YIGAL ARNON & CO.
ADVOCATES AND NOTARY
TEL AVIV July 25, 2006
Ref. 8492/1
Ms. Tangela Richter
Division of Corporate Finance
Securities and Exchange Commission
100 F Street N.E.
Washington, D.C. 20549
RE: ORGANITECH USA, INC.
REGISTRATION STATEMENT ON FORM SB-2
REGISTRATION NO. 333-134027
Dear Ms. Richter
On behalf of Organitech USA, Inc., a Delaware corporation (the "COMPANY"),
enclosed is a copy of Amendment No. 1 to the above-referenced Registration
Statement (the "REGISTRATION STATEMENT"), as filed with the Securities and
Exchange Commission (the "COMMISSION") on the date hereof, and marked to show
changes from the Registration Statement filed with the Commission on May 11,
2006; and Amendment No. 1 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 2005 (the "ANNUAL REPORT"), as filed with the
Commission on the date hereof, and marked to show changes from the Annual Report
filed with the Commission on May 2, 2006.
The changes reflected in the Registration Statement and the Annual Report
include those made in response to the comments (the "COMMENTS") of the staff of
the Division of Corporation Finance (the "STAFF") of the Commission regarding
the Registration Statement on Form SB-2 (Registration No. 333-134027) and the
Annual Report set forth in the Staff's letter of June 7, 2006 (the "COMMENT
LETTER"). The Registration Statement and Annual Report also include other
changes that are intended to update, clarify and render more complete the
information contained therein.
FORM SB-2
GENERAL
1. WHERE COMMENTS ON ONE SECTION OR DOCUMENT IMPACT PARALLEL DISCLOSURE IN
ANOTHER, MAKE CORRESPONDING CHANGES TO ALL AFFECTED SECTIONS AND DOCUMENTS.
YIGAL ARNON & CO.
RESPONSE: The Company advises the Staff that it has noted the Staff's
comment and has added the required disclosures in all applicable sections
and documents.
2. PLEASE UPDATE THE FINANCIAL STATEMENTS INCLUDED IN THE FORM SB-2 AS
REQUIRED BY ITEM 310(G) OF REGULATIONS S-B. IN ADDITION, WE REMIND YOU OF
YOUR REPORTING OBLIGATION TO FILE QUARTERLY REPORTS ON FORM 10-QSB WITHIN
45 DAYS AFTER THE QUARTER END.
RESPONSE: The Company advises the Staff that it has updated the financial
statements included in the Form SB-2 as required under Item 310(g). The
Company further advises the Staff that it has filed all of its outstanding
quarterly reports.
SELLING SECURITY HOLDERS, PAGE 15
3. EXPAND THE TABLE TO INCLUDE THE NATURAL PERSONS WITH THE POWER TO VOTE OR
TO DISPOSE OF THE SECURITIES OFFERED FOR RESALE BY THE ENTITIES THAT ARE
LISTED AS SELLING SECURITY HOLDERS. IF MORE THAN ONE HOLDER IS LISTED AS
BENEFICIAL OWNER FOR THE SAME SECURITIES, INCLUDE EXPLANATORY TEXT OR
FOOTNOTES. SEE INTERPRETATION 4S OF THE REGULATION S-K PORTION OF THE MARCH
1999 SUPPLEMENT TO THE CF TELEPHONE INTERPRETATION MANUAL.
RESPONSE: The Company advises the Staff that it has noted the Staff's
comment and has expanded the table as instructed.
4. IDENTIFY AS UNDERWRITERS ALL SELLING SECURITY HOLDERS WHO ARE REGISTERED
BROKER-DEALERS, UNLESS ANY SUCH REGISTERED BROKER-DEALERS RECEIVED THE
SHARES AS COMPENSATION FOR INVESTMENT BANKING SERVICES. IN THIS REGARD, WE
NOTE THAT CLAL FINANCE UNDERWRITING LTD. IS A REGISTERED BROKER-DEALER.
ALSO IDENTIFY ALL AFFILIATES OF REGISTERED BROKER-DEALERS THAT ARE LISTED
AS SELLING SECURITY HOLDERS.
RESPONSE: The Company advises the Staff that on the basis of both
submissions by Clal Finance Underwriting Ltd. ("Clal") and a review of the
NASD BrokerCheck website, the Company does not believe that Clal is a
registered broker-dealer. The Company further advises the Staff that none
of the other selling security holders are registered broker-dealers or
affiliates of registered broker-dealers.
FORM 10-KSB FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, PAGE 16
RESULTS OF OPERATIONS, PAGE 19
5. WE NOTE IN THE FOOTNOTE TO YOUR TABLE OF CERTAIN SELECTED FINANCIAL DATA
THAT YOU INDICATE RECLASSIFICATIONS OCCURRED BETWEEN TOTAL ASSETS AND
SHORT-TERM OBLIGATIONS AS A RESULT OF ADOPTING SOP 81-1 IN 2005. PLEASE
CLARIFY WITHIN THE FOOTNOTE WHY THE ADOPTION OF SOP 81-1 WOULD RESULT IN A
RECLASSIFICATION BETWEEN THESE BALANCE SHEET ACCOUNTS. IN ADDITION, PLEASE
EXPLAIN WHY YOU STATE THAT YOU DID NOT ADOPT SOP 81-1 UNTIL 2005 WHEN IT
APPEARS FROM YOUR ACCOUNTING POLICY NOTE DISCLOSURES THAT YOU APPLIED THE
GUIDANCE OF SOP 81-1 IN 2004 WHEN RECOGNIZING REVENUES UNDER THE COMPLETED
CONTRACT METHOD.
- 2 -
YIGAL ARNON & CO.
RESPONSE: The Company supplementally advises the Staff that it adopted SOP
81-1 commencing 2004 and that the reclassification described in comment 5,
did not result from the adoption of SOP 81-1. The Company agrees with the
comment of the Staff and has revised the footnote on page 19 of the
Form10-KSB for the Fiscal Year Ended December 31, 2005 (the "Annual
Report"), as follows:
"RECLASSIFIED. BEFORE RECLASSIFICATION, TOTAL ASSETS AND SHORT TERM
LIABILITIES WERE $441,092 AND $1,572,309 RESPECTIVELY, FOR THE YEAR ENDED
DECEMBER 31, 2004."
LIQUIDITY AND CAPITAL RESOURCES, PAGE 20
6. WE NOTE YOUR DISCLOSURE ON PAGE 20, IN WHICH YOU EXPLAIN YOU ARE REQUIRED
TO MAKE INVESTMENTS IN FIXED ASSETS IN THE AMOUNT OF $1,335,000 IN ORDER TO
MAINTAIN THE BENEFITS GRANTED UNDER THE ISRAELI ENCOURAGEMENT OF CAPITAL
INVESTMENTS LAW. PLEASE DISCLOSE WITHIN MD&A HOW YOU INTEND TO FUND THESE
INVESTMENTS. IN THE EVENT YOU ARE UNABLE TO MEET THIS REQUIREMENT AND YOU
ARE UNSUCCESSFUL IN RENEGOTIATING THE REQUIRED INVESTMENT AMOUNT, PLEASE
DISCUSS THE IMPACT THE CANCELLATION OF THESE BENEFITS WILL HAVE ON YOUR
RESULTS OF OPERATIONS AND FINANCIAL POSITION.
RESPONSE: The Company advises the Staff that it has noted the Staff's
comment and added the required disclosures to the section entitled
Governmental Regulations in Item 1 of the Annual Report and in the
Liquidity and Capital Resources section of Item 6 of the Annual Report.
CONTROLS AND PROCEDURES, PAGE 27
7. WE NOTE THAT YOU HAVE CARRIED OUT AN EVALUATION UNDER THE SUPERVISION AND
WITH THE PARTICIPATION OF YOUR MANAGEMENT, INCLUDING YOUR CHIEF EXECUTIVE
OFFICER AND CHIEF FINANCIAL OFFICER, OF THE EFFECTIVENESS OF YOUR
DISCLOSURE CONTROLS AND PROCEDURES AS OF DECEMBER 31, 2005. PLEASE COMPLY
WITH ITEM 307 OF REGULATION S-B AND DISCLOSE THE CONCLUSION OF YOUR
PRINCIPAL EXECUTIVE AND PRINCIPAL FINANCIAL OFFICERS, OR PERSONS PERFORMING
SIMILAR FUNCTIONS, REGARDING THE EFFECTIVENESS OF YOUR DISCLOSURE CONTROLS
AND PROCEDURES.
RESPONSE: The Company advises the Staff that it has noted the Staff's
comment and added the required disclosures to the Controls and Procedures
section of the Annual Report.
- 3 -
YIGAL ARNON & CO.
8. YOU STATE, "[W]ITH THE EXCEPTION OF THE MATERIAL WEAKNESSES NOTED IN OUR
10-KSB FORM FOR THE YEAR ENDED ON DECEMBER 31, 2004, ... THERE WERE NO
OTHER CHANGES IN OUR INTERNAL CONTROL OVER FINANCIAL REPORTING DURING THE
YEARS ENDED DECEMBER 31, 2004 AND DECEMBER 31, 2005 THAT HAVE MATERIALLY
AFFECTED, OR ARE REASONABLY LIKELY TO MATERIALLY AFFECT, OUR INTERNAL
CONTROL OVER FINANCIAL REPORTING." PLEASE COMPLY WITH ITEM 308(C) OF
REGULATION S-B, WHICH REQUIRES THAT YOU DISCLOSE ANY CHANGE IN YOUR
INTERNAL CONTROL OVER FINANCIAL REPORTING THAT IS IDENTIFIED IN CONNECTION
WITH THE EVALUATION REQUIRED BY PARAGRAPH (D) OF EXCHANGE ACT RULES 13A-15
OR 15D-15 THAT OCCURRED DURING THE FOURTH FISCAL QUARTER THAT HAS
MATERIALLY AFFECTED, OR IS REASONABLY LIKELY TO MATERIALLY AFFECT YOUR
INTERNAL CONTROL OVER FINANCIAL REPORTING. IF THERE WERE NO CHANGES IN YOUR
INTERNAL CONTROLS OVER FINANCIAL REPORTING DURING THE FOURTH FISCAL
QUARTER, THEN PROVIDE DISCLOSURE TO THAT EFFECT.
RESPONSE: The Company advises the Staff that it has noted the Staff's
comment and added the required disclosures to the Controls and Procedures
section of the Annual Report.
FINANCIAL STATEMENTS
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES, PAGE F-14
J. REVENUE RECOGNITION, PAGE F-16
9. WE NOTE YOUR DISCLOSURE IN WHICH YOU EXPLAIN THAT YOU RECOGNIZED REVENUE ON
THE COMPLETED CONTRACT BASIS IN 2004, BUT ADOPTED THE PERCENTAGE OF
COMPLETION METHOD IN 2005. PARAGRAPH 27 OF APB 20 REQUIRES A CHANGE IN THE
METHOD OF ACCOUNTING FOR LONG-TERM CONSTRUCTION TYPE CONTRACTS TO BE
ACCOUNTED FOR RETROACTIVELY. PLEASE CONFIRM YOU ACCOUNTED FOR THIS CHANGE
IN ACCOUNTING PRINCIPLE IN THIS MATTER, AND PROVIDE THE DISCLOSURES
OUTLINED IN PARAGRAPH 28 OF APB 20.
RESPONSE: The Company supplementally advises the Staff that its 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. The Company does not believe that using different
accounting methods for different contracts, as allowed by SOP81-1, is
considered a change in accounting method according to APB 20. Moreover, it
should be noted that the change from the completed-contract method for
contracts signed prior to 2005 to the percentage-of-completion method for
contracts signed thereafter, did not cause any change to the net loss and
net loss per share for the reported periods, since the Company applied the
zero profit margin for contracts recorded according to the percentage of
completion method. Consequently, a change was effected only for new
projects.
The Company notes that ARB 45 ("Long-Term Construction-Type Contracts")
includes the following recommendations for selecting the appropriate
method:
"...WHEN ESTIMATES OF COSTS TO COMPLETE AND EXTENT OF PROGRESS TOWARD
COMPLETION OF LONG-TERM CONTRACTS ARE REASONABLY DEPENDABLE, THE
PERCENTAGE-OF-COMPLETION METHOD IS PREFERABLE."
- 4 -
YIGAL ARNON & CO.
SOP 81-1 also establishes a presumption that the
percentage-of-completion method is preferable in most cases. The
presumption is that companies with significant contracting operations are
able to make estimates that are dependable enough to justify
percentage-of-completion. To overcome that presumption, such contractors
must have persuasive documented evidence to the contrary.
Under SOP 81-1, if a contractor's basic accounting policy is
percentage-of-completion, it is still appropriate to use the
completed-contract method for a single contract or for a group of contracts
if, for such contract(s), the contractor cannot make reasonably dependable
estimates or if "inherent hazards" make estimates doubtful. Such a
departure from the contractor's basic accounting policy should be
disclosed.
Both ARB 45 and SOP 81-1 discourage contractors from using
percentage-of-completion when inherent hazards make the contractor's
estimates doubtful.
In accordance with the above, for projects signed during the year 2004
(and performed until and during the year 2005), which were the Company's
first projects, management used the completed-contract method since the
Company could not expect to perform all of its contractual obligations and
also had not gained sufficient experience for estimating contract costs. In
addition it was impractical for management to estimate the percentage of
completion of these contracts as of the end of each reporting period. For
new contracts signed during 2005 and thereafter, and after performing
several projects signed during 2004 and obtaining adequate experience with
regards to estimating total contract revenues and total contract costs, the
Company commenced adopting the percentage-of-completion method based on a
zero profit margin. Consequently, equal amounts of revenues and costs,
measured on the basis of performance during the period, were presented in
the income statement. Therefore, the change in methods under SOP 81-1 as
described above was not accounted for retroactively.
N. STOCK-BASED COMPENSATION, PAGE F-18
10. IT APPEARS THAT YOUR NOTE DISCLOSURES UNDER THIS HEADING CONTAIN
DUPLICATIVE INFORMATION. PLEASE REVISE YOUR DISCLOSURES ACCORDINGLY.
RESPONSE: The Company advises the Staff that it has noted the Staff's
comment and has deleted the duplicative information in the Financial
Statements.
NOTE 7 - PROPERTY AND EQUIPMENT, NET, PAGE F-24
11. WE NOTE THAT WITHIN THE PROPERTY AND EQUIPMENT ACCOUNT BALANCE YOU INCLUDE
AN AMOUNT TITLED, "BASE STOCK." PLEASE EXPLAIN TO US THE NATURE OF THIS
AMOUNT, AND TELL US WHY IT IS APPROPRIATELY INCLUDED IN THE PROPERTY AND
EQUIPMENT ACCOUNT BALANCE.
- 5 -
YIGAL ARNON & CO.
RESPONSE: The Company supplementally advises the Staff that "Base Stock"
includes low-cost working tools (e.g., saws and drills,) that are routinely
used by its manufacturing personnel and which are generally long-lived
assets. While the Company could have accounted for these tools by entering
each into the fixed-assets book upon purchase, depreciating it and writing
it off when broken, lost or worn out, in order to simplify the procedure,
the Company estimated the total value of the tools (approximately $8,000)
and recorded them as "Base Stock". Additionally, as the amount of new tools
purchased is estimated to be similar to the amount of depreciation of
existing tools, the purchase amount is recorded periodically as an expense.
The Company's Base-Stock is reviewed for impairment in accordance with SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets",
whenever event or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable.
NOTE 12 - CONVERTIBLE LOANS, PAGES F-25-26
12. WE NOTE YOU HAVE ISSUED CONVERTIBLE LOANS AND WARRANTS THAT CARRY
REGISTRATION RIGHTS. SFAS 133 AND EITF 00-19 CONTAIN GUIDANCE REGARDING THE
CLASSIFICATION AND MEASUREMENT OF WARRANTS AND INSTRUMENTS WITH EMBEDDED
CONVERSION FEATURES. PLEASE SUBMIT THE ANALYSIS THAT YOU PERFORMED,
CONSIDERING THIS GUIDANCE, IN DETERMINING THE APPROPRIATE ACCOUNTING FOR
SUCH INSTRUMENTS. IF YOU REQUIRE FURTHER CLARIFICATION, YOU MAY REFER TO
SECTION II.B OF CURRENT ACCOUNTING AND DISCLOSURE ISSUES, LOCATED ON OUR
WEBSITE AT http://www.sec.gov/divisions/corpfin/acctdis120105.pdf.
RESPONSE: The Company supplementally advises the Staff that the
analysis performed for determining the appropriate accounting for the
convertible loans and warrants was as follows:
(a) On February 2, 2005, the Company entered into a Share Purchase
Agreement which was amended on January 31, 2006 (the "SPA") pursuant to
which a group of investors (the "INVESTORS") purchased shares of the
Company's common stock (the "SHARES") and warrants (the "WARRANTS")
(collectively, the "DERIVATIVE SECURITIES"). Pursuant to the SPA,
settlement of the Derivative Securities could only be made by delivery of
the Shares and Warrants, and no provision was made in the SPA for net-cash
settlement of the Derivative Securities.
Pursuant to section 2(f) of the Registration Rights Agreement (the
"RRA) entered into between the Company and the Investors, simultaneously
with the SPA, the Company was obligated to pay liquidated damages upon the
occurrence of certain specified events, namely, in the event that the
Company fails to (i) file a registration statement covering the Derivative
Securities or fails to respond to comments from Staff within the time
periods set forth in the RRA or (ii) maintain the effectiveness of the
registration statement covering the Derivative Securities.
- 6 -
YIGAL ARNON & CO.
The Company believes that these liquidated damages provisions are
commercial obligations bargained for by the Investors exclusively under the
RRA and are typical for the type of private equity financing engaged in by
the Company. The payment of any liquidated damages under the RRA would not
relieve the Company of the requirement to deliver the Shares or issue
shares of the Company's common stock upon exercise of the Warrants.
(b) The Company evaluated its accounting treatment of the Derivative
Securities issued in the private placement transaction in accordance with
EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock. The Company reviewed EITF
00-19 and determined that the Derivative Securities should be classified as
equity and not as a liability. According to the basic principles of EITF
00-19, a company must value and classify derivative financial instruments
as equity, if they are:
o contracts that require physical settlement or net-share settlement;
or
o contracts that give the company a choice of net-cash settlement or
settlement in its own shares (physical settlement or net-share settlement),
assuming that all the criteria set forth in paragraphs 12 to 32 of EITF
00-19 have been met.
In making its detailed analysis, the Company first considered whether
it could deliver unregistered shares to satisfy its obligation under each
of the Derivative Securities. According to EITF 00-19 paragraph 14, the
following factors need to be satisfied to support an equity classification:
o a failed registration statement has not occurred within six
months of the classification assessment date;
o the Derivative Securities can be settled in unregistered shares;
and
o the other conditions in EITF 00-19 are met.
With respect to the first factor, the Company did not have any failed
registration statements within six months of the classification assessment
date. With respect to the second factor, the Company sold the Derivative
Securities pursuant to the SPA entered into with the Investors. Under U.S.
securities laws, the underlying shares of common stock issuable upon the
exercise of each of the Derivative Securities are considered unregistered
or "restricted" shares because these Derivative Securities were issued in a
private placement. In Section 2(f) of the SPA, the Investors acknowledge
that the securities issued, as well as the shares underlying the Derivative
Securities are characterized as restricted securities under U.S. federal
securities laws inasmuch as they are being acquired from the Company in a
transaction not involving a public offering. However, simultaneously with
the execution of the SPA, the Company and the Investors entered into the
RRA pursuant to which the Company undertook to register the Derivative
Securities (including the shares of common stock underlying the Warrants).
- 7 -
YIGAL ARNON & CO.
The Company, in its analysis, also considered whether the existence of
liquidated damages would result in a liability classification in accordance
with EITF 00-19. The Company believes that the registration rights provided
to the Investors represent a discount from the value of issuing registered
shares that is based on a reasonable estimate of the difference in fair
values between registered and unregistered shares. The Company computed the
maximum damages possible, based on an assumption of the Company not filing
the SB-2 on time rather than on an assumption of the registration statement
not being declared effective. The computation of the maximum damages is
dependent upon the period of time over which damages can be assessed, the
total consideration on which damages are computed, and the damage rates.
The Company believes that the two-year holding period required for sale of
securities under Rule 144(k) of the Securities and Exchange Act 1933
provides the only determinable period over which damages could be assessed.
Because damages are required for failure to file the SB-2 (section 2(f) of
the RRA), the calculation of maximum damages assumes that damages are
charged only for the failure to file a registration statement. Accordingly,
the Company has determined the damages should be computed assuming a
24-month period.
In its analysis, the Company computed the liquidated damages based on
the value of the consideration actually received by the Company for the
securities issued in the private placement.
Additionally, pursuant to the RRA, the potential liquidated damages
were to be calculated at a rate of 1.0% per month (or a prorated daily
amount for a period of less than a month), and in the event the Company
failed to make payments in a timely manner, such payments would bear
interest at a rate of 1.0% per month, or such lower maximum amount as is
permitted by law, (prorated for partial months) until paid in full.
Consequently, on the basis of the foregoing, the Company calculated
that as of December 31, 2005, the maximum damages that were possible would
be approximately $226,000, assuming a registration statement was not filed
by that date. The computation was as follows (in thousands of US Dollars):
---------------------------------------------------------- ---------------
Total Consideration in Private Placement $ 1,000
---------------------------------------------------------- ---------------
Maximum number of months subject to liquidated damages 20.5 months
---------------------------------------------------------- ---------------
Liquidated damages per each month 1.0% per month
---------------------------------------------------------- ---------------
Liquidation penalty in case of late payment of the
liquidated damages, per each month 1.0% per month
---------------------------------------------------------- ---------------
Maximum liquidated damages allocated to Derivative
Securities, as a percentage of the value of Derivative
Securities 22.6%
---------------------------------------------------------- ---------------
Maximum liquidated damages allocated to Derivative
Securities $226
---------------------------------------------------------- ---------------
- 8 -
YIGAL ARNON & CO.
Based on these facts, the Company concluded that the Derivative
Securities could be settled in unregistered shares and the Company did not
believe that the liquidated damages provisions would require the
classification of the Derivative Securities as liabilities. Instead, the
Company concluded that the liquidated damages should be accounted for in
accordance with SFAS No. 5, Accounting for Contingencies. The Company
determined that the events giving rise to liquidated damages are reasonably
within the control of the Company, and that the likelihood of incurring
liquidated damages in addition to that which was been accrued for the year
ending December 31, 2005, is not probable, so no liability has been
recognized to date.
With respect to the third factor, pursuant to EITF 00-19 additional
conditions must be met for a contract to be classified as equity. The
following paragraphs show each of these conditions as they were considered
by the Company together with the Company's assessment regarding each such
condition:
CONDITION COMPANY ASSESSMENT
(a) (Para. 19 of EITF 00-19) The Company has sufficient authorized and
unissued shares available to settle the SPA after considering all other
commitments that may require the issuance of stock during the maximum
period the obligations under the SPA could remain outstanding.
Satisfied - The Company has sufficient authorized and unissued shares
available and reserved for the issuance of all shares potentially issuable
pursuant the private placement. This information was further represented to
the Investors in section 3(c) of the SPA.
(b) (Paras. 20-24 of EITF 00-19) The SPA must contain an explicit
limit on the number of shares to be delivered in a share settlement.
Satisfied - The total number of shares issued or issuable pursuant to
the private placement was fixed and was not subject to any provisions that
would result in an indeterminate number of shares upon settlement.
(c) (Para. 25 of EITF 00-19) The SPA must not require net-cash
settlement in the event the company fails to make timely filings with the
SEC.
Satisfied - There are no provisions requiring net-cash settlement in
such event.
(d) (Para. 26 of EITF 00-19) There are no required cash payments to
any of the Investors if the shares initially delivered upon settlement are
subsequently sold by such Investor and the sales proceeds are insufficient
to provide the Investor with full return of the amount due (in other words,
there are no cash settled "top-off" or "make-whole" provisions).
- 9 -
YIGAL ARNON & CO.
Satisfied - The Investors do not have any rights to receive any such
"top-off", "make-whole", or other similar payments from the Company.
(e) (Paras. 27-28 of EITF 00-19) The SPA may require net-cash
settlement only in specific circumstances in which the holders of shares
underlying the SPA would also receive cash in exchange for their shares.
Satisfied - No provision of any of the transaction documents permits
net-cash settlement for the Derivative Securities. The liquidated damages
provisions in the RRA are a separate commercial obligation and do not
relieve the Company of its obligation under the SPA to deliver shares to
settle the Derivative Securities.
(f) (Paras. 29-31 of EITF 00-19) There must be no provisions in the
SPA that indicate that the Investors have rights that rank higher than
those of a shareholder of the type of stock underlying the contract.
Satisfied - There are no provisions, such as preferential payments
upon liquidation, which may indicate that the rights of the Investors in
the private placement rank higher than other holders of the Company's
ordinary shares.
(g) (Para. 32) There must be no requirement in the contract to post
collateral at any point or for any reason.
Satisfied - The transaction documents do not provide for the posting
of any collateral at any point or for any reason.
On the basis of the aforementioned analysis, the Company determined
that the three conditions contained in paragraph 14 of EITF 00-19 were met
and that classification of the Derivative Securities as equity was
appropriate.
NOTE 13 - COMMITMENTS AND CONTINGENCIES
F. SALES COMMITMENTS, PAGE F-31
13. WE NOTE THAT YOU HAVE ENTERED INTO TWO JOINT VENTURES, A.T.A. JORDAN VALLEY
LTD. AND A.A.G. EILAT LTD. PLEASE EXPAND YOUR DISCLOSURES UNDER THIS
HEADING OR IN THE SECTION OF SIGNIFICANT ACCOUNTING POLICIES TO DISCUSS
YOUR ACCOUNTING METHODOLOGY FOR THESE JOINT VENTURES. IN ADDITION, PLEASE
TELL US HOW YOU HAVE ACCOUNTED FOR THE SALE OF A GROWTECH 2500 SYSTEM TO
A.T.A. WITH A PURCHASE PRICE OF $100,000.
RESPONSE: The Company advises the Staff that it has noted the Staff's
comment and has expanded the disclosures in Note 13.
- 10 -
YIGAL ARNON & CO.
The Company supplementally advises the Staff that the Company did not
recognize any revenue on the sale of the GrowTech 2500 system (the
"SYSTEM") to A.A.G Eilat Ltd. ("EILAT"), since the customer did not provide
technical acceptance for this product and since there was no assurance that
this obligation would be satisfied. Furthermore, the transaction was never
completed since Eilat only paid a down payment of $33,094, and failed to
pay any of the subsequent installments. As at December 31, 2005, the
Company had accumulated costs of $83,409 with respect to the System. The
Company does not believe that it is feasible to return the installed System
without significant impairment. Therefore, in accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," the
Company believes that the net realizable value of this System as at
December 31, 2005, was $33,094, which is the amount of the advance received
for this inventory. The Company consequently wrote down an amount of
$38,409 in 2004 and an amount of $11,906 in 2005.
****
If you have any questions or comments regarding the foregoing, please
contact the undersigned at +972 3 608 7864.
Sincerely yours,
Adrian Daniels, Adv.
cc: T. Towner
J. Gallagher
C. Moncada-Terry
- 11 -