ORGANITECH USA, INC.
NOTES TO THE CONDENSED UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 6 - OPTIONS (CONT.)
B. Stock Option Plans (Cont.)
(2) A summary of the Company's stock option activity with regards to
its employees, officers and directors, under the plan as of March
31, 2007, is as follows:
MARCH 31, 2007
----------------------------------------------------
WEIGHTED WEIGHTED AVERAGE
AVERAGE REMAINING AGGREGATE
NUMBER OF EXERCISE CONTRACTUAL INTRINSIC VALUE
OPTIONS PRICE TERM (YEARS) PRICE
--------- --------- --------- ---------
Outstanding as of
January 1, 2007 and March 31, 2007 3,276,508 $ 0.231 8.54 $ 40,300
========= ========= ========= =========
Vested and expected to
be vest 3,276,508 $ 0.231 8.54 $ 40,300
========= ========= ========= =========
Exercisable as of
March 31, 2007 1,661,508 $ 0.248 8.26 $ 18,470
========= ========= ========= =========
MARCH 31, 2006
------------------------------------------------------
WEIGHTED WEIGHTED AVERAGE
AVERAGE REMAINING AGGREGATE
NUMBER OF EXERCISE CONTRACTUAL INTRINSIC VALUE
OPTIONS PRICE TERM (YEARS) PRICE
--------- --------- --------- ---------
Outstanding as of
January 1, 2006 1,281,508 $ 0.248
Granted 1,750,000 $ 0.207
--------- ---------
Outstanding as of
March 31, 2006 3,031,508 $ 0.225 9.44 $ 179,005
========= ========= ========= =========
Vested and expected to
be vest 3,031,508 $ 0.225 9.44 $ 179,005
========= ========= ========= =========
Exercisable as of
March 31, 2006 889,008 $ 0.284 8.64 $ 49,145
========= ========= ========= =========
(3) A summary of the Company's stock option activity with regards to
its non-employees, as of March 31, 2007, under the plan is as
follows:
MARCH 31, 2007
-------------------------------------------------
WEIGHTED WEIGHTED AVERAGE
AVERAGE REMAINING AGGREGATE
NUMBER OF EXERCISE CONTRACTUAL INTRINSIC VALUE
OPTIONS PRICE TERM (YEARS) PRICE
--------- --------- --------- ---------
Outstanding as of
January 1, 2007 and March 31, 2007 145,000 $ 0.251 9.09 $ 1,035
========= ========= ========= =========
Vested and expected to
be vest 145,000 $ 0.251 9.09 $ 1,035
========= ========= ========= =========
Exercisable as of
March 31, 2007 11,250 $ 0.187 8.75 $ 259
========= ========= ========= =========
F - 11
ORGANITECH USA, INC.
NOTES TO THE CONDENSED UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 6 - OPTIONS (CONT.)
B. Stock Option Plans (Cont.)
MARCH 31, 2006
------------------------------------------------
WEIGHTED WEIGHTED AVERAGE
AVERAGE REMAINING AGGREGATE
NUMBER OF EXERCISE CONTRACTUAL INTRINSIC VALUE
OPTIONS PRICE TERM (YEARS) PRICE
--------- --------- --------- ---------
Outstanding as of
January 1, 2006 and March 31, 2006 45,000 $ 0.187 9.75 $ 3,285
========= ========= ========= =========
Vested and expected to
be vest 45,000 $ 0.225 9.75 $ 3,285
========= ========= ========= =========
Exercisable as of
March 31, 2006 - - - -
========= ========= ========= =========
(4) The aggregated intrinsic value in the tables above represents the
total intrinsic value (the difference between the Company's
closing stock price on the last trading day as of the relevant
period and the exercise price, multiplied by the number of
in-the-money options) that would have been received by the option
holders had all option holders exercised their options on the
last trading day of each period. This amount changes based on the
fair market value of the Company's stock.
(5) As of March 31, 2007, the total unrecognized estimated
compensation costs related to non-vested stock options granted
prior to that date was $333,290, which is expected to be
recognized over a weighted average period of 1.94 years.
(6) Compensation expenses were recognized during the three-month
periods ended March 31, 2007 and 2006, respectively, as follows:
THREE MONTHS ENDED
MARCH 31,
----------------------
2007 2006
-------- --------
Cost of Revenues $ 6,028 $ 7,714
Research and Development expenses 3,913 12,405
Selling and Marketing expenses 15,729 87,796
General and Administration expenses 20,160 102,889
-------- --------
$ 45,830 $210,804
======== ========
(7) During the second quarter of year 2007, the Company granted to
four of its employees a total of 430,000 options. The weighted
average fair value of each option granted on that date was $0.16.
F - 12
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 March 31, 2007 thereto contained
elsewhere in this report and with our audited consolidated financial statements
and notes for the year ended December 31, 2006.
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 also 'Corporate History') and leading in
offering "Hydroponics Growing Factories". We design, develop, manufacture,
market and support hydroponics solutions and platforms for the Agriculture and
Life-Science industries. Our products enable the growth of lettuce, green leafy
vegetables, herbs and other plants in a highly economic, clean and automated
surrounding, making optimal use of resources such as water, energy, labor and
land and producing extremely high yields while maintaining significantly lower
production costs than the traditional alternatives.
Our core business is conducted primarily through our wholly-owned subsidiary,
OrganiTECH Ltd. ("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 our proprietary technology. Our leading products are:
a) GrowTech(TM)2500 - our leading product - a highly automated, computerized
controlled hydroponics sustainable greenhouse designed to grow and harvest
commercial quantities of pesticide free and clean, lettuce, green leafy
vegetables, herbs and other plants while making optimal use of resources
such as water, energy, labor and land. Backed with its patented and
proprietary know-how, the GrowTech(TM)2500 is unaffected by weather
conditions, and enables consistent year round yields that are much higher
than traditional soil-based cultivation methods, in both the open- field
and regular greenhouses.
b) GrowTech(TM)2000 - a self-contained, portable, robotic, sustainable and
fully-controlled agricultural platform designed to automatically seed,
transplant, grow and harvest commercial quantities of pesticide free, green
leafy vegetables. The GrowTech(TM)2000 may also have life-science
applications since it is a non-soil and environmentally safe technology
with optimal and fully controlled growth conditions, which can be used to
grow certain plants used by the pharmaceutical, food enhancement, detergent
and cosmetic industries. However 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 the overall demand for hydroponics
systems, as follows:
1. GROWING DEMAND FOR GREEN LEAFY VEGETABLES
WORLDWIDE DEMAND FOR GREEN LEAFY 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.
Agriculture trade-flow statistics derived from the Food and Agriculture
Organization of The United Nations (FAOSTAT) present a world market of more than
22 million tones of lettuce in 2005 and rising, with a multi-billion Dollar
turn-over annually, out of which approximately half is consumed in Europe and
North America. Statistics for other green leafy vegetables, such as spinach,
broccoli, cauliflower, cabbages and herbs is similar in terms of volume and
trade potential.
Advances in technology are expected to continue to assist producers in
increasing their overall productivity and hydroponics production systems
represent an attractive means towards achieving these market trade-flows.
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
leafy vegetables in particular, is rapidly increasing.
RAPIDLY GROWING DEMAND FOR CLEAN VEGETABLES WITH EXTENDED SHELF-LIFE
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 before packing and before eating, longer shelf-life
vegetables. By using our GrowTech(TM)2500, 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.
2. RAPIDLY INCREASING PRODUCTION COSTS
INCREASE IN COST FACTORS IN THE PRODUCTION PROCESS
Over the last decade, agricultural growers in western countries have faced
increasing costs. The cost of labor has increased, even where an unqualified
work force is utilized; energy has become expensive due to the increases in the
price of oil; water has become more expensive, particularly where there are
purification and quota/accessibility problems; and the price of land near market
places has increased disproportionately.
INCREASE IN DISTRIBUTION COSTS
Additionally, transportation costs for lettuce and 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.
5
All of these factors have resulted in materially increased production costs in a
market with rapidly increasing demand. As cost factors are expected to continue
to rise, particularly in Western countries, overall production cost is expected
to continue to increase, with the price ultimately being passed on to the final
consumer.
3. ENVIRONMENTAL IMPACT
THE NEED FOR SUSTAINABLE AGRICULTURE
The practice of reducing inputs while raising output is a growing trend referred
to as "sustainable agriculture". 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, such as water, reduce
chemical usage and reduce the ecological damage which result from fertilizers
and increased reliance on pesticides.
Hydroponics in general is an example of a sustainable agricultural technology
that reduces input costs, increases yield, and is more "earth friendly". Such
technologies are expected to drive the frontline of growth in the agriculture
equipment industry.
Our GrowTech2500, because of its extremely low demand for pesticides,
insecticide and other chemicals, represents an environment-friendly solution.
Moreover, it also supports "sustainable agriculture" by saving water and energy
while enabling the use of available wasted/un-used resources of energy and
water.
RESIDUE PROBLEMS OF TRADITIONAL GREENHOUSES
Growers of soil-grown crops are faced with numerous and 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 transitioning away from soil and 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. Our GrowTech(TM)2500 offers growers a novel, environmentally friendly
growing system.
4. HYDROPONICS IS TAKING OFF
It is now clear that hydroponics cultivation is becoming a genuine, inevitable
alternative for traditional soil-based cultivation, whether in the open fields
or in greenhouses. The transition from the soil to hydroponics production
systems is becoming an attractive business opportunity for growers.
OUR POTENTIAL CUSTOMERS
Based on the above, we have identified our potential customers as follows:
1. Existing soil-based farmers and growers of lettuce and leafy vegetables who
wish to:
- Save production costs and optimize use of resources;
- Solve crucial problems of traditional cultivation in open-fields and
soil-based greenhouses;
- Increase productivity and expand their operations;
2. Existing farmers and growers, who currently do not grow lettuce and leafy
vegetables, but who wish to:
- Expand operations while enhancing competitiveness with local
soil-based and imported produce;
- Save transportation costs on imported produce;
- Establish cost-effective local production of lettuce and green leafy
vegetables;
3. Food industry companies, who wish to expand operations by the growth of
green leafy vegetables, thereby controlling their value chain.
6
4. Entrepreneurs who wish to take advantage of new business opportunities.
We are in the early stage of expanding our marketing and sales efforts,
especially where we find strong competitive advantages.
OUR PRODUCTS
THE GROWTECH(TM)2500
Our leading product to date is the GrowTech(TM)2500. It is a highly automated
platform using OrganiTECH Ltd's patented technology and proprietary know-how,
and combining it within a greenhouse controlled growing environment. The
GrowTech(TM)2500 enables the growth of lettuce, herbs, green leafy vegetables
and other plants in a highly economical, clean and automated surrounding, saving
significantly in resources such as water and labor while making optimal use of
energy and land.
The GrowTech(TM)2500's most unique feature is the Rotating Field-System (RFS)
whereby vegetables (i.e. lettuce) float in Styrofoam trays on water tables,
which serve both 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 media,
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. By maximizing land/space utilization, the GrowTech(TM)2500 achieves
extremely high yields which are approximately 20 - 30 times more than that
achieved in the field and 5-7 times more than conventional greenhouse yields.
By optimizing the integration of automation in production (seeding and
harvesting process) and optimizing the use of resources such as energy and land
through the hydroponics growing process, the GrowTech(TM)2500 can 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 an additional saving in distribution costs,
thereby reducing the cost to the consumer. This enables either local growers of
lettuce and other green leafy vegetable produce or importers of such green leafy
vegetable produce to situate in locations of their choice, in countries that
climate conditions prevent the soil-based growing of such green leafy
vegetables, while simultaneously enabling them to compete with cheap
local/imported products.
The GrowTech(TM)2500 enables year round, high yield production of quality,
clean, pesticide free plants with extended shelf-life - all in an
environmentally friendly system that enables utilizing available alternative
energy and water resources. 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. To date we have successfully deployed
GrowTech(TM)2500 systems in Spain, Russia, Ireland and Israel.
THE GROWTECH(TM)2000
Our first product was the GrowTech(TM)2000, a unique and patented, state of the
art, hydroponics growing system.
It is a low input/ high output, robotic, self-contained, portable, sustainable
and controlled hydroponics growing platform, designed to fully automate the
entire cultivation/production process (Seeding - Germination - Growing -
Harvesting) of clean, pesticide free, green leafy vegetables. This is done by
utilizing advanced growth systems such as artificial lighting system, climate
and environmental control systems, revolutionary robotics, and management
systems, and integrating them with our hydroponics technology into a closed
environment, usually of a standard size container or other industrial platforms.
Designed for highly controlled environment in closed spaces (i.e. containers)
where sunlight is not available (hence full artificial lighting and controlled
weather conditions are 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 believe 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.
7
PHYTOCHAMBER(TM) - LIFE-SCIENCE AND BIO-TECH PLATFORMS
Based on our proprietary hydroponics know-how and GrowTech(TM)2000 technology,
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 and life-science industry as well as by researchers.
The PhytoChamber(TM) is designed for the production of proteins and other
bio-molecules intended for research and for the
"laboratory"/pre-commercial/commercial manufacturing of NUTRACEUTICALS and
pharmaceuticals, by creating a contained, fully controlled, cost effective
production environment, isolating the plants from detrimental external elements
and utilizing our advanced hydroponics growing system. This combination of
technologies creates a superior method in the bio-manufacturing multi-billion
Euro market due to its non-soil, clean and environmentally safe conditions.
One PhytoChamber(TM) unit was sold to a German customer for research and
development purposes in 2005. The product is in its early stage of development
and 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 very limited numbers of either other agricultural
equipment and/or technology providers or other providers of hydroponics
solutions. We compete with both conventional methods of growing and directly
against other hydroponics solution providers. The conventional methods are
principally open field methods of growing or growing using soil-based
greenhouses, as well as classic soil-less methods, which involve inert solid
growing media and specialized irrigation systems, where water can be drained to
waste (open systems) or re-circulated (closed system).
While the hydroponics market is an emerging one, in which there are no
significant hydroponics solution providers and only few tens hectares of
hydroponics systems deployed world-wide, our principal competitors are Hydronov
Canada and Hortiplan Belguim. Hydronov Canada uses the Deep Flow Technique in
which water is re-circulated in deep water beds that serve as a growing system.
Since 1988 Hydronov Canada and other hydroponics solution providers have
deployed this technique over approximately 20 hectares, mainly in Canada, China
and Mexico. Hortiplan Belguim uses the Nutrient Film Technique in which a
shallow nutrient film runs in narrow channels where the plant roots are located.
The NFT systems are the most common hydroponics systems in the world and have
been deployed mainly in the United States, Western Europe, Australia and New
Zealand.
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, and other unique performance characteristics of OrganiTECH Ltd.'s
technologies, differentiate us from our 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 in particular, 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 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 the Company's 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 management believes to be
reasonable under the circumstances.
8
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.
REVENUE RECOGNITION
We believe our most critical accounting policy relates to revenue recognition as
described below.
The Company generates revenues from long-term contracts which 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 contracts signed in 2005 and after performing several projects and obtaining
adequate experience, the Company started to adopt the percentage-of-completion
method based on a zero profit margin, until it could make a more precise
estimate, therefore equal amounts of revenue and cost, measured on the basis of
performance during the period, were presented in the income statement.
Commencing in the second quarter of 2006, management can estimate the profit it
will gain from each project. As such, the gross profits from projects commencing
the second quarter of 2006 were based on the anticipated profit of the projects.
The change from `zero gross margin' method to `anticipated profit' method was
accounted as a change in estimate.
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. Anticipated losses on contracts are
charged to earnings when determined to be probable.
The Company believes that given the experience gathered during projects
undertaken in previous years, the use of the percentage-of-completion method is
appropriate since the Company possesses the ability to make, for a specific
project, reasonably dependable estimates of the extent of progress towards
completion, contract revenues and contract costs. 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 the Company expects to perform its contractual obligations, and its
customers are expected to satisfy their obligations under the contract.
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 the first quarter of 2007 the Company derived most of its revenues from one
project.
STOCK-BASED COMPENSATION
On January 1, 2006, the Company adopted Statement of Financial Accounting
Standards No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123(R)") which
requires the measurement and recognition of compensation expense based on
estimated fair values for all share-based payment awards made to employees and
directors. In March 2005, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 107 ("SAB 107") relating to SFAS 123(R). The Company has
applied the provisions of SAB 107 in its adoption of SFAS 123(R).
9
SFAS 123(R) requires companies to estimate the fair value of equity-based
payment awards on the date of grant using an option-pricing model. The value of
the portion of the award that is ultimately expected to vest is recognized as an
expense over the requisite service periods in the Company's consolidated
statement of operations.
The Company adopted SFAS 123(R) using the modified prospective transition
method, which requires the application of the accounting standard starting from
January 1, 2006, the first day of the Company's fiscal year 2006. Under that
transition method, compensation cost recognized in the year ended December 31,
2006, includes: (a) compensation cost for all share-based payments granted prior
to, but not yet vested as of January 1, 2006, based on the grant date fair value
estimated in accordance with the original provisions of Statement 123, and (b)
compensation cost for all share-based payments granted subsequent to January 1,
2006, based on the grant-date fair value estimated in accordance with the
provisions of Statement 123(R). Results for prior periods have not been
restated.
The Company recognizes compensation expenses for the value of its awards, which
have graded vesting based on the straight line method over the requisite service
period of each of the awards.
The fair value of the options granted were estimated using a Black & Scholes
option pricing model. The expected volatility was calculated based upon actual
historical stock price movements over the most recent periods ending on the
grant date, equal to the expected option term. The expected option term
represents the period that the Company's stock options are expected to be
outstanding and was determined based on simplified method permitted by SAB 107
as the average of the vesting period and the contractual term. The Company has
historically not paid dividends and has no foreseeable plans to issue dividends.
The risk-free interest rate is based on the yield from U.S. Treasury zero-coupon
bonds with an equivalent term.
The Company granted the options to its key employees and directors, and
currently estimates that all options will be vested.
The Company applies SFAS No. 123 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" ("EITF 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.
CONTINGENCIES
The Company is, from time to time, subject to claims arising in the ordinary
course of its business, including patent, product liability and other
litigation. In determining whether liabilities should be recorded for pending
litigation claims, the Company assesses the allegations made and the likelihood
that it will successfully defend the suit. When management believes that it is
probable that the Company 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 MONTHS ENDED MARCH 31, 2007 TO THE THREE MONTHS ENDED
MARCH 31, 2006
SUMMARY
Three months ended March 31,
2007 2006
------------ ------------
Revenues $ 427,561 $ 434,407
Net Loss $ (294,078) $ (545,777)
Net Loss per Common Share $ (0.01) $ (0.02)
Dividends per Common Share $ 0 $ 0
10
RESULTS OF OPERATIONS
REVENUES
Revenues decreased by 2% to $427,561 in the three months ended March 31, 2007
from $434,407 in the three months ended March 31, 2006. Revenues in the three
months ended March 31, 2007 derived from one large scale project with a Spanish
customer in mid 2006 as compared to the three months ended March 31, 2006 where
revenues derived from one large scale project with a Russian customer in mid
2005 - both projects were recognized based on the percentage-of-completion
method.
We believe that in 2007 our revenues will derive from a limited number of
customers.
COST OF REVENUES AND GROSS PROFIT (LOSS)
Cost of revenues decreased by 22% to $359,340 in the three months ended March
31, 2007 from $461,621 in the three months ended March 31, 2006. Cost of revenue
for the three months ended March 31, 2007 consisted mainly of 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 based on `anticipated profit'.
Cost of revenue for the three months ended March 31, 2006 consisted of the same
items as in the parallel period in 2007 that were related to the recognized
revenues adopting the percentage-of-completion method, based on a `zero profit
margin' (according which equal amounts of revenues and cost, measured on the
basis of performance during the period, were presented in the income statement).
As a percentage of revenues, our cost of revenues were 84% in the three months
ended March 31, 2007 compared to 106% in three months ended March 31, 2006.
For the reasons described above, we had gross profit of $68,221 in the three
months ended March 31, 2007 compared to a gross loss of $27,214 in the three
months ended March 31, 2006.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased by 2% to $94,471 in the three months
ended March 31, 2007 from $92,505 in the three months ended March 31, 2006. As a
percentage of revenues, our research and development expenses were 22% in the
three months ended March 31, 2007. Research and development expenses for both
periods consisted mainly of payroll costs, overhead expenses and sub-contractors
costs.
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 decreased by 50% to $134,948 in the three months
ended March 31, 2007 from $272,019 in the three months ended March 31, 2006. The
decrease in sales and marketing expenses is primarily attributable to decreased
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
32% in the three months ended March 31, 2007.
As of the date of the report, we maintain two 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 decreased by 40% to $121,154 in the three
months ended March 31, 2007 from $200,731 in the three months ended March 31,
2006. The decrease in general and administrative expenses was primarily in
amortization of deferred stock based compensation and in professional services.
As a percentage of revenue, our general and administrative expenses were 28% in
the three months ended March 31, 2007.
We expect to maintain this level of general and administrative expenses, limited
to our available financial resources.
11
FINANCIAL INCOME/EXPENSES
Financial expense was $11,726 in the three months ended March 31, 2007 compared
to an income of $46,692 in the three months ended March 31, 2007. During the
three months ended March 31, 2007 financial expenses consisted primarily of
expenses related to currency exchange rates, whereas during the three months
ended March 31, 2006 finance income consisted primarily of the writing off of a
provision recorded in 2005 for a possible penalty related to an equity
investment in our company
OPERATING LOSS AND NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
Our operating loss decreased by 52% to $282,352 in the three months ended March
31, 2007 from $592,469 in the three months ended March 31, 2006 and our net loss
decreased by 46% to $294,078 in the three months ended March 31, 2007 from
$545,777 in the three months ended March 31, 2006.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2007, we had cash and cash equivalents totaling $331,416
compared to $569,319 as of December 31, 2006 and $683,944 as of March 31, 2006.
Since our inception in 1999, we have financed our operations through private
sales of common shares and convertible loans, which have totaled $7.2 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 three months ended March 31, 2007 and for the fiscal year
ended December 31, 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 three months ended March 31, 2007, we had $593,829 in cash used in
operating activities compared with $589,834 for the three months ended March 31,
2006. The operating cash outflow for the three months ended March 31, 2007, was
primarily a result of our net loss of $294,078 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, by an increase in other payables and
accrued expenses, and by amortization of deferred stock-based compensation.
We did not use cash in investment activities for the three months ended March
31, 2007 compared with $9,630 for the three months ended March 31, 2006.
Our net cash inflow from financing activities for the three months ended March
31, 2007 was $355,926 compared with $834,334 for the three months ended March
31, 2006. The net cash inflow from financing activities in the three months
ended March 31, 2007 was generated primarily from the proceeds from a
convertible loan, whereas in the three months ended March 31, 2006 it was
generated primarily from the proceeds of the issuance of shares, net of issuance
expenses.
Other than mentioned above, there were no material long term loans, commitments
or off-balance sheet guarantees as of March 31, 2007.
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.
For further information relating to a Memorandum of Understanding with Keren
Katzir Debenture for Investment Ltd. for the investment of $3,000,000 in our
company, see under Part II, Item 5 ("Other Information") and in note 1.C. of our
condensed consolidated interim financial statements included in this Report.
12
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 and Chief Financial
Officer, of the effectiveness of our disclosure controls and procedures as of
March 31, 2007. 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 Report on 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 our disclosure controls and procedures are
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.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in our internal control over the financial reporting known
to the Chief Executive Officer or the Chief Financial Officer during the period
covered by this Report that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.
INHERENT LIMITATIONS ON EFFECTIVENESS OF INTERNAL CONTROLS
Our management, including our chief executive officer and chief financial
officer, do not expect that our disclosure controls or our internal control over
financial reporting will prevent or detect all errors and all fraud that could
occur. A control system, no matter how well designed and operated, can provide
only reasonable, not absolute, assurance that the control system's objectives
will be met. The design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Further, because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that
misstatements due to error or fraud will not occur or that all control issues
and instances of fraud, if any, within our company have been detected. These
inherent limitations include the realities that judgements in decision-making
can be faulty and that breakdowns can occur because of simple error or mistake.
Controls can also be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the controls. The
design of any system of controls is based in part on certain assumptions about
the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future
conditions. Projections of any evaluation of controls effectiveness to future
periods are subject to risks. Over time, controls may become inadequate because
of changes in conditions or deterioration in the degree of compliance with
policies or procedures.
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 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.
- - 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. The Haifa Regional Tribunal has held several
preliminary hearings in order to prepare the claim and counter-claim for
trial. A full trial date has yet to be set. Our management believes, based
on the opinion of our legal counsel, that this claim will not have a
material adverse effect on our financial condition.
- - In August 2006, a claim for approximately $15,000 against OrganiTECH Ltd.,
and Mr. Shimon Zanaty, one of our 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 our principal
shareholders, BLM NV, to purchase our shares 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 October 16, 2006,
OrganiTECH Ltd., received a letter from the attorney representing the
plaintiff, stating that OrganiTECH Ltd., was not required to file a
statement of defense and on November 20, 2006, the attorney representing
the plaintiff informed OrganiTECH Ltd., in writing that it would be removed
as a defendant in the action. OrganiTECH Ltd., has so far not received a
copy of the decision removing it as defendant. Our management believes,
based on the opinion of our legal counsel, that this claim will not have
material adverse effect on our financial condition
As of March 31, 2007 none of our directors, officers, affiliates or any owner of
record or beneficially of more than 5% of the shares of our common stock is a
party to any proceedings against us or has material interests adverse to our
own.
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
14
ITEM 5 OTHER INFORMATION
MEMORANDUM OF UNDERSTANDING WITH KEREN KATZIR DEBENTURE FOR INVESTMENT LTD.
On February 7, 2007, we filed a Form 8-K in connection with a non-binding
memorandum of understanding with respect to an investment of $3 million by Keren
Katzir Debenture for Investment Ltd. A description of the memorandum of
understanding is contained in the Form 8-K filing, and in note 1.C. of our
condensed consolidated interim financial statements included in this Report.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8K
(a) EXHIBITS
EXHIBIT No. Description
- ----------- --------------------------------------------------------------
3.1 Certificate of Incorporation of the Company. (1)
3.2 Bylaws of the Company (1)
3.3 Certificate of Incorporation of OrganiTECH Ltd.
(English Translation). (3)
3.4 Bylaws of OrganiTECH Ltd. (English Translation). (3)
10.11 Securities Purchase Agreement between the Company and B.L.M.
N.V. dated June 16, 2002, including amendment (2)
10.13 Exclusive Agency Agreement between the Company and A.T.A.
Jordan Valley Ltd., dated December 3, 2002. (3)
10.14 Sale agreement with ZAO - Sad-Gigant Kholod ("ZAO") dated
June 26, 2005. (4)
21.1 Subsidiaries of the Registrant. (3)
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 Form 8-K,
filed with the Commission on February 22, 2001.
(2) Incorporated by reference to exhibits filed with the Company's Form 10-QSB,
filed with the Commission on August 18, 2002.
(3) Incorporated by reference to exhibits filed with the Company's Form
10-KSB/A, filed with the Commission on August 23, 2005.
(4) Incorporated by reference to exhibits filed with the Company's Form 10-KSB,
filed with the Commission on March 30, 2006.
+Filed herewith.
15
(b) REPORTS ON FORM 8-K.
Our current reports on Form 8-K filed since January 1, 2007 are as follows:
- -------------------------------------- --------------------------------------
MONTH FILING DATES
- -------------------------------------- --------------------------------------
- -------------------------------------- --------------------------------------
February 2007 February 7, 2007
- -------------------------------------- --------------------------------------
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 May 21, 2007.
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
16
