U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Amendment No. 1 to
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended
December 31, 2007
Commission file number: 000-51980
ORGANITECH USA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 93-0969365
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
YOQNEAM INDUSTRIAL AREA, P.O. BOX 700,
YOQNEAM 20692, ISRAEL
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE) 972-4-9590-515
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Securities registered
pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, WITHOUT PAR VALUE
INDICATE BY CHECK MARK IF THE REGISTRANT IS A WELL-KNOWN SEASONED ISSUER, AS
DEFINED IN RULE 405 OF THE SECURITIES ACT.
YES [_] NO [X]
INDICATE BY CHECK MARK IF THE REGISTRANT IS NOT REQUIRED TO FILE REPORTS
PURSUANT TO SECTION 13 OF THE ACT.
YES [_] NO [X]
INDICATE BY CHECKMARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO [_]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [X]
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A LARGE ACCELERATED FILER, AN
ACCELERATED FILER, OR A NON-ACCELERATED FILER. SEE DEFINITION OF "ACCELERATED
FILER" AND "LARGE ACCELERATED FILER" IN RULE 12B-2 OF THE EXCHANGE ACT. (CHECK
ONE):
LARGE ACCELERATED FILER [_] ACCELERATED FILER [_]
NON-ACCELERATED FILER [_] SMALLER REPORTING COMPANY [X]
(DO NOT CHECK IF A SMALLER REPORTING COMPANY)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A SHELL COMPANY AS DEFINED IN
RULE 12B-2 OF THE EXCHANGE ACT.
YES [_] NO [X]
STATE THE AGGREGATE MARKET VALUE OF THE VOTING AND NON-VOTING COMMON EQUITY HELD
BY NON-AFFILIATES COMPUTED BY REFERENCE TO THE PRICE AT WHICH THE COMMON EQUITY
WAS LAST SOLD, OR THE AVERAGE BID AND ASKED PRICE OF SUCH COMMON EQUITY, AS OF
DECEMBER 31, 2007 WAS APPROXIMATELY $3,296,938 (COMMON STOCK).
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
CLASS OUTSTANDING AT DECEMBER 31, 2007
- --------------------------------------------------------------------------------
Common Stock 36,632,642
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the Part
of the Form 10K (e.g. Part I, Part II, etc.) into which the document is
incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes (e.g., annual report to security holders
for fiscal year ended December 24, 1980).
None
EXPLANATORY NOTE
This Amendment No. 1 on Form 10-K/A amends the Company's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 2007, filed with the
Securities and Exchange Commission ("SEC") on February 28, 2008 (the "Original
Annual Report"). This Amendment revises management's conclusion as to the
effectiveness of the Company's disclosure controls and procedures as of December
31, 2007 in Item 9A. Management has concluded that, as of December 31, 2007, our
disclosure controls and procedures are not effective because of material
deficiencies in our internal control over financial reporting as of December 31,
2007 and other factors discussed in the Amendment and has restated its
conclusions at the reasonable assurance level. The Amendment also includes
disclosure relating to our audit committee and financial expert and a revised
audit report to address a deficiency in the description of the standards of the
Public Company Accounting Oversight Board referenced in the report. We are also
filing amended Exhibit 31.1, Section 302 Certification - Principal Executive
Officer and Exhibit 31.2, Section 302 Certification - Principal Financial
Officer.
Except as described above, no attempt has been made in this Amendment to
modify or update other disclosures presented in the Original Annual Report. This
Amendment does not reflect events occurring after the filing of the Original
Annual Report, or modify or update those disclosures, including the exhibits to
the Original Annual Report, affected by subsequent events. Accordingly, this
Amendment should be read in conjunction with our filings with the SEC subsequent
to the filing of the Original Annual Report, including any amendments to those
filings.
FORWARD LOOKING STATEMENTS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS (FORWARD-LOOKING STATEMENTS
ARE TYPICALLY IDENTIFIED BY THE WORDS "BELIEVE," "EXPECT", "INTEND", "ESTIMATE"
AND SIMILAR EXPRESSIONS). THOSE STATEMENTS APPEAR IN A NUMBER OF PLACES IN THIS
REPORT AND INCLUDE STATEMENTS REGARDING OUR PLANS, OBJECTIVES, EXPECTATIONS AND
INTENTIONS. EXCEPT FOR HISTORICAL MATTERS, THE MATTERS DISCUSSED ARE
FORWARD-LOOKING STATEMENTS, WHICH REFLECT OUR CURRENT VIEWS WITH RESPECT TO
FUTURE EVENTS AND FINANCIAL PERFORMANCE. IN PARTICULAR, THESE INCLUDE STATEMENTS
RELATING TO THE DEVELOPMENT OF PRODUCTS, FUTURE REVENUES, CAPITAL EXPENDITURES,
RESEARCH AND DEVELOPMENT EXPENDITURES, FUTURE FINANCINGS AND COLLABORATIONS,
PERSONNEL, MANUFACTURING REQUIREMENTS AND CAPABILITIES, AND OTHER STATEMENTS
REGARDING MATTERS THAT ARE NOT HISTORICAL FACTS OR STATEMENTS OF CURRENT
CONDITION (HEREON "CAUTIONARY STATEMENTS"). VARIOUS RISK FACTORS COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM HISTORICAL OR ANTICIPATED RESULTS. THE
ACCOMPANYING INFORMATION CONTAINED IN THIS REPORT, INCLUDING THE INFORMATION SET
FORTH UNDER "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS", IDENTIFIES IMPORTANT FACTORS THAT COULD CAUSE SUCH
DIFFERENCES. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND
UNCERTAINTIES WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
HISTORICAL RESULTS OR THOSE ANTICIPATED. READERS ARE CAUTIONED NOT TO PLACE
UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THEIR
DATES. WE UNDERTAKE NO OBLIGATION TO PUBLICLY UPDATE OR REVISE ANY
FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE
EVENTS OR OTHERWISE. ALL SUBSEQUENT WRITTEN OR ORAL FORWARD-LOOKING STATEMENTS
ATTRIBUTABLE TO US OR PERSONS ACTING ON OUR BEHALF ARE EXPRESSLY QUALIFIED IN
THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS.
PART I
ITEM 1. BUSINESS
INTRODUCTION
We are a Delaware corporation, initially organized as a Colorado
corporation on December 8, 1981 under the name Triangle, Inc. ("Triangle"), for
the purpose of evaluating, structuring and completing a merger with, or
acquisition of, prospects consisting of private companies, partnerships or sole
proprietorships. Since our formation, we have undergone numerous transitions and
changes in our development and business strategies, as well as our name.
In 1989, under the name Triangle, we closed a public offering of our common
stock and warrants to purchase our common stock and were funded as a "blank
check" company.
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On June 20, 2000, we entered into an Investment Agreement (the "Investment
Agreement") with OrganiTECH Ltd. We agreed to invest a total of $1,000,000 for
12,460 shares of preferred stock of OrganiTECH Ltd. at a price of $80.25 per
preferred share. Under the terms of the Investment Agreement, we were given
options to purchase additional shares at specified prices, within specified time
periods.
On October 18, 2000, pending shareholder approval, we entered into a Share
Exchange Agreement with OrganiTECH Ltd. (the "Share Exchange Agreement"( whereby
OrganiTECH Ltd. shareholders would exchange 100% of the issued and outstanding
shares of OrganiTECH Ltd.'s capital stock in exchange for no less than62.5% of
issued and outstanding shares of our common stock.
On January 16, 2001, we changed our state of incorporation from Colorado to
Delaware. This change in our state of incorporation was approved by a vote of
the requisite number of holders of outstanding shares of our common stock at a
special meeting of shareholders held on January 5, 2001.
At the end of January 2001, following shareholder approval for the
transaction at the Special Meeting, we consummated the Share Exchange Agreement
with OrganiTECH Ltd.. We issued 7.5 million shares of common stock to OrganiTECH
Ltd. shareholders in exchange, and as consideration, for all of the outstanding
shares of capital stock of OrganiTECH Ltd. not owned by us. No cash was
exchanged in the transaction. As a result of the Share Exchange Agreement,
OrganiTECH Ltd. became our wholly-owned subsidiary and OrganiTECH Ltd.'s selling
shareholders became the owners of approximately 67.57% of our common stock.
Accordingly, the foregoing business combination is considered a reverse merger.
As such, for accounting purposes, OrganiTECH Ltd. was considered to be the
acquirer while we were considered to be the acquired.
In March 2001, we changed our name to "OrganiTECH Ltd. USA, Inc." to more
accurately reflect our new focus on our agricultural applied engineering
initiatives.
We design, develop, manufacture, market and support hydroponics solutions
and platforms for the Agriculture and Life-Science industries ("Hydroponics
Growing Factories"). 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, significantly saving distribution costs, and producing extremely high
yields year round while maintaining significantly lower production costs than
the traditional alternatives.
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 field of providing advanced technologies
to agriculture industry. Since its formation in 1999, it has been developing,
producing and marketing our proprietary technology. Our leading products are:
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a) GrowTech(TM)2500 - our principal product - a highly automated,
computer-controlled hydroponics sustainable greenhouse designed to
grow and harvest extremely high 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 and
significantly saving on distribution costs. 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.
The GrowTech(TM)2500's most unique feature is the Rotating
Field-System, or RFS, whereby lettuce and green leafy vegetables float
in styrofoam trays on water tables, which serve both as a nutritious
solution and a means of transport through the growth process.
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.
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 leafy vegetables is expected to
triple as the amount of arable land decreases by one half. Agricultural
trade-flow statistics derived from the Food and Agriculture Organization of The
United Nations (FAOSTAT) indicate that in 2005, the world market for lettuce was
more than 22 million tones and out of which approximately half was consumed in
Europe and North America, and that this multi-billion Dollar market is expected
to continue to increase annually. Statistics derived from the same source
indicate similar trends for other green leafy vegetables, such as spinach,
broccoli, cauliflower, cabbages and herbs, in terms of volume and trade
potential.
3
Advances in technology are expected to continue to assist producers in
increasing their overall productivity and hydroponics production systems
represent an efficient means towards meeting this goal.
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; and since washing
harms their protective tissue, the shelf-life of hydroponically grown
vegetables, 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 Distribution Costs
Transportation costs for lettuce and green 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. The GrowTech(TM)2500 can offer a
cost-effective localization of production, causing significant saving in
distribution costs.
Increase in Cost Factors in the Production Process
Additionally, over the last decade, agricultural growers in western
countries have faced increasing costs. The cost of labor increased, even where
an unqualified work force is utilized, ; energy has become expensive due to the
increases in the price of oil; water is more expensive and in some territories
are not available, particularly where there are purification and
quotas/accessibility problems; and the price of land near market places has
increased disproportionately. The GrowTech(TM)2500 enables the growth of
lettuce, herbs, green leafy vegetables and other plants in a highly economical
and automated surrounding, saving significantly in resources such as water and
labor while making optimal use of energy and land.
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, due mainly to increases in
the price of oil and other manufacturing resources, overall production costs are
expected to continue to increase, with the price ultimately being passed on to
the final consumer.
4
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 GrowTech(TM)2500, 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/unused 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, or
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 sterilizer 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
We believe 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.
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OUR POTENTIAL CUSTOMERS
Based on the above, we have identified our potential segments and customers
as follows:
1. Replacing importation - existing farmers, growers and distributors, who
currently do not grow lettuce and green leafy vegetables, but who wish to:
- Save transportation costs of imported produce;
- Establish cost-effective local production of lettuce and green leafy
vegetables;
- Expand operations while enhancing competitiveness with local
soil-based and imported produce;
2. Existing soil-based farmers and growers of lettuce and green leafy
vegetables, in particular those who suffer from expensive resources, who
wish to:
- Save production costs and optimize use of resources;
- Have constant, year round produce, of high quality;
- Overcome crucial problems of traditional cultivation in open-fields
and soil-based greenhouses;
- Increase productivity and expand their operations;
3. Food industry companies, who wish to expand their operations by the growth
of green leafy vegetables, thereby controlling their value chain.
4. Entrepreneurs who wish to take advantage of new business opportunities,
especially in markets where lettuce and green leafy vegetables cannot
currently be grown, and where there are high costs of transportation.
We are in the early stage of expanding our marketing and sales efforts,
especially where we find strong competitive advantages
OUR STRATEGY
Our goal is to be a world's leading provider of hydroponics solutions and
systems to the Agriculture and Bio-Tech industries. Key elements of our strategy
include the following:
1. Preserving And Improving Existing Deployments Of Our Products
We intend to constantly preserve and improve our existing deployed projects
while they serve both as proof that our technology concept works and as a
reference point for new customers.
2. Maintain Technology Leadership
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We believe we have established a leading technology position in the market
for hydroponics solutions, and have made it a priority to maintain this position
by continuing to make substantial investments in research and development while
establishing new strategic co-operation with leading institutions in the
agriculture and bio-tech industries. Our research and development efforts are
mainly focused on (i) improving the existing technology and the hydroponics -
agronomic know how to achieve higher yields of produce per hydroponics unit;
(ii) expanding our systems for the growing of new varieties of green leafy
vegetables; (iii) implementing engineering and technological improvements and
enhancements to the system, (iv) expanding our systems into new usages (i.e. new
green leafy vegetables and new life-science applications); and (v) adjusting and
adapting our products to the specific requirements of new and different climate
environments around the world.
3. Approaching Key Markets Opportunities
We are in the early stage of expanding our marketing and sales efforts,
especially where we find strong competitive advantages and where the potential
demand for our products is expected to be high, such as in markets where lettuce
and green leafy vegetables cannot currently be grown, and where there are high
costs of transportation; among growers who wish to increase productivity; in
markets where there is a high demand for clean green vegetables and/or long
shelf-life vegetables; in markets where the impact of environmental issues
imposes restrictions or limitations; and among food manufacturers who wish to
expand their value chain. In general, we believe our opportunities are much
broader due to the current trends in the industry discussed earlier.
4. Develop New Strategic Alliances And Market Presence
We intend to develop and expand our strategic alliances with agents and
distributors in different regions around the world, aiming to leverage their
experience and market presence to help us market our products. Additionally, we
intend to expand and form new alliances with research institutions to leverage
our technology and products into new usages for new industries, especially in
the field of Bio-tech.
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.
7
The GrowTech(TM)2500's most unique feature is the Rotating Field-System, or
RFS, whereby lettuce and green leafy vegetables 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, using information published by farming
associations, equipment providers and our competitors, we calculate to be
approximately 20 times more than that achieved in the open field and 5-7 times
more than conventional greenhouse yields (for lettuce as an example).
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. Given
the extremely high yields, production costs in general and energy cost in
particular per a plant are cost-effective in most territories.
Moreover, where the production cost is reduced, the localization of
production has become more attractive, causing additional significant savings 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 and regions where climate conditions prevent the open-field
growing of such vegetables, while simultaneously enabling them to compete with
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 environment
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 usage.
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 and harvesting) of clean, pesticide free, green leafy vegetables. This
is done by utilizing advanced growth systems such as artificial lighting
systems, climate and environmental control systems, revolutionary robotics and
management systems; and integrating them with our hydroponics technology into a
closed and fully controlled environment, usually of a standard size container or
other industrial platform.
8
Designed for highly controlled environments in closed spaces (i.e.
containers) where sunlight is not available (and as a result, 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 its 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.
PHYTOCHAMBER(TM) - LIFE-SCIENCE AND BIO-TECH PLATFORMS
Based on our proprietary hydroponics know-how and GrowTech(TM)2000
technology, we have been 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
utilized by the biotechnology and life-science industries 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
Dollars 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.
TECHNOLOGY AND RESEARCH & DEVELOPMENT ACTIVITY
Existing Product Lines
We are continuously investing in Research and Development to improve and
enhance the existing product lines, especially in order to extend our
capabilities to the growing of new varieties of green leafy vegetables and to
maximize the yield of produce per each growing unit. We are researching new
applications for the GrowTECH(TM) platforms for the emerging
agricultural-biotechnology spheres.
9
As part of an on-going process we invest time and effort in extending the
use of our existing products into new growing projects and also by improving
their functionalities. Technical improvements are being made continuously to
strengthen the reliability of the systems.
The main goals of our research and development efforts are to:
(i) Improve and adjust the functionality (agronomics and engineering) of our
products, especially the GrowTECH2500, for different varieties of lettuce
and herbs and for new green leafy plants,
(ii) Improve the engineering and operational characteristics and capabilities of
the GrowTECH2500,
(iii)Improve the engineering capabilities of the GrowTECH2500 for different
climate conditions, and
(iv) Continue the research and development of new platforms, especially through
the migration of our existing technologies into new Life-Science
applications.
Other Product Lines
We believe that technologies incorporated in the GrowTECH(TM) are
potentially extendable to the development of a number of other potential
applications. These include the cultivation of pharmaceutical plants, herbs,
spices, fruits, and flowers, seedling and transplant propagation; and the
assisting of biotechnology companies in fields such as molecular farming,
transgenic engineering, nutraceutical cultivation, and phytoremediation
applications.
Research & Development Expenditure
We incur research and development expenses in an effort to enhance
agronomics efficiency and nutrition protocols, improve and implement engineering
components and capabilities, reduce manufacturing costs, and develop new product
applications and enhancements, while replacing old technologies with more
advanced ones. Our net research and development expenses for fiscal years ended
December 31, 2007 and 2006 were $319,120 and $510,163, respectively.
INTELLECTUAL PROPERTY
On June 12, 2001, OrganiTECH Ltd. received a United States patent No.
6243987 for the GrowTECH technology and mechanism, which includes protection for
56 claims covering a wide range of new technologies and designs developed for an
automated system that provides a continuous yield of fresh agricultural produce.
10
On January 21, 2003, OrganiTECH Ltd. received a United States patent No.
6508033 for a self contained, fully automated robotic crop production facility.
On February 28, 2002, OrganiTECH Ltd. filed its patent for a self
contained, fully automated robotic crop production facility with the European
Patent Office (European Patent Application No. 0095965.1), as publication No.
1241927. Based on such application, OrganiTECH Ltd. filed a similar patent
application in Canada.
We believe that such patents will provide a strong advantage over our
competitors and enable us to increase research and development efforts for the
integration of our patented technologies into new platforms and products.
In May 2003, OrganiTECH Ltd. received a notice of allowance for the
"GrowTECH" and "OrganiTECH Ltd." trademarks, from the United States Patent and
Trademark Office.
We posses significant know-how that relates to agronomic procedures,
nutrition formulas and growing protocols associate with hydroponics growing.
Other Royalty Obligations
Singapore-Israel Industrial Research and Development Fund (SIIRD)
During fiscal year 2001, OrganiTECH Ltd. entered into a Research and
Development grants and royalties arrangement whereby OrganiTECH Ltd., together
with its Singaporean joint venture partner, Agronaut, is required to pay
royalties to the SIIRD in an amount ranging from 1.5% to 2.5% of sales of
products developed with the grants from SIIRD, such royalties not to exceed the
total amount of grants received from SIIRD. As of the date of this report, the
total of royalty bearing grants received by OrganiTECH Ltd. from SIIRD is
$250,505. Our management believes that this amount will not be due for payment
however we have conservatively recorded royalties' expenses to SIIRD on the
amounts of $37,183 and $84,714 in 2007 and 2006, respectively.
The Weizmann Institute
OrganiTECH Ltd. is also obligated to pay royalties to the Israeli Weizmann
Institute pursuant to a Memorandum of Understanding signed in September 2001
between the parties. The MOU included a development work performed by the
Weitzman Institute, for the sales of miniature tomato seeds and OrganiTECH
Ltd.'s obligation to pay to the Weizmann Institute royalties in an amount not to
exceed 5% of the sales of such miniature tomato plants. As of the date of this
report, we did not generated revenues from miniature tomato seeds.
11
Bio Disc Program
During November 2005, OrganiTech Ltd., together with six companies and
institutions from Israel and Germany, signed a cooperation agreement in order to
carry out a joint project for the development of Molecular Farming in Closed
Systems ("MoFaCS" or "Bio Disc") based on the OrganiTECH Ltd.'s GrowTECH(TM)2000
and the PhytoChamber. Based on such cooperation, the OCS approved a grant to
OrganiTECH Ltd. upon the following terms: a 30% participation in the R&D
expenses incurred by OrganiTECH Ltd., limited to a maximum amount of $210,000.
Royalty payments to be based on all OrganiTECH Ltd.'s sales at a rate 3% to 5%.
The commitment to the OCS is limited to the amount of the received
participation, linked to the U.S. $ and shall bear annual interest at LIBOR, and
is not a liability until a sale is made. As of the date of this report, the
total of royalty bearing grants received by OrganiTECH Ltd. from the OCS for
this project is $11,297.
MARKETING AND DISTRIBUTION
Moving into a new stage of sales and profitability, we intend to increase
marketing and sales efforts through indirect channels in selected regions. We
have entered into marketing, distribution and development agreements with agents
and distributors, in several territories, for the sale and distribution of the
GrowTECH(TM)2500 systems. We plan to further increase our marketing and
distribution channels in the future as we believe the need for our products is
worldwide and our sales volume is directly influenced by the sales and marketing
efforts invested.
Our direct marketing efforts with respect to the GrowTECH(TM)2500 systems
are limited and include, among others, test-system in the UK, sales
presentations, developing brochures and other marketing materials and engaging
in various forms of public relations.
Our Marketing and Sales expenses for fiscal years ended December 31, 2007
and 2006 were $663,083, and $848,504, respectively.
GOVERNMENT REGULATION
Industry Standard
For Bio-Tech applications, the P-1 and P-2 standards are biological safety
regulations that mandate levels of containment in the genetic engineering of
plants. As we intend to operate in the Ag-Bio field, if required, the
GrowTECH(TM) systems can comply with P-1 and P-2 standards under the European
Union regulatory standards for use in the cultivation of Genetically Modified
Organisms (GMO).
12
In 2007, we did not incur any expenses in complying with environmental laws
and regulations.
Grants From The Office of the Chief Scientist of Israel
OrganiTECH Ltd. has received from the Israeli Government, through the
Office of the Chief Scientist ("OCS"), certain research and development grants.
As a condition to its participation in the funding program of the OCS,
OrganiTECH Ltd. may not transfer the technologies developed using such funds or
manufacture its products outside of Israel without the consent of the OCS.
Moreover, the OCS' grant programs currently in effect require OrganiTECH Ltd. to
comply with various conditions in order for OrganiTECH Ltd. to continue to be
eligible for participation. Also, OrganiTECH Ltd. is required as well to pay
royalties to the OCS in an amount ranging from 3% to 5% (up to the amount of the
grants received, which are linked to the U.S. $ and bear annual interest at
LIBOR) of sales from products developed using the grants received from the OCS,
which could cause an increase in OrganiTECH Ltd.'s operating expenses.
OrganiTECH Ltd. anticipates that for so long as such grants continue to be
available, it will likely seek from time to time to utilize such grants. As of
December 31, 2007, the balance of royalty bearing grants received by the OCS net
of royalties paid or provided for, is $178,770 (as of December 31, 2006 -
$230,827). Royalties' expenses amounted to $52,057 and $118,600 in 2007 and
2006, respectively.
Approved Enterprise Status
In April 2001, OrganiTech Ltd. submitted a request to be granted a status
of an "Approved Enterprise" under the Israeli Law for the Encouragement of
Capital Investments, 1959 as amended (the - "Law") According to the "Alternative
Benefits program" status. During the period of benefits, the income deriving
from "Approved Enterprise" will be tax exempt for a period of ten years,
commencing the first year the "Approved Enterprise" generates taxable income.
Notwithstanding the foregoing, the period of benefits will expire in the year
2014. If these retained tax-exempt profits are distributed in a manner other
than in the complete liquidation of the Company they would be taxed at the
corporate tax rate applicable to such profits as if the Company had not elected
the alternative program of benefits (depending on the level of foreign
investment in the Company) currently between 10% to 25% for an approved
enterprise. On February 20, 2007 OrganiTech Ltd. received final approval for its
Approved Enterprise status.
As of December 31, 2007 we have carried forward tax losses in the amount of
$9.4 million, out of which $IKI8.0 million are from OrganiTech Ltd.
13
PRINCIPAL SUPPLIERS
During fiscal year 2007, our principal expenses were for raw materials,
equipment and expenses related to subcontractors. We do not work with one main
supplier and purchase our products from approximately 50 suppliers with which we
have no long-term purchase commitments or exclusive contracts. We have
historically enjoyed a positive experience with our suppliers with respect to
supplier fulfillment and retention, and we have generally not experienced
difficulty in obtaining desired materials from suppliers on acceptable terms.
CUSTOMERS
Our existing and target customers are principally (i) existing soil-based
farmers and growers of lettuce and leafy vegetables (who mainly wish to increase
productivity and save production costs); (ii) existing farmers and growers, who
do not currently grow lettuce and leafy vegetables (and who wish to expand their
operations in the most cost-effective and competitive manner), (iii) food
industry companies (seeking to expand their value chain by controlling the
growth of leafy vegetables), and (iv) new entrepreneurs seeking new business
opportunities. Our first commercial sale was during 2003 (recorded during 2004)
and currently we have deployed our products at a few customers' locations world
wide.
Generally, we sell two types of projects: (i) a Turn Key Project for a
Hydroponics Growing Factory, in which we build the fully acclimatized controlled
greenhouse, and provides the hydroponics core systems including the
hydroponics-agronomic know-how, and (ii) projects in which the greenhouse is
built by the customer and we sell only the hydroponics core systems and
hydroponics-agronomic know-how, in addition to the greenhouse upgrade, if
needed. Each project is planned, designed and tailor-made per the customer's
specific site-location and requirements that can vary depending on several
different factors such as kind of growing, climate and environmental conditions,
size of greenhouse, etc.
A typical project has the following stages/milestones: (i) entering into an
agreement in parallel to performing a detailed design work planned by our
engineers and other experts; (ii) purchasing / assembling / manufacturing of the
different systems/components by our manufacturing personnel, (iii)
shipment/delivery, (iv) building the greenhouse, (v) installation and
integration of climate control systems/components and the hydroponics systems,
including their integration with computerized control and management system (vi)
training and guidance by our agronomy and technical experts until the system has
completed several cycles of production (vii) warranty period. A project
performance/installation time is generally one to three quarters.
A typical contract with a customer includes the delivery of product and
services, including installation, commissioning, training and warranty for the
equipment and software for a limited period of time. Our contracts are generally
non-exclusive and may contain provisions allowing both us and our customers to
terminate the agreement for default. Our contracts may also specify the
achievement of shipment, delivery and service commitments. We are generally able
to meet these commitments.
14
COMPETITION
The agricultural equipment industry is highly competitive. Our technologies
are subject to competition from 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 a few tens of 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, or NFT, 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.
EMPLOYEES
As of December 31, 2007, together with OrganiTECH Ltd. we had 18 employees,
all of whom were full-time. Additionally we are engaged with sub-contractors to
reinforce our personnel to the extent needed in several fields of expertise.
Management believes that we have an adequate number of employees to support our
current operations and projects in process, which are managed partially with
subcontractors. OrganiTECH Ltd. intends to hire additional employees as
required, upon the ordering of additional projects, commercialization of its
products and the receipt of additional financing.
15
ITEM 1A. RISK FACTORS
Described below are a number of uncertainties which, in addition to
uncertainties and risks presented elsewhere in this annual report, may adversely
affect our business, operating results and financial condition. The
uncertainties enumerated below as well as those presented elsewhere in this
annual report should be considered carefully in evaluating the company, its
business and the value of its securities.
WE ARE A COMPANY WITH LIMITED OPERATIONAL HISTORY
We have a limited operating history upon which an investor can evaluate an
investment in our business. Our limited operating history will make it
difficult, if not impossible, to predict future operating results and to assess
the likelihood of our business success in considering an investment in our
company. We cannot give any assurance that we will successfully address these
risks, which may limit the ability to encourage further investment in our
company.
NO SIGNIFICANT REVENUES AND LACK OF FUNDS
We have accumulated losses since our inception in the amount of $11,030,385 and
currently have no material revenues. Our inability to generate revenues and
profits from products we have introduced onto the market could cause us to go
out of business, and for our investors to lose their entire investment.
We will most likely need to raise cash to cover the anticipated fall in our cash
flow until such time as we become cash flow positive based solely on sales less
operating and other costs. We will seek to raise additional cash and working
capital, should it become necessary, through the public or private sales of
equity securities, the procurement of advances on contracts, funding from
joint-venture or strategic partners, or a combination of the foregoing. We may
also seek to satisfy indebtedness without any cash outlay through the private
issuance of debt or equity securities. We cannot give any assurance that we will
be able to secure any additional cash we may require to continue our operations.
Our independent auditors stated in their report accompanying the financial
statements for the fiscal year ended December 31, 2007 that we have not yet
generated sufficient revenues from our operations and are dependent on external
sources for financing its operations. Additionally we have incurred recurring
net losses, negative cash flows from operations and a negative working capital.
These factors raise substantial doubt about our ability to continue as a going
concern.
16
INTENSE COMPETITION
The agro-technology market is a competitive industry, in which the standards are
constantly evolving. There are no substantial barriers to entry, and we expect
that competition will be intense and may increase.
Many of our existing competitors may have substantially greater financial,
technical and marketing resources, larger customer bases, longer operating
histories, greater name recognition and more established relationships in the
industry than we have. As a result, certain of these competitors may be able to
develop and expand their product and service offerings more rapidly, adapt to
new or emerging technologies and changes in customer requirements more quickly,
take advantage of acquisitions and other opportunities more readily, devote
greater resources to the marketing and sales of their products and services, or
aggressively reduce their sales prices below the our costs. We cannot give any
assurance that we will be able to compete successfully with existing or new
competitors.
WE DEPEND ON A LIMITED NUMBER OF KEY PERSONNEL WHO WOULD BE DIFFICULT TO REPLACE
We are dependent for our success on a few key executive officers. Our inability
to retain these officers would impede our business plan and growth strategies,
which would have a negative impact on our business and the value of an
investment. We currently have a small staff comprised of four executive officers
and sixteen employees. Although we believe that these officers and employees
will be able to handle the administrative, research and development, sales and
marketing, and manufacturing requirements in the short-term as we increase sales
and operations, we will nevertheless be required over the longer-term to hire
highly skilled managerial, engineering, technical, sales and marketing and
administrative personnel to fully implement our business plan and growth
strategies. We cannot assure that we will be able to engage the services of such
qualified personnel at competitive prices, or at all, particularly given the
risks of employment attributable to our limited financial resources and lack of
an established track record.
THE ABILITY TO MANAGE OPERATION GROWTH
We plan to grow very rapidly, which will strain our management team and other
company resources to both implement more sophisticated managerial, operational
and financial systems, procedures and controls and to train and manage the
personnel necessary to implement those functions. Our inability to manage our
growth could impede our ability to generate revenues and profits and to
otherwise implement our business plan and growth strategies, which would have a
negative impact on our business and the value of an investment.
17
We will need to significantly expand our operations to implement our longer-term
business plan and growth strategies. We will also be required to manage multiple
relationships with various strategic partners, customers, manufacturers and
suppliers, consultants and other third parties. This will require us to
significantly improve or replace our existing managerial, operational and
financial systems, procedures and controls; to improve the coordination between
our various corporate functions; and to manage, train, motivate and maintain a
growing employee base. The time and costs to effect these steps may place a
significant strain on our management personnel, systems and resources,
particularly given the limited amount of financial resources and skilled
employees that may be available at the time. We cannot give any assurance that
we will institute, in a timely manner or at all, the improvements to our
managerial, operational and financial systems, procedures and controls necessary
to support our anticipated increased level of operations and to coordinate our
various corporate functions, or that we will be able to properly manage, train,
motivate and retain our anticipated increased employee base.
RELIANCE ON KEY MARKETING AND DISTRIBUTION PARTNERS
We intend to rely upon strategic partners or third party marketing and
distribution agents to provide a significant part of our marketing and sales
function. Should they fail to perform as expected, our ability to generate
revenues and profits and to otherwise implement our business plan and growth
strategies will be adversely affected
RELIANCE ON INTELLECTUAL PROPERTY
We rely on a combination of patent, patent pending and trademark, proprietary
rights agreements and non-disclosure agreements, to protect our intellectual
properties. We cannot give any assurance that these measures will prove to be
effective in protecting our intellectual properties.
In the case of patents, we cannot give any assurance that our existing patents
will not be invalidated, that any patents that we currently or prospectively
apply for will be granted, or that any of these patents will ultimately provide
significant commercial benefits. Furthermore, competing companies may circumvent
any patents that we may hold by developing products which closely emulate but do
not infringe upon our patents. While we intend to seek patent protection for our
products in selected foreign countries, those patents may not receive the same
degree of protection as they would in the United States. We can give no
assurance that we will be able to successfully defend our patents and
proprietary rights in any action we may file for patent infringement. Similarly,
we cannot give any assurance that we will not be required to defend against
litigation involving the patents or proprietary rights of others, or that we
will be able to obtain licenses for these rights. Legal and accounting costs
relating to prosecuting or defending patent infringement litigation may be
substantial.
We also rely on proprietary designs, technologies, processes and know-how not
eligible for patent protection. We cannot give any assurance that our
competitors will not independently develop the same or superior designs,
technologies, processes and know-how.
18
POTENTIAL DIFFICULTIES IN ENFORCING CONTRACTS WITH CUSTOMERS
Our contracts and purchase orders are separately negotiated with each of our
customers and the terms vary. Some of the customers execute short-term purchase
orders for small deployments as opposed to long-term contracts for large-scale
deployments of our products. These short term contracts do not ensure that the
customer will purchase any additional products beyond those specifically listed
in the order. Moreover, since we believe that these purchase orders may
represent the early portion of longer-term customer programs, we spend
significant financial sums, personnel and operational resources to fulfill these
orders. If our customers fail to purchase additional products to fulfill their
programs as we hope, we may be unable to recover the costs it incurred and our
business could suffer.
In addition, our general framework contracts are generally non-exclusive and
contain provisions allowing our customers to terminate the agreement without
significant penalties. Our contracts may also specify our shipment, delivery and
installation commitments. If we fail to meet these commitments or negotiate
extensions in a timely manner, our customers may choose to terminate their
contracts or impose monetary penalties.
SALES AND OPERATIONS ARE DIFFICULT AND COSTLY AS A RESULT OF THE POLITICAL RISKS
WORLD WIDE
Our sales to customers based outside Israel account for the majority of our
revenues and may be influenced by the following factors: (i) longer payment
cycles and customers seeking extended payment terms, (ii) tariffs, duties, price
controls or other restrictions on foreign currencies or trade barriers imposed
by foreign countries which may make our systems expensive and uncompetitive for
local operators; (iii) import or export licensing or product-certification
requirements; (iv) unexpected changes in regulatory requirements and delays in
receiving licenses to operate; (v) political and economic instability, including
the impact of economic recessions; (vi) reluctance to staff and manage foreign
operations as a result of political unrest; and (vii) limited ability to enforce
agreements in regions where the judicial systems may be less developed.
INTERNATIONAL TRANSACTIONS AND FOREIGN CURRENCY FLUCTUATIONS
We intend to export our products. This will subject us to various risks
associated with international transactions that may adversely affect our results
of operations, including risks associated with fluctuating exchange rates;
foreign government regulation of fund transfers and export and import duties and
tariffs; and political instability. We do not currently engage in activities to
mitigate the effects of foreign currency fluctuations, and we anticipate being
paid in U.S. dollars or Euro with respect to any international transactions we
may enter into. If earnings from international operations increase, our exposure
to fluctuations in foreign currencies may increase, and we may utilize forward
exchange rate contracts or engage in other efforts to mitigate foreign currency
risks. We can give no assurance as to the effectiveness of these efforts in
limiting any adverse effects of foreign currency fluctuations on our
international operations and our overall results of operations.
19
PAYING CASH DIVIDENDS
We anticipate that we will not pay cash dividends on the shares of our common
stock in the foreseeable future, and we cannot guarantee that funds will be
legally available to pay dividends.
LOW VOLUME TRADE
The shares of our common stock are listed on the OTC Bulletin Board and as a
result, our shares are sporadically or "thinly-traded" meaning that the number
of persons interested in purchasing our shares at or near ask prices at any
given time may be relatively small or non-existent. This situation is
attributable to a number of factors, including the fact that we are a small
company, relatively unknown to stock analysts, stock brokers, institutional
investors and others in the investment community that generate or influence
sales volume, and that even if we came to the attention of such persons, they
tend to be risk-averse and would be reluctant to follow an unproven company or
purchase or recommend the purchase our shares. As a consequence, there may be
periods of several days or more when trading activity in our shares is minimal
or non-existent, as compared to other issuers which have a large and steady
volume of trading activity that will generally support continuous sales without
an adverse effect on share price. We cannot give any assurance that a broader or
more active public trading market for the shares of its common stock will
develop or be sustained, or that current trading levels will be sustained.
HIGH VOLATILITY IN SHARE PRICE AND POTENTIAL DILUTION
The market price for the shares of our common stock is particularly volatile
given our status as a relatively unknown company with a small and thinly-traded
public float, limited operating history and lack of material revenues, which
could lead to wide fluctuations in our share price. The purchase price for our
shares may not be indicative of the price that will prevail in the trading
market. Investors may be unable to sell their shares of common stock at or above
their purchase price, which may result in substantial losses. Additionally,
should we issue additional shares of common stock, options or warrants to
purchase those shares, it would dilute proportionate ownership and voting
rights.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not applicable.
ITEM 2. PROPERTIES.
We currently utilize, as an interim executive office, the corporate
facilities of OrganiTECH Ltd. The facility, which is in good condition, serves
as the corporate, research, and manufacturing facility of OrganiTECH Ltd.
Located in Yoqneam, Israel, the facility is approximately 2,500 square meters,
including offices and an integration hall and laboratory space, as well as 2,000
square meters of yard space. We currently lease this property at a price of
$3,500 per month. The lease for the offices is for two years and is due to
terminate on June 2, 2008. The lease for the integration hall and laboratory
space is for two years as well and is due to terminate August 1, 2008.
20
The change in location during 2003 to Yoqneam was done partially due to the
approval OrganiTech Ltd. received from the Investment Center of the Israel
Ministry of Commerce and Trade to operate a production facility under certain
tax exempt conditions. The receipt of such tax benefits is conditional upon
OrganiTECH Ltd. fulfilling certain obligations stipulated by Israeli law, such
as moving its operations into a certain geographic area as determined by the
Investment Center. If OrganiTECH Ltd. fails to comply with such conditions, the
tax benefits may be canceled and OrganiTECH Ltd. may be required to refund, in
whole or in part, any benefits previously received.
We have no real estate investment policies.
ITEM 3. 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. A 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 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 former directors who resigned from the board
of directors of the Company in July 2007, in connection with the Katzir
Investment (see "Material Agreements" Item 6 later in this Annual Report), 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.
21
As of December 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal period ended December 31, 2007.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
a. Market Information.
From March 26, 2001 through April 14, 2005 our common stock, under the
symbol "ORGT", was quoted on the OTC Electronic Bulletin Board ("ORGT.OB"). From
April 14, 2005, our common stock became ineligible for further quotation on the
OTC Bulletin Board and our shares have since been quoted only on the Pink Sheets
Electronic Quotation Service ("ORGT.PK"), due to our failure to fulfill our
reporting requirements. We completed the fulfillment of these requirements in
March 2007 and as a result, since July 2, 2007, our common stock has been quoted
on the OTC Electronic Bulletin Board under the symbol ORGT.OB.
The current price quotation as of February 27, 2008 was $0.07.
The following table sets forth the range of the high and low closing share
price of our common stock for each quarterly period within the past two fiscal
years:
CLOSING SHARE PRICES
PERIOD LOW HIGH
- ------ ------ -------
2006
FIRST QUARTER $0.22 $0.35
SECOND QUARTER $0.26 $0.33
THIRD QUARTER $0.23 $0.35
FOURTH QUARTER $0.12 $0.28
2007
FIRST QUARTER $0.20 $0.26
SECOND QUARTER $0.18 $0.23
THIRD QUARTER $0.13 $0.20
FOURTH QUARTER $0.09 $0.14
22
These quotations reflect closing share prices, without retail mark-up,
markdown, or commission, and may not represent actual transactions.
b. Holders:
As of December 31, 2007 and the date of this report, there were
approximately 120 shareholders of record of our common stock.
(c) Dividends.
We have not paid any cash dividends with respect to our common stock. There
are no contractual restrictions on our present or future ability to pay cash
dividends. However, we may retain any earnings in the near future for
operations, thus we do not anticipate that any cash dividends will be paid in
the foreseeable future.
In the event OrganiTECH Ltd. distributes cash dividends from income which
was tax-exempt as a result of OrganiTECH Ltd.'s Approved Enterprise status,
OrganiTECH Ltd. may have to withhold for the Israeli tax authorities between 10%
to 25% (depending on the level of foreign investment in our company) of the
amount of cash dividends distributed and this payment could restrict OrganiTECH
Ltd.'s ability to pay dividends.
(d) Securities authorized for issuance under equity compensation plans
Number of securities
remaining available for
Number of Securities to be Weighted-average exercise future issuance under
issued upon exercise of price of outstanding equity compensation plans
outstanding, options, options, warrants and excluding securities
warrants and rights rights reflected in column (a))
Plan Category (a) (b) (c)
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Equity compensation plans
approved by security holders 3,851,508 0.235 867,000
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Equity compensation plans not
approved by security holders - - -
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Total 3,851,508 0.235 867,000
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
23
On May 29, 2000 we granted a key employee options to purchase 96,508 shares
of our common stock at an exercise price of $1 per share. The options can be
exercised upon the occurrence of our making a public issuance of our shares, a
merger or an acquisition of our company.
On May 31, 2005, the Board of Directors approved a Stock Option Plan
("SOP") for our executives, directors, key employees and service providers
comprising options to purchase up to 1,622,000 shares of our common stock. On
February 19, 2006, the Board of Directors approved the increase of the SOP by a
further 3,000,000 shares of common stock, so that options to purchase a total of
4,622,000 shares of common stock of the Company were available for grant under
the SOP. As of December 31, 2007, options for the purchase of 867,000 shares of
common stock of the Company were still available for future grants.
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.
Options vest over a period of zero to four years from the date of grant and
expire no longer than ten years of grant.
(e) Sales of Unregistered Securities.
During 2007, our company or OrganiTECH Ltd. sold the following securities
without registration under the Securities Act of 1933, as amended (the
"Securities Act"):
(i) In July 2007 we executed an investment agreement, or the Katzir
Investment, which was consummated on July 19, 2007 with `Keren Katzir
Debenture for Investment Ltd.' or Katzir, an Israeli investment
company publicly traded on the Tel- Aviv Stock Exchange, pursuant to
which we issued (i) 10,000,000 shares of our common stock, equal to
approximately 27.3% of our issued and outstanding share capital
(post-investment) in consideration for $2 million and (ii) a three
year warrant for the purchase of up to 3,846,154 shares of our common
stock for an exercise price of $0.26 per share in consideration for an
additional $20,000.
(ii) On March 1, 2007 we entered into an agreement with a certain third
party, or Lender, pursuant to which the Lender provided us with a
convertible loan, or Loan, in the amount of $357,500 for a period of 3
years, bearing net interest of 9% per annum to be paid at the end of
each calendar quarter. The Loan or any part of it may be converted
into shares of our common stock with a conversion price of $0.26 per
share, which was considered the fair market value of our shares of
common stock on the date of the agreement.
24
We believe that the transactions described above were exempt from registration
under Section 4(2) of the Securities Act because none of the investors was a
"U.S. Person" as that term is defined in Rule 902(k) of Regulation S promulgated
under the Securities Act, and each investor represented that it was not
acquiring the securities for the account or benefit of any U.S. person.
Additionally, we believe that the transaction described above was exempt from
registration under Section 4(2) of the Securities Act because the subject
securities were sold to a limited group of persons, each of whom was believed to
have been a sophisticated investor and to have been purchasing for investment
without present intention to distribute.
ITEM 6. SELECTED FINANCIAL DATA.
Pursuant to the Securities and Exchange Commission's rules and regulations
this item is not applicable to the Company as a smaller reporting company.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following management's discussion and analysis of financial condition
and results of operations should be read in conjunction with our audited
consolidated financial statements and notes thereto contained elsewhere in this
report. This discussion contains forward-looking statements based on current
expectations that involve risks and uncertainties. Actual results and the timing
of certain events may differ significantly from those projected in such
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of their dates.
OVERVIEW
We design, develop, manufacture, market and support hydroponics solutions and
platforms for the Agriculture and Life-Science industries, enabling 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. Since
2003 we have been offering our "Hydroponics Growing Factory".
With the introduction of the GrowTECH2500 we can now offer a highly automated,
computerized controlled hydroponics sustainable greenhouse designed to grow and
harvest commercial quantities of hydroponics, 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. See "Item 1 - Description of
Business".
26
Following a small number of successful small-scale projects that were deployed
during 2004 and accepted mainly during 2005 (the majority of which were deployed
in Israel), since the middle of 2005 we have deployed three large scale
hydroponics projects of our GrowTECH2500 system. The first project of 1.2
Hectare of hydroponics greenhouse was executed in mid- 2005 and deployed in
Russia for a Russian local grower. The second project of 1.2 Hectare of
hydroponics greenhouse was executed in mid- 2006 and deployed in Spain for a
traditional lettuce grower who is a principle exporter of green leafy produce to
whole Europe. The third project of 0.6 Hectare of hydroponics greenhouse was
executed in mid- 2007 in Israel.
During 2008 management intends to continuously increase investment in both its
selling and marketing activities and in improving and enhancing our product
lines.
CHANGES IN MANAGEMENT
On July 19, 2007, upon the consummation, and as part of the Katzir Investment
(as described later in this Item 6 under "Material Agreements"), Messrs. Shimon
Zenaty and Samuel Hessel resigned from our Board of Directors. Messrs. Yossi
Hevron, Rami Mandola, Yossi Levi and Meir Miran and Ms. Rona Rephaely, were
appointed to our Board of Directors.
Immediately following the consummation of the Katzir Investment, Mr. Lior
Hessel, resigned as chairman of our Board of Directors and on July 23, 2007, our
Board of Directors elected Mr. Yossi Hevron as the new Chairman of our Board of
Directors. Additionally, on August 13, 2007 and November 5, 2007, Messrs. Amnon
Sudri and Gideon Sturlesi, respectively, were appointed to our Board of
Directors. On November 4, 2007, Mr. Lior Hessel resigned from our Board of
Directors.
Following Mr. Hevron's resignation on November 5, 2007, from our Board of
Directors and from serving as its chairman, due to ill health, our Board of
Directors elected Mr. Gideon Sturlesi to serve as our new chairman.
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 the management believes to be
reasonable under the circumstances.
26
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 its inception and until 2006 the Company has devoted substantially most of
its efforts to business planning, marketing, research and development,
recruiting management and technical staff, acquiring assets and raising capital.
Commencing 2006, the Company has generated significant revenues and accordingly,
the Company is not considered to be as a development stage company, 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.
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.
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 the use of the percentage-of-completion method is
appropriate since the Company has the ability to make 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. In 2007 the Company recorded provision for loss
in the amount of $190,000.
27
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 2007 we derived most of our revenues from two projects, each of a single
customer. In 2006 we also derived most of our revenues from two projects, each
of a single customer, out of which the deployment of one project continued
throughout 2007.
STOCK-BASED COMPENSATION
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 costs recognized in the years ended December 31,
2006 and 2007, include: (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.
As a result of adopting SFAS 123(R) on January 1, 2006, the Company's financial
position and result of operation had an immaterial change, than if it had
continued to account for stock-based compensation under SFAS 123.
The fair value of the options granted during years 2005, 2006 and 2007 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.
28
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.
RESULTS OF OPERATIONS
The following table sets forth certain selected financial data, and is qualified
in its entirety by reference to our financial statements and the notes to the
financial statements:
YEAR ENDED DECEMBER 31,
2007 2006
-------- --------
Total Assets $ 1,563,472 $ 924,846
Short Term Obligations $ 1,969,918 $ 2,188,128
Revenue $ 1,487,334 $ 3,395,338
Net Loss $(1,556,396) $(1,379,761)
Net Loss per Common Share $ (0.05) $ (0.05)
Dividends per Common Share $ 0 $ 0
YEAR ENDED DECEMBER 31, 2007 COMPARED TO THE YEAR ENDED DECEMBER 31, 2006
REVENUES
Revenues decreased 56.2% to $1,487,334 for the year ended December 31, 2007 from
$3,395,338 for the year ended December 31, 2006. The $1,908,004 decrease in
revenues is due to a decrease in new sales of our products.
We believe that in 2008 our revenues will come from a limited number of
customers.
29
COST OF REVENUES AND GROSS PROFIT/LOSS
Cost of revenues decreased 45.9% from $2,811,564 in the year ended December 31,
2006 to $1,522,342 in the year ended December 31, 2007. This decrease was due
primarily to the decrease in revenues. As a percentage of revenues, our cost of
revenues was 102.4% in 2007 and 82.8% in 2006. Cost of revenue for fiscal 2007
includes mainly (i) cost of materials and salaries in addition to the decrease
in sales related expenses such as provision for warranties and royalties to the
Israeli Office of Chief Scientist; (ii) a provision for estimated loss from a
new project entered into during June 2007 for which revenues are recognized
commencing the third quarter of 2007; and (iii) an off-setting adjustment to a
provision for warranty related to the recognized revenues.
For the reasons described above, during fiscal year 2007 we had a gross loss of
$35,008 versus a gross profit of $583,774 for the fiscal year 2006.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development, net expenses decreased 37.4% from $510,163 in the year
ended December 31, 2006 to $319,120 in the year ended December 31, 2007. The
decrease was primarily due to decreased payroll and related costs, materials and
sub-contractors' costs during year 2007. As a percentage of revenue, our R&D
expenses were 15.0% in 2006 and 21.5% in 2007. In 2008, we expect to continue to
incur R&D costs, however limited to our available financial resources, related
to our continued GrowTECH2500 development and to a lesser extent, our continued
development of other life science applications.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses decreased 21.9% from $848,504 in the year ended
December 31, 2006 to $663,083 in the year ended December 31, 2007. The decrease
in selling and marketing expenses is primarily attributable to the decreased
sales' commission and to the decrease in marketing expenses of Demo systems. As
a percentage of revenues, our selling and marketing expenses were 25.0% in 2006
and 44.6% in 2007.
As of the date of the report, we maintain one demo-site for which the majority
of the expense was already incurred. However, in 2008 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 selling and marketing efforts
invested.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses decreased 8.4% from $637,529 in the year
ended December 31, 2006 to approximately $583,684 in the year ended December 31,
2007. The decrease in general and administrative expenses was primarily in
professional services and write-off of impaired fixed assets in 2006. As a
percentage of revenues, our general and administrative were 18.8% in 2006 and
39.2% in 2007. In 2008, we expect to maintain this level of general and
administrative expenses, limited to our available financial resources.
30
FINANCIAL INCOME/EXPENSES
Financial income increased from $32,661 in the year ended December 31, 2006 to
$42,499 in the year ended December 31, 2007. During 2007 financial income
consisted primarily of a gain from exchange rate differences and interest on
cash, net of interest and other expenses related to a convertible loan. During
year 2006 financial income consisted primarily of a cancellation of a provision
for a fine in connection with a PIPE & interest on cash, net of financing
expenses related to short term bank credit and others.
OPERATING LOSS AND NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
Our operating loss increased by 13.2% to $1,598,895 for the year ended December
31, 2007 from $1,412,422 for the year ended December 31, 2006 and our net loss
increased by 12.8% to $1,556,396 for the year ended December 31, 2007 from
$1,379,761 for the year ended December 31, 2006.
YEAR ENDED DECEMBER 31, 2006 COMPARED TO THE YEAR ENDED DECEMBER 31, 2005
REVENUES
Revenues increased 106% to approximately $3.4 million for the year ended
December 31, 2006 from approximately $1.65 million for the year ended December
31, 2005. The approximately $1.75 million increase in revenues is primarily from
the completion of the deployment of a large scale project in Russia and a
substantial progress we made in the deployment of a large scale project in
Spain- - both projects were recognized based on the percentage-of-completion
method.
We believe that in 2007 our revenues will come from a limited number of
customers out of which a significant amount will be attributed to our Spanish
customer.
COST OF REVENUES AND GROSS PROFIT/LOSS
Cost of revenues increased 67% from approximately $1.686 million in the year
ended December 31, 2005 to approximately $2.812 million in the year ended
December 31, 2006. This increase was due primarily to the increase in revenues.
As a percentage of revenues, our cost of revenues was improved to 83% in 2006
from 102% in 2005. Cost of revenues for fiscal 2006 includes mainly cost of
materials and salaries in addition to the increase in sales related expenses
such as provision for warranties and royalties to the Israeli Office of Chief
Scientist.
31
For the reasons described above, during fiscal year 2006 we had gross profit of
17% (approximately $584,000) versus gross loss of 2% for the fiscal year 2005
(approximately $36,000).
RESEARCH AND DEVELOPMENT EXPENSES
Research and development, net expenses increased 236% from approximately
$152,000 in the year ended December 31, 2005 to approximately $510,000 in the
year ended December 31, 2006. The increase was primarily due to increased
payroll and related costs, materials and sub-contractors' costs during year
2006. As a percentage of revenues, our R&D expenses were 9% in 2005 and 15% in
2006. In 2007, we expect to continue to incur R&D costs, however limited to our
available financial resources, related to our continued GrowTECH2500 development
and to a lesser extent, our continued development of other life science
applications.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses increased 187% from approximately $296,000 in the
year ended December 31, 2005 to approximately $849,000 in the year ended
December 31, 2006. The increase in selling and marketing expenses is primarily
attributable to the increased payroll costs, amortization of deferred stock
based compensation and to expenses related to demo-systems deployed in Europe
and the USA. As a percentage of revenues, our selling and marketing expenses
were 18% in 2005 and 25% in 2006.
As of the date of the report, we maintain two demo-sites for which the majority
of the expense was already incurred. However, in 2007 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 selling and marketing efforts
invested.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased 89% from approximately $338,000 in
the year ended December 31, 2005 to approximately $638,000 in the year ended
December 31, 2006. 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 revenues, our general and administrative were 20% in 2005 and
19% in 2006.
In 2007, we expect to maintain this level of general and administrative
expenses, limited to our available financial resources.
32
FINANCIAL INCOME/EXPENSES
Financial income was approximately $33,000 in the year ended December 31, 2006
compared to an expense of approximately $177,000 in the year ended December 31,
2005. During 2006 financial income consisted primarily of writing off of a
provision recorded in 2005 for a possible fine related to an equity investment
in our company (for further information see note 11-E(4). of our annual
consolidated financial statements for the year ended December 31, 2006 of this
Report) that was set-off by expenses related to currency exchange rates. During
year 2005 financial expenses consisted primarily of interest on a convertible
loan received from a related party and of a provision recorded for a possible
fine related to an equity investment in our company.
OPERATING LOSS AND NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
Our operating loss increased by 72% to approximately $1.412 million for the year
ended December 31, 2006 from approximately $822,000 for the year ended December
31, 2005 and our net loss increased by 38% to approximately $1.38 million for
the year ended December 31, 2006 from approximately $998,000 for the year ended
December 31, 2005.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
YEAR ENDED DECEMBER 31, 2007 COMPARED TO THE YEAR ENDED DECEMBER 31, 2006
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2007, we had cash and cash equivalents totaling $909,551
versus approximately $569,319 as of December 31, 2006.
Since our inception in 1999, we have financed our operations through private
sales of shares of our common stock and convertible loans, which have totaled as
of December 31, 2007 $8 million (net of issuance 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 did not have sufficient cash to satisfy our company's and
OrganiTECH Ltd.'s operational and development requirements over the next 12
months. The report of our independent public accountants on our consolidated
financial statements for the fiscal years ended December 31, 2007 includes 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 its ability to continue as a going concern.
For the year ended December 31, 2007, we had $1,885,117 cash used in operating
activities compared with $746,297 for the year ended December 31, 2006. The
operating cash outflow for fiscal year 2007 was primarily a result of our net
loss of $1,556,396 and a decrease in trade payable and customer advances and by
an increase in trade receivables. The cash outflow was partially offset by a
decrease in costs incurred in relation to contracts in progress, by an increase
in other payables and accrued expenses, and by amortization of deferred
stock-based compensation.
33
The net cash provided by investment activities for the year ended December 31,
2007 was $1,470 compared with $19,366 used in investment activities for the year
ended December 31, 2006. The cash provided by investment activities for fiscal
2007 was a result of disposal of property and equipment net of purchases of new
equipment.
Our net cash inflow from financing activities for the year ended December 31,
2007 was $2,223,879 compared with $885,908 for the year ended December 31, 2006.
The net cash inflow from financing activities for fiscal year 2007 was generated
primarily from the proceeds of the issuance of shares, net of issuance expenses
and from a convertible loan, off-set by an increase in short-term credit from
financial institutions.
For further information relating to an investment in our company by Keren Katzir
Debenture for Investment Ltd., see under "Material Agreements" later in this
Item 6.
Other than as otherwise mentioned in this quarterly report, there were no
material long term loans, commitments or off-balance sheet guarantees as of
December 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.
YEAR ENDED DECEMBER 31, 2006 COMPARED TO THE YEAR ENDED DECEMBER 31, 2005
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2006, we had cash and cash equivalents totaling approximately
$569,000 versus approximately $449,000 as of December 31, 2005.
For the year ended December 31, 2006, we had approximately $746,000 cash used in
operating activities compared with approximately $14,000 for the year ended
December 31, 2005. The operating cash outflow for fiscal 2006 was primarily a
result of our loss of approximately $1.38 million and a decrease in customer
advances. 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.
34
The net cash used in investment activities for the year ended December 31, 2006
was approximately $19,000 compared with approximately $58,000 provided by
investment activities for the year ended December 31, 2005. The cash used in
investment activities for fiscal 2006 was a result of property and equipment
purchases.
Our net cash inflow from financing activities for the year ended December 31,
2006 was approximately $886,000 compared with approximately $408,000 for the
year ended December 31, 2005. 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 long term loans and commitments or off balance sheet guarantees as
of December 31, 2006.
OFF-BALANCE SHEET ARRANGEMENTS
As of December 31, 2006, we did not have any off-balance sheet arrangements that
had or were 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.
MATERIAL AGREEMENTS
INVESTMENT BY KEREN KATZIR DEBENTURE FOR INVESTMENT LTD.
In July 2007 we executed an investment agreement, or the Katzir Investment,
which was consummated on July 19, 2007 with `Keren Katzir Debenture for
Investment Ltd.' or Katzir, an Israeli investment company publicly traded on the
Tel- Aviv Stock Exchange which specializes in investing in industrial companies,
pursuant to which we issued (i) 10,000,000 shares of our common stock, equal to
approximately 27.3% of our issued and outstanding share capital
(post-investment) in consideration for $2 million and (ii) a three year warrant
for the purchase of up to 3,846,154 shares of our common stock for an exercise
price of $0.26 per share in consideration for an additional $20,000. As part of
the Katzir Investment, certain of our shareholders who hold collectively greater
than 50% of our issued and outstanding shares entered into an agreement pursuant
to which they agreed to vote their shares in favor of a board comprised of 11
members, 5 of whom would be nominated by Katzir.
35
PURCHASE AGREEMENT WITH A SPANISH CUSTOMER
On June 28, 2006, we entered into 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
fully recognized during year 2007.
CLAL INVESTMENTS LTD.
(1) Pursuant to a series of On investment agreements between February
2005 and January 2006 (the "PIPE Agreements"), we issued several investors
including Clal Investments Ltd., ("Clal") (which also represented the
investors), an aggregate of 6,000,000 shares of our common stock for an
aggregate purchase price of $1,500,000 (the "Investment Shares"). Pursuant
to the PIPE Agreements we also issued warrants to the investors, which
warrants have since expired without having been exercised. The Investment
Shares are included in a Form SB-2 which was declared effective on October
4, 2006. As a result, we didn't pay the investors and Clal any fine with
regards to the said registration statement.
(2) On March 14, 2006, we entered into an agreement with Clal for the
provision of past and future services provided to us by Clal in securing
part of the investments mentioned above. Under the agreement, Clal is
entitled to an aggregate payment of $30,000 +VAT (of which $22,000 + VAT
has previously been paid) and to A-1 Warrants for the purchase of an
additional 180,000 shares of our common stock (of which 82,500 warrants
have previously been issued to Clal) and A-2 Warrants for the purchase of
additional 180,000 shares of our common stock (of which 82,500 warrants
have previously been issued to Clal).
(3) On November 16, 2004, we entered into a service agreement with a
consultant whereby the consultant will present us to potential investors
and as part of the success-based consideration. Following the PIPE
Agreements for which he provided services, the consultant is entitled to
A-1 Warrants for the purchase of 27,500 shares of our common stock and A-2
Warrants for the purchase of 27,500 shares of our common stock under the
same terms and conditions detailed in the PIPE agreement.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Pursuant to the Securities and Exchange Commission's rules and regulations
this item is not applicable to the Company as a smaller reporting company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Reference is made to pages F-1 through F-27 comprising a portion of this
annual report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
36
ITEM 9A. CONTROLS AND PROCEDURES.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.
Our management, including our chief executive officer and chief financial
officer, evaluated the effectiveness of our disclosure controls and procedures
as of the end of the period covered by this report. The term "disclosure
controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act, means controls and other procedures of a company that are designed
to ensure that information required to be disclosed by the company in the
reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms. Disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to be disclosed by a
company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the Company's management, including its
principal executive and principal financial officers, as appropriate to allow
timely decisions regarding required disclosure. Management recognizes that any
controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving their objectives, and management
necessarily applies its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Based on that evaluation, our management
concluded that our disclosure controls and procedures required by paragraph (b)
of Rules 13a-15 or 15d-15 were not effective at the reasonable assurance level
because of the identification of material weaknesses in our internal control
over financial reporting and the failure to include information relating to
disclosure controls and procedures and internal control over financial reporting
as required in the report.
Our remediation plans for our weaknesses in internal control over financial
reporting are disclosed below. The Company has also engaged a law firm to assist
us in preparing and filing corporate documents and periodic reports, including
the information relating to disclosure controls and procedures and internal
control over financial reporting.
MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended) for us.
In order to ensure whether our internal control over financial reporting is
effective, management has assessed such controls for its financial reporting as
of December 31, 2007. This assessment was based on criteria for effective
internal control over financial reporting described in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission ("COSO").
37
In performing this assessment, management has identified the following material
weaknesses:
Absence of adequate segregation of duties relating to oversight and management
of our systems. This resulted primarily from the fact that certain part of the
work of our chief financial officer is not monitored or reviewed. The absence of
adequate segregation of duties may have an affect on the systems which we use in
the evaluation and processing of certain accounts and areas and in the posting
and recording of journal entries into certain accounts, as described below:
o REVENUE & RECEIVABLES PROCESS - There was a material weakness in
the sub-process of `Expenses/Costs Related To Recognized Revenues'
which resulted from the fact that there are certain calculations (such
as (i) processing of purchase orders or other commercial engagements
signed with customers, and (ii) distribution & delivery of goods
sold to customers) that are made by our chief financial officer and
which are not reviewed or approved by anyone else.
o PURCHASING & INVENTORY PROCESSES in Relation to the Allocations
between Expense and Inventory - There was a material weakness in the
sub-processes of `Purchasing and Recording Inventory' which resulted
from the fact that there are certain calculations in relation to
capitalizations of purchasing to Inventory, that are made by our chief
financial officer and which are not reviewed by anyone else.
o FINANCIAL STATEMENTS CLOSING PROCESS- There was a material weakness in
the process of closing our financial statements which resulted from
the fact that the work of our chief financial officer in this process
(starting with processing the trial balance, through the evaluation
and implementation of policies and accounting issues, until the
complete production of comprehensive financial statements) is not
reviewed by anyone else.
o TREASURY AND CASH PROCESS - There was a material weakness in the
sub-process of debt management which resulted from the fact that our
chief financial officer manages, evaluates, and discloses all matters
which relate to debts, convertible loans, hybrid debts, issuance
expenses, interest, etc. whose work is not reviewed by anyone else.
As a result of these material weaknesses in our internal control over financial
reporting, our management concluded that our internal control over financial
reporting, as of December 31, 2007, was not effective based on the criteria set
forth by COSO in Internal Control - Integrated Framework. A material weakness in
internal control over financial reporting is a deficiency, or a combination of
deficiencies, in internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of the company's annual or
interim financial statements will not be prevented or detected on a timely
basis.
38
MANAGEMENT'S PLAN FOR REMEDIATION OF MATERIAL WEAKNESSES
In light of the conclusion that our internal control over financial reporting
was not effective, our management is in the process of implementing a plan
intended to remediate such ineffectiveness and to strengthen our internal
controls over financial reporting through the implementation of certain remedial
measures, which include:
o Improving the control and oversight of the duties relating to the
systems we use in the evaluation and processing of certain accounts
and areas and in the posting and recording of journal entries into
certain accounts (in which material weaknesses have been identified as
described above);
o The segregation of duties relating to the processing of accounts and
the recording of journal entries into certain accounts; and
o Obtaining the assistance of experienced financial personnel to enhance
our financial reporting capabilities by overseeing and reviewing the
chief financial officer's work
We have commenced implementing controls to address the segregation of duties
relating to the systems we use in the evaluation and processing of certain
accounts and areas and in the posting and recording of journal entries into
certain accounts (in which material weaknesses have been identified as described
above). Additionally, we intend to actively obtain the assistance of experienced
financial personnel to enhance our financial reporting capabilities by
reviewing/overseeing the chief financial officer's work.
This annual report does not include an attestation report of our public
accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit us to provide only management's report in this annual
report.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of the Company has evaluated, with the participation of the
Chief Executive Officer of the Company, any change in the Company's internal
control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) that occurred during the fourth fiscal quarter of the
period covered by this Annual Report on Form 10-KSB. There were no changes in
our internal control over the financial reporting identified in that evaluation
that occurred during the fourth fiscal quarter of the period covered by this
Annual Report on Form 10-KSB that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
However, since January 1, 2008, we have commenced implementing controls to
address the segregation of duties relating to the systems we use in the
evaluation and processing of certain accounts and areas and in the posting and
recording of journal entries into certain accounts (in which material weaknesses
have been identified as described above). Additionally, we intend to actively
obtain the assistance of experienced financial personnel to enhance our
financial reporting capabilities by reviewing/overseeing the chief financial
officer's work.
ITEM 9B. OTHER INFORMATION.
Not applicable.
39
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Our executive officers and directors and their ages as of the date of this
report are as follows:
NAME AGE POSITION
- ---- --- --------
Gideon Sturlesi 49 Chairman of Board of Directors
Heli Ben-Nun 56 Chief Executive Officer, Director
Yaron Shalem 35 Chief Financial Officer
Arieh Keidan 58 Director
Yaacob Hannes 71 Director
Ohad Hessel 39 Director
Rami Mandola 49 Director
Yossi Levi 47 Director
Meir Meiran 32 Director
Rona Rephaely 26 Director
Amnon Sudri 45 Director
BIOGRAPHIES OF EXECUTIVE OFFICERS AND DIRECTORS
Mr. Gideon Sturlesi - Mr. Sturlesi was appointed to serve on our board of
directors and act as its chairman on November 5, 2007. Mr. Sturlesi is the
founder and since 2001 has been serving as a general partner of BioMedical
Israel Ltd., a private life-science fund. Since 2004 Mr. Sturlesi has served as
a venture partner in Ofer Hi-Tech LP, a leading investor in technology-based
Israeli-related companies. Mr. Sturlesi is also a co-founder and since 1996 till
2001 has served as Executive Vice President of Galil Medical Ltd., a developer
of minimal invasive devices for use in urology, general surgery and
interventional MRI, and a founder and CEO of their US subsidiary, Galil Medical
Inc. Additionally, from 1989 until 1996 Mr. Sturlesi served as a divisional
director for marketing & business development and as a group manager of R&D in
Rafael Israel's Armaments Development Authority. Mr. Sturlesi holds a Master's
degree (cum-laude), in Engineering from Technion Institute of Technology, Haifa,
Israel.
Mrs. Rachel Ben-Nun - Since January 2, 2006, Mrs. Ben-Nun has served as our
Chief Executive Officer and since February 19, 2006 Mrs Ben-Nun has served as a
member of our Board of Directors. Mrs. Ben-Nun is a co-founder of Arel
Communication and Software Ltd. ("Arel") and a co-founder of Arelnet Ltd.
("ArelNet") a leading provider of VOIP systems. Mrs. Ben-Nun was the CEO of Arel
during its initial public offering on the NASDAQ National Market in 1994 and
Arelnet's CEO during its initial public offering on the Tel-Aviv Stock Exchange
(TASE: ARNT) in 2000 and at the time of its acquisition in June 2005 by Airspan
Networks Inc., a Washington company traded on the Nasdaq National Market
(NASDAQ: AIRN). Mrs. Ben-Nun has over 25 years of experience in the Hi-Tech
industry mainly in management and development of Telecommunication systems and
software. Mrs. Ben-Nun holds a Master's degree, in Industrial Engineering from
Ben-Gurion University, Israel.
40
Mr. Yaron Shalem - Since February 23, 2006 Mr. Shalem has served as our
Chief Financial Officerl. Prior to joining OrganiTech he was the CFO of Arelnet
Ltd, an Israeli company traded on the Tel-Aviv Stock Exchange, (TASE: ARNT)
which was purchased by Airspan Networks Inc., a Washington company traded on the
Nasdaq National Market (NASDAQ: AIRN). Prior to joining ArelNet Mr. Shalem was
CFO of CellPay Ltd, an Israeli start-up - a worldwide leading technology
provider in the Mobile Payment arena, at Telrad Networks group, a leading
Israeli Telecommunications Company, and served as an accountant at Price
Waterhouse Coopers Israel. Yaron is an experienced CPA and holds a B.A. in
Economics & Accounting from Tel Aviv University and an EMBA from Bar-Ilan
University.
Mr. Arieh Keidan - Mr. Keidan has been a member of our board of directors
since August 2002. Mr. Keidan has more than 30 years of experience in banking
and finance management in Israel. Mr. Keidan was the Finance Officer of
American-Israel Paper Mills Ltd., throughout the 1970's, a manager of real
estate investments for Migdal Insurance Company, and Bank Leumi Leisrael, and a
manager of the real estate development of Shikun Vebinui, one of Israel's
largest corporations.
Mr. Yaacob Hannes - Mr. Hannes has served on our board of directors since
2003. Mr. Hannes served for 20 years as CFO of the Israeli holding company Elron
Electronic Industries Ltd. and of several of its affiliated companies. Since
1989 Mr. Hannes has worked as an independent financial consultant to various
companies in various industries. Mr. Hannes also serves as director of the
following public companies; Caprice Jewelry Ltd., Afsek Industries Ltd., Kalil
Industries Ltd. and the following companies: Clal Finance Underwriters Ltd.,
Rosario Capital Underwriters Ltd. and HerbaMed Ltd. Mr. Hannes is a Director and
Owner of Y.Hannes & Co. Ltd. and Hannes Holdings Ltd. Mr. Hannes is deemed by
our board of directors as our financial expert.
Mr. Ohad Hessel - Mr. Hessel has served on our board of directors since
January 2001 and acted as the Company's Vice President of Operations from
January 2001 until April 2003. From 1993 to 1999, Mr. Hessel served as Executive
Vice President of the Northern Region for D.G. Pizza. Mr. Hessel earned a degree
in industrial management engineering from ORT College in Israel and has
completed additional studies in international executive management both in the
United States and Israel.
41
Mr. Amnon Sudri - Mr. Sudri was appointed to serve on our board of
directors on August 13, 2007. Mr. Sudri has been serving as a director in Katzir
Fund Debentures for Investments Ltd., a public fund traded on the TASE, since
August 2007, and as chairman of the board of directors of Galil Mountain Winery
since December 1999. Until December 2006, Mr. Sudri served as CEO of Paskal
Technologies. Additionally, between the years 1998 and 2003, Mr. Sudri served as
CEO of Kibbutz Yiron and prior to that, as CFO of Kibbutz Yiron. Mr. Sudri holds
a B.A degree in Management & Economics from Rupin Academic Center, Israel.
Mr. Rami Mandola - Mr. Mandola was appointed to serve on our board of
directors on July 19, 2007. Mr. Mandola is the founder of Katzir Fund Debentures
for investments Ltd., a public fund traded on the TASE, and has been acting as
its CEO since January 2006. Until 2006, Mr. Mandola served as partner with Ernst
& Young Israel. For the last decade, Mr. Mandola has accompanied companies into
the stock market, private placements and strategic partnerships. Mr. Mandola
holds a C.P.A license (Isr.) and a B.A degree in Economics & Accounting from
Tel-Aviv University, Israel.
Mr. Yossi Levi - Mr. Levy was appointed to serve on our board of directors
on July 19, 2007. Mr. Levy has been serving as a Chief Analyst in Katzir Fund
Debentures for investments Ltd., a public fund traded on the TASE, since July
2007. Between the years 1997 and 2006, Mr. Levy served as the CFO of Gibor Sport
Active Wear, an international manufacturer of branded textile from Israel.
Mr. Meir Miran - Mr. Miran was appointed to serve on our board of directors
on July 19, 2007. Mr. Miran has been serving as CFO of Katzir Fund Debentures
for investments Ltd., a public fund traded on the TASE, since January 2006.
Between the years 2003 and 2006, Mr. Miran was a manager with E&Y Israel. Mr.
Miran holds a C.P.A license (Isr.) and a B.A degree in Economics & Accounting
from Hebrew University, Jerusalem, Israel.
Ms. Rona Rephaely - Miss Rephaely was appointed to serve on our board of
directors on July 19, 2007. Miss Rephaely has been serving as an operational
manager in Katzir Fund Debentures for investments Ltd., a public fund traded on
the TASE, since January 2006. Miss Rephaely holds a B.A degree, in Biochemistry
and Food science from Hebrew University, Jerusalem, Israel.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act, as amended, requires our executive officers,
directors and persons who beneficially own more than 10% of our common stock to
file reports of their beneficial ownership and changes in ownership, Forms 3, 4
and 5, and any amendment thereto, with the SEC. Executive officers, directors,
and greater-than-ten percent holders are required to furnish us with copies of
all Section 16(a) forms they file. Based on our review of the activity of our
officers and directors for the fiscal year ended December 31, 2007, we believe
all Forms 3, 4 or 5 were timely filed.
42
CODE OF ETHICS
On August 13, 2007, we adopted a formal Code of Ethics, that applies to all of
our employees, officers and directors, including our Chief Executive Officer,
our Chief Financial Officer and our principal accounting officer or controller
or other persons performing similar functions.
Copies of our code of ethics will be available at our executive offices upon
request.
We do not have an Audit Committee. Therefore, the entire board of directors
performs the functions of the Audit Committee. Our board of directors has
determined that Mr. Yaacob Hannes is our audit committee financial expert and is
independent in accordance with applicable Securities and Exchange Commission
regulations.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth all compensation paid in respect of our
Chief Executive Officer and those individuals who received compensation in
excess of $100,000 per year (collectively, the "Named Executive Officers") for
our last two completed fiscal years:
Nonqualified
Non-Equity Deferred
Name and Stock Option Incentive Plan Compensation All Other
Principal Salary Bonus Awards Awards* Compensation Earnings Compensation
Position Year ($) ($) ($) ($) ($) ($) ($)
(a) (b) (c) (d) (e) (f) (g) (h) (i)
- -------------- ------- ------------- ------- ---------- ------------ ---------------- ---------------- ---------------
Gideon 2007 -- -- -- -- -- -- --
Sturlesi
- -Chairman (1) 2006
(N/A)
- -------------- ------- ------------- ------- ---------- ------------ ---------------- ---------------- ---------------
Lior Hessel 2007 139,500(2) -- -- 19,323(3) -- -- --
- -Previous
Chairman 2006 117,018(2) 58,180(3)
- -------------- ------- ------------- ------- ---------- ------------ ---------------- ---------------- ---------------
Heli Ben-Nun 2007 129,412(4) -- -- 78,750(5) -- -- --
- - CEO &
Director 2006 113,448(4) 157,500(5)
- -------------- ------- ------------- ------- ---------- ------------ ---------------- ---------------- ---------------
Yaron Shalem 2007 96,323(6) -- -- 17,167(7) -- -- --
- - CFO 2006 81,504(6) 27,500(7)
- -------------- ------- ------------- ------- ---------- ------------ ---------------- ---------------- ---------------
(1) We have not entered into any agreement for compensation with Mr. Gideon
Sturlesi.
43
(2) On May 2, 2006 we entered into an employment agreement with Mr. Lior
Hessel, who served on our Board of Directors until November 4, 2007, which
replaced his previous employment agreement dated November 1999. The new
agreement provides for an annual base salary of approximately U.S. $80,000
plus certain benefits, including a pension plan. Each side may terminate
the agreement upon 180 days notice. On December 18, 2007 our employment of
Mr. Hessel was terminated.
(3) On December 29, 2005, we granted Mr. Hessel 360,000 options to purchase
shares of our common stock with an exercise price of $0.187 per share. The
options vest over 2 years and are exercisable for a period of 10 years
following the grant. The weighted fair market value of the options as
calculated in accordance with FAS 123R is $0.22 per share, constituting a
total benefit at the date of grant of $77,715, amortizing equally over the
vesting period, with an expense of $19,323 and $58,180 being recorded for
fiscal years 2007 and 2006, respectively. For more information see, note 10
D of our annual financial statements for the year ended December 31, 2007.
(4) On May 2, 2006 we entered into an employment agreement with Rachel Ben-Nun,
our CEO, which replaced the initial letter of intent entered into with her
on January 1, 2006. The employment agreement provides for an annual base
salary of approximately U.S. $80,000 plus certain benefits, including a
vehicle and insurance and pension policies. Each side may terminate the
agreement upon 180 days notice. On July 19, 2007 we approved an agreement
and undertaking by Mrs. Ben-Nun, that in consideration for our agreeing to
extend the exercise period of Mrs. Ben-Nun's options to purchase shares of
our common stock to twenty-four months, the execution of the Katzir
Investment and the issuance of securities to Katzir thereunder would not
cause acceleration of the vesting of her option.
(5) On January 2, 2006, we granted Ms. Ben Nun 1,500,000 options to purchase
shares of our common stock with an exercise price of $0.20 per share. The
options vest over 3 years and are exercisable for a period of 10 years
following the grant. The weighted fair market value of the options as
calculated in accordance with FAS 123R is $0.21 per share, constituting a
total benefit at the date of grant of $315,000, amortizing equally over the
vesting period, with an expense of $78,750 and $157,500 being recorded for
fiscal year 2007 and 2006, respectively. Additionally, according to the
employment agreement, should we complete a re-organization, merger,
acquisition or similar transaction with an unaffiliated third party, in
which we issue at least 25% of our share capital outstanding at such time,
then in the event that Ms. Ben-Nun's employment is terminated for any
reason within 12 months of the completion of such transaction, all of Ms.
Ben-Nun's unvested options shall become immediately exercisable. For more
information see, note 10 D of our annual financial statements for the year
ended December 31, 2007.
(6) On May 2, 2006 we entered into an employment agreement with Yaron Shalem,
our CFO, which replaced the initial letter of intent entered into with him
on February 15, 2006. The employment agreement provides for an annual base
salary of approximately U.S. $61,000 plus certain benefits, including a
vehicle and insurance and pension policies. Each side may terminate the
agreement upon 90 days notice. On July 19, 2007 we approved an agreement
and undertaking signed by Mr. Shalem, that in consideration for our
agreeing to extend the exercise period of Mr, Shalem's options to purchase
shares of our common stock to twenty-four months, the execution of the
Katzir Investment and the issuance of securities to Katzir thereunder would
not cause acceleration of the vesting of his option
(7) On February 19, 2006, we granted Mr. Shalem 250,000 options to purchase
shares of our common stock with an exercise price of $0.25 per share and on
and on April 16, 2007 we granted Mr. Shalem 50,000 options to purchase
shares of our common stock with an exercise price of $0.26 per share. The
options vest over 3 years and are exercisable for a period of 10 years
following the grant. The weighted fair market value of the options as
calculated in accordance with FAS 123R is $0.22 and $0.16 per share,
respectively, constituting a total benefit at the date of grant of $55,000
and $8,000, amortizing equally over the vesting period, with an expense of
$17,167 and $27,500 being recorded for fiscal years 2007 and 2006,
respectively. Additionally, according the employment agreement, should we
complete a re-organization, merger, acquisition or similar transaction with
an unaffiliated third party, in which we issue at least 25% of our share
capital outstanding at such time, then in the event that Mr. Shalem's
employment is terminated for any reason within 12 months of the completion
of such transaction, all of Mr. Shalem's unvested options shall become
immediately exercisable. For more information see, note 10 D of our annual
financial statements for the year ended December 31, 2007.
44
The following table provides a summary of the outstanding equity awards held by
Named Executive Officers, as of December 31, 2007:
Outstanding Equity Awards at Fiscal Year-End
- --------------------------------------------------------------------------------------------------------------------------
Option Awards Stock Awards
- ---------------------------------------------------------------------------------- --------------------------------------
Equity
Incentive
Plan
Awards:
Market
Equity or
Incentive Payout
Market Plan Value
No. Value Awards: of
Equity of of Number Unearned
Incentive Shares Share of Shares,
Plan or or Unearned Units
Awards: Units Unites Shares, or
Number of Number of Number of of of Units or Other
Securities Securities Securities Stock Stock Other Rights
Underlying Underlying Underlying that that Rights That
Unexercised Unexercised Uxercised Option Option have have That Have
Name and Options Options Unearned Exercise Expiration not not Have Not Not
Principal (#) (#) Options Price Date Vested Vested Vested Vested
Position Exercisable Unexercisable (#) ($) ($) (#) ($) (#) (#)
(a) (b) (c) (d) (e) (f) (g) (h) (i) (j)
- ------------- ----------- ------------- ------------- ----------- ---------- --------- ------ --------- --------
Lior Hessel 360,000 - $0.187 December - - - -
(1) 29, 2015
- ------------- ----------- ------------- ------------- ----------- ---------- --------- ------ --------- --------
Heli Ben-Nun 750,000 750,000 - $ 0.20 January 2, - - - -
- - CEO & 2016
Director (2)
- ------------- ----------- ------------- ------------- ----------- ---------- --------- ------ --------- --------
Yaron 12,500 37,500 - $ 0.26 April 16 - - - -
Shalem - 2017
CFO (3) 125,000 125,000 $ 0.25 February
19, 2016
- ------------- ----------- ------------- ------------- ----------- ---------- --------- ------ --------- --------
During the fiscal year 2007 none of the Named Executive Officers exercised
options at fiscal year end.
45
The following table presents the compensation of each of our directors for the
year ended December 31 2007:
Director Compensation
- ----------------------------------------------------------------------------------------------------------------
Nonqualified
Fees Non-Equity Deferred
Earned or Stock Option Incentive Plan Compensation All Other
Paid In Awards Awards Compensation Earnings Compensation Total
Name * Cash ($) ($) ($) ($) ($) ($)
(a) (b) (c) (d) (e) (f) (i) (j)
- ------------- ----------- ------------ ----------- ---------------- --------------- ---------------- -----------
Arieh Keidan - - 2,684 (1) - - - 2,684
- ------------- ----------- ------------ ----------- ---------------- --------------- ---------------- -----------
Yaacob Hannes 4,910 (2) - 5,397 (3) - - - 10,307
- ------------- ----------- ------------ ----------- ---------------- --------------- ---------------- -----------
Ohad Hessel - - 1,611 (4) - - - 1,611
- ------------- ----------- ------------ ----------- ---------------- --------------- ---------------- -----------
Rami Mandola - - - (5) - - - -
- ------------- ----------- ------------ ----------- ---------------- --------------- ---------------- -----------
Yossi Levi - - - (5) - - - -
- ------------- ----------- ------------ ----------- ---------------- --------------- ---------------- -----------
Meir Meiran - - - (5) - - - -
- ------------- ----------- ------------ ----------- ---------------- --------------- ---------------- -----------
Rona Rephaely - - - (5) - - - -
- ------------- ----------- ------------ ----------- ---------------- --------------- ---------------- -----------
Amnon Sudri - - - (5) - - - -
- ------------- ----------- ------------ ----------- ---------------- --------------- ---------------- -----------
* Details regarding compensation paid to Mrs. Heli Ben-Nun who is a member of
our board of directors are included earlier in this Item 10.
(1) On December 29, 2006, we granted Mr. Arieh Keidan 50,000 options to
purchase shares of our common stock with an exercise price of $0.187 per
share. The options vest over 2 years and are exercisable for a period of 10
years following the grant. The weighted fair market value of the options as
calculated in accordance with FAS 123R is $0.22 per share, constituting a
total benefit at the date of grant of $10,794, amortizing equally over the
vesting period, with an expense of $2,684 and $8,081 being recorded for
fiscal years 2007 and 2006, respectively. For more information see, note 10
D of our annual financial statements for the year ended December 31, 2007.
(2) On March 26, 2007, our Board of Directors approved the payment to Mr.
Hannes of external director fees upon terms equivalent to the terms set
forth in the Israel Companies Law and Regulations for an external director
of a publicly traded Israeli company of the size of OrganiTech USA Inc.
commencing January 1, 2007. These fees are in the approximate amount of NIS
15,000 per year, plus approximately NIS 1000 per each Board meeting he
attends.
(3) On December 29, 2006, we granted Mr. Yaakob Hannes 100,000 options to
purchase shares of our common stock with an exercise price of $0.187 per
share. The options vest over 3 years and are exercisable for a period of 10
years following the grant. The weighted fair market value of the options as
calculated in accordance with FAS 123R is $0.22 per share, constituting a
total benefit at the date of grant of $21,587, amortizing equally over the
vesting period, with an expense of $5,397 and $10,784 being recorded for
fiscal years 2007 and 2006, respectively. For more information see, note 10
D of our annual financial statements for the year ended December 31, 2007.
46
(4) On December 29, 2006, we granted Mr. Ohad Hessel 30,000 options to purchase
shares of our common stock with an exercise price of $0.187 per share. The
options vest over 2 years and are exercisable for a period of 10 years
following the grant. The weighted fair market value of the options as
calculated in accordance with FAS 123R is $0.22 per share, constituting a
total benefit at the date of grant of $6,476, amortizing equally over the
vesting period, with an expense of $1,611 and $4,848 being recorded for
fiscal years 2007 and 2006, respectively. For more information see, note 10
D of our annual financial statements for the year ended December 31, 2007.
(5) Pursuant to the Katzir Investment, we pay Katzir a Management Fee. For
information on the Management Fee, see Item 12 later in this Annual Report.
We have not entered into any agreement for compensation with the directors
appointed by Katzir.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
For securities authorized for issuance under equity compensation plans, see
ITEM 5(d) earlier in this Annual Report.
In this Item, a person is deemed to be a beneficial owner of securities
that can be acquired by such person within 60 days from the filing of this
report upon the exercise of options and warrants or conversion of convertible
securities. Each beneficial owner's percentage ownership is determined by
assuming that options, warrants and convertible securities that are held by such
person (but not held by any other person) and that are exercisable or
convertible within 60 days from the filing of this report have been exercised or
converted. Except as otherwise indicated, and subject to applicable community
property and similar laws, each of the persons named has sole voting and
investment power with respect to the shares shown as beneficially owned. All
percentages are determined based on 36,632,642 shares issued and out standing on
December 31, 2007.
(a) Security ownership of certain beneficial owners.
The table below sets forth the beneficial owners or groups of beneficial
owners (with the exception of our executive officers and directors) who are
known by us to beneficially own more than 5% of our outstanding common stock, as
of February 27, 2008.
(3) Amount and Nature of
(1) Title of Class (2) Name of Beneficial Owner Beneficial Ownership (4) Percent of Class
- ------------------ ---------------------------- ------------------------ --------------------
Common BLM NV 5,448,416 (1) 14.85%
Common Keren Katzir Debenture for
Investment Ltd. (2) 13,846,154 (3) 34.21%
TOTAL AS A GROUP 19,294,570 47.61%
(1) Includes an option to purchase 46,242 ordinary shares exercisable within 60
days
47
(2) Rami Mandola, Yossi Levi, Meir Miran, Rona Rephaely and Gideon Sturlesi are
directors appointed by Katzir pursuant to the Katzir Investment and are
office holders of Katzir, and therefore may be considered, together, to be
the beneficial holders of the 27.3% of our issued share capital held by
Katzir.
(3) Includes 3,846,154 shares of common stock issuable upon the exercise of
warrants which are exercisable within 60 days.
(b) Security ownership of management
The following tables, set forth information, as of February 27, 2008,
regarding stock ownership of our executive officers, all directors, and all our
directors and officers as a group:
(3) Amount and Nature of
(1) Title of Class (2) Name of Beneficial Owner Beneficial Ownership(a) (4) Percent of Class
- ------------------ ---------------------------- ------------------------ --------------------
Common Lior Hessel (1) 3,900,288 (1) 10.54%
Common Shmuel Hessel (2) 50,000 (2) 0.14%
Common Ohad Hessel 230,000 (3) 0.63%
Common Arie Keidan 50,000 (4) 0.14%
Common Simon Zenaty (5) 1,821,699 (5) 4.96%
Common Yaacob Hannes 90,000 (6) 0.25%
Common Heli Ben-Nun 2,325,000 (7) 6.16%
Common Yaron Shalem 400,000 (8) 1.09%
ALL OFFICERS AND DIRECTORS
AS A GROUP 8,866,987 (1)-(8) 22.98%(1)-(8)
(1) Includes an option to purchase 360,000 ordinary shares exercisable within
60 days. Mr. Hessel resigned from our Board of Directors on July 23, 2007.
(2) Includes an option to purchase 50,000 ordinary shares exercisable within 60
days. Mr. Hessel resigned from our Board of Directors on July 19, 2007.
(3) Includes an option to purchase 30,000 ordinary shares exercisable within 60
days.
(4) Includes an option to purchase 50,000 ordinary shares exercisable within 60
days.
(5) Includes an option to purchase 60,000 ordinary shares exercisable within 60
days and 1,109,090 shares held by SH.A Gali Ltd., a company controlled by
Simon Zenaty. Mr. Zenaty resigned from our Board of Directors on July 19,
2007.
(6) Includes an option to purchase 75,000 ordinary shares exercisable within 60
days.
(7) Includes an option to purchase 1,125,000 ordinary shares exercisable within
60 days.
(8) Includes an option to purchase 200,000 ordinary shares exercisable within
60 days.
48
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
(a) We have been engaged in the following transactions with related persons
since the beginning of fiscal year 2007:
THE KATZIR INVESTMENT
For information on the Katzir Investment, see `Material Agreements'.
MONTHLY MANAGEMENT FEE TO KEREN KATZIR DEBENTURE FOR INVESTMENT LTD.
As part of the Katzir Investment, we agreed to pay the Chairman of the
Board a monthly fee in the amount of US $5,000, plus reimbursement of expenses,
or Management Fee, for so long as Katzir holds at least 14% of the issued and
outstanding share capital of the Company. Since the completion of the
Investment, the Management Fee has been paid directly to Katzir pursuant to a
provision in the Investment agreement, which entitles the Management Fee to be
assigned by the Chairman to Katzir.
RACHEL BEN-NUN EMPLOYMENT AGREEMENT
For information on the Employment Agreement of Rachel Ben-Nun, see footnote
(4) to the first table under Item 10 - Executive Compensation.
YARON SHALEM EMPLOYMENT AGREEMENT
For information on the Employment Agreement of Yaron Shalem, see footnote
(6) to the first table under Item 10 - Executive Compensation.
(b) Director Independence
Of our directors, Yaacob Hannes is an independent director as defined by the
independence standard under Section (b)(1) of Rule 10A-3 of the Securities
Exchange Act of 1934.
CURRENT NON-INDEPENDENT DIRECTORS
None of the following directors may be deemed to be an independent director as
defined by the aforementioned standard, due to the following reasons:
1. Rami Mandola, Gideon Storlezi, Amnon Sudri, Yossi Levi, Meir Merian
and Rona Rephaely are either executive officers of Katzir, employees
of Katzir or nominated solely by Katzir.
49
2. Heli Ben-Nun is an executive officer of the Company.
3. Arieh Keidan is a controlling shareholder of one of our principal
shareholders, BLM NV.
4. Ohad Hessel is a family member of one of our major shareholders, Lior
Hessel, who holds more than 10% of our issued share capital.
PAST NON-INDEPENDENT DIRECTORS
None of the following persons who served on our board of directors during
any part of the last completed fiscal year may be deemed to be an independent
director as defined by the aforementioned standard, due to the following
reasons:
1. Yossi Hevron was an executive officer of Katzir.
2. Lior Hessel was an executive officer of the Company.
3. Shimon Zenaty is a shareholder of the Company.
Samuel Hessel is a family member of Lior Hessel, who acted as an executive
officer of the Company until November 4, 2007, and who is one of our major
shareholders.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
Our board of directors reviews and approves audit and permissible non-audit
services performed by its independent accountants, as well as the fees charged
for such services. In its review of non-audit service fees and its appointment
of the firm Kost, Forer, Gabbay, & Kasierer, member of Ernst & Young Global, as
our independent registered accounting firm, the board of directors considered
whether the provision of such services is compatible with maintaining
independence. All of the services provided and fees charged by Kost, Forer,
Gabbay, & Kasierer in 2007 were approved by the board of directors.
Audit and Audit Related Fees
The aggregate fees billed by our independent registered accounting firm,
Kost, Forer, Gabbay, & Kasierer, for professional services for the audit of our
annual financial statements for 2007 and 2006 were $50,000 and $50,000,
respectively, net of expenses.
The aggregate fees billed by our independent registered accounting firm,
Kost, Forer, Gabbay, & Kasierer, for other services (including Tax services) for
the years 2007 and 2006 were $20,000 and $21,000, respectively, net of expenses.
50
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) FINANCIAL STATEMENTS.
Our financial statements as set forth in the Index to Financial Statements
attached hereto commencing on page F-1 are hereby incorporated by reference.
(B) EXHIBITS.
The following exhibits, which are numbered in accordance with Item 601 of
Regulation S-K, are filed herewith or, as noted, incorporated by reference
herein:
EXHIBIT No. Description
- ----------- -----------
3.1 Certificate of Incorporation of the Company. (1)
3.2 Bylaws of the Company (1)
3.3 Amendment to Bylaws (2)
10.1 1997 Stock Award Plan. (3)
10.2 Incentive Stock Option Plan. (3)
10.3 Agreement between OrganiTECH Ltd. and OCS, dated January 30, 2002
(English Translation). (4)
10.4 Investment Agreement between the Company and Keren Katzir
Debenture for Investment Ltd., dated July 10, 2007. (5)
10.5 Registration Rights Agreement between the Company and Keren
Katzir Debenture for Investment Ltd., dated July 19, 2007. (5)
10.6 Form of Common Stock Purchase Warrant issued to Keren Katzir
Debenture for Investment Ltd. (5)
21.1 Subsidiaries of the Registrant. +
51
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 8-K,
filed with the Commission on November 26, 2007.
(3) Incorporated by reference to exhibits filed with the Company's Registration
Statement on Form S-8, filed February 21, 1997, registration number
333-22203.
(4) Incorporated by reference to exhibits filed with the Company's Form 10-KSB,
filed with the Commission on April 15, 2002.
(5) Incorporated by reference to exhibits filed with the Company's Form 8-K,
filed with the Commission on July 23, 2007.
+Filed herewith.
52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ORGANITECH USA INC.
Date: April 2, 2009 By: /s/ Rachel Ben-Nun
----------------------------
Rachel Ben-Nun
Chief Executive Officer
(Principal Executive Officer)
KNOW ALL MEN BY THESE PRESENTS, that each person director and officer whose
signature appears below constitutes and appoints, Rachel Ben-Nun and Oren Bloch
or either of them, his or her true and lawful attorney-in-fact and agent, with
full power of substitution and re-substitution, to sign in any and all
capacities any and all amendments or post-effective amendments to this Annual
Report on Form 10-K/A and to file the same with all exhibits thereto and other
documents in connection therewith with the Securities and Exchange Commission,
granting such attorneys-in-fact and agents, and each of them, full power and
authority to do all such other acts and execute all such other documents as
they, or any of them, may deem necessary or desirable in connection with the
foregoing, as fully as the undersigned might or could do in person, hereby
ratifying and confirming all that such attorneys-in-fact and agents, or any of
them, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed by the following persons in the capacities and on the dates
indicated.
Name Position Date
- ---- -------- ----
/s/ Rachel Ben-Nun Chief Executive Officer and Director April 2, 2009
- ---------------------------- (Principal Executive Officer)
Rachel Ben-Nun
/s/ Peretz Shachar Chairman of the Board of Directors April 2, 2009
- ----------------------------
Peretz Shachar
/s/ Arieh Keidan Director April 2, 2009
- ----------------------------
Arieh Keidan
/s/ Rami Mandola Director April 2, 2009
- ----------------------------
Rami Mandola
/s/ Meir Miran Director April 2, 2009
- ----------------------------
Meir Miran
/s/ Rona Rephaely Director April 2, 2009
- ----------------------------
Rona Rephaely
/s/ Yossi Noyman Director April 2, 2009
- ----------------------------
Yossi Noyman
/s/ Oren Bloch Principal Financial Officer April 2, 2009
- ----------------------------
Oren Bloch
53
------------------------
ORGANITECH USA, INC.
------------------------
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2007
------------------------
ORGANITECH USA, INC.
------------------------
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2007
CONTENTS
Page
-----
Report of Independent Registered Public Accounting Firm F-3
Consolidated Balance Sheet F-4
Consolidated Statements of Operations F-5
Statements of Changes in Shareholders` Deficiency F-6
Consolidated Statements of Cash Flows F-7
Notes to the Consolidated Financial Statements F-8 - F-27
F - 2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
ORGANITECH USA, INC.
We have audited the accompanying consolidated balance sheet of OrganiTech USA
Inc. ("the Company") and its subsidiary as of December 31, 2007 and the related
consolidated statements of operations, changes in shareholders' deficiency and
cash flows for each of the two years in the period ended December 31, 2007.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the Company's internal control over financial reporting. Our audit
included considerations of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, based on our audits the consolidated financial statements,
referred to above, present fairly, in all material respects, the consolidated
financial position of the Company and its subsidiary as of December 31, 2007 and
the consolidated results of their operations and their cash flows for each of
the two years in the period ended December 31, 2007, in conformity with U.S.
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1B to
the consolidated financial statements, the Company has incurred recurring net
losses, negative cash flows from operations and has working capital deficiency.
In addition the Company is dependent on external sources for financing its
operations. These factors raise substantial doubt about the Company's ability to
continue as a going concern. The consolidated financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that might be necessary should the Company unable to continue as a
going concern.
Haifa, Israel KOST FORER GABBAY & KASIERER
February 27, 2008 A Member of Ernst & Young Global
F - 3
ORGANITECH USA, INC.
CONSOLIDATED BALANCE SHEET
- --------------------------------------------------------------------------------
IN U.S. DOLLARS (EXCEPT SHARE DATA)
DECEMBER 31,
NOTE 2007
--------- ------------
ASSETS
Current assets :
Cash and cash equivalents (3) $ 909,551
Trade receivables 277,596
Unbilled receivables 76,306
Other receivables and prepaid expenses (4) 34,883
Related parties (13) 1,508
Inventories (5) 70,545
------------
1,370,389
------------
Long-term assets:
Long-term lease deposit 13,372
Severance pay fund 86,851
Property and equipment, net (6) 92,860
------------
193,083
------------
$ 1,563,472
============
LIABILITES AND SHAREHOLDERS' DEFICIENCY
Liabilities :
Trade payables (7) 348,480
Other payables and accrued expenses (8) 1,473,876
Related parties (13) 12,562
Customers advances 135,000
------------
1,969,918
------------
Convertible loan (10A) 357,500
Accrued severance pay 175,856
------------
533,356
------------
Contingencies and commitments (9)
Shareholders' deficiency (10)
Common shares of $0.001 par value, authorized
- 80,000,000 shares, issued
and outstanding - 36,632,642 shares 36,633
Additional paid in capital 10,053,950
Accumulated deficit (11,030,385)
------------
Total shareholders' deficiency (939,802)
------------
$ 1,563,472
============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED
FINANCIAL STATEMENTS.
F - 4
ORGANITECH USA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
IN U.S. DOLLARS (EXCEPT SHARE DATA)
YEAR ENDED DECEMBER 31
------------------------------
NOTE 2007 2006
------------ ------------ ------------
Revenues $ 1,487,334 $ 3,395,338
Cost of revenues 1,522,342 2,811,564
------------ ------------
Gross profit (loss) (35,008) 583,774
------------ ------------
Research and development expenses 319,120 510,163
Selling and marketing expenses 663,083 848,504
General and administrative expenses 581,684 637,529
------------ ------------
Total operating expenses 1,563,887 1,996,196
------------ ------------
Operating loss (1,598,895) (1,412,422)
Financing income, net (11) 42,499 32,661
------------ ------------
Net loss $ (1,556,396) $ (1,379,761)
============ ============
Basic and diluted net loss per common share $ (0.05) $ (0.05)
============ ============
Weighted average number of common shares outstanding used
In basic and diluted net loss per share calculation 31,165,609 26,133,738
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED
FINANCIAL STATEMENTS.
F - 5
ORGANITECH USA, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIENCY
- --------------------------------------------------------------------------------
IN U.S. DOLLARS (EXCEPT SHARE DATA)
NUMBER OF COMMON ADDITIONAL TOTAL
OUTSTANDING SHARES PAID IN DEFICIT SHAREHOLDERS'
COMMON SHARES CAPITAL CAPITAL (1) ACCUMULATED DEFICIENCY
------------ ------------ ------------ ------------ ------------
IN THOUSANDS
------------
Balance as of January 1, 2006 23,033 $ 23,033 $ 6,753,152 $ (8,079,228) $ (1,303,043)
Common shares ($0.25) issued in April 2006 3,600 3,600 880,900 - 884,500
Amortization of stock-based compensation - - 353,575 - 353,575
Net loss - - - (1,379,761) (1,379,761)
------------ ------------ ------------ ------------ ------------
Balance as of December 31, 2006 26,633 26,633 7,987,627 (9,458,989) (1,444,729)
Common shares ($0.20) issued in July 2007, net (*) 10,000 10,000 1,857,953 - 1,867,953
Amortization of stock-based compensation - - 203,007 - 203,007
Warrants granted to non employees - - 5,363 - 5,363
Cumulative impact of change in accounting for
uncertainties in income taxes (Fin 48) - - - (15,000) (15,000)
Net loss - - - (1,556,396) (1,556,396)
------------ ------------ ------------ ------------ ------------
Balance as of December 31, 2007 36,633 $ 36,633 $ 10,053,950 $(11,030,385) $ (939,802)
============ ============ ============ ============ ============
(*) net of issuance expenses of $152,047
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED
FINANCIAL STATEMENTS.
F - 6
ORGANITECH USA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
IN U.S. DOLLARS
YEAR ENDED DECEMBER 31,
----------------------------
2007 2006
----------- -----------
Cash flows from operating activities:
Net loss $(1,556,396) $(1,379,761)
----------- -----------
Adjustments to reconcile net loss to net cash
used in operating activities :
Amortization of stock - based compensation 203,007 353,575
Depreciation 27,593 34,145
Write down of inventories 5,094 28,000
Changes in accrued severance pay, net 7,085 34,144
Loss from disposal of property and equipment 106 32,443
Amortization of warrants' compensation 1,493 -
Decrease (increase) in trade receivables (353,902) 68,890
Decrease (increase) in other receivables and
long term lease deposit (5,490) 231,796
Decrease in inventories 236,523 448,269
Increase (decrease) in trade payables (394,584) 69,280
Increase in other payables and accrued expenses 393,634 469,181
Decrease in customers advances (449,280) (1,136,259)
----------- -----------
Total adjustments (328,721) 633,464
----------- -----------
Net cash used in operating activities (1,885,117) (746,297)
----------- -----------
Cash flows from investing activities :
Proceeds from disposal of property and equipment 3,813 -
Purchase of property and equipment (2,343) (19,366)
----------- -----------
Net cash provided by (used in) investing activities 1,470 (19,366)
----------- -----------
Cash flows from financing activities :
Increase (decrease) in short-term credit, net (1,574) 1,408
Proceeds from issuance of a convertible loan 357,500 -
Proceeds from issuance of shares, net (Note 10B(2)) 1,867,953 884,500
----------- -----------
Net cash provided by financing activities 2,223,879 885,908
----------- -----------
Net increase in cash and cash equivalents 340,232 120,245
Cash and cash equivalents at the beginning of the year 569,319 449,074
----------- -----------
Cash and cash equivalents at the end the year $ 909,551 $ 569,319
=========== ===========
Interest paid $ 26,813 $ -
=========== ===========
Income tax paid $ 2,939 $ 2,707
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED
FINANCIAL STATEMENTS.
F - 7
ORGANITECH USA, INC.
NOTES TO THE CONLSIDATED 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
leafy vegetables, while maintaining lowest production costs and making
optimal use of resources such as water, energy, labor and land/space.
Since its inception and until 2006 the Company has devoted
substantially most of its efforts to business planning, marketing,
research and development, recruiting management and technical staff,
acquiring assets and raising capital. Commencing 2006, the Company has
generated significant revenues and accordingly, the Company is not
considered to be as a development stage company, as defined in
Statement of Financial Accounting Standards No. 7, "Accounting and
reporting by development Stage Enterprises" ("SFAS No. 7").
B. The Company is devoting substantial efforts towards activities such as
marketing its products, 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
achieved profitable operations or positive cash flows from operations
or positive working capital. The Company's accumulated deficit
aggregated to $11,030,385 through December 31, 2007. 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.
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. In 2006 and 2007, the Company derived most of its revenues from two
projects, each of a single customer. One of the projects was finalized
in 2007.
F - 8
ORGANITECH USA, INC.
NOTES TO THE CONLSIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in the United States ("U.S.
GAAP"), applied on a consistent basis, as follows:
A. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported and disclosure of
contingent assets and liabilities in the financial statements and
accompanying notes. Actual results could differ from those estimates.
B. FINANCIAL STATEMENTS IN U.S. DOLLARS
The Company's revenues are expected to be mainly in U.S. dollars. Most
of the Company's costs are incurred in U.S. dollars. In addition, the
Company raised its financing resources in U.S. dollars. The Company's
management believes that the U.S. dollar is the primary currency of
the economic environment in which the Company operates. Thus, the
functional and reporting currency of the Company is the U.S. dollar.
Transactions and balances originally denominated in U.S. dollars are
presented at their original amounts. Transaction and balances in other
currencies have been remeasured into U.S. dollars in accordance with
principles set forth in SFAS No. 52 "Foreign Currency Translation".
All exchange gains and losses from the remeasurement mentioned above
are reflected in the statement of income in financial income or
expenses.
C. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, OrganiTech Ltd. All
Intercompany transactions and balances have been eliminated upon
consolidation.
D. CASH EQUIVALENTS
Cash equivalents, are short-term highly liquid investments that are
readily convertible to cash with maturities of three months or less at
the date of acquisition.
E. INVENTORIES
Inventories are stated at the lower of cost or market value.
Costs incurred on long-term contracts in progress and finished goods
include direct labor costs, material costs, subcontractors, other
direct costs and overheads. These costs represent recoverable costs
incurred for production and allocable operating overhead cost.
F - 9
ORGANITECH USA, INC.
NOTES TO THE CONLSIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
F. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated
depreciation.
Depreciation is calculated by the straight-line method over the
estimated useful lives of the assets, as follows:
Years
-----
Computers 3
Furniture and office equipment 17
Communication equipment 7
Other equipment 10-14
Motor vehicles 7
Leasehold improvements are amortized using the straight-line method
over the shorter of the terms of the lease or useful life.
G. IMPAIRMENT OF LONG-LIVED ASSETS
The Company's long-lived assets are reviewed for impairment in
accordance with SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets" whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to the future
undiscounted cash flows expected to be generated by the asset. If an
asset is determined to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the asset
exceeds its fair value.
H. SEVERANCE PAY
The Company's liability for severance pay to its Israeli employees is
calculated pursuant to Israeli severance pay law based on the most
recent salary of the employees multiplied by the number of years of
employment, as of the balance sheet date. Employees are entitled to
one month's salary for each year of employment or a portion thereof.
The Company's liability for all of its employees is fully provided by
monthly deposits with insurance policies and by an accrual. The value
of these policies is recorded as an asset in the Company's balance
sheet. The deposited funds include profits accumulated up to the
balance sheet date. The deposited funds may be withdrawn only upon the
fulfillment of the obligation pursuant to Israeli severance pay law or
labor agreements. The value of the deposited funds is based on the
cash surrendered value of these policies, and includes immaterial
profits.
Severance expenses for the years ended December 31, 2007 and 2006,
amounted to approximately $63,993 and $67,657, respectively.
F - 10
ORGANITECH USA, INC.
NOTES TO THE CONLSIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
I. REVENUE RECOGNITION
The Company generates revenues from long-term contracts involving the
design, development, manufacture and integration of Hydroponics
systems and solutions.
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.
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. In 2007 the Company recorded provision for
loss in the amount of $190,000.
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.
J. WARRANTY
The Company estimates the costs that may be incurred under its basic
warranty and records a liability in the amount of such costs at the
time revenue is recognized. The specific terms and conditions of those
warranties vary depending upon the product sold and the country in
which the Company does business. Factors that affect the Company's
warranty liability include the number of delivered products,
engineering estimates and anticipated rates of warranty claims. The
Company periodically assesses the adequacy of its recorded warranty
liability and adjusts the amount as necessary.
Changes in the Company's provision for warranty during the year are as
follows:
YEAR 2007 2006
- ----- --------- ---------
Balance, at the beginning of the year $ 196,884 $ 33,345
Warranties utilized or ended during the year (160,852) (33,345)
Warranties issued during the year 30,100 196,884
--------- ---------
Balance, at the end of the year $ 66,132 $ 196,884
========= =========
F - 11
ORGANITECH USA, INC.
NOTES TO THE CONLSIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
K. RESERCH AND DEVELOPMENT EXPENSES
Research and development expenses are charged to the statement of
operations as incurred.
The Company's subsidiary in Israel received grants (mainly
royalty-bearing) from the Government of Israel and from other sources
for the purpose of funding approved research and development projects.
These grants were recognized as a deduction from research and
development expenses at the time the Company was entitled to such
grants on the basis of the research and development expenses incurred.
L. DEFERRED INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". This Statement prescribes the use of
the liability method whereby deferred tax assets and liability account
balances are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. The Company provides a valuation
allowance to reduce deferred tax assets to their estimated realizable
value.
In September 2006, the Financial Accounting Standards Board ("FASB")
issued FASB interpretation ("FIN") No. 48, "Accounting for Uncertainty
in Income Taxes - an Interpretation of FASB Statement 109" ("FIN 48").
FIN 48 establishes a single model to address accounting for uncertain
tax positions. FIN 48 clarified 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 also provides guidance on recognition, measurement,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. The Company adopted the provisions of FASB
Interpretation No. 48, ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES, on
January 1, 2007. As a result of the implementation of Interpretation
48, the Company recognized an increase of approximately $15,000 in the
liability for unrecognized tax benefits, which was accounted for as a
reduction to the January 1, 2007, balance of retained earnings
M. 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. The
Company has applied the provisions of Staff Accounting Bulletin No.
107 ("SAB 107") in its adoption of SFAS 123(R), which allows the use
of the "simplified method" in determining the expected life of the
options. (See note 2P(3)).
SFAS 123(R) require 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 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.
F - 12
ORGANITECH USA, INC.
NOTES TO THE CONLSIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
M. STOCK-BASED COMPENSATION (Cont.)
As a result of adopting SFAS 123(R) on January 1, 2006, the Company's
financial position and result of operation had an immaterial change,
than if it had continued to account for stock-based compensation under
SFAS 123.
The fair value of the options granted during years 2006 and 2007 were
estimated using a Black & Scholes option pricing model, with the
following weighted average assumptions:
Year of grant 2007 2006
- ------------- ------- -------
Divided yield 0% 0%
Expected volatility 118% 122%
Risk-free interest rate 4.74% 4.70%
Expected life 6 years 6 years
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 applies SFAS No. 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" ("EITF 96-18"), with respect to options and warrants issued
to non-employees. SFAS No. 123(R) requires the use of option valuation
models to measure the fair value of the options and warrants at the
date of grant.
N. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount reported in the balance sheet for cash and cash
equivalents, trade receivables, other receivables and prepaid
expenses, short-term bank credit and loans, trade payables and other
payables approximate their fair values due to the short-term
maturities of such instruments.
O. BASIC AND DILUTED NET LOSS PER SHARE
Basic net loss per share is computed based on the weighted average
number of common shares outstanding during each year. Diluted net loss
per share is computed based on the weighted average number of common
shares outstanding during each period, plus dilutive potential common
shares considered outstanding during the year in accordance with
Statement of Financial Accounting Standard No. 128, "Earnings Per
Share" (SFAS No. 128"). Outstanding stock options and warrants are
excluded from the calculation of the diluted net loss per common share
when such securities are anti-dilutive. All outstanding stock options
and warrants have been excluded from the calculation of the diluted
loss per common share because all such securities are anti-dilutive
for each of the periods presented.
F - 13
ORGANITECH USA, INC.
NOTES TO THE CONLSIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
P. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
(1) In September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements" ("SFAS 157"). This statement provides a single
definition of fair value, a framework for measuring fair value,
and expanded disclosures concerning fair value. Previously,
different definitions of fair value were contained in various
accounting pronouncements creating inconsistencies in measurement
and disclosures. SFAS 157 applies under those previously issued
pronouncements that prescribe fair value as the relevant measure
of value, except SFAS 123(R) and related interpretations. The
statement does not apply to accounting standard that require or
permit measurement similar to fair value but are not intended to
represent fair value. This pronouncement is effective for fiscal
years beginning after November 15, 2007. The Company is currently
evaluating the impact of adopting SFAS 157. On February 12, 2008,
the FASB issued FASB Staff Position No. FAS 157-2, EFFECTIVE DATE
OF FASB STATEMENT NO. 157 (the FSP). The FSP amends FASB
Statement No. 157, FAIR VALUE MEASUREMENTS (Statement 157), to
delay the effective date of Statement 157 for nonfinancial assets
and nonfinancial liabilities, except for items that are
recognized or disclosed at fair value in the financial statements
on a recurring basis (that is, at least annually). For items
within its scope, the FSP defers the effective date of Statement
157 to fiscal years beginning after November 15, 2008, and
interim periods within those fiscal years. The Company is
currently evaluating the impact of adopting SFAS 157.
(2) In February 2007, the FASB issued SFAS No. 159, "The Fair Value
Option for Financial Assets and Financial Liabilities"("SFAS
159"). This Statement provides companies with an option to report
selected financial assets and liabilities at fair value.
Generally accepted accounting principles have required different
measurement attributes for different assets and liabilities that
can create artificial volatility in earnings. The Statement's
objective is to reduce both complexity in accounting for
financial instruments and the volatility in earnings caused by
measuring related assets and liabilities differently. This
Statement is effective as of the beginning of an entity's first
fiscal year beginning after November 15, 2007. Adoption of the
standard will not have any effect on the Company.
(3) On December 21, 2007 the SEC staff issued Staff Accounting
Bulletin No. 110 (SAB 110), which, effective January 1, 2008,
amends and replaces SAB 107, Share-Based Payment. SAB 110
expresses the views of the SEC staff regarding the use of a
"simplified" method in developing an estimate of expected term of
"plain vanilla" share options in accordance with FASB Statement
No. 123(R), Share-Based Payment. Under the "simplified" method,
the expected term is calculated as the midpoint between the
vesting date and the end of the contractual term of the option.
The use of the "simplified" method, which was first described in
Staff Accounting Bulletin No. 107, was scheduled to expire on
December 31, 2007. SAB 110 extends the use of the "simplified"
method for "plain vanilla" awards in certain situations. The SEC
staff does not expect the "simplified" method to be used when
sufficient information regarding exercise behavior, such as
historical exercise data or exercise information from external
sources, becomes available. The Company is currently evaluating
the potential impact that the adoption of SAB 110 could have on
its financial statements.
F - 14
ORGANITECH USA, INC.
NOTES TO THE CONLSIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
P. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS (Cont.)
(4) SFAS 141(R) - In December 2007, the FASB issued SFAS 141(R),
Business Combinations. This Statement replaces SFAS 141, Business
Combinations, and requires an acquirer to recognize the assets
acquired, the liabilities assumed, including those arising from
contractual contingencies, any contingent consideration, and any
noncontrolling interest in the acquiree at the acquisition date,
measured at their fair values as of that date, with limited
exceptions specified in the statement. SFAS 141(R) also requires
the acquirer in a business combination achieved in stages
(sometimes referred to as a step acquisition) to recognize the
identifiable assets and liabilities, as well as the
noncontrolling interest in the acquiree, at the full amounts of
their fair values (or other amounts determined in accordance with
SFAS 141(R)). In addition, SFAS 141(R)'s requirement to measure
the noncontrolling interest in the acquiree at fair value will
result in recognizing the goodwill attributable to the
noncontrolling interest in addition to that attributable to the
acquirer.
SFAS 141(R) amends SFAS No. 109, Accounting for Income Taxes, to
require the acquirer to recognize changes in the amount of its
deferred tax benefits that are recognizable because of a business
combination either in income from continuing operations in the
period of the combination or directly in contributed capital,
depending on the circumstances. It also amends SFAS 142, Goodwill
and Other Intangible Assets, to, among other things, provide
guidance on the impairment testing of acquired research and
development intangible assets and assets that the acquirer
intends not to use. SFAS 141(R) applies prospectively to business
combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or
after December 15, 2008. The Company is currently evaluating the
potential impact that the adoption of SFAS 141(R) could have on
its financial statements.
(5) SFAS 160 - In December 2007, the FASB issued SFAS 160,
Noncontrolling Interests in Consolidated Financial Statements.
SFAS 160 amends Accounting Research Bulletin 51, Consolidated
Financial Statements, to establish accounting and reporting
standards for the noncontrolling interest in a subsidiary and for
the deconsolidation of a subsidiary. It also clarifies that a
noncontrolling interest in a subsidiary is an ownership interest
in the consolidated entity that should be reported as equity in
the consolidated financial statements. SFAS 160 also changes the
way the consolidated income statement is presented by requiring
consolidated net income to be reported at amounts that include
the amounts attributable to both the parent and the
noncontrolling interest. It also requires disclosure, on the face
of the consolidated statement of income, of the amounts of
consolidated net income attributable to the parent and to the
noncontrolling interest. SFAS 160 requires that a parent
recognize a gain or loss in net income when a subsidiary is
deconsolidated and requires expanded disclosures in the
consolidated financial statements that clearly identify and
distinguish between the interests of the parent owners and the
interests of the noncontrolling owners of a subsidiary. SFAS 160
is effective for fiscal periods, and interim periods within those
fiscal years, beginning on or after December 15, 2008. The
Company is currently evaluating the potential impact that the
adoption of SFAS 160 could have on its financial statements.
F - 15
ORGANITECH USA, INC.
NOTES TO THE CONLSIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 3 - CASH AND CASH EQUIVALENTS
DECEMBER 31,
2007
----------
In New Israeli Shekels $ 702,205
In other currencies (mainly U.S. Dollars) 207,346
----------
$ 909,551
==========
NOTE 4 - OTHER RECEIVABLES AND PREPAID EXPENSES
DECEMBER 31,
2007
----------
Prepaid expenses $ 29,292
Government department 5,591
----------
$ 34,883
==========
NOTE 5 - INVENTORIES
DECEMBER 31,
2007
----------
Cost incurred on long-term contract in progress $ 53,976
Finished goods 16,569
----------
$ 70,545
==========
NOTE 6 - PROPERTY AND EQUIPMENT, NET
DECEMBER 31,
2007
----------
Cost:
Computers $ 69,226
Furniture and Office equipment 2,983
Other equipment 8,172
Communication equipment 9,972
Leaseholds improvements 59,576
Motor vehicles 79,082
----------
229,011
----------
Accumulated depreciation:
Computers 60,997
Furniture and Office equipment 608
Other equipment 5,341
Communication equipment 3,696
Leaseholds improvements 25,748
Motor vehicles 41,761
----------
138,151
----------
Depreciated cost 90,860
Base stock 2,000
----------
$ 92,860
==========
F - 16
ORGANITECH USA, INC.
NOTES TO THE CONLSIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 6 - PROPERTY AND EQUIPMENT, NET (CONT.)
Depreciation expenses amounted to $ 27,593 and $ 34,145 for the years ended
December 31, 2007 and 2006, respectively.
NOTE 7 - TRADE PAYABLES
DECEMBER 31,
2007
----------
Open accounts $ 131,697
Notes payable 216,783
----------
$ 348,480
==========
NOTE 8 - OTHER PAYABLES AND ACCRUED EXPENSES
DECEMBER 31,
2007
----------
Provision for payroll and related expenses $ 137,290
Vacation pay 66,101
Provision for Warranty 66,132
Accrued expenses 613,799
Royalties 375,554
Provision for income taxes 15,000
Other 200,000
----------
$1,473,876
==========
NOTE 9 - CONTINGENCIES AND COMMITMENTS
A. Royalty Commitments
(1) OrganiTech Ltd. is committed to pay royalties to the Office of
the Chief Scientist ("OCS") on proceeds from the sales of
products, which the OCS participated in their research and
development. Royalty payments are computed on the portion of
sales from such products at a rate 3% to 5% up to the amount of
the grants received, which are linked to the U.S. $ and bear
annual interest at Libor.
The terms of the OCS grants provide certain restriction on
OrganiTech Ltd's ability to manufacture products or transfer the
technologies developed using these grants outside of Israel.
As of December 31, 2007, the balance of royalty bearing grants
received by the OCS net of royalties paid or provided for, is
$178,770 (as of December 31, 2006 - $230,827).
Royalties' expenses amounted to $52,057 and $118,600 in 2007 and
2006, respectively.
(2) In September 2001, OrganiTech Ltd. received an approval for
Magnaton Research and Development program from the OCS. Magnaton
program reflects a joint venture between OrganiTech Ltd. and the
Weitzman Institute (Yeda Research and Development Ltd. ("Yeda"))
in order to develop new varieties of miniature tomatoes that can
be adapted to the GrowTECH 2000 system.
Through December 31, 2007, OrganiTech Ltd received from the OCS a
payment of $66,508. OrganiTech Ltd. is committed to pay royalties
to the Weitzman Institute up to 5% on sales of products developed
with the grants participation of the Magnaton program up to the
amount of grant received.
F - 17
ORGANITECH USA, INC.
NOTES TO THE CONLSIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 9 - CONTINGENCIES AND COMMITMENTS (CONT.)
A. Royalty Commitments (cont.)
(3) In November 2001, OrganiTech Ltd. and a third party -"Agronaut"
received approval from the Singapore-Israel Industrial Research
and Development ("SIIRD") for funding the development of an
updated commercial version of the GrowTECH. As of December 31,
2007 OrganiTech Ltd. has received $250,505 from SIIRD.
OrganiTech Ltd. and Agronaut are committed to pay royalties to
SIIRD ranging from 1.5% to 2.5% on sales of products developed
with the grants participation of SIIRD. The commitment for
royalty payments to SIIRD is limited to the amount of received
participation.
Royalties' expenses to SIIRD amounted to $37,183 and $84,714 in
2007 and 2006, respectively.
(4) In August 2005, OrganiTech Ltd and a German R&D institute
received approval from the OCS and the Industrial Research and
Development fund ("Bio Disc") for development of a Bio-Tech
system based on OrganiTECH's GrowTECH(TM)2000 and
PhytoChamber(TM) . OrganiTech Ltd will be committed to royalty
payments computed on the all sales of the Company at a rate 3% to
5%. The commitment to the OCS is limited to the amount of the
received participation, link to the U.S. dollar and bears annual
interest at Libor. As of December 31, 2007 OrganiTech Ltd. has
received $11,297 from the OCS.
B. Legal claim
(1) 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. A 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.
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.
F - 18
ORGANITECH USA, INC.
NOTES TO THE CONLSIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 9 - CONTINGENCIES AND COMMITMENTS (CONT.)
B. Legal claim (Cont.)
(2) In August 2006, a claim for approximately $15,000 against
OrganiTech Ltd and Mr. Shimon Zanaty, one of the Company's former
directors (who resigned from the board of directors of the
Company in July 2007, in connection with the Katzir investment -
see note 10B(2)), 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 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 in November 20, 2006, the attorney representing the plaintiff
informed OrganiTech Ltd in writing that it would be removed as a
defendant in the action. The Company has so far not received a
copy of the decision removing it as defendant.
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.
C. Lease Commitment
The future minimum lease commitment of the Company under
non-cancelable operating lease agreement in respect of premises and
vehicles is as of December 31, 2007 as follows:
December 31, 2008 - $ 72,800
December 31, 2009 - $ 32,010
December 31, 2010 - $ 3,930
Total - $108,740
========
Lease expenses for years ended December 31, 2007 and 2006 were $87,070
and $42,060, respectively.
NOTE 10 - SHARE CAPITAL
A. Convertible loan
On March 1, 2007 the Company entered into an agreement with an
investor (the "Investor") to grant the Company a convertible loan (the
"Loan") in the amount of $357,500 for a period of 3 years, bearing net
interest of 9% per annum to be paid at the end of each calendar
quarter. The Loan or parts of it may be converted into the Company's
shares with a conversion price of $0.26 per share, which was the fair
market value of the Company's shares on the commitment date.
Under the Loan agreement, the Investor is entitled to ask for early
repayment, upon the occurrence of certain events including a failure
by the Company to achieve at least $7,000,000 in sales in the year
ending December 31, 2008. The Investor is entitled to request the
registration of the shares issueable upon conversion of the Loan and
will also be entitled to pre-emptive rights in the event that it
converts the Loan into shares of the Company's common stock.
According to SFAS 133 "Accounting for Derivative Instruments and
Hedging Activities" the fair value of the early repayment feature,
which should be separated as an embedded derivative is immaterial as
of grant date and as of December 31, 2007.
F - 19
ORGANITECH USA, INC.
NOTES TO THE CONLSIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 10 - SHARE CAPITAL (CONT.)
B. Private Investment in Public Entity ("PIPE")
(1) Clal Investments Ltd.'s PIPE
(a) 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.
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.
(b) 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.
(c) On January 31, 2006, Clal and the investors invested the
remaining $400,000 for which they received in April 2006 an
additional 1,600,000 shares of the Company's common stock,
A-1 Warrants to purchase 800,000 shares of the Company's
common stock and A-2 Warrants to purchase 800,000 shares of
the Company's common stock.
F - 20
ORGANITECH USA, INC.
NOTES TO THE CONLSIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 10 - SHARE CAPITAL (CONT.)
B. Private Investment in Public Entity ("PIPE") (cont.)
(1) Clal Investments Ltd.'s PIPE (Cont.)
(d) On January 2, 2006, the Company's Board of Directors
approved the increase of the financing under the PIPE
agreement to 1.3M$ - 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.
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.
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. As
of December 31, 2005 the Company has recorded a provision in
the amount of $40,000 in consideration for the accrued fine.
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, therefore
in 2006 the $40,000 provision was cancelled.
(e) All A-1 Warrants and A-2 Warrants were not exercised until
their final exercise dates and have expired (on April 30,
2007 for all A-1 Warrants and on July 31, 2007 for all A-2
Warrants, respectively).
F - 21
ORGANITECH USA, INC.
NOTES TO THE CONLSIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 10 - SHARE CAPITAL (CONT.)
B. Private Investment in Public Entity ("PIPE") (cont.)
(2) Katzir Debenture Fund for Investment Ltd 's PIPE
On July 19, 2007, the Company signed an investment agreement with
Katzir Debenture Fund for Investment Ltd. ("Katzir"), an Israeli
investment company. Pursuant to the investment, Katzir invested
$2 million in the Company in consideration for 10,000,000 common
stock of the Company equal to approximately 27.3% of the
Company's issued and outstanding share capital (post-investment).
Katzir also paid $20,000 in consideration for a three year
warrant for the purchase of up to 3,846,154 common stock of the
Company for an exercise price of $0.26 per share. Pursuant to the
investment agreement, settlement of the warrant could only be
made by shares.
In addition it was agreed that Katzir is entitled to a management
fee in the amount of $5,000 per month, commencing July 19, 2007
for so long as the chairman of the Company's board of director is
appointed by Katzir.
In addition, the Registration Rights Agreement ("RRA") entered
into between the Company and Katzir, simultaneously with the
investment agreement stated that upon certain occurrences, the
Company shall use its best efforts, as soon as practicable, to
file a registration statement with the Securities and Exchange
Commission, on Form SB-2 or such other applicable registration
form available. The RRA did not include any provisions with
regards to liquidated damages.
The Company evaluated its accounting treatment of the warrant
issued pursuant to the investment agreement in accordance with
EITF 00-19, "Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company's Own Stock"
and concluded that the warrant should be classified as equity.
C. 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. Following the PIPE agreement with Clal (see note
10B(1)) 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.
(3) On December 3, 2006 the Company entered into a service agreement
with a consultant where by the consultant will present the
Company to potential investors for a success-based consideration.
Following the receiving of the Convertible Loan (mentioned in
Note 10(A)) on March 2, 2007, the consultant is entitled to
warrants for the purchase of 41,250 shares of the Company's
common shares for exercise price of $0.26 per share. The warrants
will expire on March 2, 2010. The fair value of the warrants at
the grant date was $5,363.
F - 22
ORGANITECH USA, INC.
NOTES TO THE CONLSIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 10 - SHARE CAPITAL (CONT.)
D. Stock Option Plans
(1) On May 31, 2005, the Board of Directors approved a Stock Option
Plan ("SOP") for the grant of options to purchase up to 1,622,000
common shares of the Company to the Company's executives,
directors, key employees and service providers. On February 19,
2006, the Board of Directors approved the increase of the SOP by
a further 3,000,000 shares of common stock, so that options to
purchase a total of 4,622,000 shares of common stock of the
Company were available for grant under the SOP. As of December
31, 2007, options for the purchase of 867,000 shares of common
stock of the Company were still available for future grants.
(2) A summary of the Company's stock option activity with regards to
its employees, officers and directors, under the plan as of
December 31, 2007, is as follows:
DECEMBER 31, 2007
--------------------------------------------------------
WEIGHTED
WEIGHTED AVERAGE
AVERAGE REMAINING AGGREGATE
NUMBER OF EXERCISE CONTRACTUAL INTRINSIC
OPTIONS PRICE TERM (YEARS) VALUE PRICE
---------- ---------- ---------- ----------
Outstanding as of
January 1,2006 1,281,508 $ 0.248
Granted 2,080,000 $ 0.219
Forfeited (85,000) $ 0.187
----------
Outstanding as of
December 31, 2006 3,276,508 $ 0.231
Granted 430,000 $ 0.26
----------
Outstanding as of
December 31, 2007 3,706,508 $ 0.234 7.98 $ -
========== ========== ========== ==========
Vested and expected to
be vest 3,631,758 $ 0.235 7.97 $ -
========== ========== ========== ==========
Exercisable as of
December 31, 2007 2,211,508 $ 0.24 7.71 $ -
========== ========== ========== ==========
F - 23
ORGANITECH USA, INC.
NOTES TO THE CONLSIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 10 - SHARE CAPITAL (CONT.)
D. Stock Option Plans (CONT.)
(3) A summary of the Company's stock option activity with regards to
its non-employees, as of December 31, 2007, under the plan is as
follows:
DECEMBER 31, 2007
-------------------------------------------------------
WEIGHTED
WEIGHTED AVERAGE
AVERAGE REMAINING AGGREGATE
NUMBER OF EXERCISE CONTRACTUAL INTRINSIC
OPTIONS PRICE TERM (YEARS) VALUE PRICE
---------- ---------- ---------- ----------
Outstanding as of
January 1, 2006 45,000 $ 0.187
Granted 100,000 $ 0.28
----------
Outstanding - as of
December 31, 2006 145,000 $ 0.251 9.34 $ 2,385
========== ========== ========== ==========
Outstanding - as of
December 31, 2007 145,000 $ 0.251 8.34 $ -
========== ========== ========== ==========
Exercisable - as of
December 31, 2007 47,500 $ 0.236 8.26 $ -
========== ========== ========== ==========
The aggregated intrinsic value in the table above represents the
total intrinsic value (the difference between the Company's
closing stock price 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 the fiscal year. This amount changes
based on the fair market value of the Company's stock.
(4) The weighted average grant date fair value of options granted to
employees and non-employees during the years 2007 and 2006 was
$0.21.
(5) As of December 31, 2007, the total unrecognized estimated
compensation costs related to non-vested stock options granted
prior to that date was $235,385, which is expected to be
recognized over a weighted average period of 1.6 years.
(6) Compensation expenses were recognized during the years ended
December 31, 2007 and 2006, respectively, as follows:
YEAR ENDED DECEMBER 31,
---------------------
2007 2006
-------- --------
Cost of Revenues $ 35,604 $ 28,906
Research and Development expenses 20,640 28,660
Selling and Marketing expenses 63,859 137,460
General and Administration expenses 82,904 158,549
-------- --------
$203,007 $353,575
======== ========
F - 24
ORGANITECH USA, INC.
NOTES TO THE CONLSIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 11 - FINANCING INCOME, NET
YEAR ENDED DECEMBER 31,
----------------------
2007 2006
-------- --------
Bank commissions and interest expenses $ (8,539) $(11,757)
Gain (loss) from exchange rate differences 65,112 (1,644)
Interest on cash and cash equivalents 18,202 6,062
Interest related to convertible loan (see note 10(A)) (26,813) -
Commission related to convertible loan (see note 10(A)) (3,970) -
Amortization of warrants' compensation (1,493) -
Provision for a fine in connection with a PIPE (see note 10B(1)) - 40,000
-------- --------
$ 42,499 $ 32,661
======== ========
NOTE 12 - INCOME TAXES
A. Tax laws applicable to the companies:
(1) The Company is taxed under U.S. tax laws.
(2) Organitech Ltd. is taxed under the Israeli income Tax Ordinance
and the Income Tax (Inflationary Adjustments) Law, 1985: ("the
law"). According to the law, the subsidiary's results for tax
purposes are measured based on the changes in the Israeli CPI.
(3) The Law for the Encouragement of Capital Investment, 1959
In April 2001, OrganiTech Ltd. has submitted a request to be
granted a status of an "Approved Enterprise" under the Israeli
Law for the Encouragement of Capital Investments, 1959 as amended
(the - "Law") According to the "Alternative Benefits program"
status. On February 20, 2007 OrganiTech Ltd. received final
approval for its Approved Enterprise status.
During the period of benefits, the income deriving from "Approved
Enterprise" will be tax exempt for a period of ten years,
commencing the first year the "Approved Enterprise" generates
taxable income. Notwithstanding the foregoing, the period of
benefits will expire in the year 2014.
(3) The Law for the Encouragement of Capital Investment, 1959 (Cont.)
If these retained tax-exempt profits are distributed in a manner
other than in the complete liquidation of the Company they would
be taxed at the corporate tax rate applicable to such profits as
if the Company had not elected the alternative program of
benefits (depending on the level of foreign investment in the
Company) currently between 10% to 25% for an approved enterprise.
F - 25
ORGANITECH USA, INC.
NOTES TO THE CONLSIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 12 - INCOME TAXES (CONT.)
B. Net operating loss carried forwards
(1) As of December 31, 2007, for U.S. income tax purposes the Company
had approximately $1.4 million of net operating losses which can
be carried forward 20 years following the loss year. Such net
operating losses begin expiring in 2017.
(2) As of December 31, 2007, OrganiTech Ltd. had net operating loss
carry forwards for Israeli tax purposes of approximately $8.0
million. The net operating loss carry forward are available to
offset future taxable income, if any, for an indefinite period.
OrganiTech Ltd. had accumulated capital losses carry forward of
approximately $6,300 to be realized only from future capital
gains.
C. Deferred tax assets
Significant components of the Company's deferred tax assets are as
follows:
DECEMBER 31,
2007
-----------
Tax assets with respect to tax loss
carry forward $ 2,489,918
Other 38,777
Less - valuation allowance (2,528,695)
-----------
Net deferred tax assets $ -
===========
Realization of deferred tax assets is depended on generating
sufficient taxable income in the period that the deferred tax assets
are realized. Based upon all available information and because the
Company's lack of earnings history, deferred tax assets have been
fully offset by a valuation allowance.
The Company and OrganiTECH Ltd. have not been assessed for tax
purposes since incorporation.
F - 26
ORGANITECH USA, INC.
NOTES TO THE CONLSIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 12 - INCOME TAXES (CONT.)
D. Effective January 1, 2007, the company adopted the provision of FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes -
an interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48
prescribes a recognition threshold and a measurement attribute for the
financial statement recognition and measurement of tax positions taken
or expected to be taken in at tax return. For those benefits to be
recognized, a tax position must to more-likely-than-not to be
sustained upon examination by taxing authorities. There was not a
material impact on the company's consolidated financial position and
results of operations as a result of the adoption of the provisions of
FIN 48. At December 31, 2007, the company had a liability for
unrecognized tax benefits of $15,000. The Company does not believe
there will be any material changes in its unrecognized tax positions
over the net twelve months.
E. On July 25, 2005, the Israeli government approved the Law for the
Amendment of the Income Tax Ordinance (No. 147), 2005, which
prescribes, among other provisions, a gradual decrease in the
corporate tax rate in Israel to the following tax rates: in 2006 -
31%, in 2007 - 29%, in 2008 - 27%, in 2009 - 26% and in 2010 and
thereafter - 25%.
NOTE 13 - TRANSACTION AND BALANCES WITH RELATED PARTIES
The Company conducts transactions in the ordinary course of business with
related parties.
(1) Balances with related parties are presented in:
DECEMBER 31,
2007
---------
Current assets $ 1,508
=========
Current liability $ 12,562
=========
(2) Transaction with related parties
YEAR ENDED DECEMBER 31,
-----------------------
2007 2006
--------- ---------
Compensation, payroll expenses and
related benefits $ 496,941 $ 579,523
========= =========
Financing income - $ 40,000
========= =========
Officers compensation, payroll expenses and
related benefits $ 130,864 $ 120,512
========= =========
Cost of revenue $ 5,094 $ 28,000
========= =========
F - 27