loss - - - - - - (1,708,326) (1,708,326)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance as of December 31, 2001 - - 11,000 11,100 3,879,502 (55,156) (3,195,650) 639,796
Common shares ($0.363) issued in October - - 275 275 99,725 - - 100,000
Proceeds for future share issuance (1) - - - - 134,884 - - 134,884
Amounts assigned to issuance of warrants to service
providers - - - - 2,116 - - 2,116
Amortization of deferred stock-based compensation - - - - - 47,948 - 47,948
Net loss - - - - - - (967,905) (967,905)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance as of December 31, 2002 - $ - 11,275 $ 11,375 $ 4,116,227 $ (7,208) $(4,163,555) $ (43,161)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
(1) Net of issuance expenses.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS.
F - 5
ORGANITECH USA, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED INTERIM STATEMENTS OF SHAREHOLDERS' DEFICIENCY (CONT.)
- --------------------------------------------------------------------------------
IN U.S. DOLLARS
COMMON SHARES
--------------------------- DEFICIT
NUMBER OF COMMON ADDITIONAL RECEIPT ON ACCUMULATED TOTAL
OUTSTANDING SHARES PAID IN ACCOUNT OF DEFERRED DURING THE SHAREHOLDERS'
COMMON SHARES CAPITAL CAPITAL (1) SHARES COMPENSATION DEVELOPMENT STAGE DEFICIENCY
----------- ----------- ----------- ----------- ----------- ----------- -----------
IN THOUSANDS
-----------
Balance as of December 31, 2002 11,275 $ 11,375 $ 4,116,227 - $ (7,208) $(4,163,555) $ (43,161)
Common shares ($0.363) issued in May 344 344 (344) - - - -
Common shares ($0.18) issued in May ,June ,September
and November 3,043 3,043 544,697 - - - 547,740
Common shares to service provider ($0.2) issued in November
550 550 13,200 - - - 13,750
Common shares to service provider ($0.3) issued in
November 200 200 30,975 - - - 31,175
Options exercised in June 188 188 - - - - 188
Options exercised in November 463 463 (463) - - - -
Common shares to service provider ($1) issued in May 600 600 599,400 - - - 600,000
Common shares to service providers ($0.25) issued in April 48 48 (48) - - - -
Proceeds for future share issuance (January 2004) - - - 187,528 - - 187,528
Amortization of deferred stock-based compensation - - - - 7,208 - 7,208
Treasury stock - (100) 100 - - - -
Previous years issuance of common stock 37 37 (37) - - - -
Net loss - - - - - (1,612,516) (1,612,516)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance as of December 31, 2003 16,748 16,748 5,303,707 187,528 - (5,776,071) (268,088)
Common shares ($0.18) issued in January 1,100 1,100 196,902 (187,528) - - 10,474
Common shares to service provider ($0.3) 320 320 124,380 - - - 124,700
Compensation related to amortization of deferred marketing
and distribution costs - - 55,000 - - - 55,000
Common shares to service provider ($0.18) issued in April 100 100 17,900 - - 18,000
Proceeds for future share issuance (May 2005) - - - 25,000 - - 25,000
Fair value of shares issued and beneficial conversion
feature
related to convertible loan - - 88,000 - - - 88,000
Stock-based compensation related to warrants granted to
Consultant - - 3,000 - - 3,000
Net loss - - - - (1,304,659) (1,304,659)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance as of December 31, 2004 18,268 $ 18,268 $ 5,788,889 $ 25,000 $ - $(7,080,730) $(1,248,573)
----------- ----------- ----------- ----------- ----------- ----------- -----------
(1) Net of issuance expenses.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS.
F - 6
ORGANITECH USA, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED INTERIM STATEMENTS OF SHAREHOLDERS' DEFICIENCY (CONT.)
- --------------------------------------------------------------------------------
IN U.S. DOLLARS
COMMON SHARES
--------------------------- DEFICIT
NUMBER OF ADDITIONAL ACCUMULATED TOTAL
OUTSTANDING COMMON PAID IN RECEIPT ON DURING THE SHAREHOLDERS'
COMMON SHARES SHARES CAPITAL CAPITAL (1) ACCOUNT OF SHARES DEVELOPMENT STAGE DEFICIENCY
----------- ----------- ----------- ----------- ----------- -----------
IN THOUSANDS
-----------
Balance as of December 31, 2004 18,268 $ 18,268 $ 5,788,889 $ 25,000 $(7,080,730) $(1,248,573)
Common shares to service provider ($0.15) issued in May 452 452 71,016 - - 71,468
Common shares to service provider ($0.15) issued in May 653 653 98,309 - - 98,962
Common shares ($0.25) issued in March, May and November 2,400 2,400 521,899 - - 524,299
Common shares to consultant ($0.18) issued in May 33 33 2,967 - - 3,000
Compensation related to amortization of deferred marketing
and distribution costs - - 41,250 - - 41,250
Common shares to supplier issued in May 18 18 4,456 - - 4,474
Common shares ($0.25) issued in May 100 100 24,900 (25,000) - -
Common shares to SH.A Gali issued in March in connection
with a grant of convertible loan 200 200 (200) - - -
Common shares to SH.A Gali ($0.22) issued in November for a
convertible loan 455 455 99,545 - - 100,000
Penalty paid to SH.A Gali in connection with convertible
loan ($0.22) 454 454 99,546 100,000
Amortization of stock-based compensation - - 575 - - 575
Net loss - - - - (998,498) (998,498)
----------- ----------- ----------- ----------- ----------- -----------
Balance as of December 31, 2005 23,033 23,033 6,753,152 - (8,079,228) (1,303,043)
Common shares ($0.25) issued in April 3,600 3,600 880,900 - - 884,500
Amortization of stock-based compensation - - 311,211 - - 311,211
Net loss for the period - - - - (1,084,151) (1,084,151)
----------- ----------- ----------- ----------- ----------- -----------
Balance as of September 30, 2006 (unaudited) 26,633 $ 26,633 $ 7,945,263 $ - $(9,163,379) $(1,191,483)
=========== =========== =========== =========== =========== ===========
(1) Net of issuance expenses.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS.
F - 7
ORGANITECH USA, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
IN U.S. DOLLARS
Period from
inception
Nine months (July 1, 1999)
Ended September 30, through
---------------------------- September 30,
2006 2005 2006
----------- ----------- -----------
Unaudited Unaudited
----------------------------- -----------
Cash flows used in operating activities:
Net loss for the period $(1,084,151) $ (670,616) $(9,163,379)
----------- ----------- -----------
Adjustments to reconcile net loss to net cash used
in operating activities :
Amortization of stock-based compensation 311,211 - 793,271
Depreciation 25,272 17,865 167,018
Impairment of inventories and base stock 10,000 11,906 65,275
Changes in accrued severance pay, net 31,855 (23,171) 79,631
Loss from disposal of property and equipment - 179 3,388
Warrants granted to consultant - 3,000 8,116
Interest in respect of convertible loan - (2,923) -
Amortization of beneficial conversion feature
related to convertible loan - 20,166 44,000
Amortization of finance costs related to shares
issued in connection with a convertible loan - 20,167 44,000
Penalty in connection with convertible loan - 100,000 100,000
Adjustment of exchange rate changes - - 3,617
Issuance of shares in non-cash expenses -Annex A - 41,250 1,118,971
Changes in assets and liabilities :
Decrease (increase) in trade receivables 66,817 (1,578) (2,073)
Decrease (increase) in other receivables 128,426 (552,733) (142,343)
Decrease (increase) in costs incurred on contracts
in progress 454,524 (1,281,996) (384,222)
Increase (decrease) in trade payables (13,134) 537,180 665,124
Increase (decrease) in other payables and accrued
expenses 476,290 (46,147) 1,057,200
Increase (decrease) in customers advances in
excess of costs incurred on contracts in progress (1,128,887) 1,716,507 591,652
Total adjustments 362,374 559,672 4,212,625
----------- ----------- -----------
Net cash used in operating activities (721,777) (110,944) (4,950,754)
----------- ----------- -----------
Cash flows from investing activities :
Proceeds from disposal of property and equipment - 6,513 15,824
Purchase of property and equipment (19,366) (59,816) (354,535)
----------- ----------- -----------
Net cash used in investing activities (19,366) (53,303) (338,711)
----------- ----------- -----------
Cash flows from financing activities :
Increase in short-term credit, net 1,195 42,765 1,361
Repayment of long-term loan from Financial
institution - (13,274) -
Proceeds from issuance of convertible loans - - 200,000
Proceeds from issuance of shares, net of issuance
expenses 884,500 424,299 5,681,730
----------- ----------- -----------
Net cash provided by financing activities $ 885,695 $ 453,790 $ 5,883,091
----------- ----------- -----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS.
F - 8
ORGANITECH USA, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
IN U.S. DOLLARS
Period from
inception
Nine months (July 1, 1999)
Ended September 30, through
---------------------------- September 30,
2006 2005 2006
----------- ----------- -----------
Unaudited Unaudited
---------------------------- -----------
Net cash used in operating activities $ (721,777) $ (110,944) $(4,950,754)
Net cash used in investing activities (19,366) (53,303) (338,711)
Net cash provided by financing activities 885,695 453,790 5,883,091
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents 144,552 289,543 593,626
Cash and cash equivalents at the beginning of
the period 449,074 112,798 -
----------- ----------- -----------
Cash and cash equivalents at the end of the
period $ 593,626 $ 402,341 $ 593,626
=========== =========== ===========
ANNEX A - SUPPLEMENTARY DISCLOSURE OF NON-CASH
EXPENSES
During the reporting period, the Company issued
shares and warrants in exchange for liabilities
to Shareholders, supplier and services rendered
by third party as follows:
Management fees - see Note 6(K) $ - $ - $ 230,430
Marketing and distribution expenses -
see Note 6(M)(2) - 41,250 110,000
Marketing and distribution expenses -
see Note 6(M)(3) - - 155,875
Marketing and distribution expenses -
see Note 6(M)(4) - - 600,000
Marketing and distribution expenses - - 22,666
----------- ----------- -----------
$ - $ 41,250 $ 1,118,971
=========== =========== ===========
SUPPLEMENTARY DISCLOSURE OF NON-CASH
TRANSACTIONS
Management fees - see Note 6(K) $ - $ 170,430 $ 170,430
Convertible loan Clal - see Note 6(N)(2) - 100,000 100,000
Issuance of shares in consideration of loan
converted - see Note 6(N)(1) - 100,000 100,000
Materials from supplier - see Note 6(M)7 - 4,474 4,474
----------- ----------- -----------
$ - $ 374,904 $ 374,904
=========== =========== ===========
SUPPLEMENTARY CASH FLOW INFORMATION :
Interest paid $ 5,440 $ (7,084) $ 4,955
=========== =========== ===========
Income tax paid $ 1,996 $ 1,901 $ 15,816
=========== =========== ===========
F - 9
ORGANITECH USA, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 1 - GENERAL
A. OrganiTech USA Inc. ("the Company" or "OrganiTECH"), a Delaware
corporation, incorporated in 1981, and its subsidiary (collectively
"the Group") design, develop, manufacture, market and support
Hydroponics solutions and platforms for the Agriculture and
Life-Science industries.
The Company's core business is conducted primarily through its
wholly-owned subsidiary, OrganiTECH Ltd., a company organized under
the laws of Israel. OrganiTECH Ltd. operates mainly in the Agriculture
Industrialization arena. Since its formation in 1999, it has been
developing, producing and marketing its leading proprietary technology
- a Self-contained, highly automated, robotic, sustainable
agricultural platforms designed to automatically seed, transplant and
harvest commercial quantities of hydroponics, pesticide free, green
leaf vegetables.
B. The Company is devoting substantial efforts towards activities such as
research and development of its products, marketing, financial
planning and capital raising. In the course of such activities, the
Company and its subsidiary have sustained operating losses. The
Company and its subsidiary have not generated sufficient revenues and
have not achieved profitable operations or positive cash flows from
operations. The Company's deficit accumulated during the development
stage aggregated to $9,163,379 through September 30, 2006. There is no
assurance that profitable operations, if ever achieved, could be
sustained on a continuing basis.
The Company plans to continue to finance its operations with a
combination of stock issuance and private placements and from its
revenues. There are no assurances, however, that the Company will be
successful in obtaining an adequate level of financing needed for the
long term development and commercialization of its planned products.
These conditions raise substantial doubt about the Company's ability
to continue as a going concern. The consolidated financial statements
do not include any adjustments relating to the recoverability and
classification of recorded assets amounts or the amounts and
classification of liabilities that might be necessary should the
Company be unable to continue as a going concern.
C. The accompanying unaudited interim consolidated financial statements
have been prepared as of September 30, 2006, in accordance with United
States generally accepted accounting principles relating to the
preparation of financial statements for interim periods. Accordingly,
they do not include all the information and footnotes required by
generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three-month
and nine-month periods ended September 30, 2006 are not necessarily
indicative of the results that may be expected for the year ended
December 31, 2006.
F - 10
ORGANITECH USA, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed in the preparation of these
statements are identical to those applied in preparation of the latest
annual financial statements, except for the followings:
A. FASB Statement No. 123 (revised 2004), "Share-Based Payments"
("Statement 123(R)"):
The Company has elected until December 31, 2001 to follow Accounting
Principles Board Statement No. 25 "Accounting for Stock Option Issued
to Employees" ("APB No. 25") and Financial Accounting Standards Board
Interpretation No. 44 "Accounting for Certain Transactions Involving
Stock Compensation" ("FIN No. 44") in accounting for its employee
stock option plan. Under APB 25, when the exercise price of an
employee stock option is equivalent to or is above the market price of
the underlying stock on the date of grant, no compensation expense is
recognized.
The Company adopted the disclosure provisions of Statement of
Financial Accounting Standard No. 148, "Accounting for Stock-Based
Compensation - transition and disclosure" ("SFAS No. 148"), which
amended certain provisions of Statement of Financial Accounting
Standard No. 123 "Accounting for Stock-Based Compensation" ("SFAS No.
123").
Compensation expense for stock options granted to employees since 2002
until and including 2005 under the Company's stock option plans has
been determined based on the fair value at the date of grant,
consistent with the method of SFAS No. 123.
Effective January 1, 2006, the Company adopted the provisions of
Statement 123(R), using the modified prospective method. The adoption
of Statement 123(R) had an immaterial effect on the Company's
financial position and results of operations.
The Company's pro forma net loss for the period from inception through
September 30, 2006 approximates the reported net loss for the related
period.
B. FASB Interpretation No. 48 "Accounting for Uncertainty in Income Taxes
an Interpretation of FASB Statement No. 109" ("FIN 48")
In July 2006, the FASB issued ("FIN 48"). FIN 48 clarifies the
accounting for income taxes by prescribing the minimum recognition
threshold a tax position is required to meet before being recognized
in the financial statements. FIN 48 utilizes a two-step approach for
evaluating tax positions. Recognition (step one) occurs when an
enterprise concludes that a tax position, based solely on its
technical merits, is more-likely-than-not to be sustained upon
examination. Measurement (step two) is only addressed if step one has
been satisfied (i.e., the position is more-likely-than-not to be
sustained). Under step two, the tax benefit is measured as the largest
amount of benefit, determined on a cumulative probability basis that
is more-likely-than-not to be realized upon ultimate settlement.
F - 11
ORGANITECH USA, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
B. FIN 48 (Continued)
FIN 48 applies to all tax positions related to income taxes subject to
the Financial Accounting Standard Board Statement No. 109, "Accounting
for income taxes" ("FAS 109"). This includes tax positions considered
to be "routine" as well as those with a high degree of uncertainty.
FIN 48 has expanded disclosure requirements, which include a tabular
roll forward of the beginning and ending aggregate unrecognized tax
benefits as well as specific detail related to tax uncertainties for
which it is reasonably possible the amount of unrecognized tax benefit
will significantly increase or decrease within twelve months. These
disclosures are required at each annual reporting period unless a
significant change occurs in an interim period.
FIN 48 is effective for fiscal years beginning after December 15,
2006. The cumulative effect of applying FIN 48 will be reported as an
adjustment to the opening balance of retained earnings.
The Company is currently evaluating the effect of the adoption of FIN
48 on its financial statements.
NOTE 3 - REVENUE RECOGNITION - CHANGE IN ESTIMATE
Revenues from long-term contracts are recognized based on Statement of
Position 81-1 "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts" ("SOP 81-1"). The Company adopted the
percentage-of-completion method based on a zero profit margin, until it can
make a more precise estimate, therefore equal amounts of revenues and
costs, measured on the basis of performance during the period, are
presented in the statements of operations.
Commencing in the second quarter of 2006, management is estimating the
probable range of profit it will gain from each project. As such, the gross
profits from projects during the second and third quarters were based on
the lowest probable level of estimate of the anticipated profit of the
projects.
The change to a more precise estimate is accounted for as a change in
accounting estimate. The effect of the change in the estimate on the net
loss and net loss per share for both, the nine-month and three-month
periods ended September 30, 2006 has been $130,480 and $0.01, respectively.
In the nine-month and three-month periods ended September 30, 2006 the
Company derived most of its revenues from two projects, each of a single
customer.
F - 12
ORGANITECH USA, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 4 - COST INCURRED ON CONTRACTS IN PROGRESS
SEPTEMBER 30,
--------
2006
--------
Unaudited
--------
Cost incurred on long-term contracts in progress $186,870
Raw materials 137,037
--------
323,907
Less -
Cost incurred on contracts in progress deducted
From customer advances 186,870
Less -
Advanced received from customer 23,094
--------
$113,943
========
NOTE 5 - CONTINGENCIES
Legal claims
A. In February 2000, OrganiTech Ltd. signed a distribution agreement with
Leami ("Leami"), whereby it granted Leami the exclusive right to
market OrganiTech Ltd's GrowTECH platforms in Israel. Under the terms
of the agreement, Leami agreed to purchase two GrowTECH platforms in
consideration for $100,000. In March 2000, OrganiTech Ltd. received an
advance payment from Leami in an amount of $60,000. In July 2000,
OrganiTech Ltd. delivered the two GrowTECH platforms to Leami.
OrganiTech Ltd. and Leami negotiated certain claims of Leami
concerning the GrowTECH platforms delivered and the distribution
agreement. On February 2, 2005, Leami filed a lawsuit against
OrganiTech Ltd. in the amount of $295,500. On April 20, 2005 the
Company filed a counter lawsuit against Leami at the amount of
$148,800 claiming that Leami had not fulfilled its obligations and
commitments under the sale agreement signed and by not doing so and
taking other actions, it caused OrganiTech Ltd. to suffer damages and
expenses.
Company's management believes, based on the opinion of its legal
counsel, that due to the early stage of the lawsuit it is unable to
predict the outcome of these claims.
F - 13
ORGANITECH USA, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 5 - CONTINGENCIES (CONTINUED)
Legal claims (Continued)
B. In August 2006, a claim for approximately $15,000 against the Company
and Mr. Shimon Zanaty, one of the Company's directors, was filed with
the Haifa Magistrates' Court in Israel. The claim was filed by a
private individual who entered into an agreement in 2003 with one of
the Company's principal shareholders, BLM NV, to purchase shares of
the Company which had previously been purchased by BLM and were held
by a trustee. The plaintiff claims that she paid BLM for the shares,
but has never received them.
Company's management believes, based on the opinion of its legal
counsel, that this claim will not have material adverse effect on the
Company's financial condition.
NOTE 6 - SHARE CAPITAL
A. In July 1999, OrganiTech Ltd. issued 4,790,000 of its common shares at
a price of approximately $0.00004 per share, for a consideration of
$169.
B. In October 1999, OrganiTech Ltd. issued 684,000 of its common shares
at a price of approximately $0.03 per share, for a consideration of
$21,000.
C. In October 1999, OrganiTech Ltd. issued 489,000 of its common shares
at a price of approximately $0.19 per share, for a consideration of
$93,440.
D. In April 2000, OrganiTech Ltd. issued 684,000 of its common shares at
a price of approximately $0.08 per share, for a consideration of
$55,544.
E. In June 2000, OrganiTech Ltd. issued 853,000 of its preferred shares
at a price of approximately $1.14 per preferred share, for a
consideration of $973,000.
After giving effect to the reverse acquisition, discussed in Note 6F,
these preferred shares were cancelled ("the cancelled shares").
F. In January 2001, the Company consummated an agreement with OrganiTech
Ltd., whereby the Company issued 7.5 million of common shares to the
shareholders of OrganiTech Ltd. in exchange for all of the outstanding
ordinary shares of OrganiTech Ltd. not already owned by the Company.
The 7.5 million common shares issued by the Company to the selling
shareholders represented 67.57% of the voting common stock of the
Company. Accordingly, this business combination was considered to be a
reverse acquisition. As such, for accounting purposes OrganiTech Ltd.
is considered to be the acquirer while the Company is considered to be
the acquiree.
F - 14
ORGANITECH USA, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 6 - SHARE CAPITAL (CONTINUED)
G. In January 2001, The Company issued 4,453,000 common shares at the
price of approximately $0.51 per share, for a consideration of
$2,266,000.
This share issuance net of the cancelled shares mentioned in E above,
reflects the issuance by the Company to its shareholders prior to the
reverse acquisition
H. On August 1, 2004, the Company and an investor agreed that the
investor will invest $25,000 in the Company in consideration for
100,000 common shares, at a price of $0.25 per share. On May 2, 2005
the Company issued the shares.
I. Treasury stock
In October 2000, the Company issued 100,000 common shares to a
consultant according to a consulting agreement. In September 2001, the
Company accepted the 100,000 common shares of the Company from the
consultant, the shares were cancelled and the consulting agreement was
terminated at the parties' mutual agreement.
J. Private placement
Pursuant to an investment agreement entered into with a third party
("Investor"), in June 2002 and a series of amendments to that
agreement, including management fee agreement, the Investor has
invested an aggregate of $1,042,229 in the Company and received an
aggregate of 5,402,174 shares of the Company's common stock,
constituting 23.45% of the Company's issued and outstanding share
capital as of December 31, 2005. Additionally, the Investor also has
an option to purchase 46,242 shares of the Company's common stock for
an exercise price of $1.00 per share.
K. Management Fees
(1) On June 16, 2002 the Company and a third party investor (the
"Investor") signed a management agreement. The management fees
accumulated till December 31, 2004 were paid on May 2, 2005 by
the issuance of 452,174 common shares of the Company.
(2) On July 1, 2003 the Company and Mr. Shimon Zenaty ("Shimon")
signed a management agreement. The management fees accumulated
till December 31, 2004 were paid on May 2, 2005 by the issuance
of 652,059 common shares of the Company.
F - 15
ORGANITECH USA, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 6 - SHARE CAPITAL (CONTINUED)
L. Equity Agreement
On July 20, 2003, the Company and Dutchess Capital Management, LLC
("Dutchess") signed on a term sheet for equity line of credit ("Equity
Line") which was approved on July 31, 2003 by the Company's Board of
Directors, whereby:
(1) Dutchess shall be committed to purchase the Company's common
share ("Stock") in consideration for up to $5,000,000 over a
period of 36 months ("Line Period"), starting the date either
free trading shares are deposited into an escrow account or a
registration statement of the Stock has been declared effective
("Effective Date") by the U.S. Securities and Exchange Commission
("SEC").
(2) The amount that the Company shall be entitled to withdraw from
the Equity Line is equal to 200% of the averaged daily volume of
the Company's share trading ("ADV") multiplied by the average of
the 3 daily closing ("Best Bid") prices immediately preceding the
day on which the Company will give the notice.
(3) If the market price with respect to the notice date does not meet
75% of the closing Best Bid price of the Company common shares
for the 10 trading days prior to the notice date, the Company
shall automatically withdraw the notice amount.
(4) The Company will issue shares in respect of the exercised Equity
Line base upon 94% of the lowest Company Best Bid price of the
Company's share at the 5 consecutive trading days immediately
after the notice date.
Management is of the opinion that there is no assurance that the terms
and conditions of the term sheet will not be changed or that such
offering will be completed.
As of September 30, 2006, the Company has not yet executed the Equity
Line.
M. Service and consulting agreements for share issuance
(1) On April 9, 2003 the Company's Board of Directors authorized the
Company to issue 57,280 common shares under certain agreements to
pay brokerage fees and commission for services provided to the
Company by third parties and a related party, out of which 9,280
common shares were issued to a related party. On May 14, 2003,
the Company issued the balance of the 48,000 common shares.
F - 16
ORGANITECH USA, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 6 - SHARE CAPITAL (CONTINUED)
M. Service and consulting agreements for share issuance (Continued)
(2) On October 1, 2003, the Company entered into 24 month consulting
agreement with third party (the "consultant"). Pursuant to the
consulting agreement the consultant will provide the Company
business consulting services in consideration for 550,000 common
shares. In November 2003 the Company issued the shares. The fair
market value of the shares at grant date was $0.20 per share. The
consulting expenses which amount to $110,000 were recorded
proportionally over the period of the agreement.
(3) On October 13, 2003 the Company and MC Services AG ("MC") entered
into advising and public relation service agreement which was
approved by the Company's Board of Directors on October 27, 2003,
for a period of ten months commencing November 1, 2003 at the
cost of $155,875 (include additional costs of $8,375).
As of December 31, 2004, the Company issued 519,583 common shares
to MC pursuant to this agreement. The service expenses were
recorded proportionally over the period of the agreement.
(4) On May, 2003 the Company issued 600,000 common shares to Agronaut
in consideration for its marketing and distribution expenses of
$600,000 of the Company's systems.
(5) On April 29, 2004, the Company issued 100,000 common shares to a
service provider, in consideration for legal services rendered of
$18,000.
(6) On October 21, 2004, the Company entered into a 4 month
consulting agreement with a third party. Pursuant to the
consulting agreement the consultant will provide the Company
financial consulting services for a consideration of $2,500 per
month and $1,500 in warrants to purchase common shares. The
number of the warrants will be determined upon the average price
of the share for each month. The consulting agreement was
terminated at the end of February 2005.
On May 2, 2005 the consultant exercised the warrants to 33,000
common shares.
(7) On May 2, 2005, the Company issued 17,950 common shares to a
supplier in consideration for materials that were supplied in the
amount of $4,474.
F - 17
ORGANITECH USA, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 6 - SHARE CAPITAL (CONTINUED)
N. Convertible loans
(1) Convertible loan issued to SH.A.Gali Ltd.
On June 14, 2004, the Company signed a convertible loan agreement
with SH.A.Gali Ltd. ("Gali"), a company under the control of a
director, whereby Gali provided the Company with a convertible
loan in the amount of $100,000 (the "Loan"), convertible upon
Gali's discretion, into 454,545 shares of the Company's common
stock, based on the conversion price of $0.22 per share which is
the fair market value of the Company's common stock at the date
of the agreement. In addition, Gali was also entitled to 200,000
shares of the Company's common stock under the Loan in
consideration for the provision of the Loan. If not converted,
the loan should have been repaid in one installment following of
12 months from the granting date. The loan bears interest at
Libor +3 %, to be paid at maturity or upon conversion.
According to the loan agreement the Company paid the incurred
interest in the amount of $6,128 and issued to Gali 200,000
common shares of the Company in May 2005 as additional financing
expenses.
The Company accounted for the Loan according to APB Opinion No.
14 "Accounting for Convertible Debt and Debt Issued with Stock
Purchase Warrants", EITF 98-5 "Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios" and EITF 00-27 "Application of
Issue No. 98-5 to certain Convertible Instruments".
According to APB Opinion No. 14 and EITF 00-27 (Issue 1 -
Effective Conversion Price) the Company allocated the proceeds
received under the Loan and for the 200,000 detachable shares.
The amount allocated to the detachable shares was recorded only
as additional paid in capital (receipt on account of shares)
since at that time the shares were not issued. Following such
allocation, the Company applied EITF 98-5 to the amount allocated
to the Loan, using the effective conversion price and measured
the intrinsic value of the embedded conversion option.
The Company recorded as paid-in capital, a beneficial conversion
feature in the amount of $88,000, related to the Loan and to the
fair value of the 200,000 shares of the Company's common stock
issued in connection with the Loan, to be amortized over a period
of one year. Consequently, the Company recorded in its statement
of operations for 2004 and 2005, financing expenses in the
aggregate of $88,000, recorded as $47,667 in 2004 and $40,333 for
2005.
In May 2005, following the issuance to Gali of the said 200,000
shares of common stock, the Company reduced the paid-in capital
initially recorded in 2004 for the par-value of the shares
issued, in the amount of $200. Such a reduction was reflected in
the Company's statement of shareholders' deficiency for 2005.
F - 18
ORGANITECH USA, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 6 - SHARE CAPITAL (CONTINUED)
N. Convertible loans (Continued)
(1) Convertible loan issued to SH.A.Gali Ltd. (Continued)
As the Company did not repay the loan on its due date, Gali was
entitled to a penalty in the form of issuance of additional
common stock of the Company equivalent to $100,000, computed
based upon the fair market value of the Company's common stock at
the date of the agreement, determined at $0.22 per share. On
November, 2005, following the Company's failure to repay the loan
on time, Gali was issued with 909,090 common shares.
(2) Convertible loan issued to Clal Finance Underwriters Ltd.
("Clal")
On December 21, 2004, the Company issued a convertible promissory
Note to Clal with the principal amount of $100,000 bearing an
annual interest at a rate equal to the prime rate of Bank of
America, N.A as of the repayment date plus 5%. Clal had the
option to convert the promissory Note into 400,000 common shares
of the Company for which, fair market value approximates the
amount of the Note on the issuance date. On March 2, 2005, Clal
converted the promissory Note (See note 6(P)).
The Company accounted for this convertible loan according to EITF
00-27 "Application of Issue No. 98-5 to certain Convertible
Instruments". No beneficial conversion feature was recorded as
the effective conversion price of the convertible loan was equal
to the fair market value of the common stock on the date of
issuance, which was also the commitment date.
O. Private Investment in Public Entity ("PIPE")
(1) On February 20, 2005 (the "closing date"), the Company and
several investors including and represented by Clal Investments
Ltd., ("Clal") entered into an investment agreement whereby, the
investors and Clal were entitled to purchase up to 4,000,000
shares of the Company's common stock (the "Investment Shares")
for an aggregate purchase price of $1,000,000 and options to
purchase shares of common stock of the Company.
Such aggregated price included the conversion by Clal of the
convertible promissory note into an equity investment in the
Company (see note 4 B). Pursuant to the agreement, the Company
agreed to issue to the investors and Clal, two types of options,
proportionally to their effective investment: (i) Options type A
("A-1 Warrants") were for up to 2,000,000 shares of common stock
exercisable for the longer of 360 days from the closing date or 3
months from the registration of the Investment Shares for an
exercise price of $0.75; and (ii) Options type B ("A-2 Warrants")
were for up to 2,000,000 shares of common stock exercisable for
the longer of 540 days from the closing date or 3 months from the
registration of the Investment Shares for an exercise price of
$1.00 or, in the last 30 days of the life of the options, at a
10% discount from the average share price within the 30 days
period prior to the date of the delivery notice.
F - 19
ORGANITECH USA, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 6 - SHARE CAPITAL (CONTINUED)
O. Private Investment in Public Entity ("PIPE") (Continued)
(2) Pursuant to the agreement, during February 2005, the Company
received a total consideration of $550,000, for which, during
March and May 2005, the Company issued Clal and the investors the
following: 2,200,000 shares of the Company's common stock, A-1
Warrants to purchase 1,100,000 shares of the Company's common
stock and A-2 Warrants to purchase 1,100,000 shares of the
Company's common stock. On July 1, 2005 the Investors and Clal
invested additional $50,000 in consideration for 200,000 common
shares of the Company, issued on November 2005, A-1 Warrants to
purchase a further 100,000 shares of the Company's common stock
and A-2 Warrants to purchase a further 100,000 shares of the
Company's common stock.
(3) On January 31, 2006, Clal and the investors invested the
remaining $400,000 for which they received in April 2006 an
additional 1,600,000 shares of the Company's common stock, A-1
Warrants to purchase 800,000 shares of the Company's common stock
and A-2 Warrants to purchase 800,000 shares of the Company's
common stock.
(4) On January 2, 2006, the Company's Board of Directors approved the
increase of the financing under the PIPE agreement to 1.3M$ -
1.5M$ until February 1, 2006. Pursuant to the above approval and
to an amendment to the investment agreement signed on January 31,
2006, Clal and the investors invested an additional $500,000 for
which they received in April 2006 2,000,000 common shares at
$0.25 per share, and additional options as follows: (i) A-1
Warrants for up to 1,000,000 shares of common stock for an
exercise price of $0.75 and (ii) A-2 Warrants for up to 1,000,000
shares for common stock for an exercise price of $1.00 or, in the
last 30 days of the options, at a 10% discount from the average
share price within the 30 days period prior to the date of the
delivery notice. As of March 31, 2006 the Company received
$450,000 and the remaining of $50,000 were received in April
2006.
The final exercise date for all A-1 Warrants under the original
investment agreement was extended until the later of April 30,
2007 or 3 months from the registration of the Investment Shares
and the final exercise date for all type A-2 Warrants under the
original investment agreement was extended until the later of
July 31, 2007 or 3 months from the registration of the Investment
Shares.
Under the amendment, the investors waived any claims that any of
them, had, has or may have had at any time in the past until and
including the date of the amendment, to receive compensation
pursuant to the Company's failure to file the registration
statement within the Registration Period.
F - 20
ORGANITECH USA, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 6 - SHARE CAPITAL (CONTINUED)
O. Private Investment in Public Entity ("PIPE") (Continued)
In addition, the amendment to the investment agreement stated
that the Company shall use its best efforts, as soon as
practicable, but not later than 75 business days following
January 31, 2006 (the "Amended Registration Period"), to file a
registration statement with the Securities and Exchange
Commission, on Form SB-2 or such other applicable registration
form available.
Should the Company fails to (i) file a registration statement
covering the Investment Shares and Warrants, or (ii) respond to
comments from the Security and Exchange Commission ("SEC") within
the time periods set forth in the Investment Agreement, or (iii)
maintain the registration statement covering the Investment
Shares and Warrants effective, the Company will bear a fine equal
to 1% of the total amount under the PIPE agreement ($1.5M) per
month. The Company filed the requested Form SB-2 on May 12, 2006
which was declared effective on October 4, 2006 by the United
States Securities and Exchange Commission.
P. Options to Purchase Company Shares
(1) On March 14, 2006 the Company and Clal entered into an agreement
for the provision of past services provided by Clal to the
Company in securing part of the PIPE agreement. Under the
agreement, Clal is entitled to A-1 Warrants for the purchase of
additional 180,000 shares of the Company's common shares and A-2
Warrants for the purchase of additional 180,000 shares of the
Company's common shares under the same terms and conditions
detailed in the PIPE agreement.
(2) On November 16, 2004 the Company entered into a service agreement
with a consultant where by the consultant will present the
Company to potential investors and as part of the success-based
consideration, the consultant will be entitled to purchase
options for Company's common shares at certain conditions.
Following the PIPE agreement the consultant is entitled to A-1
Warrants for the purchase of additional 27,500 shares of the
Company's common shares and A-2 Warrants for the purchase of
additional 27,500 shares of the Company's common shares under the
same terms and conditions detailed in the PIPE agreement.
F - 21
ORGANITECH USA, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 6 - SHARE CAPITAL (CONTINUED)
Q. Stock Option Plans
(1) On December 23, 1999, OrganiTech Ltd. Board of Directors approved
a stock compensation program with regard to one employee. The
stock options granted under the program permits the employee to
purchase 6,000 common shares at an exercise price of New Israeli
Shekel 0.01 per share. The Company and the employee agreed to
convert the option to purchase 6,000 OrganiTech Ltd. common
shares under this program, into options to purchase 463,236
common shares of the Company at an exercise price of $0.0001 per
share. All options granted under this program were exercised in
full into common shares of the Company at their vesting dates.
(2) On May 29, 2000 the Company granted a key employee options to
purchase 96,508 common shares at an exercise price of $1 per
share. The options can be exercised upon the occurrence of a
public issuance of shares by the Company, a merger or an
acquisition of the Company. As of September 30, 2006 all of the
options granted are outstanding and fully vested.
(3) On May 31, 2005, the Board of Directors approved a Stock Option
Plan ("SOP") for Company's executives, directors, key employees
and service providers comprising options to purchase up to
1,622,000 common shares of the Company.
The SOP provides that no option may be granted at an exercise
price less than the fair market value of the common shares on the
date of grant and no option can have a term in excess of ten
years. Options which are canceled or forfeited before expiration
become available for future grants.
On December 29, 2005, the Company granted 1,230,000 options
pursuant to the SOP and as of December 31, 2005, 392,000 options
of the Company were still available for future grants. The fair
value of options granted on that date was $0.22.
On February 19, 2006, the Board of Directors approved the
increasing of the SOP in additional options to purchase up to
additional 3,000,000 common shares of the Company.
On January 2, 2006 and February 19, 2006 the Company granted to
the Chief Executive Officer and Chief Financial Officer of the
Company 1,500,000 and 250,000 options, respectively. The weighted
average fair values of options granted on these dates were $0.21
and $0.22, respectively. On June 28, 2006 the Company granted to
four of its employees and one service provider a total of 430,000
options. The weighted average fair value of the options granted
on that date was $0.27.
As of September 30, 2006, 1,212,000 options of the Company were
still available for future grants.
F - 22
ORGANITECH USA, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 6 - SHARE CAPITAL (CONTINUED)
Q. Stock Option Plans (Continued)
(3) (Continued)
Options vest over a period of zero to four years from the date of
grant and expire no longer than ten years of grant.
The fair value of the options granted during year 2005 and the
nine-month period ended September 30, 2006 was estimated using a
Black & Scholes option pricing model, with the following weighted
average assumptions:
Divided yield 0%
Expected volatility 122%
Risk-free interest rate 4.6% - 5.23%
Expected life 6 years
(4) A summary of the status of the Company's stock option plans:
PERIOD FROM INCEPTION
NINE MONTHS ENDED NINE MONTHS ENDED (JULY 1, 1999) THROUGH
SEPTEMBER 30, 2006 SEPTEMBER 30, 2005 SEPTEMBER 30, 2006
------------------------ ---------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------- ------ ---------- ---------- ---------- -------
Outstanding - beginning
of the year 1,326,508 $0.246 96,508 $ 1 - -
Granted 2,180,000 $0.222 - - 3,969,744 $ 0.204
Exercised - - - - (463,236) $0.0001
---------- ------ ---------- ---------- ---------- -------
Outstanding - ending of
the period 3,506,508 $0.231 96,508 $ 1 3,506,508 $ 0.231
========== ====== ========== ========== ========== =======
Exercisable - ending of
the period 949,008 $0.284 96,508 $ 1 949,008 $ 0.284
========== ====== ========== ========== ========== =======
Compensation expenses amounting to $311,211, $(0) and $793,271
were recognized during the nine months ended September 30, 2006
and 2005 and for the period from inception through September 30,
2006, respectively.
As of September 30, 2006, the total unrecognized estimated
compensation costs related to non-vested stock options granted
prior to that date was $439,804, which is expected to be
recognized over a period of up to 3.75 years. The weighted
average remaining contractual term (years) for outstanding and
exercisable stock options as of September 30, 2006 is 5.17 years
and 5.28 years, respectively.
F - 23
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following management's discussion and analysis or plan of operation should
be read in conjunction with our condensed interim unaudited consolidated
financial statements for the period ended September 30, 2006 thereto contained
elsewhere in this report and with our audited consolidated financial statements
and notes for the year ended December 31, 2005.
This filing contains forward-looking statements. The words "anticipate,"
"believe," "expect, "plan," "intend," "seek," "estimate," "project," "will,"
"could," "may," and similar expressions are intended to identify forward-looking
statements. These statements include, among others, information regarding future
operations, future capital expenditures, and future net cash flow. Such
statements reflect our management's current views with respect to future events
and financial performance and involve risks and uncertainties, including,
without limitation: (a) the timing of our sales could fluctuate and lead to
performance delays; (b) without additional equity or debt financing we cannot
carry out our business plan; (c) we operate internationally and are subject to
currency fluctuations, which could cause us to incur losses even if our
operations are profitable; (d) our research and development facilities are
located in Israel and we have important facilities and resources located in
Israel which could be negatively affected due to military or political tensions;
(e) certain of our officers and employees are required to serve in the Israel
defense forces and this could force them to be absent from our business for
extended periods; (f) the rate of inflation in Israel may negatively impact our
costs if we exceeds the rate of devaluation of the NIS against the Dollar.
Should one or more of these risks or uncertainties occur, or should underlying
assumptions prove to be incorrect, actual results may vary materially and
adversely from those anticipated, believed, estimated or otherwise indicated.
These forward-looking statements speak only as of the date of this Report.
Subject at all times to relevant federal and state securities law disclosure
requirements, we expressly disclaim any obligation or undertaking to disseminate
any update or revisions to any forward-looking statement contained herein to
reflect any change in our expectations with regard thereto or any changes in
events, conditions or circumstances on which any such statement is based.
Consequently, all of the forward-looking statements made in this Report are
qualified by these cautionary statements and there can be no assurance of the
actual results or developments.
DESCRIPTION OF BUSINESS
We are a Delaware corporation, incorporated in 1981 (organized as a Colorado
corporation on December 8, 1981, see further on in 'Corporate History') and
leading in offerings a "Hydroponics Growing Factory". We design, develop,
manufacture, market and support Hydroponics solutions and platforms for the
Agriculture and Life-Science industries, enabling the growth of leafy vegetables
and herbs in a highly economic, clean and automated surrounding, making optimal
use of resources such as water, energy, labor and land.
Our core business is conducted primarily through our wholly-owned subsidiary,
OrganiTECH Ltd., a company organized under the laws of Israel. OrganiTECH Ltd.
operates mainly in the Agriculture Industrialization arena. Since our formation
in 1999, we have been developing, producing and marketing our proprietary
technology. Our leading products are:
a) GrowTECHTM 2500 - the Company's leading product - a fully automated
,computerized controlled Hydroponics sustainable greenhouse designed to
grow and harvest commercial quantities of hydroponics, pesticide free,
green leaf vegetables and herbs, while making optimal use of resources such
as water, energy, labor and land.
b) GrowTECHTM2000 - a self-contained, portable, robotic, sustainable
agricultural platform designed to automatically seed, transplant, grow and
harvest commercial quantities of hydroponics, pesticide free, green leaf
vegetables and herbs. It has yet to be matured and additional development
work is still required before its full commercialization.
4
INDUSTRY OVERVIEW
There are several key factors that influence on the overall demand for
hydroponics systems, as follows:
WORLDWIDE DEMAND FOR GREEN LEAF PRODUCTS IS RAPIDLY INCREASING
By the year 2030, the world's population is projected to reach an estimated 8
billion people - approximately 2 billion more than today. Additionally, during
the next 50 years, worldwide demand for green leaf vegetables is expected to
triple as the amount of arable land decreases by one half. Advances in
technology are expected to continue to assist producers in increasing their
overall productivity.
PRODUCTION AND DISTRIBUTION COSTS INCREASE
Over the last decade, agricultural producers in western countries have faced
increasing costs in relation to labor, energy, water purification and access and
transportation, as well as disproportionate increases in costs in the price of
land near market places. All of these factors have resulted in materially
increased production costs in a market with rapidly increasing demand.
LOCALIZATION OF AGRICULTURAL COST-EFFECTIVE-PRODUCTION
The distribution costs for producers of leafy vegetables are relatively large as
a result of the high space/weight ratio when transporting these products. As a
result producers typically seek locations near to the point of sale, which will
often be close to large conurbations where overhead costs, especially energy and
labor, are very high.
By optimizing the integration of automation in production and optimizing the use
of resources such as energy and land through our Hydroponics growing technology,
we offer a cost-effective production process, enabling significant reductions in
the cost of labor and water, compared to traditional soil-based growing methods.
Moreover, where the production cost is reduced, the localization of production
has become more attractive causing savings in distribution costs, thereby
reducing the cost to the consumer. This enables either local growers of leafy
vegetable produce or importers of leafy vegetable produce to situate in
locations of their choice while simultaneously enabling them to compete with
cheap local/imported products.
MOVING TO VEGETABLE-BASED NUTRITION
Lately, an additional new trend can be identified, especially in the Western
world - the growing demand for vegetable based nutrition over other nutrition
components such as proteins. Demand for vegetables in general and for green leaf
vegetables in particular, is rapidly increasing and becoming a principal part of
every Western meal.
RAPIDLY GROWING DEMAND FOR CLEAN VEGETABLES WITH EXTENDED SHELF-LIFE
Lately we have identified a new trend of rapidly growing demand for 'high-end',
ready to eat vegetables where customers are willing to pay more for cleaner,
unnecessary to wash, longer shelf-life vegetables. By using our hydroponics
technology, the cultivated vegetables do not require a wash process before
packaging and are ready to eat; hence their shelf-life is dramatically
increased. Moreover, given a longer shelf-life, distribution to remote areas is
possible and new markets are available.
THE NEED FOR SUSTAINABLE AGRICULTURE
The practice of reducing inputs while raising output is a growing trend referred
to as "sustainable agriculture". An estimated 30-80 percent of applied nitrogen
and pesticides used in the agriculture industry are already lost to the
environment. According to many industry experts, one of the most critical
elements for agricultural equipment innovations is that they should be guided by
ecological considerations that not only increase world food production, but also
preserve our non-renewable resources and reduce chemical usage, water scarcity,
global warming and ecological implications from fertilizers and increased
reliance on pesticides compound. There is a need for innovations that balance
the needs of the "natural world" with the insatiable demands of the "human
world". Sustainable agricultural technologies - those that reduce input costs,
increase yield, and are more "earth friendly" - such as our hydroponics
technology, are expected to drive the frontline of growth in the agriculture
equipment industry.
5
ALTERNATIVE SOLUTION WHERE TRADITIONAL GREENHOUSES FAIL
Growers of soil-grown crops are faced with numerous, potentially insurmountable,
problems associated with soil-borne pathogens, pests and weeds and the
concomitant application of pesticides or plant protection products ("PPP's")
which lead, on occasions, to unacceptable residues at harvest. This has recently
been made worse due to the revocation of Methyl Bromide as an effective soil
sterilant which has exacerbated the need for additional PPPs.
It is now understood that a move out from the soil-grown crops into a
hydroponics production system could potentially solve many of the current
residue problems, increase throughput and ultimately improve the longer-term
economic outlook for the crop. This is where our hydroponics production systems
enter the equation offering growers novel, environmentally friendly growing
units and methods.
OUR POTENTIAL CUSTOMERS
Our potential customers are principally farmers and growers who wish to reduce
production costs and increase productivity or who wish to expand their
operations, food industry companies seeking to expand their value chain by
controlling the growth of leafy vegetables and entrepreneurs.
OUR PRODUCTS
THE GROWTECH TM 2500
Our leading product to date is the GrowTECH(TM)2500, an automated platform using
GrowTECH(TM)2000 (see below) proprietary technology and know-how, and combining
it within a greenhouse controlled environment. The GrowTECH(TM)2500 enables the
growth of leafy vegetables in a highly economical clean and automated
surrounding, saving significantly in resources such as energy and labor while
making optimal use of water and land. By integrating OrganiTECH Ltd.'s
hydroponics Rotating Field-System (RFS) technology in the GrowTECH(TM)2500,
vegetables (i.e. lettuce) float in Styrofoam trays on water tables, which serve
as a nutritious solution and a means of transport through the growth process. By
floating the plants on water rather than planting them in the growing
environment, and by automating the seedling and harvesting process, the
GrowTECH(TM)2500 enables growers to control and therefore optimize the density
of the plants growing over the water-tables at each stage of the growth process.
The system therefore maximizes land utilization resulting in a yield which is
approximately 20 - 30 times more than that achieved in the field and 5-7 times
more than conventional greenhouse yields.
GrowTECH(TM)2500 enables year round, high yield production of quality pesticide
free plants with extended shelf-life, while significantly reducing heating and
labor costs per plant, the most serious cost-drivers in the greenhouse industry.
Although already successfully commercially deployed, we intend to continuously
invest in the advanced development of GrowTECH(TM)2500, adding and enhancing
functionalities while adjusting it to new types of growing and usages. The
GrowTECH(TM) 2500 system was first presented at the leading European exhibition
for state of the art agriculture and horticulture "Hortifair" in Amsterdam, held
in November 2003 and to date few GrowTECH(TM)2500 systems have been installed
and are operating successfully in Europe and Israel.
THE GROWTECH TM 2000
Our first product was the GrowTECH(TM)2000, a unique and patented, state of the
art, hydroponics system. It is a low input/ high output, robotic,
self-contained, portable, sustainable and controlled agricultural platform,
utilizing advanced growth lighting systems, environmental control systems,
revolutionary robotics, and management systems, all designed to fully automate
the entire cultivation process (Seeding - Germination - Growing - Harvesting) of
hydroponics, pesticide free, green leaf vegetables in a closed environment of a
standard size container.
Designed for highly controlled environment in closed spaces (i.e. containers)
where sunlight is not available and full artificial lightning is required for
the cultivation process, the cost-efficiency of the GrowTECH(TM)2000 is
generally determined by the cost of energy and can therefore vary significantly.
GrowTECH(TM)2000 has yet to be matured and additional development work is still
required before our full commercialization. However, we believes that such a
patented platform will provide a strong advantage over our competitors and
enable us to increase research and development efforts for the integration of
GrowTECH(TM)2000 technologies into new platforms and products.
6
BIO-TECH PLATFORMS
We are also developing our PhytoChamber(TM) product, a state of the art,
two-chambered, cost-effective hydroponics growth platform designed to maximize
and provide optimal growth conditions for certain plants to be used and utilized
by the biotechnology industry and researchers.
The PhytoChamber(TM) is designed for the production of proteins and other
bio-molecules intended for research and commercial manufacturing of
NUTRACEUTICALS and pharmaceuticals, by creating a contained, cost effective,
production environment, isolating the plants from detrimental external elements
and utilizing an advanced hydroponics growing system. This combination of
technologies creates an alternative and superior method in the bio-manufacturing
multi-billion Euro market due to its non-soil, clean, environmentally safe and
proliferating conditions.
PhytoChamber(TM) is based on our proprietary hydroponics know-how and GrowTECH
technology. One PhytoChamber(TM) unit was sold to a German customer for research
and development purposes, in year 2005. The product is in its early stage of
development and an extensive additional development work is required before
achieving commercial maturity.
COMPETITION
The agricultural equipment industry is highly competitive. Our technologies are
subject to competition from either other agricultural equipment and/or
technology providers or from other providers of hydroponics solutions, both
which are very few in number worldwide. We face competition in the agricultural
equipment industry from 4 types of technologies:
1. Classic soil-less systems which involve inert solid growing media and
specialized irrigation systems, where water can be drained to waste (open
systems) or re-circulated (closed system);
2. Hydroponics water bed systems - involve deep water beds and a growing
system where water can be re-circulated.
3. Hydroponics Nutrient Film Technique ("NFT") systems - systems involving a
shallow nutrient film running in narrow channels where the plant roots are
located. The NFT systems are the most common hydroponics systems in the
world. The technology was developed during the late 60's in England and was
installed by private growers all over the modern world, mainly in the US,
Western Europe and Australia - New Zealand.
4. Other conventional growing methods, either regular greenhouse based growing
or soil based field growing.
Many of our potential competitors have substantially longer operating histories,
larger installed client bases, greater name recognition, more experience and
significantly greater financial, technical, marketing and other resources than
we have.
We believe that a wide range of factors, such as productivity, reliability,
price, as well as other unique performance characteristics of our technologies,
succeed in differentiating it from its competitors and will be the principal
competitive factor expected to affect future sales of our systems. Additionally,
we believe that our intellectual property will provide us with a strong
advantage over our competitors around the world in general and in the United
States specifically, and will enable us to increase both sales and research and
development efforts for the integration of the GrowTECH(TM) technologies into
new platforms.
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
The preparation of the condensed interim consolidated financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions in certain circumstances
that affect amounts reported in the accompanying consolidated financial
statements and related footnotes. Actual results may differ from these
estimates. To facilitate the understanding of the business activities, described
below are certain of our accounting policies that are relatively more important
to the portrayal of the financial condition and results of operations and that
require management's subjective judgments. We base our judgments on our
experience and various other assumptions that the management believes to be
reasonable under the circumstances.
7
The following listing is not intended to be a comprehensive list of all of our
accounting policies. In many cases, the accounting treatment of a particular
transaction is specifically dictated by generally accepted accounting
principles, with no need for management's judgment in their application. There
are also areas in which management's judgment in selecting any available
alternative would not produce a materially different result.
DEVELOPMENT STAGE COMPANY
Since our inception, we have devoted substantially most of our efforts to
business planning, research and development, marketing, recruiting management
and technical staff, acquiring assets and raising capital. In addition, we have
not generated significant revenues. Accordingly, we are considered to be in the
development stage, as defined in Statement of Financial Accounting Standards No.
7, "Accounting and reporting by development Stage Enterprises" ("SFAS No. 7")
REVENUE RECOGNITION
We believe our most critical accounting policy relates to revenue recognition as
described below.
Revenues from long-term contracts are recognized based on Statement of Position
81-1 "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts" ("SOP 81-1") according to which revenues are
recognized based on either the completed contract basis or the percentage of
completion basis.
For projects signed during 2004 (and performed till and during 2005), which were
our first projects, management used the completed-contract method as we could
not expect to perform all of our contractual obligations and had not gained
sufficient experience for estimating contract costs. For contracts signed in
2005 and thereafter, and after performing several projects and obtaining
adequate experience, management believes we possess sufficient technical,
business and commercial experience to ensure and estimate, for each specific
project, the percentage-of-completion. As such, until the first quarter of 2006,
while we were still unable to make a more precise estimate as to our contract
costs, we adopted the percentage-of-completion method based on a zero profit
margin, therefore equal amounts of revenues and costs, measured on the basis of
performance during the period, were presented in the statement of operations.
Commencing from the second quarter of 2006, we adopted the
percentage-of-completion method based on a lowest probable level of profit. As
such, management estimated the probable range of profit it will gain from its
projects, and therefore the gross profit of the projects in the second and third
quarters was based on an estimate of the lowest probable level of the
anticipated profit of the projects. The change to a more precise estimate is
accounted for as a change in accounting estimate. Anticipated losses on
contracts are charged to earnings when determined to be probable.
Based on the percentage-of-completion method, sales and profits under long-term
fixed-price contracts which provide for a substantial level of development and
design efforts in relation to total contract efforts are recorded based on the
ratio of hours incurred by key personnel to estimated total hours required from
such key personnel at completion.
The percentage-of-completion method of accounting requires management to
estimate the cost and gross profit margin for each individual contract.
Estimated gross profit or loss from long-term contracts may change due to
changes in estimates resulting from differences between actual performance and
original estimated forecasts. Such changes in estimated gross profit are
recorded in results of operations when they are reasonably determinable by
management, on a cumulative catch-up basis.
We do not provide, in the normal course of business, a right of return to our
customers. If uncertainties exist, such as the granting to the customer of right
of cancellation if the product is not technically acceptable, revenue is
recognized when the uncertainties are resolved.
In some cases, we grant customers with an evaluation period, usually several
months, to evaluate the product prior to purchase. We do not recognize revenue
from sales of products shipped to customers for evaluation until such products
are actually purchased. Until purchased, these products are recorded as
consignment inventory at the lower of cost or market.
Penalties applicable to performance of contracts are considered in estimating
sales and profit rates and are recorded when there is sufficient information to
assess anticipated contract performance.
In addition, contracts executed include provisions that clearly specify the
enforceable rights regarding services to be provided and received by the parties
to the contracts, the consideration to be exchanged and the manner and terms of
settlement. In all cases we expect to perform our contractual obligations, and
our customers are expected to satisfy their obligations under the contract.
8
Management reviews periodically the estimates of progress towards completion and
project costs. These estimates are determined based on engineering estimates and
past experience, by personnel having the appropriate expertise to make
reasonable estimates of the related costs and take into consideration the
probability of achievement of certain milestones, as well as other factors that
might impact the contract's completion.
A number of internal and external factors affect cost estimates, including labor
rates, estimated future material prices, revised estimates of uncompleted work,
linkage to indices and exchange rates, customer specifications and other
required unplanned adjustments. If any of the above factors were to change, or
if different assumptions were used in estimating progress cost and measuring
progress towards completion, it is likely that different amounts would be
reported in our consolidated financial statements.
We believe that the use of the percentage-of-completion method is appropriate
since we have the ability to make reasonably dependable estimates of the extent
of progress towards completion, contract revenues and contract costs.
STOCK-BASED COMPENSATION
We apply SFAS No. 123 (commencing January 1, 2006 SFAS 123(R)) and Emerging
Issues Task Force No. 96-18 "Accounting for Equity Instruments that are Issued
to other than Employees for Acquiring, or in conjunction with selling, goods or
services" ("EIFT 96-18"), with respect to options and warrants issued to
non-employees. SFAS No. 123 requires the use of option valuation models to
measure the fair value of the options and warrants at the date of grant. The
fair value of the options granted is estimated using a Black & Scholes option
pricing model.
CONTINGENCIES
We are, from time to time, subject to claims arising in the ordinary course of
our business, including patent, product liability and other litigation. In
determining whether liabilities should be recorded for pending litigation
claims, we assess the allegations made and the likelihood that we will
successfully defend the suit. When management believes that it is probable that
we will not prevail in a particular matter, management then estimates the amount
of the liability based in part on advice of outside legal counsel.
COMPARISON OF THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2006 TO THE THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 2005
SUMMARY
Nine months ended Three months ended
September 30, September 30,
2006 2005 2006 2005
----------- ----------- ----------- -----------
Revenues $ 2,463,062 $ 289,380 $ 1,171,146 $ 289,380
Net Loss $(1,084,151) $ (670,616) $ (318,554) $ (218,132)
Net Loss per Common Share $ (0.04) $ (0.03) $ (0.01) $ (0.01)
Dividends per Common Share $ 0 $ 0 $ 0 $ 0
9
RESULTS OF OPERATIONS
REVENUES
Revenues increased by 751% to $2,463,062 in the nine months ended September 30,
2006 from $289,380 in the nine months ended September 30, 2005. In the three
months ended September 30, 2006 our revenues increased by 305% to $1,171,146
from $289,380 in the three months ended September 30, 2005.
The revenues in 2006 derived from two GrowTECH2500 large scale projects - the
first was signed with a Russian customer in mid 2005 and the second was signed
with a Spanish customer in mid 2006 - both projects were recognized based on the
percentage-of-completion method.
We believe that in 2006 our revenues will derive from a limited number of
customers and that a significant amount will be attributed to our projects in
Russia and Spain mentioned above.
COST OF REVENUES AND GROSS PROFIT (LOSS)
Cost of revenues increased by 537% to $2,059,953 in the nine months ended
September 30, 2006 from $323,211 in the nine months ended September 30, 2005.
The increase was primarily due to increased materials, labor and sub-contractors
expenses and provisions recorded for royalties and warranties that were related
to the recognized revenues derived from our adoption of the
percentage-of-completion method in the nine months ended September 30, 2006.
In the three months ended September 30, 2006 cost of revenues increased by 218%
to $998,069 from $313,705 in the three months ended September 30, 2005. The
increase was primarily due to increased expenses related to the recognized
revenues derived from the adoption of the percentage-of-completion method.
In the first quarter of 2006 revenues and costs were recognized based on `zero
profit margin', where equal amounts of revenues and costs, measured on the basis
of performance during the period, were presented in the statements of
operations. Commencing in the second quarter of 2006, management recognized
profit in accordance with the percentage-of-completion method, based on the
lowest probable level of profit. The effect of the change in the estimate of the
net loss and net loss per share for both the nine-month and three-month periods
ended September 30, 2006 has been $130,480 and $0.01, respectively.
For the reasons described above, we had gross profit of $403,109 in the nine
month period ended September 30, 2006 compared to a gross loss of $33,831 in the
nine months ended September 30, 2005. For the same reasons described above, in
the three months ended September 30, 2006 we had gross profit of $173,077
compared to a gross loss of $24,325 in the three months ended September 30,
2005.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased by 235% to $347,261 in the nine
months ended September 30, 2006 from $103,691 in the nine months ended September
30, 2005. The increase was primarily due to increased payroll and related costs,
materials and sub-contractors' costs during the nine months ended September 30,
2006. As a percentage of revenues, our research and development expenses were
14% in the nine months ended September 30, 2006.
In the three months ended September 30, 2006 research and development expenses
increased by 92% to $119,973 from $62,503 in the three months ended September
30, 2005. The increase was primarily due to increased payroll costs, materials
and sub-contractors costs. As a percentage of revenue, our research and
development expenses were 10% in the three months ended September 30, 2006.
We expect to continue to incur research and development costs (which will be
limited to our available financial resources), related to our continued
GrowTECH2500 development and to a lesser extent, our continued development of
GrowTECH2000 and other Bio-Tech product lines.
SALES AND MARKETING EXPENSES
Sales and marketing expenses increased by 350% to $663,798 in the nine months
ended September 30, 2006 from $147,455 in the nine months ended September 30,
2005. The increase in sales and marketing expenses is primarily attributable to
increased payroll costs, amortization of deferred stock based compensation,
commissions related to recognized revenues and to expenses related to
demo-systems deployed in Europe and the USA. As a percentage of revenues, our
sales and marketing expenses were 27% in the nine months ended September 30,
2006.
10
In the three months ended September 30, 2006 sales and marketing expenses
increased by 542% to $196,393 from $30,594 in the three months ended September
30, 2005. The increase was primarily due to increased payroll costs,
amortization of deferred stock based compensation and commissions related to
recognized revenues during the three months ended September 30, 2006. As a
percentage of revenues, our sales and marketing expenses were 17% in the three
months ended September 30, 2006.
As of the date of the report, we maintain three demo-sites for which the
majority of the expense was already incurred. However, we expect to continue to
incur other increased selling and marketing expenses (limited to our available
financial resources), as we believe that the need for our products is worldwide
and our sales volume is directly influenced by the sales and marketing efforts
invested.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased by 98% to $499,540 in the nine
months ended September 30, 2006 from $252,828 in the nine months ended September
30, 2005. The increase in general and administrative expenses was primarily in
payroll costs and amortization of deferred stock based compensation, the
majority of which was related to the recruiting of a new chief executive officer
and chief financial officer, and in professional services. As a percentage of
revenue, our general and administrative expenses were 20% in the nine months
ended September 30, 2006.
In the three months ended September 30, 2006 general and administration expenses
increased by 78% to $154,469 from $86,603 in the three months ended September
30, 2005. The increase was primarily due to increased payroll costs and
amortization of deferred stock based compensation and in professional services.
As a percentage of revenue, general and administration expenses were 13% in the
three months ended September 30, 2006.
We expect to maintain this level of general and administrative expenses, limited
to our available financial resources.
FINANCIAL INCOME/EXPENSES
Financial income was $23,339 in the nine months ended September 30, 2006
compared to an expense of $132,632 in the nine months ended September 30, 2005.
During the nine months ended September 30, 2006 financial income consisted
primarily of writing off of a provision recorded in 2005 for a possible penalty
related to an equity investment in our company (for further information see note
7-P. of our condensed interim unaudited consolidated financial statements for
the period ended September 30, 2006 in Part I - Item 1 of this Report) that was
set-off by expenses related to currency exchange rates. During the nine months
ended September 30, 2005 financial expenses consisted primarily of interest on a
convertible loan received from a related party.
In the three months ended September 30, 2006 financial expenses increased by 47%
to $20,796 from $14,107 in the three months ended September 30, 2005.
OPERATING LOSS AND NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
In the three months ended September 30, 2006 our operating loss increased by 46%
to $297,758 from $204,025 in the three months ended September 30, 2005 and our
net loss decreased by 46% to $318,554 in the three months ended September 30,
2006 from $218,132 in the three months ended September 30, 2005.
Our operating loss increased by 106% to $1,107,490 in the nine months ended
September 30, 2006 from $537,805 in the nine months ended September 30, 2005 and
our net loss increased by 62% to $1,084,151 in the nine months ended September
30, 2006 from $670,616 in the nine months ended September 30, 2005.
11
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2006, we had cash and cash equivalents totaling $593,626
compared to $449,074 as of December 31, 2005.
We entered into an equity line agreement with Dutchesss Capital Management LLC
signed on November 20, 2003, that we do not anticipate using. The agreement will
terminate on November 20, 2006. For more information on the equity line, see
Note 14L of our audited annual financial statements for the year ended December
31, 2005 included in our Annual Report on Form 10KSB/A.
Since our inception in 1999, we have financed our operations through private
sales of common shares and convertible loans, which have totaled $8.0 million
(net of transaction expenses). We have used the proceeds of the sale of all
securities for working capital and other general corporate purposes.
Until we are able to generate sufficient cash from operations, we intend to use
our existing cash resources to finance our operations. Based on our monthly
expenses, we do not have sufficient cash to satisfy our operational and
development requirements over the next 12 months. Our consolidated financial
statements for the fiscal year ended December 31, 2005 and for the nine months
ended September 30, 2006 include an explanatory paragraph which states that we
have suffered recurring losses from operations and a negative cash flow from
operating activities that raise substantial doubt about our ability to continue
as a going concern.
For the nine months ended September 30, 2006, we had $721,777 in cash used in
operating activities compared with $110,944 for the nine months ended September
30, 2005. The operating cash outflow for the nine months ended September 30
2006, was primarily a result of our net loss of $1,084,151 and a decrease in
customer advances and trade payables. The cash outflow was partially offset by a
decrease in costs incurred on contracts in progress and other receivables, by an
increase in other payables and accrued expenses, and by amortization of deferred
stock-based compensation.
The net cash used in investment activities for the nine months ended September
30, 2006 was $19,366 compared with $53,303 for the nine months ended September
30, 2005. The cash used in investment activities was a result of the purchase of
capital equipment.
Our net cash inflow from financing activities for the nine months ended
September 30, 2006 was $885,695 and for the nine months ended September 30, 2005
was $453,790. The net cash inflow from financing activities for both periods was
generated primarily from the proceeds of the issuance of shares, net of issuance
expenses.
There were no material long term loans, commitments or off-balance sheet
guarantees as of September 30, 2006.
For information on our failure to invest in our fixed assets, the sums required
for maintaining certain tax benefits to which we are entitled as an Approved
Enterprise, see our Annual Report on Form 10K/A for the year ended December 31,
2005 - Item 1, Governmental Regulation.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition, changes in
future condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources.
ITEM 3 CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
An evaluation was carried out under the supervision and with the participation
of our management, including our Chief Executive Officer ("CEO") and Chief
Financial Officer ("CFO"), of the effectiveness of our disclosure controls and
procedures as of September 30, 2006. Disclosure controls and procedures are
procedures that are designed with the objective of ensuring that information
required to be disclosed in our reports filed under the Securities Exchange Act
of 1934, such as this Form 10-QSB, is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms. Based on this evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that as of September 30, 2006, our
disclosure controls and procedures are generally effective for gathering,
analyzing and disclosing the information that we are required to disclose in the
reports filed under the Securities Exchange Act of 1934.
12
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
Based on the material weakness in internal control over financial reporting
during the year ended December 31, 2004 and for the purpose of improving our
controls over the financial reporting process as was mentioned in our 10-KSB
form for the year ended on December 31, 2004, we hired an Israeli Certified
Public Accountant on June 1, 2005, who is currently assisting us with our
financial reporting responsibilities. Additionally, we recruited a new Chief
Financial Officer on February 1, 2006 and are in the process of enhancing our
internal control processes in order to be able to comprehensively review the
accounting and disclosure implications of our operations.
There were no changes in our internal controls over financial reporting, known
to the Chief Executive Officer or the Chief Financial Officer that occurred
during the period covered by this report that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
13
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
We are, from time to time, subject to claims arising in the ordinary course of
our business, including patent, product liability and other litigation. In
determining whether liabilities should be recorded for pending litigation
claims, we assesses the allegations made and the likelihood that we will
successfully defend the suit. When management believes that it is probable that
we will not prevail in a particular matter, management then estimates the amount
of the liability based in part on advice of outside legal counsel.
To the knowledge of our company and OrganiTECH Ltd., at September 30, 2006,
there was no material litigation pending or threatened against our company or
OrganiTECH Ltd., or our respective officers and directors in their capacities as
such, nor are there any material legal or administrative proceedings to which
we, OrganiTECH Ltd. or our respective officers and directors, as such, are a
party.
- - In February 2005, a legal suit was filed with the Haifa Regional Tribunal,
Israel, against OrganiTECH Ltd. by Leami 2000 (96) Ltd. ("Leami") in the
amount of approximately $295,500, arising out of the sale of one of
OrganiTECH Ltd.'s products for which Leami had paid $60,000 out of the
total purchase price of $100,000. Leami claimed that the product had not
operated in the manner that it had anticipated and that as a result Leami
had suffered damages. OrganiTECH Ltd. disputes the claim of Leami, and has
stated in its defense that the product sold was a product at a development
stage and that this fact was clearly stated in the sales contract. On April
20, 2005 OrganiTECH Ltd. filed a counter lawsuit against Leami in the
amount of $148,800 claiming that Leami had not fulfilled its obligations
and commitments under the sale agreement signed with OgraniTECH, and by not
doing so and taking other actions, it caused OrganiTECH Ltd. to suffer
damages and expenses. We believe, based on the opinion of its legal
counsel, that due to the early stage of the lawsuit it is unable to predict
the outcome of these claims.
- - In August 2006, a claim for approximately $15,000 against the Company and
Mr. Shimon Zanaty, one of the Company's directors, was filed with the Haifa
Magistrates' Court in Israel. The claim was filed by a private individual
who entered into an agreement in 2003 with one of the Company's principal
shareholders, BLM NV, to purchase shares of the Company which had
previously been purchased by BLM and were held by a trustee. The plaintiff
claims that she paid BLM for the shares, but has never received them. In
written correspondence with the attorney representing the plaintiff, the
Company was informed that at this stage it is not required to file a
statement of defense. We believe, based on the opinion of its legal
counsel, that this claim will not have material adverse effect on the
Company's financial condition.
ITEM 2 UNRESGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the period covered by this Form 10-QSB, neither we nor our wholly owned
subsidiary engaged in the sale of any of our unregistered equity securities.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 OTHER INFORMATION
CHANGES IN MANAGEMENT
On January 2, 2006, we appointed Ms. Rachel Ben-Nun to serve as our chief
executive officer and on February 23, 2006, we appointed Mr. Yaron Shalem to
serve as our chief financial officer. Mr. Lior Hessel, who was until that time
the CEO and acting CFO, was appointed to serve as the Chairman of our board of
Directors.
14
PURCHASE AGREEMENT WITH A SPANISH CUSTOMER
On July 3, 2006, we issued a press release announcing the execution of a
purchase agreement for the sale of our hydroponics greenhouses to a Spanish
customer for Euro 1.8 million. The purchase agreement also provides the customer
with an option to purchase two further systems for an aggregate of an additional
Euro 3.6 million. The agreement was entered into on June 28, 2006. As of the
date of this report we have collected Euro 450,000 under the purchase agreement.
EFFECTIVENESS OF FORM SB2
On October 4, 2006, the United States Securities and Exchange Commission,
declared our registration statement on Form SB-2, effective. The registration
statement registered the sale of 6,000,000 of our shares of common stock and
6,415,000 warrants to purchase shares of our common stock which were issued to
certain investors and service providers during 2005 and 2006.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8K
(a) EXHIBITS
EXHIBIT No. Description
- ----------- -----------------------------------------------------------------
2.3 OrganiTECH Ltd. Investment Agreement dated June 20, 2000. (2)
2.4 Stock Exchange Agreement between the Company and OrganiTECH Ltd.,
dated October 19, 2000. (5)
2.5 Amendments to Stock Exchange Agreement between the Company and
OrganiTECH Ltd., dated January 26, 2001. (5)
2.6 Plan and Agreement of Merger between Incubate This!, Inc., a
Colorado corporation, and Incubate This!, Inc., a Delaware
corporation, dated as of January 5, 2001. (4)
2.7 Certificate of Ownership and Merger of the Company into Incubate
This!.(6)
3.1 Certificate of Incorporation of the Company. (4)
3.2 Bylaws of the Company (4)
3.3 Certificate of Incorporation of OrganiTECH Ltd. (English
Translation). (9)
3.4 Bylaws of OrganiTECH Ltd. (English Translation). (9)
10.1 1997 Stock Award Plan. (1)*
10.2 Incentive Stock Option Plan. (1)*
10.4 Beta Site Cooperation Agreement between the Company and Agronaut,
dated November 30, 2001. (7)
10.5 Cooperation and Project Funding Agreement between OrganiTECH
Ltd., Agronaut and SIIRDF, dated November 19, 2001. (7)
10.6 Agreement between OrganiTECH Ltd. and OCS, dated January 30, 2002
(English Translation). (7)
10.7 Joint Venture Agreement between OrganiTECH Ltd. and Weitzman
Institute, dated September 23, 2001 (English Translation). (7)
10.8 Agreement between OrganiTECH Ltd. and the Fund for Export
Encouragement, dated December 31, 2001 (English Translation). (7)
15
10.9 Option Allotment Agreement between OrganiTECH Ltd. and David
Baron, dated May 29, 2000 (English Translation). (7)
10.10 Option Agreement between OrganiTECH Ltd. and David Baron, dated
January 9, 2001. (7)
10.11 Securities Purchase Agreement between the Company and B.L.M. N.V.
dated June 16, 2002, including amendment (8)
10.12 Distribution Agreement dated August 27, 2002 between the Company
and Agronaut PTE. (9)
10.13 Exclusive Agency Agreement between the Company and A.T.A. Jordan
Valley Ltd., dated December 3, 2002. (9)
10.14 Sale agreement with ZAO - Sad-Gigant Kholod ("ZAO") dated June
26, 2005. (10)
21.1 Subsidiaries of the Registrant. (9)
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 +
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 +
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 +
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 +
(1) Incorporated by reference to exhibits filed with the Company's Registration
Statement on Form S-8, filed February 21, 1997, registration number
333-22203.
(2) Incorporated by reference to exhibits filed with the Company's Form 10-QSB
for the quarter ended June 30, 2000.
(3) Incorporated by reference to exhibits filed with the Company's Form 10-QSB
for the quarter ended September 30, 2000.
(4) Incorporated by reference to exhibits filed with the Company's Form 8-K,
filed with the Commission on February 22, 2001.
(5) Incorporated by reference to exhibits filed with the Company's Form 8-K,
filed with the Commission on February 9, 2001.
(6) Incorporated by reference to exhibits filed with the Company's Form 8-K,
filed with the Commission on March 28, 2001.
(7) Incorporated by reference to exhibits filed with the Company's Form 10-KSB,
filed with the Commission on April 15, 2002.
(8) Incorporated by reference to exhibits filed with the Company's Form 10-QSB,
filed with the Commission on August 18, 2002.
(9) Incorporated by reference to exhibits filed with the Company's Form
10-KSB/A, filed with the Commission on August 23, 2005.
(10) Incorporated by reference to exhibits filed with the Company's Form 10-KSB,
filed with the Commission on March 30, 2006.
+ Filed herewith.
16
(b) REPORTS ON FORM 8-K.
Our current reports on Form 8-K filed since July 1, 2006 are as follows:
- ---------------------------------------- ---------------------------------------
MONTH FILING DATES
- ---------------------------------------- ---------------------------------------
July 2006 July 3, 2006
- ---------------------------------------- ---------------------------------------
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized, on November 13, 2006.
ORGANITECH USA, INC.
By: /s/ Lior Hessel
- -------------------
Lior Hessel, Chairman of the Board of Directors
By: /s/Rachel Ben-Nun
- ---------------------
Rachel Ben-Nun, Chief Executive Officer
By: /s/ Yaron Shalem
- --------------------
Yaron Shalem, Chief Financial Officer and Principal Accounting Officer
17
