UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2005
Or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to _____________________.
Commission File Number: 33-22175
SAFETEK INTERNATIONAL, INC.
----------------------------------------------------
(Exact name of company as specified in its charter)
Delaware 75-2226896
------------------------------- ----------------
(State or other jurisdiction (IRS Employer
of incorporation) Identification No.)
23 Aminadav Street
Tel Aviv, Israel 67898
(Address of principal executive offices)
972-3-561-3468
(Company'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,
$0.0001 par value
Check whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act |_|
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 |_|
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part II of this Form 10-KSB or any
amendment to this Form 10-KSB. |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act) |_| Yes |X| No
The issuer's revenues for its most recent fiscal year were $ 0.
Based on the closing sales price of the Common Stock on March 23, 2006, the
aggregate market value of the voting common equity held by non-affiliates
computed by reference to the price at which the common equity was sold, or the
average bid and asked price of such common equity, as of March 23, 2006 (a date
within the past 60 days) was $15,034,731.
The number of shares outstanding of the issuer's class of common stock
outstanding as of March 23, 2006 is 60,138,923.
Documents Incorporated By Reference: None
Transitional Small Business Issuer Disclosure Format (check one): Yes |_|
No |X|.
ii
INDEX
Page
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PART I
Item 1. Description of Business................................................................... 5
Item 2. Description of Property................................................................... 15
Item 3. Legal Proceedings......................................................................... 15
Item 4. Submission of Matters to a Vote of Security Holders....................................... 15
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.................................. 15
Item 6. Management's Discussion and Analysis or Plan of Operation................................. 18
Item 7. Financial Statements...................................................................... 23
Item 8. Changes In and Disagreements with Accountants on Accounting and Financial Disclosures.....
48
Item 8A. Controls and Procedures................................................................... 49
Item 8B. Other Information......................................................................... 50
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section
16(a) of the Exchange Act ................................................................ 50
Item 10. Executive Compensation.................................................................... 52
Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder 54
Matters...................................................................................
Item 12. Certain Relationships and Related Transactions............................................ 55
Item 13. Exhibits.................................................................................. 58
Item 14. Principal Accountant Fees and Services.................................................... 58
Signatures
Certification 60
iii
Forward-Looking Statements
This Annual Report on Form 10-KSB contains forward-looking information.
Forward-looking information includes statements relating to future actions,
future performance, costs and expenses, outcome of contingencies, financial
condition, results of operations, liquidity, business strategies, cost savings,
objectives of management, and other such matters of Safetek International, Inc.
(the "Company"). The Private Securities Litigation Reform Act of 1995 provides a
"safe harbor" for forward-looking information to encourage companies to provide
prospective information about themselves without fear of litigation so long as
that information is identified as forward-looking and is accompanied by
meaningful cautionary statements identifying important factors that could cause
actual results to differ materially from those projected in the information.
Forward-looking information may be included in this Annual Report on Form 10-KSB
or may be incorporated by reference from other documents filed with the
Securities and Exchange Commission (the "SEC") by the Company. Many of these
statements can be found by looking for words including, for example, "believes,"
"expects," "anticipates," "estimates" or similar expressions in this Annual
Report on Form 10-KSB or in documents incorporated by reference in this Annual
Report on Form 10-KSB. The Company undertakes no obligation to publicly update
or revise any forward-looking statements, whether as a result of new information
or future events.
The Company has based the forward-looking statements relating to the Company's
operations on management's current expectations, estimates, and projections
about the Company and the industry in which it operates. These statements are
not guarantees of future performance and involve risks, uncertainties and
assumptions that the Company cannot predict. In particular, the Company has
based many of these forward-looking statements on assumptions about future
events that may prove to be inaccurate. Accordingly, the Company's actual
results may differ materially from those contemplated by these forward-looking
statements. Any differences could result from a variety of factors, including,
but not limited to general economic and business conditions, the inability to
raise sufficient funding inability to commence research and development,
inadequate results from research and development projects,, lack of
marketability, operating costs, advertising and promotional efforts, the
existence or absence of adverse publicity, changes in business strategy or
business development plans, the ability to retain management, availability,
terms and deployment of capital, business abilities and judgment of personnel,
availability of qualified personnel, changes in, or failure to comply with
various government regulations and slower than anticipated completion of
research and development projects. Actual results may also differ as a result of
factors over which we have no control, including general economic and business
conditions, effects of war or terrorists acts on the capital markets or the
Company's activities.
4
PART I
Item 1. Description of Business
A. History
Safetek International, Inc. (the "Company") was incorporated in the State of
Delaware in April 1988 under the name Theoretics, Inc. In January 1989, the
Company changed its name to Safetek International, Inc. In May 2001, pursuant to
a Stock Purchase Agreement between Halter Capital Corporation (the "Seller"),
which was the majority shareholder of the Company at the time, and Shmuel
Shneibalg (the "Purchaser"), Seller sold to Purchaser 47,761 shares of common
stock of the Company, representing approximately 51.1% of the Company's issued
and outstanding shares of common stock. Such sale effectively transferred
control of the Company to Purchaser. Simultaneously, the Company's then current
directors or officers resigned and Purchaser was appointed the sole director and
officer of the Company.
The Company has not had any products, services or business operations since
December 31, 2002. Prior to December 31, 2002, the Company manufactured
prototypes and distributed the final product on behalf of technology developers.
During 2003 and 2004, the company did not have any business activity.
In accordance with Financial Accounting Standards Board (FASB) SFAS No. 7, the
Company is considered a development stage company, beginning April 16, 2005, the
date it commenced with its new business activity.
B. Life Sciences and Health Care Fields Potential Transactions
On May 17, 2005, the Company established an Israeli wholly owned subsidiary
under the laws of the State of Israel, called Oriens Life Sciences Ltd. (the
"Subsidiary") , to serve as a platform for the Company to screen the Israeli
life sciences and health care industry and identify, analyze, and acquire or
invest in technologies in this field.
NanoDiagnostics
On July 5, 2005, the Company entered into a Term Sheet with NanoDiagnostics,
Inc. ("NanoDiagnostics"), a Delaware company, and Judith Seligman ("Seligman"),
the principal of NanoDiagnostics. NanoDiagnostics is engaged in developing the
ability to extract certain cells known as Pluripotent Stem cells from blood
samples. The parties did not reach agreement and the contemplated transaction
has been terminated. Neither party has any further obligation to the other.
Matrix Pharma
On August 9, 2005, the Company and Matrix Pharma, Inc., a Delaware Corporation
("Matrix"), entered into a term sheet pursuant to which Matrix would, at closing
of a definitive agreement grant the Company an exclusive license in all of
Matrix's intellectual property rights in its Thrombin inhibition compounds. The
Company and Matrix agreed to jointly develop a research and development program
for the development of products based on the Thrombin inhibition compounds and
to obtain approval from the U.S. Food and Drug Administration. At the closing,
the Company shall pay to Matrix $60,000 as an advance towards the funding of the
first stage of the research and development program. In further consideration
for the license grant and services rendered to the Company in connection with
the research and development program, Matrix shall be paid certain specified
amounts if the Company successfully achieves each of certain specified
milestones with respect to the development of products based on the license
granted to the Company.
On January 4, 2006, the Company closed on a transaction contemplated by the
Exclusive Patent and Know How License Option Agreement dated December 28, 2005
with Matrix. Pursuant to this Agreement, the Company acquired from Matrix an
option to purchase an exclusive, world-wide license in all of Matrix's
intellectual property rights in its Thrombin inhibition compounds. The Company
may exercise such option at any time until March 31, 2006 by written notice to
Matrix. In consideration for the option, the Company paid Matrix a total of
$60,000 as an advance (the "Advance"). $30,000 of the Advance is to be returned
to the Company if it decides not to exercise the option on grounds that its due
diligence of Matrix reveals that certain patents relating to the matters subject
to the license are likely to be invalid.
5
On March 30 2006, the Company and Matrix signed an amendment extending the
exercise date of the option to May 15, 2006. The amendment provides that until
April 15, the Company will pay Matrix $15,000 in consideration for Matrix's
agreement to extend the exercise date. Such amount will be deducted from the
repayment of costs that the Company shall pay if it exercises the option.
Upon execution of the option, the Company is required to pay Matrix up to
$105,000 (less the $15,000 paid to Matrix to extend the option) for the
completion of the optimization stage of development. The Company is under no
obligation to exercise the option or to commence the research and development
program and may do so in its sole discretion. However, the Company shall not
instruct Matrix to commence the research and development program unless the
Company has first secured funds sufficient to fund at least the first two of the
five stages contemplated. The Company estimates that it will have to invest
approximately $3.5 million to complete the five stages of development, bringing
a compound to the end of stage IIa.
As further consideration for the license grant, Matrix shall be paid certain
specified amounts if the Company successfully achieves each of certain specified
milestones with respect to the development of products based on the license
granted to the Company. Such milestone payments shall be paid, at the Company's
discretion, either by cash or by the issuance of shares of the Company to
Matrix, based on the average price per share at which the shares of the Company
were traded during the last 60 days prior to the issuance of such shares. Any
such shares shall have piggyback registration rights, with a lock up of 180
days. As further consideration for the license grant, the Company shall also pay
to Matrix royalties from net income resulting from sales of products covered by
the license and from any grant by the Company of any rights to third parties
which are subsidiaries of the Company.
At Matrix's option, the license granted to the Company may be either terminated
or converted to a non-exclusive license if (a) the Company fails to timely pay
the applicable royalty payment or milestone payment after an agreed grace period
or (b) after the Company starts a project, the Company fails to complete each
stage of development, or fails to commence the next stage of development within
specified time periods after the previous one ended.
The Agreement was entered into in connection with a collaboration between the
Company and Matrix for the development of a new drug known as an Oral Direct
Thrombin Inhibitor, which is intended to be used for protection against a
disease known as Thrombosis. Immediately following the closing, the parties
established a two-member committee (the "Steering Committee"), which is
responsible for the development and administration of such research program. The
committee is comprises of one member on behalf of the Company and one member on
behalf of Matrix. The five main stages of such research and development program
and the estimated duration and budget for each stage were generally agreed to,
although the details are to be worked out by the Steering Committee.
Thrombosis occurs when a certain type of clot known as a thrombus forms within
the cardiovascular system. The thrombus obstructs vascular blood flow locally or
particles that break off the thrombus might travel within the blood stream and
block small blood vessel in distant sites, usually in the lung. The Oral Direct
Thrombin Inhibitor Drug is intended to work by directly inhibiting Thrombin, a
pivotal factor in the process of clot formation, known as the coagulation
cascade. Matrix has developed a proprietary computer aided process that allows
many pharmacology parameters effecting the activity, metabolic stability, and
toxicity of a drug candidate to be taken into consideration in the very early
optimization process of a drug, thus increasing the likelihood of successful
human clinical trials required in connection with obtaining the approval of the
Food and Drug Administration. According to representations made to the Company
by Matrix, Matrix has invested approximately $900,000 since 2002 in developing
Thrombin inhibitor candidates.
The Company does not currently have sufficient funds to effectuate its planned
activities during the next 12 months. Accordingly, if the Company determines to
exercise the option granted by Matrix, the Company will not have sufficient
resources to fund the research and development program for developing the
thrombin inhibitor compound and to bring the compound to clinical phases.
Notwithstanding, the Company is continuing its efforts to raise additional
capital and/or enter into a strategic arrangement with a third party, including
searching for other compounds and products to expand its pipeline. There can be
no assurance that the Company will be able to obtain additional financing if and
when needed or that, if available, financing will be on acceptable terms.
Serapis
On August 10, 2005, the Company and Serapis Technologies Inc., a Delaware
corporation and Serapis Biotech Ltd., a subsidiary of Serapis ("Serapis"),
entered into a Term Sheet pursuant to which, the Company would, at closing,
purchase from Serapis its intellectual property relating to chemical compounds
designed to affect membrane receptor activity. The Company will also be granted
a one-year option to purchase from Serapis certain equipment. In consideration
for such assets, Serapis and certain of its principals will receive from the
Company a specified amount of cash and shares of the common stock of the
Company. Serapis agreed to an exclusivity period until September 30, 2005.
6
On December 1, 2005, the Company and Serapis entered into a letter agreement
(the "Letter Agreement") extending the date by which a definitive agreement must
be agreed to until May 31, 2006. The Letter Agreement also gives the Company a
right of first refusal. Pursuant to such right of first refusal, if a third
party makes an offer to Serapis prior to May 31, 2006 to invest in Serapis or
its subsidiary, Serapis must notify the Company and extend to the Company an
offer on the same terms and conditions as the third party's offer. Pursuant to
the Letter Agreement, the Company is also entitled to purchase from Serapis
certain biological materials at prices specified therein. Pursuant to the Letter
Agreement, the Company also agreed to loan to Serapis $30,000. If a definitive
agreement is not signed by the Company and Serapis on or before May 31, 2006,
then the amounts loaned shall be repaid to the Company upon its request. As a
security for such loan, Serapis granted to the Company a security interest in
certain biological materials identified in the Letter Agreement.
On March 27, 2006 the Company exercised its right that was given to it in the
"Letter Agreement" to purchase certain biological materials from Serapis for a
purchase price of $100,000 plus value added tax (VAT). The purchase price was
paid by the forgiveness of $29,906 (the actual amount that was delivered to
Serapis) of debt owed to the Company, and the balance to be paid to Serapis in
12 equal monthly payments, with the first payment on the signing date.
The Company intends to develop a technology that will assist and accelerate the
identification of new generation of lead compounds stimulating the activity of
muscarinic receptors, for the development of new therapies for variety of
diseases such as Alzheimer's disease, glaucoma, and over active bladder.
Cygnus
On August 10, 2005, the Company, Cygnus Biotechnology Inc., a Delaware
corporation ("Cygnus"), and Cygnus Biotech Israel Ltd., a subsidiary of Cygnus
(the "Cygnus Subsidiary"), together the "Cygnus Companies" entered into a term
sheet pursuant to which the Cygnus Companies would, at closing, grant to the
Company exclusive licenses relating to their intellectual property in their
research regarding (1) stem cells, (2) specific clinical applications or
diseases in areas of cardiovascular diseases, and (3) all other areas of
cardiovascular diseases. Such licenses shall be perpetual, except that the
license in areas of cardiovascular diseases not related to specific clinical
applications or diseases shall expire upon the occurrence of either of the
following within 12 months after the closing: (1) the Company has not committed
to finance a budget of at least $1,500,000 for a joint research and development
project between the Company and Cygnus; or (2) the Company has not issued a
specified amount of shares of its common stock to certain of Cygnus's
principals. The Company and Cygnus also agreed to enter into an agreement for
the provision of research and development services with respect to the licensed
intellectual property, with all rights in the intellectual property developed
belonging to the Company. In consideration for such licenses, Cygnus and certain
of its principals will receive from the Company a specified amount of cash and
shares of the common stock of the Company. They agreed to an exclusivity period
until September 30, 2005. No extension has been agreed to. However, the Company
is still considering entering in to definitive agreement with Cygnus.
Resdevco
On March 23, 2006, the Company entered into a term sheet with Resdevco Ltd, a
company incorporated under the laws of Israel ("Resdevco"). The term sheet sets
forth the principal terms of a proposed agreement between the Company and
Resdevco, pursuant to which Resdevco will grant the company an exclusive,
worldwide license (the "License") in Resdevco's Antioxidant salicylate compounds
(the "Licensed Technology").
The consummation of the transactions contemplated by the term sheet is subject
to the execution of mutually acceptable definitive agreement, approval of the
transaction and definitive agreements by the respective Boards of Directors of
the parties, completion of due diligence to the satisfaction of the Company,
receipt of financial reports of the last three years, receipt of any required
approvals of governmental authorities, and receipt of necessary consents and
approvals of third parties. It is anticipated that a definitive agreement will
be executed within 60 days after the completion by the Company of its due
diligence.
7
Pursuant to the License, the Company will have the right to research, develop,
make, have made, use, sell, dispose, sub-lease, distribute, display, bundle,
import and export any and all products or services based on the Licensed
Technology, including a right to sub-license. The License will be exclusive,
world-wide, and perpetual, subject to certain earlier termination provisions.
The Company shall have the right to terminate the License at any time, with
prior written notice of 90 days. Resdevco will have the right, after prior
written notice of 90 days, to terminate the license or, at its option, to
convert it into a non-exclusive license, if the Company fails to pay any payment
pursuant to the definitive agreement, or fails to satisfy certain milestones as
set out in a schedule to be concluded and attached in the definitive agreement.
The Company will be fully responsible for the development of the Licensed
Technology after the execution of the definitive agreements, at its own expense.
Resdevco will agree to assist the Company in developing the Licensed Technology
at the cost and expense of Safetek. Any new intellectual property developed by
the Company based on the Licensed Technology will be owned by Resdevco and
subject to the License.
In consideration for the License, Safetek will pay to Resdevco a specified
license fee at the beginning of each year of the term of the License. The
Company will also pay to Resdevco a percentage of its net sales of any products
it develops based on the License Technology and a specified portion of any
consideration or other benefits actually received by the Company from third
parties in connection with sublicensing of the Licensed Technology.
Resdevco and its shareholders and directors agreed to refrain from negotiating
any licensing of the Licensed Technology until the earlier of signing the
definitive agreement, or receipt by Resdevco of notice from the Company that it
does not wish to close the transaction, or the expiry of 90 days from the date
of the term sheet. Such agreement is binding.
Upon execution of the term sheet, the Company advanced Resdevco $5,000. An
additional $5,000 will be advanced at the beginning of each month thereafter,
provided Resdevco continues to provide Safetek with due diligence materials in
its possession in a timely manner, but not more than 14 days after the date of
request, until the earlier to occur of: (a) The Company finishes its due
diligence, up to an aggregate amount (together with the initial payment) of
$15,000, or (b) The Company provides Resdevco with written notice that it does
not wish to close the transaction. All monthly payments will be part of the
total first year License Fee. No monthly payments will be paid to Resdevco in
the time period between completion of due diligence and signing the definitive
agreement.
C. Competition
Competition in the area of life sciences and health care industry research and
development and in each of the fields the Company signed a term sheet or
agreement to purchase technology is intense. The competitive ability of the
Company depends mainly on the ability to purchase high level technology, to
successfully raise enough funds to finance those purchases, to keep and develop
scientific innovativeness, to protect its technology by patents and other
protective methods, to raise sufficient funds to finance its research and
developments plans, to receive government approval to its developments, to
commercialize its developments, and to successfully employ and retain highly
qualified scientific personnel and consultants.
In all the fields the Company is considering entering there are many companies
which have financial, technical and marketing resources significantly greater
than the Company. In addition, many biotechnology companies have more
accessibility to high level technology and the ability to offer better financial
compensation and science support to form collaborations to support research and
development and for the commercialization of their research and development
products. In addition, academic institutions, governmental agencies and other
public and private research organizations also conduct research activities and
seek patent protection and may commercialize products on their own or through
joint ventures, and many of those institutions also have more accessibility to
financing sources and to technological innovations than the Company.
We are aware of certain other technology or products in the fields that the
Company has term sheets or agreements, some of them in more advanced development
stages than the products or technologies that the Company intends to purchase.
There can be no assurance that developments by third parties will not render our
technologies obsolete or noncompetitive, that we will be able to keep pace with
new technological developments or that our technology will be able to supplant
established products and methodologies. The foregoing factors could have a
material adverse affect on our business, financial condition and results of
operations.
D. Employees
The Company currently employs 3 full-time employees. All the employees work in
the Company's offices in Tel Aviv, Israel.
8
E. Risk Factors
An investment in the Company has a high degree of risk. Before an investment in
the Company is made, a prospective investor should carefully consider the risks
and uncertainties described below and the other information in this Form 10-KSB.
If any of the following risks actually occur, the Company's business, operating
results and financial condition could be harmed and the value of the Company's
stock could go down. This means that an investor could lose all or a part of its
investment.
Risks Relating to Our Business:
Auditors Have Expressed Substantial Doubt About Our Ability To Continue As A
Going Concern.
The Company's auditors stated that the Company's financial statements for the
fiscal years ended December 31, 2005 and 2004 were prepared assuming that we
would continue as a going concern. The Company has experienced recurring net
operating losses. At December 31, 2005, the Company has a stockholder deficit of
$3,103,260. This matter raises substantial doubt about the Company's ability to
continue as a going concern.
Our ability to continue as a going concern is an issue raised as a result of our
recurring net operating losses from operations.
We Are In The Developmental Stage And Have Not Yet Acquired Any Rights To
Develop Or Commercialize Any Technologies.
We are just commencing our research and development activity. We are in a middle
of due diligence processes and negotiations on signing definitive agreements to
purchase or license technologies. There is a high risk level that the due
diligence process will fail, or the negotiations on signing definitive agreement
will not succeed.
At Present Our Success Depends On Our Ability To Purchase Technologies.
Many companies have more access to technologies than the Company and the ability
to offer better compensation and scientific support, to form collaborations with
large, established companies to support research, development and
commercialization research and development products than the Company.
Accordingly, there is no assurance that the Company will be successful in
signing definitive agreements to purchase technologies or to exercise the
agreements it already signed.
We Have No Operating History.
Our company's future operations will be subject to all the risks inherent in the
establishment of a developing enterprise and the uncertainties arising from the
absence of operating history and we are considered in a development stage. No
assurance can be given that we may be able to operate on a profitable basis.
There Is No Assurance That Our Future Research And Development Plans Will
Commence and There Is No Assurance That Our Future Research And Development
Plans Will Succeed.
The Company has not yet started its research and developments plans. There is no
assurance that the Company will succeed in establishing its research and
development plans and conducting its business operation. Our future operations
will be subject to obtaining sufficient science support, qualified and
experienced employees and success in the efficient organizing of the Company.
The success in operating our future research and development plans is
substantially uncertain. All the technologies that the Company is considering to
purchase or license are in very early stages of development. There are a lot of
potential risks and uncertainties regarding proving their scientific and
technological capabilities, as well as commercializing the technologies.
9
Competition In All The Fields That The Company Signed Term Sheets Or Agreements
Are Intense And Developments By Other Companies Could Render Our Products Or
Technologies Non-Competitive.
The biotechnology industry is highly competitive and subject to significant and
rapid technological change. Developments by other companies within the industry
could render our future research and development or technologies
non-competitive. Some of the research and development by these companies may be
more effective or have an entirely different approach or means of accomplishing
the desired effect than our future development. We expect technological
competition from biotechnology companies and academic research institutions to
increase over time.
Many competitors and potential competitors have substantially greater product
development capabilities and financial, scientific, marketing and human
resources than we do. Our competitors may succeed in developing products earlier
and obtaining regulatory approvals and patent protection for such products more
rapidly than we can.
Our Success Depends On Our Ability To Protect Our Proprietary Rights And Operate
Without Infringing Upon The Proprietary Rights Of Others.
We plan to protect our future technology by patent rights. Patent rights, in the
biotechnology area, are generally uncertain and involve complex legal and
factual questions. We do not know whether any of our future patent applications
will result in the issuance of any patents. Even issued patents may be
challenged, invalidated or circumvented. Patents may not provide a competitive
advantage or afford protection against competitors with similar technology.
Competitors or potential competitors may have filed applications for, or may
have received patents and may obtain additional and proprietary rights to
compounds or processes used by or competitive with ours. In addition, laws of
certain foreign countries do not protect intellectual property rights to the
same extent as do the laws of the United States or Canada.
Patent litigation is becoming widespread in the biotechnology industry and we
cannot predict how this will affect our research and development. If challenged,
our patents may not be held valid. We could also become involved in interference
proceedings in connection with one or more of our future patents or patent
applications to determine priority of invention. If we become involved in any
litigation, interference or other administrative proceedings, we will likely
incur substantial expenses and the efforts of our technical and management
personnel will be significantly diverted. In addition, an adverse determination
could subject us to significant liabilities or require us to seek licenses that
may not be available on favorable terms, if at all. We may be restricted or
prevented from manufacturing and selling our products in the event of an adverse
determination in a judicial or administrative proceeding or if we fail to obtain
necessary licenses.
Our Success Depends On Our Ability To Attract And Retain Collaborative Partners
Over Whom We Have Limited Control.
Our business will likely depend on our ability to enter into arrangements with
corporate and academic collaborators relating to the developing, testing,
manufacturing, marketing and commercialization of our products. Consequently,
our success depends upon our potential partners' ability to perform those tasks.
There can be no assurance that we will be able to establish necessary
arrangements on favorable terms, or at all, or that collaborative agreements
will be successful.
We May Not Be Able To Manage Our Growth Effectively.
Our future success will be highly dependent upon our ability to successfully
manage the expansion of our operations. Our ability to manage and support our
growth effectively will be substantially dependent on our ability to: implement
adequate improvements to financial and management controls, reporting and order
entry systems and other procedures and hire sufficient numbers of financial,
accounting, administrative, and management personnel. Our expansion and the
resulting growth in the number of our employees would result in increased
responsibility for both existing and new management personnel. We are in the
process of establishing and upgrading our financial accounting and procedures.
We may not be able to identify, attract, and retain experienced accounting and
financial personnel. Our future operating results will depend on the ability of
our management and other key employees to implement and improve our systems for
operations, financial control, and information management, and to recruit,
train, and manage its employee base. We may not be able to achieve or manage any
such growth successfully or to implement and maintain adequate financial and
management controls and procedures, and any inability to do so would have a
material adverse effect on its business, results of operations, and financial
condition.
10
Our Collaborations With Scientific Advisors And Academic Institutions May Be
Subject To Restriction And Change.
We plan on working with scientific advisors and academic collaborators who will
assist us in our ongoing research and development efforts. These scientists will
not be our employees and may have other commitments that limit their
availability to us. If a conflict of interest arises between their work for us
and their work for another entity, we may lose their services. In addition,
although we plan on our scientific advisors and academic collaborators signing
non-disclosure agreements, it is possible that valuable proprietary knowledge
may become publicly known which would compromise our competitive advantage.
Our Future Operations Are Contingent on Our Ability To Recruit Employees and We
Are Subject To Intense Competition For Skilled Personnel And The Loss Of Key
Personnel Or The Inability To Attract And Retain Additional Personnel Could
Impair Our Ability To Conduct Our Operations.
In the event we are able to obtain necessary funding, we expect to experience
growth in the number of employees and the scope of our operations. In
particular, we may hire additional scientists, project managers and
administrative personnel. Additionally, acquisitions could result in an increase
in employee headcount and business activity. Such activities could result in
increased responsibilities for management. We believe that our ability to
increase capability and to attract, train, and retain qualified technical, and
management personnel, will be a critical factor to our future success. We are
highly dependent on the principal members of our management and scientific
staff, especially Amnon Presler, our Chief Executive Officer, and Shay
Goldstein, M.D., the Chief Medical Officer of the Company. The loss of their
services might adversely impact the achievement of our objectives and the
continuation of existing collaborations.
Our Offices Are Located In Israel, Which Has Historically Experienced Military
And Political Unrest.
Our offices are located in Israel. As a result, we are directly influenced by
the political, economic and military conditions affecting Israel. Any major
hostilities involving Israel, or the interruption or curtailment of trade
between Israel and its present trading partners, could significantly harm our
business, operating results and financial condition.
Risks Relating to Our Current Financing Arrangement:
We Will Be Required To Seek Additional Means Of Financing.
On November 18, 2005, we entered into a financing arrangement involving the sale
of an aggregate of $750,000 principal amount of callable secured convertible
notes. The issuance is to be made in three installments, the first, of $250,000
was received upon signing the definitive investment agreements, the second in
the amount of $250,000 upon the filing of a registration statement and the third
in the amount of $250,000 upon the effectiveness of the registration statement.
However, we currently have no means to generate revenues from operations.
Accordingly, we will still be required to obtain additional private or public
financing including debt or equity financing and there can be no assurance that
such financing will be available as needed, or, if available, on terms favorable
to us. Any additional equity financing may be dilutive to stockholders and such
additional equity securities may have rights, preferences or privileges that are
senior to those of our existing common stock.
Furthermore, debt financing, if available, will require payment of interest and
may involve restrictive covenants that could impose limitations on our operating
flexibility. Our failure to successfully obtain additional future funding may
jeopardize our ability to continue our business and operations.
If we raise additional funds by issuing equity securities, existing stockholders
may experience a dilution in their ownership. In addition, as a condition to
giving additional funds to us, future investors may demand, and may be granted,
rights superior to those of existing stockholders.
11
There Are A Large Number Of Shares Underlying Our Callable Secured Convertible
Notes And Warrants That May Be Available For Future Sale And The Sale Of These
Shares May Depress The Market Price Of Our Common Stock.
As of March 23, 2006, we had 60,138,923 shares of common stock issued and
outstanding and callable secured convertible notes outstanding, and outstanding
warrants or an obligation to issue warrants to purchase 14,233,332 shares of
common stock and an obligation to issue options to purchase 5,689,085 shares of
common stock pursuant Employees/Consultants/Directors Stock Compensation Plan.
In addition, the number of shares of common stock issuable upon conversion of
the outstanding callable secured convertible notes may increase if the market
price of our stock declines. All of the shares, including all of the shares
issuable upon conversion of the notes and upon exercise of our warrants, may be
sold without restriction. The sale of these shares may adversely affect the
market price of our common stock.
The Continuously Adjustable Conversion Price Feature Of Our Callable Secured
Convertible Notes Could Require Us To Issue A Substantially Greater Number Of
Shares, Which Will Cause Dilution To Our Existing Stockholders.
Our obligation to issue shares upon conversion of our callable secured
convertible notes is essentially limitless. The following is an example of the
amount of shares of our common stock that are issuable, upon conversion of the
callable secured convertible notes (excluding accrued interest), based on the
average bid and ask prices as of March 23, 2006 as reported on
http://Bloomberg.com, with a 25%, 50% and 75% discount. The average bid and ask
price on such day was 0.25.
With Number of % of
% Below Price Per Discount of Shares Outstanding
Market Share 50% Issuable Stock
--------- ----------- ------------ ----------- -----------
25% 0.1875 0.0938 2,666,667 4%
50% 0.1250 0.0625 4,000,000 6%
75% 0.0625 0.0313 8,000,000 12%
As illustrated, the number of shares of common stock issuable upon conversion of
our secured convertible notes will increase if the market price of our stock
declines, which will cause dilution to our existing stockholders.
The Continuously Adjustable Conversion Price Feature Of Our Callable Secured
Convertible Notes May Encourage Investors To Make Short Sales In Our Common
Stock, Which Could Have A Depressive Effect On The Price Of Our Common Stock.
The callable secured convertible notes are convertible into shares of our common
stock at a 50% discount to the trading price of the common stock prior to the
conversion or at a price of $0.15, whichever is less. The significant downward
pressure on the price of the common stock as the selling stockholder converts
and sells material amounts of common stock could encourage short sales by
investors. This could place further downward pressure on the price of the common
stock. The selling stockholder could sell common stock into the market in
anticipation of covering the short sale by converting their securities, which
could cause the further downward pressure on the stock price. In addition, not
only the sale of shares issued upon conversion or exercise of notes, warrants
and options, but also the mere perception that these sales could occur, may
adversely affect the market price of the common stock.
The Issuance Of Shares Upon Conversion Of The Callable Secured Convertible Notes
And Exercise Of Outstanding Warrants May Cause Immediate And Substantial
Dilution To Our Existing Stockholders.
The issuance of shares upon conversion of the callable secured convertible notes
and exercise of warrants may result in substantial dilution to the interests of
other stockholders since the selling stockholders may ultimately convert and
sell the full amount issuable on conversion. Although the selling stockholders
may not convert their Callable Secured Convertible Notes and/or exercise their
warrants if such conversion or exercise would cause them to own more than 4.99%
of our outstanding common stock, this restriction does not prevent the selling
stockholders from converting and/or exercising some of their holdings and then
converting the rest of their holdings. In this way, the selling stockholders
could sell more than this limit while never holding more than this limit. There
is no upper limit on the number of shares that may be issued which will have the
effect of further diluting the proportionate equity interest and voting power of
holders of our common stock, including investors in this offering.
12
In The Event That Our Stock Price Declines, The Shares Of Common Stock Allocated
For Conversion Of The Callable Secured Convertible Notes May Not Be Adequate And
We May Be Required To File A Subsequent Registration Statement Covering
Additional Shares. If The Shares We Have Allocated And Are Registering Herewith
Are Not Adequate And We Are Required To File An Additional Registration
Statement, We May Incur Substantial Costs In Connection Therewith.
Based on our current market price and the potential decrease in our market price
as a result of the issuance of shares upon conversion of the Callable Secured
Convertible Notes, we have made a good faith estimate as to the amount of shares
of common stock that we are required to register and allocate for conversion of
the Callable Secured Convertible notes. As we do not currently have the required
amount of shares available, we may be required to file an additional
registration statement after we have increased our authorized common stock.
Accordingly, subject to obtaining an increase in our authorized shares of common
stock, we will allocate and register approximately 24,054,824 shares to cover
the conversion of the Callable Secured Convertible Notes and stock purchase
warrants.
If We Are Required For Any Reason To Repay Our Outstanding Callable Secured
Convertible Notes, We Would Be Required To Deplete Our Working Capital, If
Available, Or Raise Additional Funds. Our Failure to Repay the Callable Secured
Convertible Notes, If Required, Could Result In Legal Action Against Us, Which
Could Require The Sale Of Substantial Assets.
On November 18, 2005, we entered into a financing arrangement involving the sale
of an aggregate of $750,000 principal amount of callable secured convertible
notes and stock purchase warrants to buy 1,000,000 shares of our common stock.
The callable secured convertible notes are due and payable, with 8% interest,
three years from the date of issuance, unless sooner converted into shares of
our common stock. Although we currently have $250,000 callable secured
convertible notes outstanding, the investor is obligated to purchase additional
callable secured convertible notes in the aggregate amount of $500,000. In
addition, any event of default such as our failure to repay the principal or
interest when due, our failure to issue shares of common stock upon conversion
by the holder, our failure to timely file a registration statement or have such
registration statement declared effective, breach of any covenant,
representation or warranty in the Securities Purchase Agreement or related
convertible note, the assignment or appointment of a receiver to control a
substantial part of our property or business, the filing of a money judgments,
writ or similar process against us in excess of $50,000, the commencement of a
bankruptcy, insolvency, reorganization or liquidation proceeding against us and
the delisting of our common stock could require the early repayment of the
callable secured convertible notes, 130% times the sum of the principal amount,
plus the unpaid interest on the unpaid principal amount plus default Interest,
if any, or the highest number of shares of Common Stock issuable upon conversion
of the default sum. We anticipate that the full amount of the callable secured
convertible notes will be converted into shares of our common stock, in
accordance with the terms of the callable secured convertible notes. If we are
required to repay the callable secured convertible notes, we would be required
to use our limited working capital and raise additional funds. If we were unable
to repay the notes when required, the note holders could commence legal action
against us and foreclose on all of our assets to recover the amounts due. Any
such action would require us to curtail or cease operations.
We Are Currently Delinquent in Our Obligation to File A Registration Statement.
According to the financing agreement, the Company was obligated to file, on or
prior to thirty days from November 18, 2005, a registration statement, to
register the shares of common stock underlying the Notes and warrants issued to
the Investors. The Company has been delayed in its obligation and is currently
in default. As a result, the Company will have to pay penalties at a rate of 2%
of the outstanding amount of debentures for each month of delay. The penalties
can be paid in cash or at the Company's option, in shares of Common Stock priced
at the Conversion Price (as defined in the Notes) on such payment date.
As a consequence of the default, the holders of the Notes can require the early
repayment of the callable secured convertible notes in an amount of 130% times
the sum of the principal amount, plus the unpaid interest on the unpaid
principal amount plus default interest, if any, or the highest number of shares
of Common Stock issuable upon conversion of the default sum.
The estimated penalties amount is $29,597.
13
Risks Relating to Our Common Stock:
Our Common Stock Trades In A Limited Public Market, The NASD OTC Electronic
Bulletin Board; Accordingly, Investors Face Possible Volatility Of Share Price.
Our common stock is currently quoted on the NASD OTC Bulletin Board under the
ticker symbol SFIN.OB. As of March 23, 2006, there were approximately 60,138,913
shares of Common Stock outstanding, of which approximately 16,530,423 were
tradable without restriction under the Securities Act of 1933, as amended.
There can be no assurance that a trading market will be sustained in the future.
Factors such as, but not limited to, technological innovations, new products,
acquisitions or strategic alliances entered into by us or our competitors,
government regulatory action, patent or proprietary rights developments, and
market conditions for penny stocks in general could have a material effect on
the liquidity of our common stock and volatility of our stock price.
If We Fail To Remain Current On Our Reporting Requirements, We Could Be Removed
From The OTC Bulletin Board Which Would Limit The Ability of Broker-Dealers To
Sell Our Securities And The Ability Of Stockholders To Sell Their Securities In
The Secondary Market.
Companies trading on the OTC Bulletin Board, such as us, must be reporting
issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and
must be current in their reports under Section 13, in order to maintain price
quotation privileges on the OTC Bulletin Board. If we fail to remain current on
our reporting requirements, we could be removed from the OTC Bulletin Board. As
a result, the market liquidity for our securities could be severely adversely
affected by limiting the ability of broker-dealers to sell our securities and
the ability of stockholders to sell their securities in the secondary market.
Our Common Stock Is Subject To The "Penny Stock" Rules Of The SEC And The
Trading Market In Our Securities Is Limited, Which Makes Transactions In Our
Stock Cumbersome And May Reduce The Value Of An Investment In Our Stock.
The Securities and Exchange Commission has adopted Rule 15g-9 which establishes
the definition of a "penny stock," for the purposes relevant to us, as any
equity security that has a market price of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions. For
any transaction involving a penny stock, unless exempt, the rules require:
o That a broker or dealer approve a person's account for transactions
in penny stocks; and
o The broker or dealer receives from the investor a written agreement
to the transaction, setting forth the identity and quantity of the
penny stock to be purchased.
In order to approve a person's account for transactions in penny stocks, the
broker or dealer must:
o Obtain financial information and investment experience objectives of
the person; and
o Make a reasonable determination that the transactions in penny
stocks are suitable for that person and the person has sufficient
knowledge and experience in financial matters to be capable of
evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny
stock, a disclosure schedule prescribed by the Commission relating to the penny
stock market, which, in highlight form:
o Sets forth the basis on which the broker or dealer made the
suitability determination; and
o That the broker or dealer received a signed, written agreement from
the investor prior to the transaction.
Generally, brokers may be less willing to execute transactions in securities
subject to the "penny stock" rules. This may make it more difficult for
investors to dispose of our common stock and cause a decline in the market value
of our stock.
Disclosure also has to be made about the risks of investing in penny stocks in
both public offerings and in secondary trading, about the commissions payable to
both the broker-dealer and the registered representative, and current quotations
for the securities and the rights and remedies available to an investor in cases
of fraud in penny stock transactions. Finally, monthly statements have to be
sent disclosing recent price information for the penny stock held in the account
and information on the limited market in penny stocks.
14
Lack of Anti-Takeover Provisions
We do not currently have a shareholder rights plan or any anti-takeover
provisions in our Certificate of Incorporation or By-laws. Without any
anti-takeover provisions, there is no deterrent for a take-over of our Company,
which may result in a change in our management and directors
Item 2. Properties
The Company currently leases office space of 90 square meters at 23 Amindav
Street, Tel Aviv, Israel. The monthly rent is $1,000 per month indexed to the
Israeli CPI. The lease expires on July 31 2007.
Item 3. Legal Proceedings
No legal proceedings are pending against the Company or its officers and
directors, and the Company has no knowledge that any such proceedings are
threatened.
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 year covered by this report.
PART II
Item 5. Market for Company's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
A Market Information.
The Company's Common Stock trades on the Bulletin Board under the symbol
SFIN.OB. The following table sets forth the range of quarterly high and low
closing bid information of the common stock as reported on
http://finance.yahoo.com during the year ending December 31, 2004 and as
reported on http://Bloomberg.com during the year ending December 31, 2005:
----------------------------------------------------------------------
Financial Quarter Bid Information*
----------------------------------------------------------------------
Year Quarter High Bid Low Bid
----------------------------------------------------------------------
2005 Fourth Quarter $0.22 $0.22
----------------------------------------------------------------------
Third Quarter $0.50 $0.49
----------------------------------------------------------------------
Second Quarter $0.49 $0.49
----------------------------------------------------------------------
First Quarter $0.51 $0.35
----------------------------------------------------------------------
2004 Fourth Quarter $0.90 $0.40
----------------------------------------------------------------------
Third Quarter $0.14 $0.40
----------------------------------------------------------------------
Second Quarter $1.60 $0.70
----------------------------------------------------------------------
First Quarter $2.00 $0.60
----------------------------------------------------------------------
* The quotations do not reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.
B Holders.
On March 23, 2006, there were approximately 1,223 holders of record of the
Company's common stock.
C Dividends.
The Company has not declared or paid any cash dividends on its common stock nor
does it anticipate paying any in the foreseeable future. Furthermore, the
Company expects to retain any future earnings to finance its operations and
expansion. The payment of cash dividends in the future will be at the discretion
of its Board of Directors and will depend upon its earnings levels, capital
requirements, any restrictive loan covenants and other factors the Board
considers relevant. Also The Company has not declared or paid any cash dividends
on its preferred shares nor does it anticipate paying any in the foreseeable
future.
15
D Securities authorized for issuance under equity compensation plans.
On September 15, 2005, the board of directors resolved to adopt the 2005
Employees/Consultants/Directors Stock Compensation Plan (the "Plan"). In
connection with the adoption of the Plan, the Company reserved 10,600,000 shares
of common stock of the Company for the future exercise of options granted
pursuant to the Plan. The Company decided to grant an aggregate of 5,318,893
stock options to its directors for future services.
--------------------------------------------------------------------------------------------------------
Equity Compensation Plan Information
--------------------------------------------------------------------------------------------------------
Number of securities
remaining available for
future issuance under
Number of securities to Weighted-average equity compensation
be issued upon exercise exercise price of plans (excluding
of outstanding options, outstanding options, securities reflected
warrants and rights warrants and rights in column (a))
Plan category (a) (b) (c)
--------------------------------------------------------------------------------------------------------
Equity compensation
plans approved by
security holders N/A N/A N/A
--------------------------------------------------------------------------------------------------------
Equity compensation
plans not approved
by security holders
and not granted 5,318,893 $0.10 5,281,107
--------------------------------------------------------------------------------------------------------
Total 5,318,893 5,281,107
--------------------------------------------------------------------------------------------------------
These options were allocated as follows:
Shay Goldstein Chairman and the Chief Medical Officer - 2,659,446 options Tamar
Tzaban - Director and CFO - 2,127,557 options Gilad Yoeli - Director - 265,945
options Jean-Pierre Elisha Martinez - Director -265,945 options
No vesting occurs during the first year after the option grant; the options
commence vesting beginning in the second year in 36 quarterly parts.
On January 10, 2006 the Company increased the number of options awarded to two
of the board members: Gilad Yoeli - Director - 185,096 options Jean-Pierre
Elisha Martinez - Director -185,096 options
The purpose of the Stock Plan is to provide incentives to attract, retain, and
motivate eligible persons whose present and potential contributions are
important to the success of our Company by offering them an opportunity to
participate in our future performance through awards of options, restricted
stock and stock bonuses. The Stock Plan offers directors, officers and selected
key employees, advisors and consultants of the Company an opportunity to acquire
a proprietary interest in the success of the Company, to receive compensation,
or to increase such interest, by purchasing shares of the Company's common
stock. The Plan provides both for the direct award or sale of shares and for the
grant of options to purchase shares. Options granted under the Plan may include
non-statutory options, as well as incentive stock options ("ISO's") intended to
qualify under section 422 of the Internal Revenue Code of 1986, as amended, and
Section 102 or 3(i) of the Israeli Income Tax Ordinance.
The Stock Plan is to be interpreted and applied by a Compensation Committee of
our Board of Directors (the "Committee"), which currently consists of Gilad
Yoeli and Jean-Pierre Elisha Martinez. The Committee's principal
responsibilities are the following: interpret and apply the provisions of the
Stock Plan; determine when shares are to be awarded or offered for sale and when
Options are to be granted under the Plan; select the offerees and optionees;
determine the number of shares to be offered to each Offeree or to be made
subject to each option; prescribe the terms and conditions of each award or sale
of shares, including (without limitation) the purchase price, and to specify the
provisions of the Stock Purchase Agreement relating to such award or sale;
prescribe the terms and conditions of each option, including (without
limitation) the exercise price; determine how such option is to be classified
under the Internal Revenue Code or the Israeli Income Tax Ordinance, and to
specify the provisions of the Stock Option Agreement relating to such option; to
prescribe the consideration for the grant of each option or other right under
the Stock Plan and to determine the sufficiency of such consideration.
16
Stock Options and Awards may be granted only to employees or independent
contractors (including, officers and directors who are also employees) of the
Company or of an affiliate of the Company.
Each Stock Option Agreement shall specify the exercise price. The exercise price
under any option shall be determined by the Committee at its sole discretion,
except that the exercise price of an ISO shall not be less than 100 percent of
the fair market value of a share on the date of grant and the exercise price of
a non-statutory option shall not be less than 85 percent of the fair market
value of a share on the date of grant.
Each Stock Option Agreement shall specify the date when all or any installment
of the option is to become exercisable. The vesting of any option shall be
determined by the Committee at its sole discretion. A Stock Option Agreement may
provide for accelerated exercisability in the event of the optionee's death,
total and permanent disability or retirement or other events. The Stock Option
Agreement shall also specify the term of the option. The term shall not exceed
10 years from the date of grant. Subject to the preceding sentence, the
Committee at its sole discretion shall determine when an Option is to expire.
If an optionee's service to the Company terminates for any reason other than the
optionee's death, then such optionee's option(s) shall expire on the earliest of
the following: (a) the date it is scheduled to expire; (b) the date 90 days
after the termination of the Optionee's Service for any reason other than total
and permanent disability; or (c) the date twelve months after the termination of
the Optionee's Service by reason of total and permanent disability.
If an optionee dies while he or she is in service, then such Optionee's
Option(s) shall expire on the earlier of the following dates: (a) The date it is
scheduled to expire; or (b) the date twelve months after the optionee's death.
Any Shares issued upon exercise of an Option shall be subject to such special
forfeiture conditions and other transfer restrictions as the Committee may
determine. Such restrictions shall be set forth in the applicable Stock Option
Agreement and shall apply in addition to any general restrictions that may apply
to all holders of Shares.
Options issued under Section 102 of the Israeli Income Tax Ordinance shall be
subject to the receipt of any and all required approvals or permits from the
Israeli tax authorities. The Company is currently in the process of obtaining
such approvals.
E Recent Sales of Unregistered Securities; Use of Proceeds from Registered
Securities.
On November 18, 2005 the Company signed an agreement with four investors,
pursuant to which the Company issued $250,000 of convertible debentures (the
"Notes") due three years after issuance. The Notes bear interest at the rate of
8% per annum payable quarterly in cash. The Notes can be immediately convertible
into shares of the Company's common stock. The conversion price will be equal to
the lesser of: (i) $0.15 and (ii) the average of the lowest 3 intra-day trading
prices during the 20 trading days immediately prior to the conversion date
discounted by 50%. In addition, the Company will issue to the purchasers of the
Notes 333,334 warrants with an exercise price of $0.30 per share. The Notes and
Warrants were issued pursuant to Section 4(2) of the Securities Act of 1933, as
amended.
According to the agreement with the four investors, the Company was obligated to
file, on or prior to thirty days from November 18, 2005, a registration
statement, to register the shares of common stock underlying the Notes and
warrants issued to the Investors. The Company has been delayed in its obligation
and is currently in default. As a result, the Company will have to pay penalties
at a rate of 2% of the outstanding amount of debentures for each month of delay.
During July 2005 through December 2005, the Company issued an aggregate of
6,850,000 units to investors through an ongoing private placement of units (the
"Units") for $0.10 per Unit. Each Unit consists of one share of common stock,
one Class A warrant giving the holder the right to purchase one share of stock
at $1.00, which is exercisable for one year from the date of issuance, and one
Class B warrant giving the holder the right to purchase one share of stock for
$1.50, which is exercisable for 2 years from the date of issuance. The Company
also issued 100,000 units as an issuance fee. The Company received an aggregate
of $ 685,000 for units subscribed. The units were offered and issued pursuant to
Regulation S promulgated by the Securities and Exchange Commission. The Company
did not make any offers in the United States, each of the purchasers was outside
the United States and there were no selling efforts in the United States. In
addition, the Company issued 100,000 shares as an issuance fee.
17
During March 2005 through April 2005, we issued 14,900,000 shares of common
stock to the holders of subordinated convertible redeemable debentures that the
Company had issued in the years 2001 and 2002. This resulted in cancellation of
indebtedness in an aggregate of $119,200, which $117,710 was charged to
additional paid in capital.
On January 21, 2005, the Company received in cash a gross amount equal in the
aggregate to $ 37,369 and executed subscription agreements from 48 persons
relating to the purchase of an aggregate of 37,369,500 shares of common stock at
a per share purchase price of $0.001 per share. The shares were offered and
issued pursuant to Regulation S promulgated by the Securities and Exchange
Commission. The Company did not make any offers in the United States, each of
the purchasers were outside the United States and there were no selling efforts
in the United States.
There were no underwriters or broker-dealers involved in any of the foregoing
described private placements and therefore no underwriting discounts or
commissions were paid; the Company received the full gross proceeds of the
offering.
There were no other sales of unregistered securities during the fiscal years
ending December 31, 2005 and December 31, 2004.
F Purchases of equity securities by the issuer and affiliated purchasers.
None
Item 6. Management's Discussion and Analysis or Plan of Operation
A Plan of Operation.
Since April 15, 2005, the Company has been focusing on screening new
technologies in the life sciences and health care fields. On May 17, 2005, the
Company established an Israeli wholly owned subsidiary under the laws of the
State of Israel, called "Oriens Life Sciences Ltd. (the "Subsidiary"), to serve
as a platform for the Company to screen the Israeli life sciences and health
care industry and identify, analyze, and acquire or invest in technologies in
this field.
The Company is in the process of organizing in order to commence its business
activities, particularly to invest its efforts in executing the term sheets that
were signed. Also, the Company is raising funds in order to ensure it has the
capabilities to exercise the potential term sheets/agreements and to commence a
research and development program utilizing the funds it will raise.
During the fiscal year ended December 31, 2005, the Company signed 4 term sheets
to purchase technologies in the life science field. In due course, on January 4,
2006, the Company closed on a transaction contemplated by the Exclusive Patent
and Know How License Option Agreement dated December 28, 2005 with Matrix Pharma
Inc., a Delaware corporation ("Matrix"). Pursuant to the Agreement, the Company
acquired from Matrix an option to purchase an exclusive, world-wide license in
all of Matrix's intellectual property rights in its Thrombin inhibition
compounds. The option will expire on March 31, 2006. After the balance date the
Company agreed with Matrix to extend the option period to May 15, 2006.
On March 23, 2006, the Company entered into a term sheet with Resdevco Ltd, a
company incorporated under the laws of Israel ("Resdevco"). The term sheet sets
forth the principal terms of a proposed agreement between the Company and
Resdevco, pursuant to which Resdevco will grant the Company an exclusive,
worldwide license in Resdevco's Antioxidant salicylate compounds.
On March 27, 2006, the Company exercised its right to purchase certain
biological materials from Serapis for a purchase price of $100,000 plus a value
added tax (VAT). The purchase price was paid by the forgiveness of $29,906 (the
actual amount that was delivered to Serapis) of debt owed to the Company, and
the balance to be paid to Serapis in 12 equal monthly payments, with the first
payment on the signing date.
The Company intends to develop a technology that will assist and accelerate the
identification of new generation of lead compounds stimulating the activity of
muscarinic receptors, for the development of new therapies for variety of
diseases such as Alzheimer's disease, glaucoma, and over active bladder.
18
B Critical Accounting Policies And Estimates
Our financial statements and accompanying notes have been prepared in accordance
with generally accepted accounting principles in the United States of America.
The preparation of these financial statements requires our Management to make
estimates, judgments and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. We continually evaluate the accounting
policies and estimates we use to prepare the consolidated financial statements.
We base our estimates on historical experiences and assumptions believed to be
reasonable under current facts and circumstances. Actual amounts and results
could differ from these estimates made by Management. We do not participate in,
nor have we created, any off-balance sheet special purpose entities or other
off-balance sheet financing. In addition, we do not enter into any derivative
financial instruments for speculative purposes and use derivative financial
instruments primarily for managing our exposure to changes in interest rates.
Going Concern
As of December 31, 2005, we have cash on hand of approximately $294,348 which we
received from securities issuance. This amount is inadequate for us to
effectuate our planned activities during the next 12 months. Accordingly, we may
be unable to continue operations in the future as a going concern. Our plans to
deal with this uncertainty include raising additional capital or entering into a
strategic arrangement with a third party. There can be no assurance that our
plans can be realized. There can be no assurance that we will be able to obtain
additional financing if and when needed or that, if available, financing will be
on acceptable terms. Additional equity financings may be dilutive to holders of
our common stock and debt financing, if available, and may involve significant
payment obligations and covenants that restrict how we operate our business
Certain conditions raise substantial doubt about the Company's ability to
continue as a going concern beyond the next twelve (12) month period. As of
December 31, 2005 the Company had a shareholders' deficit of $3,103,260 and an
accumulated deficit of $7,160,889. Our balance sheet as of December 31, 2005
reflects total liabilities of $3,698,221. The Company needs to obtain additional
financing to fund payment of its obligations and to provide working capital for
operations.
D Off Balance Sheet Arrangements
None
E Financial Condition and Results of Operation.
In the fiscal year ending December 31, 2005, and 2004, the Company had no
revenues. There can be no assurance that we will generate revenues in the
future, or that we will be able to operate profitably in the future. The
Company's expenses in 2005 amounted to $2,928,819, and in 2004 was $124,828. The
reason for the increase in expenses was primarily due to the increased activity
and derivative liability relating to debentures and warrants that the Company
issued to finance its current activity.
F Adjustments
As part of the quarterly report for the nine months ended September 30, 2005,
the financial statements for the year ended December 31, 2004 were adjusted to
reflect the proper accounting treatment accorded to the terms of subordinated
convertible redeemable debentures that were issued in the years 2001 and 2002
(the "debentures") and to add to the accumulated deficit $14,293 as a result of
interest expense which should have been recorded for the fiscal year ended
December 31, 2003. The interest was waived by the debentures holders during the
third quarter of 2005, and as a result, the Company recognized additional gain
from cancellation of indebtedness of $14,293. Additionally, $323,282 was charged
to paid in capital and accumulated deficit in order to reflect a beneficial
conversion feature charge that should have been recorded when the debentures
were initially issued.
The Company concluded that since there was no material effect on the results of
operations and the balance sheet on the annual report for the fiscal year ended
December 31, 2004, a restatement was not necessary.
19
To reflect a correction in the number of shares issued and outstanding, the
Company restated the weighted average number of shares outstanding (basic and
diluted) as of the year ended December 31, 2004. The average number of shares
was restated from 557,249 to 659,518. This was not a material difference and
therefore for the year ended December 31, 2004 the restatement did not have a
material effect on the net income (loss) per share.
The following table summarizes the statement of operations data for the Company
for the years ended December 31, 2004 and December 31, 2005:
Year Ended Year Ended
December 31,2004 December 31,2005
----------------------------------------
$ $
Operating Expenses
Payroll and Related Expenses -- 144,600
Office & General Expenses 37,400 75,092
Professional Fees -- 304,984
Business Development Cost -- 40,324
Net Loss from Operations (37,400) (565,000)
Other Income (Expenses)
Income from Cancellation of Indebedtness 212,432
Gains from Sale of Securities 9,001
Exchange Rate Losses -- (11,734)
Interest Expenses 87,427 (5,001)
Interest Income -- 1,616
Amortization of debentures and
warrants discount (9,817)
Derivative Liabilities Expenses (2,560,316)
---------- -----------
Net Income (124,827) (2,928,819)
========== ===========
Revenues
For years 2004 and 2005, there were no revenues.
General and Administrative Expenses
For 2005, our general and administrative expenses were $565,000 as compared to
$37,400 for 2004. Our expenses increased mainly as a result of our efforts of
screening technologies in the life sciences field and as a result of the due
diligence procedures and the efforts invested in executing the signed term
sheets and progressing to definitive agreements. The main expenses in 2005
consisted of professional fees of $304,984 and payroll related expenses of
$144,600 that primarily related to salaries of our new management and benefit
expenses.
Business development costs consisted primarily of the payment of $15,000 to
Nanodiagnostic, a company that we signed a term sheet with. The parties did not
reach agreement and the contemplated transaction was terminated. Additionally,
the Company made a $6,072 loan to Cygnus to be repaid on the date of signing a
definitive agreement. The binding date was due, and the Company did not sign the
definitive agreement. In the event a definitive agreement is signed in the
future, Cygnus will be obligated to repay the loan
In 2005, the Company had a net operating loss of $565,000. In 2004, the Company
had a net operating loss of $37,400.
Other Income and Expenses
For the year 2005, we recognized indebtness income from cancellation of of
$212,432 as a result of the (a) write- off of $131,300 accounts payable to two
vendors who confirmed that the amount was not owed. (b) waiver of accrued
interest in the amount of $81,132 and (c) realized gains from securities that
the Company is holding for financing its current activity.
20
The following table presents the Company's other expenses:
2005
Exchange rate loss $ 11,734
Interest expenses convertible debentures 5,001
Amortization of debentures discount 9,817
Derivative Convertible Liability Expenses
Derivative liability expenses (warrants) 1,949,748
Derivative liability expenses (convertible debentures) 542,015
Derivative liability expenses (warrants debentures) 38,956
Penalties 29,597
----------------
Total derivative liability expenses $ 2,560,316
================
1. Interest expenses includes, $5,001 interest related to the debentures.
2. The Warrants that the Company issued presented at their fair value and
classified as liabilities, according to paragraphs 20 and 24 of EITF 00-19
"Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company's Own Stock,"
As a result of the terms of debentures the Company issued, and because
theoretically the debentures can be converted into a number of shares
that will exceed the company's authorized shares if the Company's market
price is reduced below 0.000569 (As of March 23, 2006 as reported on
http://Bloomberg.com, the average bid and ask price was 0.25). The Company
recorded a derivative liability expense of 1,949,749.
3. Expenses related to the debentures issued on November 18, 2005 include
$580,971 evaluation of the convertible debt at fair value.
4. $29,597 penalties allowance. According to the debentures terms, the
Company was obligated to file a registration statement on or prior to
thirty days from November 18, 2005, , to register the shares of common
stock underlying the notes and warrants issued to the investors. The
Company has been delayed in its obligation and is currently in default.
Liquidity and Capital Resources
The Company's cash and cash equivalents as of December 31, 2005 were $294,348
and the Company held $122,162 in securities, compared to none as of December 31,
2004. The increase in the cash and cash equivalents is a result of receiving
$685,000 in consideration for Units consisting of common stock and warrants and
$37,369 from shares issued in January 2005 and net amount of $190,000 from
debentures issuance. Net cash used in operating activities decreased mainly as a
result of an increase in the Company's business activity ,an increase in our
accounts payable and accrued expenses and acquisition of trading securities.
Such amounts are inadequate for us to effectuate our planned activities during
the next 12 months. Accordingly, we may be unable to continue operations in the
future as a going concern. Our plans to deal with this uncertainty include
raising additional capital or entering into a strategic arrangement with a third
party. There can be no assurance that our plans can be realized. There can be no
assurance that we will be able to obtain additional financing if and when needed
or that, if available, financing will be on acceptable terms. Additional equity
financings may be dilutive to holders of our common stock and debt financing, if
available, and may involve significant payment obligations and covenants that
restrict how we operate our business.
Certain conditions raise substantial doubt about the Company's ability to
continue as a going concern beyond the next twelve (12) month period. The
Company has an accumulated deficit as of December 31, 2005 of $7,160,888, and
needs to obtain additional financing to fund payment of its obligations and to
provide working capital for operations.
We currently have no revenues. The Company is not sure whether the proceeds
received from the private placements and additional capital that the Company is
planning to raise in the future will be sufficient to satisfy the Company's cash
requirements for the next twelve (12) months. We are in the process of
attempting to raise funds in order to have the capability of conducting research
and development activity. The Company intends to finance its operations by
private placements, stocks and debt issuance and financial arrangements. There
are currently no plans or arrangements regarding any of the foregoing.
21
As of December 31, 2005 we had a shareholders' deficit of $3,103,260 and an
accumulated deficit of $7,160,889. Our balance sheet as of December 31, 2005
reflects total liabilities of $3,698,221.
Item 7. Financial Statements
22
SAFETEK INTERNATIONAL, INC. AND SUBSIDIARY
Table of Contents
Report of Independent Registered Public Accounting Firm 24
Financial Statements: 25
Consolidated Balance Sheet 25
Consolidated Statements of Operations 26
Consolidated Statements of Changes in Stockholders' Deficit 27
Consolidated Statements of Cash Flows 28
Notes to Financial Statements 29
23
Report of Independent Registered Public Accounting Firm
The Board of Directors
Safetek International, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheet of Safetek
International, Inc. and Subsidiary as of December 31, 2005 and the related
consolidated statements of operations, changes in stockholders' deficit, and
cash flows for the years ended December 31, 2005 and 2004 and for the period
from April 16, 2005 through December 31, 2005 (development stage). These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purposes of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used an significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above, present
fairly, in all material respects, the financial position of Safetek
International, Inc. and Subsidiary as of December 31, 2005, and the results of
their operations and their cash flows for the years ended December 31, 2005 and
2004 and for the period from April 16, 2005 through December 31, 2005
(development stage) in conformity with accounting principles generally accepted
in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has experienced recurring net
operating losses. At December 31, 2005, the Company continues to experience a
working capital deficit and also has a stockholder deficit of $3,103,260. These
matters raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 2. The accompanying consolidated financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might result should
the Company be unable to continue as a going concern.
/s/ Sherb & Co., LLP
Boca Raton, Florida
April 14, 2005
24
SAFETEK INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Balance Sheet
December 31, 2005
ASSETS
Current Assets
Cash & Cash Equivalents $ 294,348
Trading Securities 122,162
Other Receivable 16,094
Prepaid Expenses 24,253
Other Current Assets 54,906
--------------
Total Current Assets 511,763
Available-For-Sale Securities 5,490
Property and Equipment, Net 15,247
Other 4,744
Debt Financing Cost, Net of Amortization 57,717
---------------
TOTAL ASSETS $ 594,961
===============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts Payable $ 89,918
Accrued Expenses 131,067
Accrued Payroll and Related Expenses 50,259
Loans Payable 69,647
Convertible Debentures, Net 6,911
Warrants, net 624
Derivative Liability - Convertible Debentures and Warrants 860,567
Derivative Liability - Warrants, Current Portion 1,096,059
--------------
Total Current Liabilities 2,305,052
Other
Derivative Liability - Warrants 1,160,769
Redeemable Convertible Preferred Shares
(4,648 shares, par value $ .0001,
redeemable prior to February 21, 2002 at
$50 per share)
50,000,000 shares authorized at December 31, 2005 232,400
--------------
Total Other Liabilities 1,393,169
---------------
TOTAL LIABILITIES 3,698,221
---------------
Stockholders' Deficit:
Common Stock, $.0001 Par Value Authorized
500,000,000 Shares, Issued and Outstanding
60,138,923 at December 31, 2005 6,014
Additional Paid in Capital 5,435,726
Accumulated Deficit Through April 15, 2005* (4,250,580)
Deficit Accumulated During the Development Stage (2,910,309)
Deferred Compensation (1,384,111)
--------------
Total Stockholders' Deficit (3,103,260)
---------------
TOTAL LIABILITIES & STOCKHOLDERS' DEFICIT $ 594,961
===============
*Commencement of development stage
25
SAFETEK INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Operations
Cumulative
for the
Period from
April 16,
2005*
Year Ended Year Ended Through
December December December 31,
31,2004 31,2005 2005
-------------------------------------------
Operating Expenses
Payroll and Related Expenses $ -- $ 144,600 $ 144,600
Office & General Expenses 37,400 75,092 71,282
Professional Fees -- 304,984 292,984
Business Development Cost -- 40,324 40,324
----------- ------------ ------------
Total Operaing Expenses (37,400) (565,000) (549,190)
----------- ------------ ------------
Loss from Operation (37,400) (565,000) (549,190)
----------- ------------ ------------
Other Income (Expenses)
Income from Cancellation of
Indebedtness -- 212,432 212,432
Gain from Securities 9,001 9,001
Exchange Rate Loss -- (11,734) (11,734)
Interest Expenses Convertible
Debentures 87,427 (5,001) (2,301)
Interest Income 1,616 1,616
Amortization of Convertible Debentures and
Warrants Discount (9,817) (9,817)
Derivative Liability Expenses (2,560,316) (2,560,316)
----------- ------------ ------------
Total Other Income (Expenses) -- (2,363,819) (2,361,119)
Net (Loss) $ (124,828) $ (2,928,819) $ (2,910,309)
=========== ============ ============
Net(Loss) Per Share
Basic & Diluted Per
Common Shares $ -- $ (0.06) $ (0.053)
----------- ------------ ------------
Weighted Average Number of
Shares Outstanding -
Basic and Diluted* 659,518 48,222,817 54,734,819
----------- ------------ ------------
*Commencement of development stage
26
SAFETEK INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statement of Changes in Stockholders' Deficit
Deficit
Common Stock Accumulated Accumulated
------------------------------------------------------------------------------------------
Deficit
Number Additional Through During the
of Par paid-In Deferred April 15, Development Stockholders'
Shares Value Capital Compensation 2005 Stage Deficit
------------------------------------------------------------------------------------------
Balance at December 31, 2003 382,472 $ 38 $3,382,520* $ $(4,107,242)* $ $ (724,684)*
==========================================================================================
Shares Issued for Services 17,000 2 20,398 -- -- -- 20,400
Shares Issued on Reverse Stock Split 240,069 24 (24) -- --
Shares Issued for Repayment of Loan
Due to Stockholder 100,000 10 119,990 -- -- -- 120,000
Net Loss for the Year -- -- -- -- (124,828) (124,827)
------------------------------------------------------------------------------------------
Balance as of December 31, 2004 739,541 74 3,522,884* -- (4,232,070)* -- (709,112)*
==========================================================================================
Shares Issued on January 21, 2005 37,369,500 3,737 33,633 -- -- -- 37,370
Shares Converted from Subordinated
Convertible Redeemable Debentures
on March 10, 2005 1,800,000 180 14,220 -- -- -- 14,400
Shares Converted from Subordinated
Convertible Redeemable Debentures
on April 8, 2005 13,100,000 1,310 103,490 -- -- -- 104,800
Shares Issued for Services 0n
April 14, 2005 179,000 18 161 -- -- -- 179
Shares Issued on Reverse Stock Split
April 27,2005 882 -- -- -- -- -- --
Shares and Warrants Issued on
August 10, 2005 1,850,000 185 184,815 -- -- -- 185,000
Shares Issued As Issuance Fee 100,000 10 9,990 -- -- -- 10,000
Issuance Fee -- -- (10,000) -- -- -- (10,000)
Warrants Fair Value -- -- (307,078) -- -- -- (307,078)
Shares and Warrants Issued on
December 1, 2005 2,500,000 250 249,750 -- -- -- 250,000
Shares and warrants issued on
December 13, 2005 2,500,000 250 249,750 -- -- -- 250,000
Deferred Compensation -- -- 1,384,111 (1,384,111) -- -- --
Net Loss for the Period -- -- -- - (18,510) (2,910,309) (2,928,819)
-----------------------------------------------------------------------------------------
Balance as of December 31, 2005 60,138,923 $ 6,014 $5,435,726 $(1,384,111) $(4,250,580) $(2,910,309) $(3103,260)
=========================================================================================
* Adjusted (see note 2)
27
SAFETEK INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Cash Flows
Period from
April 16,
For the year For the Year 2005*
Ended Ended Through
December December December 31,
31,2004 31,2005 2005
--------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss for the period $ (124,827) $(2,928,819) $(2,910,309)
Adjustment required to reflect the cash flows used in
operating activities
Depreciation -- 1,228 1,228
Stock Issued for Services 20,400 179 179
Income from Cancellation of Indebtedness -- (212,432) (212,432)
Amortization of Prepaid D&O Insurance -- 30,581 30,581
Non Cash Interest Expenses 87,427 5,001 5,001
Debentures Derivative Liability Expenses -- 2,560,316 2,560,316
Amortization of Debentures and
Warrants Discount -- 9,817 9,817
Other -- (4,256) (4,256)
Changes in Assets and Liabilities
Increase in Trading Securities -- (117,906) (117,906)
(Increase) in Prepaid Expenses -- (54,834) (54,834)
(increase)in Account Receivable -- (16,094) (16,094)
Increase in Account Payable 10,000 42,342 36,342
Increase in Accrued Expenses -- 128,767 126,067
Increase in Accrued Payroll and
Related Expenses -- 50,263 50,263
------------ ------------- -----------
Net Cash Used in Operating Activities (7,000) (505,847) (496,037)
------------ ------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Property and Equipment -- (16,475) (16,475)
Advance payment to Matrix -- (25,000) (25,000)
Loan to Serapis -- (29,906) (29,906)
Other Long Term Assets -- (4,744) (4,744)
Available-For-Sale Securities -- (5,490) (5,490)
------------ ------------- ------------
Net Cash Used in Investing Activities -- (81,615) (81,615)
------------ -------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceed from Issuance of Shares
and Warrants, Net of Issuance Expenses 722,370 685,001
Proceeds from Issuance of Debentures,
Net of Issuance Expenses 190,000 190,000
Payments on Debentures (15,827) --
Proceeds from Loans Payable 7,000 --
Payments on Loan Payable (14,733) (3,001)
------------ ------------- -----------
Net Cash Provided by Financing Activities 7,000 881,8110 872,000
------------ ------------- -----------
INCREASE IN CASH AND CASH EQUVALENTS -- 294,348 294,348
BALANCE OF CASH AND CASH EQUIVALENTS
AT THE BEGINNING OF YEAR -- -- --
------------ ------------- -----------
BALANCE OF CASH AND CASH EQUIVALENTS
AT THE END OF YEAR -- 294,348 294,348
------------ ------------- -----------
28
SAFETEK INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: ORGANIZATION AND DESCRIPTION OF BUSINESS
Safetek International, Inc. (the "Company") was incorporated in April
1988 under the name Theoretics, Inc. The Company reorganized in May
2001 for the purpose of providing embryonic companies with good
concepts and promising patented ideas. During the years 2002-2004 the
Company did not have any business activity.
As of April 15, 2005, Dr. Goldstein was appointed as the Company's
Chairman, Chief Executive Officer and Secretary, and since then the
Company has been focusing on screening new technologies in the life
sciences and health care fields. On May 17, 2005, the Company
established an Israeli wholly owned subsidiary under the laws of the
State of Israel, called "Oriens Life Sciences Ltd. (the "Subsidiary") ,
to serve as a platform for the Company to screen the Israeli life
sciences and health care industry and identify, analyze, and acquire or
invest in technologies in this field.
In accordance with Financial Accounting Standards Board (FASB) No. 7,
the Company is considered a development stage company, beginning on
April 16, 2005, the date it commenced with its new business activity.
During the fiscal year ended December 31, 2005, the Company signed 4
term sheets to purchase technologies in the life science field. In due
course, on January 4, 2006, the Company closed on a transaction
contemplated by the Exclusive Patent and Know How License Option
Agreement dated December 28, 2005 with Matrix Pharma Inc., a Delaware
corporation ("Matrix"). Pursuant to the Agreement, the Company acquired
from Matrix an option to purchase an exclusive, world-wide license in
all of Matrix's intellectual property rights in its Thrombin inhibition
compounds. The option will expire on March 31, 2005. After the balance
date the Company signed an extension agreement with Matrix (see also
note 18)
On March 23, 2006, the Company entered into a term sheet with Resdevco
Ltd, a company incorporated under the laws of Israel ("Resdevco"). The
term sheet sets forth the principal terms of a proposed agreement
between the Company and Resdevco, pursuant to which Resdevco will grant
the Company an exclusive, worldwide license in Resdevco's Antioxidant
salicylate compounds. (See also note 18)
The Company currently invests its efforts in exercising at least one or
more term sheet and in negotiations to acquire or invest in other
technologies and in raising funds in order to establish the potential
term sheets/agreements.
As of December 31, 2005, the Company has an accumulated deficit of
$7,160,889. Our prospects must therefore be evaluated in light of the
problems, expenses, delays and complications associated with the
financial situation of the Company. The Company is in the process of
raising funds to finance its activities, including without limitation,
the completion of the above described prospective transactions, and
other potential technology purchases. The Company requires funds in
order to finance its current activities and in order to begin the
development of these technologies if and when the definitive agreements
will be executed.
29
SAFETEK INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTING PRINCIPLES
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles ("GAAP") in the United
States of America ("U.S. GAAP").
GOING CONCERN
As of December 31, 2005, we have cash on hand of approximately $294,348
which we received for securities issuance. This amount is inadequate
for us to effectuate our planned activities during the next 12 months.
Accordingly, we may be unable to continue operations in the future as a
going concern. Our plans to deal with this uncertainty include raising
additional capital or entering into a strategic arrangement with a
third party. There can be no assurance that our plans can be realized.
There can be no assurance that we will be able to obtain additional
financing if and when needed or that, if available, financing will be
on acceptable terms. Additional equity financings may be dilutive to
holders of our common stock and debt financing, if available, and may
involve significant payment obligations and covenants that restrict how
we operate our business.
Certain conditions raise substantial doubt about the Company's ability
to continue as a going concern beyond the next twelve (12) month
period. As of December 31, 2005 the Company had stockholders' deficit
of $3,103,260 and an accumulated deficit of $7,160,889. Our balance
sheet as of December 31, 2005 reflects total liabilities of $3,698,221.
The Company needs to obtain additional financing to fund payment of its
obligations and to provide working capital for operations.
USE OF ESTIMATES
The preparation of these financial statements requires our management
to make estimates, judgments and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses. We continually
evaluate the accounting policies and estimates we use to prepare the
consolidated financial statements. We base our estimates on historical
experiences and assumptions believed to be reasonable under current
facts and circumstances. Actual amounts and results could differ from
these estimates made by Management. We do not participate in, nor have
we created, any off-balance sheet special purpose entities or other
off-balance sheet financing. In addition, we have not and do not
anticipate entering into any derivative financial instruments for
speculative purposes or use derivative financial instruments primarily
for managing our exposure to changes in interest rates. Significant
estimates include the useful life of property and equipment and the
fair value of derivative liabilities.
ADJUSTMENTS/RESTATEMENT
As part of the quarterly report for the nine months ended September 30,
2005, the financial statements for the year ended December 31, 2004
were adjusted to reflect the proper accounting treatment accorded to
the terms of subordinated convertible redeemable debentures that were
issued in the years 2001 and 2002 (the "debentures") to add to the
accumulated deficit $14,293 as a result of interest expense which
should have been recorded for the fiscal year ended December 31, 2003.
The interest was waived by the debentures holders during the third
quarter of 2005, as a result, the Company recognized additional gain
from cancellation of indebtedness of $14,293. $323,282 was charged to
paid in capital and accumulated deficit in order to reflect a
beneficial conversion feature charge that should have been recorded
when the debentures were initially issued.
30
SAFETEK INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
The Company concluded that since there was no material effect on the
results of operations and the balance sheet on the annual report for
the fiscal year ended December 31, 2004, a restatement was not
necessary.
To reflect a correction in the number of shares issued and outstanding,
the Company restated the weighted average number of shares outstanding
(basic and diluted) as of the year ended December 31, 2004. The average
number of shares was restated from 557,249 to 659,518. This was not a
material difference and therefore for the year ended December 31, 2004
the restatement did not have a material effect on the net income (loss)
per share.
DEVELOPMENT STAGE COMPANY
In accordance with Financial Accounting Standards Board (FASB) No. 7,
the Company is considered a development stage company, beginning on
April 16, 2005, the date it commenced with its new business activity.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements
of the Company and its subsidiary. All material inter-company balances
and transactions have been eliminated in consolidation.
FUNCTIONAL CURRENCY
The currency of the primary economic environment in which the
operations of the Company and its subsidiary are conducted is the US
dollar. A significant part of the Company's capital expenditures and
most of its financing is in dollars. Most of the Company's expenses
incurred in dollars and all intercompany balances are denominated in
dollars. In addition, a substantial portion of the subsidiary's
expenses are incurred in dollars. Thus, the functional currency of the
Company and its subsidiary is the US dollar.
Transactions and balances originally denominated in dollars are
presented at their original amounts. Balances in foreign currencies are
translated into dollars using historical and current exchange rates for
non-monetary and monetary balances, respectively. For foreign
transactions and other items reflected in the statements of operations,
the following exchange rates are used: (1) for transactions - exchange
rates at transaction dates or average rates and (2) for other items
(derived from non-monetary balance sheet items such as depreciation) -
historical exchange rates. The resulting transaction gains or losses
are carried to financial income or expenses, as appropriate.
31
SAFETEK INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments, which include
short-term bank deposits (up to three months from date of deposit) that
are not restricted as to withdrawal or use, to be cash equivalents.
INVESTMENTS IN SECURITIES
The Company and its subsidiary account for securities in accordance
with Statement of Financial Accounting Standard No. 115, "Accounting
for Certain Investments in Debt and Equity Securities"
Securities that are bought and held principally for the purpose of
selling them in the near term shall be classified as trading
securities. Investments not classified as trading securities shall be
classified as available-for-sale securities.
Unrealized holding gains and losses for trading securities shall be
included in earnings. Unrealized holding gains and losses for
available-for-sale securities shall be excluded from earnings and
reported in other comprehensive income until realized except in hedge
transactions.
PREPAID EXPENSES
Prepaid expenses included are amortized over the service and contract
period.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated by the
straight-line method over the estimated useful lives of the assets.
The useful lives of property and equipment for purposes of computing
depreciation are:
Years
-------
Computers and peripheral equipment 3
Leashold Improvements 2
Office furniture and equipment 7
Website 2
OTHER LONG TERM ASSETS
Other long term assets include deposits on leased property that will be
applied toward the last three months of the three year leasing period.
DEBENTURES
The Company accounts for debentures that were issued in accordance with
APB 14, SFAS 133 and EITF 00-19. Per APB 14, when Warrants are
detachable from the debt instrument, and the warrants are used as
security for the debt instrument, the proceeds from the sale of the
debt instrument and the detachable warrants should be allocated between
the warrants and the debt instrument.
Paragraph 12 of Statement of Financial Accounting Standard No. 133
provides that in the case of contracts that do not in their entirety
meet the definition of a derivative instrument such as bonds, insurance
policies, and leases, any embedded derivative instruments shall be
separated from the host contract and accounted for as a derivative
instrument.
32
SAFETEK INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
Paragraph 11(a) of Statement of Financial Accounting Standard No. 133
provides that contracts issued or held by a reporting entity that are
both (1) indexed to its own stock and (2) classified in stockholders'
equity in its statement of financial position, shall not be considered
derivative instruments for purposes of this statement.
EITF Issue No. 00-19, "Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company's Own Stock,"
provides guidance in determining whether an embedded derivative which
is indexed to its own stock would be classified in stockholders' equity
in accordance with paragraph 11(a) of Statement of Financial Accounting
Standard No. 133 or if it was freestanding. EITF Issue No. 00-19
excludes from its classification requirements "conventional
instruments". Such instruments are defined in EITF 05-2 as: instruments
that provide the holder with an option to convert into a fixed number
of shares (or equivalent amount of cash at the discretion of the
issuer) for which the ability to exercise the option is based on the
passage of time or a contingent event should be considered
"conventional" for purposes of applying Issue 00-19. Instruments that
contain "standard" antidilution provisions would not preclude a
conclusion that the instrument is convertible into a fixed number of
shares. Standard antidilution provisions are those that result in
adjustments to the conversion ratio in the event of an equity
restructuring transaction (as defined in the glossary of Statement
123(R) 2 ) that are designed to maintain the value of the conversion
option.
WARRANTS
The Warrants that the Company issued are presented at their fair value
and classified as liabilities, according to paragraphs 20 and 24 of
EITF 00-19 "Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in, a Company's Own Stock".
As a result of the terms of the debentures that the Company issued and
since theoretically the debentures can be converted into a number of
shares that will exceed the company's authorized shares if the
Company's market price falls below 0.000569. (As of March 23, 2006 as
reported on http://Bloomberg.com, the average bid and ask price was
0.25). All convertible instruments of the Company including warrants
(but excluding employee stock options) are accounted as derivative
liabilities.
INCOME TAX
The Company and its subsidiary account for income taxes in accordance
with Statement of Financial Accounting Standard No. 109, "Accounting
for Income Taxes". This Statement requires the use of the liability
method of accounting for income taxes, whereby deferred tax asset and
liability account balances are determined based on the 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 and
its subsidiary provide a valuation allowance, if necessary, to reduce
deferred tax assets to their estimated realizable value.
33
SAFETEK INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
BASIC AND DILUTED NET LOSS PER SHARE
Basic and diluted net losses per common share are presented in
accordance with FAS No. 128 "Earning per share" ("FAS 128"), for all
periods presented. Outstanding warrants have been excluded from the
calculation of the diluted loss per share because such securities have
an anti-dilutive effect for all periods presented. The total number of
shares of common stock outstanding excluded 19,922,417 warrants and
options. In addition, 3,333,333 , shares to be exercise into the
Company Common stock by converting debentures that were issued and
1,000,000 shares upon a default event (calculated according the market
price as of December 31 2005) for the year 2005. After the balance date
the company also issued 370,192 options to employees.
STOCK BASED COMPENSATION
In December 2004, the Financial Accounting Standards Board ("FASB")
issued the revised Statement of Financial Accounting Standards ("FAS")
No. 123, "Share-Based Payment" (FAS 123R), which addresses the
accounting for share-based payment transactions in which the Company
obtains employee services in exchange for (a) equity instruments of the
Company or (b) liabilities that are based on the fair value of the
Company's equity instruments or that may be settled by the issuance of
such equity instruments. The Statement will be effective as of the
beginning of the first interim or annual reporting period that begins
after December 15, 2005, for small business issuers.
The Company decided to adopt FAS 123R and to reflect the fair value of
the options granted to employees during the year 2005.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
1. In December 2004, the Financial Accounting Standards Board
("FASB") issued the revised Statement of Financial Accounting
Standards ("FAS") No. 123, Share-Based Payment (FAS 123R), which
addresses the accounting for share-based payment transactions in
which the Company obtains employee services in exchange for (a)
equity instruments of the Company or (b) liabilities that are
based on the fair value of the Company's equity instruments or
that may be settled by the issuance of such equity instruments.
This Statement eliminates the ability to account for employee
share-based payment transactions using APB Opinion No. 25,
Accounting for Stock Issued to Employees, and requires instead
that such transactions be accounted for using the grant-date fair
value based method. This Statement will be effective as of the
beginning of the first annual reporting period that begins after
December 15, 2005, for small business issuers (October 1, 2006 for
the Company). Early adoption of FAS 123R is encouraged.
2. On June 7, 2005, FASB issued Statement No. 154, "Accounting
Changes and Error Corrections, a replacement of APB Opinion No.
20, Accounting Changes, and Statement No. 3, Reporting Accounting
Changes in Interim Financial Statements" ("SFAS No. 154"). SFAS
No. 154 changes the requirements for the accounting for, and
reporting of, a change in accounting principle. Previously, most
voluntary changes in accounting principles were required to be
recognized by way of a cumulative effect adjustment within
34
SAFETEK INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
net income during the period of the change. SFAS No. 154 requires
retrospective application to prior periods' financial statements,
unless it is impracticable to determine either the period-specific
effects or the cumulative effect of the change. SFAS No. 154 is
effective for accounting changes made in fiscal years beginning
after December 15, 2005; however, SFAS No. 154 does not change the
transition provisions of any existing accounting pronouncements.
The Company does not believe adoption of SFAS No. 154 will have a
material effect on its consolidated financial position, results of
operations or cash flows.
3. In June, 2005 the Emergency Issue Task Force (EITF), issued EITF
05-2 "The Meaning of "Conventional Convertible Debt Instrument" in
Issue No. 00-19".
The Task Force concluded that that the exception to the
requirements of paragraphs 12-33 of Issue 00-19 for "conventional
convertible debt instruments" should be retained and, instruments
that provide the holder with an option to convert into a fixed
number of shares (or equivalent amount of cash at the discretion
of the issuer) for which the ability to exercise the option is
based on the passage of time or a contingent event should be
considered "conventional" for purposes of applying Issue 00-19.
The task force also reached the conclusion that convertible
preferred stock with a mandatory redemption date may qualify for
the exception included in paragraph 4 of Issue 00-19 if the
economic characteristics indicate that the instrument is more akin
to debt than equity.
4. On September 15, 2005 Emergency Issue Task Force (EITF), issued
EITF 05-4: " The Effect of a Liquidated Damages Clause on a
Freestanding Financial Instrument Subject to Issue No. 00-19".The
Task Force discussed (a) whether a registration rights penalty
meets the definition of a derivative and (b) whether the
registration rights agreement and the financial instrument to
which it pertains should be considered as a combined freestanding
instrument or as separate freestanding instruments. Additionally,
some Task Force members expressed a preference for evaluating a
liquidated damages provision based on the probable amount that the
issuer would pay rather than the maximum amount. The Task Force
was not asked to reach a consensus on this Issue. The Task Force
asked the FASB staff to obtain additional information about how
entities currently evaluate and account for registration rights
agreements in practice. Additionally, the Task Force asked the
FASB staff to analyze registration rights penalties in comparison
with other penalties that do not meet the definition of a
derivative.
NOTE 3: TRADING SECURITIES
Consist of mutual funds that primarily hold securities indexed to
fluctuations in the U.S. dollar.
35
SAFETEK INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
NOTE 4: PREPAID EXPENSES AND OTHER CURRENT ASSETS
2005
PREPAID EXPENSES
D&O insurance $ 23,919
Other Prepaid Insurance 334
------------
Total $ 24,253
============
OTHER CURRENT ASSETS
Loan to Matrix (1) $ 25,000
Loan to Serapis (2) 29,906
------------
Total $ 54,906
============
1. Other current assets consist of $25,000 advance payment to Matrix
Pharma Inc. and Matrix Advanced Solutions Ltd. (Matrix) with whom
the Company signed a term sheet. Said advance enabled the Company
to obtain an option to an exclusive patent and know how license to
Thrombin Inhibitor compounds (as described below). It was also
agreed that Matrix shall return to the Company the advance in the
event that a definitive agreement will not be signed before
October 31, 2006. On January 4, 2006 a definitive agreement was
signed as disclosed in details in note 18.
2. On November 30, the Company signed an extension to the term sheet
with Serapis Technologies Inc. and Serapis Biotech Ltd (
"Serapis"). The extension expires on May 31, 2006. As part of the
extension, the Company was obligated to give Serapis a bridge loan
of $29,906. According to the extension letter, if a definitive
agreement is not signed within the extension period, the loan will
be refunded to the Company, within two business days following the
Company's written request. In order to secure the bridge loan,
Serapis granted the Company a first priority charge on biological
materials.( see also note 18).
NOTE 5: PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, 2005:
Useful Life 2005
----------- ----
Computer Equipment & Hardware 3 $ 4,475
Office Furniture and Equipment 7 4,715
Leasehold Improvement 2 2,854
Website 2 4,431
=========
Total 16,475
Accumulated depreciation: (1,228)
---------
Property and Equipment, Net $ 15,247
=========
Depreciation expense totaled $1,228 in 2005.
36
SAFETEK INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
NOTE 6: AVAILABLE FOR SALE SECURITIES
Available for sale securities consist of Israeli's government bonds.
This securities account is used as a security for the Subsidiary two
year rent agreement (see note 14).
NOTE 7: DEBT FINANCING COSTS, NET
Debt financing costs of $60,000 related to the debentures that The
Company issued on November 18, 2005 are being amortized over the three
years debentures term. During 2005, the Company expensed $2,283.
NOTE 8: ACCOUNTS PAYABLE
As of December 31, 2005, accounts payable includes $37,397 that was
incurred in the years 2001 and 2002. To the Company's knowledge no
claims have been made against the Company with respect with those
debts.
In July 2005, the Company was informed by one of its vendors that it
does not owe the vendor any monies. Accordingly, the Company wrote- off
$100,000 of said account payable balance.
The Company was also informed by another vendor that it does not owe
the vendor any monies. Accordingly, the Company wrote- off $31,000 of
said account payable balance.
NOTE 9: ACCRUED EXPENSES
Accrued expenses is primarily comprised of $70,000 of accounting fees,
$34,371other advisory and vendors expenses and $26,696 legal fees.
NOTE 10: LOANS PAYABLE
The Company has a total of $69,647 of loan payable as of December 31,
2005 which is due on demand and is non-interest bearing. In October
2005, the Company offered the lender the right to convert its loan into
units according the terms the Company offered to investors under the
terms of the last private placement. The conversion was not performed.
As of March 2006, the rights in the loan were endorsed to another
holder under the same terms.
NOTE 11: SUBORDINATED CONVERTIBLE REDEEMABLE DEBENTURES (2001 AND 2002)
The subordinated convertible redeemable debentures were issued in the
years 2001 and 2002, with a due date in May 2003. The original terms of
the debentures included; 8% annual interest payments and entitlement to
convert the interest and the principal amount to shares of common stock
at a price equal to 70% of the lowest closing bid price.
37
SAFETEK INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
As of August, 2004, the rights in an aggregate amount of $119,200 of
principal were endorsed by the prior debenture holder to a group of 9
investors in consideration for $30,000. None of the investors are
affiliated with the Company; although one of the new investors is a
company under the control of the prior debenture holder. When the
debentures holders could convert the debentures according to its
original terms, they had the right to convert the debentures to
approximately 26% of the issued and outstanding shares of the Company.
According to the terms of the modification executed between the Company
and each of the 9 debenture holders in February and March 2005, the
conversion price of the outstanding principal and accrued interest due
under the debentures was modified to $0.008 per share.
This modification was done in order to maintain the debentures holders'
rights in the Company's capital that were significantly diluted as a
result of a 1 for 1000 reverse stock split in August 2004 (and the
market price of the Company's stock was not proportionately adjusted)
and the issuances of shares in January 2005.
During the three month period ended March 31, 2005, $30,227 was paid on
the debentures in cash and the issuance of 1,800,000 shares of common
stock. The balance of $104,800 was paid on April 8, 2005 with the
issuance of 13,100,000 shares of common stock. As of said date, the
debentures were fully paid.
As detailed in note 2, the Company adjusted its financial reports in
order to present a Beneficial Conversion Feature (BCF) charge regarding
the issuance of the debentures in 2001 and 2002, according to generally
accepted accounting principles in the U.S.
As of December 31, 2005, these debentures were paid in full and are not
reflected in the Company's balance sheet.
NOTE 12: DEBENTURES AND EMBEDDED DERIVATIVE INSTRUMENTS (2005)
1. On November 18, 2005 the Company signed an agreement with 4
investors (together, the "Investors") to issue an aggregate of
$750,000 as convertible debentures (the "Notes") due three years
after issuance. The issuance is to be made in three installments,
the first, in the amount of $250,000 was received upon signing the
definitive investment agreements, the second in the amount of
$250,000 upon the filing of a registration statement covering the
shares underlying the Notes and the warrants referred to below,
and the third in the amount of $250,000 upon the effectiveness of
the registration statement.
The Notes bear interest at the rate of 8% per annum payable
quarterly in cash. Interest on delay payments shall be 15%
annually. No interest shall be due and payable for any month in
which the Trading Price is greater than $0.1875 for each Trading
Day of the month.
The Notes can be immediately convertible into shares of the
Company's common stock. The conversion price will be equal to the
lesser of: (i) $0.15 and (ii) the average of the lowest 3
intra-day trading prices during the 20 trading days immediately
prior to the conversion date discounted by 50%.
38
SAFETEK INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
In addition, the Company issued to the Investors 333,334 warrants
with an exercise price of $0.3 per share. The Company will issue
to the investors an additional 333,333 warrants while receiving
the second amount of $250,000 and 333,334 warrants while receiving
the third amount of $250,000 upon the effectiveness of the
registration statement. All the Company assets secured the debt.
According to the agreement, the Company was obligated to file, on
or prior to thirty days from November 18, 2005, a registration
statement, to register the shares of common stock underlying the
Notes and warrants issued to the Investors. The Company has been
delayed in its obligation and is currently in default. As a
result, the Company will have to pay penalties at a rate of 2% of
the outstanding amount of debentures for each month of delay. The
penalties can be paid in cash or at the Company's option, in
shares of Common Stock priced at the Conversion Price (as defined
in the Notes) on such payment date. The Company announced the
Debentures holders of the delay in filing.
At a default event the Holders of a majority of the aggregate
principal amount of the outstanding Notes issued have got the
option to ask for immediate due and payable and the Company shall
pay to the Holders, an amount equal to the greater of (i) 130%
times the sum of the outstanding principal amount, plus accrued
and unpaid interest on the unpaid principal amount, plus Default
Interest, if any, and/or any other amounts owed to the Holders
under the Registration Rights Agreement or (ii) the highest number
of shares of Common Stock issuable upon conversion of or otherwise
pursuant to such Default Sum in accordance with the Trading Day
immediately preceding the Mandatory Prepayment Date as the
"Conversion Date" for purposes of determining the lowest
applicable Conversion Price, unless the Default Event arises as a
result of a breach in respect of a specific Conversion Date in
which case such Conversion Date shall be the Conversion Date),
multiplied by (b) the highest Closing Price for the Common Stock
during the period beginning on the date of first occurrence of.
Because of the delay in filing the registration statement the
Company is also in a delay in declaration of effectiveness by the
Securities and Exchange Commission. The Company intends to file
the registration statement at the beginning of April, 2006.
The Company applied the provisions of APB 14 and allocated the
proceeds to the detachable warrants and the convertible notes
based on their respective fair values. The Company further
evaluated the convertible notes to determine if they contain
derivatives that warrant bifurcation. The Company concluded that
in accordance with EITF 05-2 the convertible debentures do not
meet the definition of conventional convertible debt instruments
for purposes of evaluating the existence of embedded derivatives
under EITF 00-19. The Company further concluded that as a
freestanding derivative, the embedded feature would not be
classified as equity under EITF 00-19, and as such, determined
that the embedded feature needs to be bifurcated from the host
contract.
In addition, the Company determined that the liquidated damages
clause contained in the registration rights agreement needs to be
bifurcated as well. The clause requires the Company to pay 2% per
month of the outstanding principal amount of the debentures, in
cash, to the debenture holders in the event that a registration
statement covering the shares underlying the convertible
debentures is not declared effective within 120 days of the date
the debentures were issued. The probability that in such occur the
holders will announce on a default event is remote since the
economical motivation to receive registrant shares.
39
SAFETEK INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
The Company also determined that a contingent interest payment
feature exists and needs to be bifurcated from the host
instrument. That feature exempts the Company from having to pay
the stated interest on the debentures if the stock price reaches a
price of $0.1875.
In order to evaluate the embedded derivatives, the Company
estimated the fair market values using the Binomial model and the
Black - Scholes model.
Since the fair value of the embedded featured exceeded the value
of the debt and because the Company is in default, the Company
presented the excess derivative liability separate from the
debentures. The Company also made an allowance of $29,597, to
reflect the penalties it should pay because of not filing on time
the registration statement as disclosed above.
The Company recorded the initial value of the detachable warrants
at $20,691. Pursuant to EITF No. 00-19 and EITF No. 05-2, on the
issuance date. The Company recorded a derivative liability for the
fair value of those warrants since there is a possibility that the
Company will be required to issue more shares then are authorized.
The Company remeasured the warrants at December 31, 2005, and
recorded the warrants as a derivative liability totaling $59,647
with the resulting increase of $38,956 recorded as a change in
fair value of derivative instruments.
The following weighted average assumptions were used on the
issuance date of the convertible debt instruments for purposes of
determining the fair value of the freestanding warrants during
2005:
November 18, 2005 December 31, 2005
Exercise price $0.3 $0.3
Expected dividend yield 0% 0%
Expected volatility 317% 307%
Risk free interest rate 5% 5%
Expected life of warrant 3 years 3 years
The Company concluded that the conversion option in the debt
instrument embedded needs to be bifurcated from the host contract.
Since the value of the features exceed the value of the debt
instrument, and the Company is in a default, the Company decided
to present the convertible instrument at its fair value. The
Company remeasured the convertible debentures at December 31, 2005
and charged $542,015 as an adjustment to the fair value.
The Derivative Liability - convertible debentures and warrants
detachable are presented together in amount of $ 860,567. As
disclosed in Note 15B, The Company remeasured the class A and
class B warrants that it issued during the year. As a result of
the remeasurment, the Company recorded the Class A warrants at
December 2005 at $1,096,059 and the class B at $1,160,769. As a
result, the Company charge a derivative liabilities expense a
$1,949,748.
40
SAFETEK INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
The Company estimated the fair market value using the Binomial
model and the Black-Scholes model. The following assumptions were
used on the issuance dates of the convertible debt instruments for
purposes of determining the fair value of the features:
November 18, 2005 December 31, 2005
----------------- -----------------
Exercise price The lower of $0.15 - 50% The lower of $0.15 - 50%
of the market price of the market price
Expected dividend yield 0% 0%
Expected volatility 317% 307%
Risk free interest rate 5% 5%
Expected life of warrant 3 years 3 years
NOTE 13: REDEEMABLE CONVERTIBLE PREFERRED STOCK
The redeemable convertible preferred stocks were issued prior to 2001.
The shares may be converted to common shares at a rate of one-half
common share for each preferred stock and are redeemable on February
21, 2002 at $50 per share. The shares are presented at their obligation
amount of $232,400 associated with the redemption feature.
NOTE 14: COMMITMENTS AND CONTINGENCIES
o Rent- the Subsidiary rents offices under a two year rent
agreement. The monthly rent is $1,000 adjusted to the changes in
the Israeli CPI. For executing the rent agreement the Subsidiary
obtained a bank guarantee in amount of $5,431.
Rental expenses for the year 2005 were $5,826.
o The Subsidiary vehicles are rented under operating leases
agreements for three year periods. The monthly rent is $1,386.
The following chart shows lease obligations for the coming 5 years
including rental and vehicle leases:
Year Amount
2006 $ 28,632
2007 23,632
2008 16,632
2009 --
2010 --
--------
Total $ 68,896
========
NOTE 15: STOCKHOLDERS' EQUITY
A. Capital Stock
1. On January 21, 2005, the Company received in cash a gross amount
equal in the aggregate to $ 37,370 and executed subscription
agreements from 48 persons relating to the purchase of an
aggregate of 37,369,500 shares of common stock at a per share
purchase price of $0.001 per share.
41
SAFETEK INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
As part of the effort the Company invests in raising funds to a
finance its business activity, the Company issued 1,850,000 units
to investors through an ongoing private placement of units (the
"Units") for $0.10 per Unit. Each Unit consists of one share of
common stock, one Class A warrant giving the holder the right to
purchase one share of stock at $1.00, which is exercisable for one
year from the date of issuance, and one Class B warrant giving the
holder the right to purchase one share of stock for $1.50, which
is exercisable for 2 years from the date of issuance. The Company
also issued 100,000 units as an issuance fee. The total
consideration from the private placement was $685,000.
2. In December 2005, the Company issued 5,000,000 units to investors
through an ongoing private placement of units (the "Units") for
$0.10 per Unit. Each Unit consists of one share of common stock,
one Class A warrant giving the holder the right to purchase one
share of stock at $1.00, which is exercisable for one year from
the date of issuance, and one Class B warrant giving the holder
the right to purchase one share of stock for $1.50, which is
exercisable for 2 years from the Date of issuance. The total
proceeds from this private placement were $500,000.
B. Warrants
A summary of the warrant activity for 2005 is as follows (there
were no warrants outstanding in 2004):
Weighted
Shares Average
Underlying Exercise
Warrants Price
---------- -----------
$
Outstanding at January 1, 2005 -- --
Granted 14,233,332 1.23
Forfeited -- --
---------- -----------
Outstanding at December 31, 2005 14,233,332 1.23
========== ===========
Warrants exercisable at December 31, 2005 14,233,332 1.23
========== ===========
The weighted average grant date fair value of warrants
class A Granted equal to: *0.143
The weighted average grant date fair value of warrants
class B Granted equal to: *0.180
The weighted average grant date fair value of warrants
detachable the debentures : *0.277
*The warrants were valued using the Black-Scholes model.
We used the following assumptions as for the grant date.
o Warranted issued on August 2005 - dividend yield - 0%, interest
rate - 3.5% and volatility - 111%.
o Warrant issued on December 2005 - dividend yield - 0%, interest
rate 5% and volatility - 317% and 314%.
42
SAFETEK INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
The following table summarizes information concerning warrants
outstanding at December 31, 2005:
Number Outstanding Weighted Average
Exercise Price
$
6,950,000 1
6,950,000 1.5
333,332 0.3
14,233,332 1.23
As describe in note warrants as of November 18, 2005 and as of
December 31, 2005, the Company presented the warrants as a
derivative liabilities according to EITF 00-19.
The following assumptions were used in calculating the fair value.
o As of November 18, 2005 - dividend yield - 0%, expected
volatility - 317%, risk free interest rate - 5%.
o As of December 31, 2005 - Dividend yield - 0%, expected
volatility - 307%, risk
o Free interest rate - 5%.
As a result of the remeasurment, the Company recorded the Class A
warrants at December 2005 at $1,096,059 and the class B at
$1,160,769. As a result, the Company charge a derivative
liabilities expense a $1,949,748.
C. Stock Options to Employees
The company follows fair value accounting and the related provisions of
SFAS No. 123R for all share based payment awards. The fair value of
each option or warrant granted is estimated on the date of grant using
the Black-Scholes option-pricing model. The following is a summary of
all stock options granted to employees. All option grants have been
recorded as deferred compensation in stockholders equity due to the
fact that they are not yet vested with an offsetting credit to
additional paid in capital:
Weighted
Shares Average
Underlying Exercise
Options Price
$
Outstanding at January 1, 2005 --
Granted 5,318,893 0.1
Forfeited --
---------------------------
Outstanding at December 31, 2005 5,318,893 0.1
===========================
Options exercisable at December 31, 2005 --
===========================
The weighted average grant date fair
value of warrants class A Granted
equal to: 0.26
===========================
43
SAFETEK INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
On September 15, 2005, the board of directors resolved to adopt the
2005 Employees/Consultants/Directors Stock Compensation Plan (the
"Plan"). In connection with the adoption of the Plan, the Company
reserved 10,600,000 shares of common stock of the Company for the
future exercise of options granted pursuant to the Plan. The Company
decided to grant an aggregate of 5,318,893 stock options to its
directors for future services.
Pursuant to the provisions of the Plan, the board of directors resolved
on September 15, 2005 to grant options to purchase an aggregate of
5,318,893 shares of common stock of the Company, exercisable at a price
of $0.10 per share. These options vest over the three year period
commencing the first anniversary of the grant date as follows:
Shay Goldstein Chairman and the Chief Medical Officer - 2,659,446
Tamar Tzaban - Director and CFO - 2,127,557
Gilad Yoeli - Director - 265,945
Jean-Pierre Elisha Martinez - Director -265,945
The options grant was valued pursuant to SFAS 123R and totaled
$1,384,111.
Weighted average assumptions used by management were as follows:
Dividend yield 0%
Expected volatility 111%
Risk free interest rate 3.5%
Expected life of option 7 years
On January 10, 2006 the board of directors resolved to grant an
aggregate of 370,192 stock options to its directors for future services
exercisable at a price per share equal to 90% of the last transaction
price quoted for such date by the NASDAQ system on the NASDAQ National
Market as of the stock Option Agreement date, according to the plan .
These options vest over the three year period commencing the first
anniversary of the grant date as follows:
Gilad Yoeli - Director - 185,096
Jean-Pierre Elisha Martinez - Director -185,196
The total stock options granted to employees are 5,689,085.
The total stock options outstanding at December 31, 2005 are 5,318,893.
NOTE 16: OTHER INCOME AND EXPENSES
1. Debt forgiveness income contains $81,132 from Cancellation of
Indebtness. $131,300 of old debt that acquired in 2001 and 2002
were written off after receiving announcements from the vendors
that the Company does not owe them any monies.
2. Gain from Securities consist of unrealized gain of $4,041 and
realize gain from trading securities of $4,960.
44
SAFETEK INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
The following table presents the Company's other expenses:
2005
Exchange rate loss $ 11,734
Interest expenses convertible debentures 5,001
Amortization of debentures discount 9,817
Derivative Convertible Liability Expenses
Derivative liability expenses (warrants) 1,949,748
Derivative liability expenses (convertible debentures) 542,015
Derivative liability expenses (warrants debentures) 38,956
Penalties 29,597
------------
Total derivative liability expenses $ 2,560,316
============
1. Interest expenses includes, $5,001 interest related to the
debentures.
2. As a result of the terms of debentures the Company issued, and
because theoretically the debentures can be converted into number
of shares that will exceed the company's authorized shares if the
Company's market price will be reduced below 0.000569 (As of March
23, 2006 as reported on http://Bloomberg.com, the average bid and
ask price was 0.25). The Company recorded a derivative liability
expense of $1,949,748.
3. Expenses related to the debentures issued on November 18, 2005
include $580,971 evaluation of the convertible debt at fair value.
4. $29,597 penalties allowance. According to the debentures terms,
the Company was obligated to file a registration statement on or
prior to thirty days from November 18, 2005. To register the
shares of common stock underlying the notes and warrants issued to
the investors. The Company has been delayed in its obligation and
is currently in default.
NOTE 17: TAXES ON INCOME
The company accounts for income taxes under SFAS 109, which requires
use of the liability method. SFAS 109 provides that deferred tax assets
and liabilities are recorded based on the differences between assets
and liabilities and their carrying amounts for financial reporting
purposes, referred to as temporary differences.
Deferred tax assets and liabilities at the end of each period are
determined using the currently enacted tax rates applied to taxable
income in the periods in which the deferred tax assets and liabilities
are expected to be settled or realized.
45
SAFETEK INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
The income tax expense (benefit) differs from the amount computed by
applying the U.S. federal income tax rate as follows:
2005 2004
Tax expenses (benefit) at the federal statutory rate $ (1,025,086) $ (43,689)
Permanent differences 898,808 --
Foreign taxes, net of credits -- --
Increase (decrease) in valuation allowance 126,278 43,689
------------- ------------
Tax expense (benefit) -- --
============= ============
The components of the deferred tax assets
are as follows
Deferred tax asset:
Federal net operating loss carry forwards 1,494,354 1,368,076
Valuation allowance (1,494,354) (1,368,076)
------------- ------------
Net deferred tax asset $ -- $ --
============= ============
As of December 31, 2005, the Company has net operating loss carry
forwards of approximately $4,200,000, be available to offset future
taxable income. If not used these carryforwards will expire through
2025 for the Company. For the Israeli subsidiary losses carryforwards
have no expiration date. The deferred assets related to operating
losses have been fully reserved at December 31, 2005 and 2004; since
management believes that it is not more likely than not that the
benefit of such losses will be returned. Further, such losses may be
limited under internal revenue code section 382 that limits the use of
losses in the event of certain ownership changes.
The Israeli subsidiary is taxed in accordance with Israeli tax laws.
Under the Income Tax (Inflationary Adjustments) Law, 1985, results for
tax purposes are measured in real terms, in accordance with the changes
in the Israeli consumer price index ("CPI"). The Israeli subsidiary is
taxed under this law. Israeli taxes creditable under the U.S. foreign
tax credit regime at such time that Israeli earninings are includible
in U.S. taxable income. Accordingly, on a world - wide basis the
maximum tax paid by the Company on Israeli subsidiary income is at 35%
of such amounts.
NOTE 18: SUBSEQUENT EVENTS
On January 4, 2006, the Company closed on the transaction contemplated
by the Exclusive Patent and Know How License Option Agreement (the
"Agreement") dated December 28, 2005 with Matrix Pharma Inc., a
Delaware corporation ("Matrix"). Pursuant to the Agreement, the Company
acquired from Matrix an option to purchase an exclusive, world-wide
license in all of Matrix's intellectual property rights in its Thrombin
inhibition compounds. The Registrant may exercise such option at any
time until March 31, 2006 by written notice to Matrix. In consideration
for the option, the Registrant paid Matrix a total of $60,000 which
$25,000 was given as a loan on September 29, 2005. $30,000 of the
Advance shall be returned to the Company if it decides not to exercise
the option on grounds that its due diligence of Matrix reveals that
certain patents relating to the matters subject to the license are
likely to be invalid.
46
SAFETEK INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
Pursuant to the Agreement, the Company and Matrix agreed to jointly
develop a research and development program for the development of
products based on the Thrombin inhibition compounds and their approval
by the federal Food and Drug and Administration.
Upon execution of the option, the Company will pay Matrix up to
$105,000 for the completion of the optimization stage of development.
The Company is under no obligation to exercise the option or to
commence the research and development program and may do so in its sole
discretion. However, the Company shall not instruct Matrix to commence
the research and development program unless the Company has first
secured funds sufficient to fund at least the first two of the five
stages contemplated. The Company estimates that it will have to invest
about $3.5 million to complete the five stages of development, bringing
a compound to the end of stage IIa.
On March 30 2006 the Company and Matrix signed an amendment, extending
the exercise date of the option to May 15, 2006. The amendment provides
that until April 15 the Company will pay Matrix $15,000 in
consideration for Matrix's agreement to extend the exercise date. Such
amount will be deducted from the repayment of costs that the Company
shall pay if it exercises the option.
On March 23, 2006, the Company entered into a term sheet with Resdevco
Ltd, a company incorporated under the laws of Israel ("Resdevco"). The
term sheet sets forth the principal terms of a proposed agreement
between the Company and Resdevco, pursuant to which Resdevco will grant
the Company an exclusive, worldwide license in Resdevco's Antioxidant
salicylate compounds.
On March 27, 2006 the Company exercised its right that was given to it
in a Letter Agreement dated December 1, 2005 to purchase certain
biological materials from Serapis for a purchase price of $100,000 plus
value added tax (VAT). The purchase price was paid by the forgiveness
of $29,906 debt owed to the Company, and the balance to be paid by
Serapis in 12 equal monthly payments, with the first payment on the
signing date.
47
Item 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure -
Dismissal of Former Accountants
On December 13, 2005, the Company dismissed PricewaterhouseCoopers Israel as the
Company's principal independent accountants. Pricewaterhouse Coopers Israel was
dismissed as a result of the unanticipated, increased cost and delay of
maintaining the Pricewaterhouse Coopers Israel as the Company's accountants.
Pricewaterhouse Coopers Israel was the independent registered public accounting
firm for the Company commencing with the review for the quarter ending September
30, 2005 and ending with their dismissal on December 13, 2005. Pricewaterhouse
Coopers Israel did not issue any reports on any financial statements of the
Company.
As the Company disclosed in its notification of its late filing for the Form
10-QSB for the quarter ending September 30, 2005 that the Company filed on
November 15, 2005, Pricewaterhouse Coopers Israel determined that it was
necessary for the Company to restate its financial statements for the annual
fiscal periods ended December 31, 2004, 2003 and 2002 regarding the accounting
treatment of the convertible debentures (the "Debentures") that the Company
issued in the years 2001 and 2002. Pricewaterhouse Coopers Israel also
determined that it was necessary for the Company to restate its financial
statements for the semi-annual fiscal period ended June 30, 2005. The Company
believes that such preliminary determination by Pricewaterhouse Coopers Israel
was based on the information and belief in its possession at such time. The
Company agreed with Pricewaterhouse Coopers Israel that if the accounting
treatment of the Debentures was not in accordance with generally accepted
accounting principals and that if such treatment would have a material effect on
the financial statements, the financial statements would need to be restated.
To the date of the termination of its engagement as the Company's independent
accountants, Pricewaterhouse Coopers Israel had still not reached its conclusion
as to whether the accounting treatment of the Debentures was in accordance with
generally accepted accounting principals, or whether the previous financial
statements should no longer be relied upon because of an error contained
therein. The Company presented Pricewaterhouse Coopers Israel with all
information and documentation requested by Pricewaterhouse Coopers Israel which
were in the possession of the Company or which the Company was able to obtain.
It was not until the meeting of the Board of Directors of the Company on
Tuesday, December 13, 2005 that the Company ceased providing such information
and documentation to Pricewaterhouse Coopers Israel.
At that time, the Company did not know whether Sherb & Co., LLP would determine
that the previous financial statements of the Company needed to be restated; but
if such determination was reached, the Company would agree to such restatement.
As a result of the unanticipated increased cost and delay of maintaining
Pricewaterhouse Coopers Israel as the Company's independent accountants, the
Board of Directors of the Company determined to terminate Pricewaterhouse
Coopers Israel as the principal independent accountants of the Company.
From September 27, 2005 (the date Pricewaterhouse Coopers Israel was engaged as
the accountants for the Company)) through December 13, 2005 (the date
Pricewaterhouse Coopers Israel was terminated), there were no disagreements with
Pricewaterhouse Coopers Israel on any matters of accounting principles or
practices, financial statement disclosure, or auditing scope or procedures,
which disagreements, if not resolved to the satisfaction of Pricewaterhouse
Coopers Israel, would have caused it to make reference to the subject matter of
the disagreements in connection with its reports. There were no reportable
events as set forth in Item 304(a)(1)(iv)(B) of Regulation S-B which occurred
within the Company's two most recent fiscal years or through December 13, 2005,
other than the initial determination of Pricewaterhouse Coopers Israel that the
previous financial statements of the Company need to be restated.
Notwithstanding such initial determination, said issue was not resolved by
Pricewaterhouse Coopers Israel since Pricewaterhouse Coopers Israel did not
provide the Company with an initial draft of the restated financial statements
(even for the quarter ending September 30, 2005). Therefore the Company can not
determine if the treatment accorded to the Debentures would result in a material
change to the financial statements which would necessitate restating the
Company's previous financial statements.
48
Engagement of Present Accountants
On December 14, 2005, the Company retained Sherb & Co., LLP as its principal
independent accountants. The decision to change accountants was recommended and
approved by the Company's Board of Directors. Sherb & Co., LLP had been the
principal independent accountant of the Company from November 8, 2004 through
September 13, 2005.
Commencing November 8, 2004, the date that Sherb & Co., LLP was retained as the
principal independent accountants of the Company, through September 13, 2005,
the date that Sherb & Co., LLP was dismissed as the Company's accountant, the
Company consulted with Sherb & Co., LLP. Prior to November 8, 2004 and during
the period from September 13, 2005 through December 13, 2005:
(1) The Company did not consult Sherb & Co., LLP regarding either the
application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
Company's financial statements;
(2) Neither a written report nor oral advice was provided to the
Company by Sherb & Co., LLP that they concluded was an important factor
considered by the Company in reaching a decision as to the accounting, auditing
or financial reporting issue; and
(3) The Company did not consult Sherb & Co., LLP regarding any matter
that was either the subject of a "disagreement" (as defined in Item
304(a)(1)(iv) of Regulation S-B and the related instructions) or any of the
reportable events set forth in Item 304(a)(1)(iv)(B) of Regulation S-B.
Item 8A. Controls and Procedures
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of
December 31, 2005, the Company's management carried out an evaluation of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. This evaluation was carried out by the Company's Chief Executive
Officer, and the Company's Chief Financial Officer. Based upon that evaluation,
the Company's Chief Executive Officer and Chief Financial Officer concluded that
as of December 31, 2005, the Company's disclosure controls and procedures were
effective except as set forth below, in the following paragraph, in timely
alerting them to material information required to be included in the Company's
periodic SEC reports.
The Company's independent auditors, in conjunction with their audit of the
Company's financial statements for the year ended December 31, 2005, advised the
Company and the Audit Committee that in the auditors' view, the Company's
disclosure controls and procedures were subject to a material weakness resulting
from inadequate segregation of duties related to accounting controls caused by
the limited number of personnel available for accounting duties. Management
plans to expand personnel to provide for adequate segregation of duties when it
is cost beneficial to the Company and, in the interim, has implemented
mitigating controls wherever possible in consideration of the limited
segregation of duties.
It should be noted that the design of any system of controls is based in part
upon certain assumptions about the likelihood of future events and there can be
no assurance that any design will succeed in achieving its stated goals under
all potential future conditions, regardless how remote. Disclosure controls and
procedures are controls and other procedures that are designed to ensure that
information required to be disclosed in the Company's reports filed or submitted
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 in the Company's reports filed
under the Exchange Act is accumulated and communicated to management, including
the Company's Chief Executive Officer and Chief Financial Officer, to allow
timely decisions regarding required disclosure.
49
There were no changes in the Company's internal control over financial reporting
identified in connection with the evaluation required by paragraph (d) of Rule
13a-15 under the Exchange Act with respect to the fiscal year ended December 31,
2005 that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
Item 8B. Other Information
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Set forth below is the name, age and present principal occupation or employment,
and material occupations, positions, offices or employments for the past five
years of our current directors and executive officers.
Name Age Positions and Offices
---------------------------- ---- -------------------------------------
Amnon Presler 53 Chief Executive Officer
Dr. Shay Goldstein 37 Chief Medical Officer
Tamar Tzaban Nuhomov 45 Chief Financial Officer and Director
Jean-Pierre Elisha Martinez 55 Director, Chairman
Gilad Yoeli 40 Director
Amnon Presler. Amnon Presler has been our Chief Executive Officer since December
1, 2005. Mr. Presler has more than 29 years of executive management, operations
and international marketing experience, mainly in Datacom. He served as Chief
Executive Officer of Corigin, and of Broadlight for 3 years and as President and
Chief Executive Officer of Visonic, for 3 years. Before that he served at RAD
Data Communications as President of RAD USA for 7 years and head of R&D for 9
years. Mr, Presler holds B,Sc in Electric Engineering from Ben Gurion University
of the Negev, Israel.
Dr. Shay Goldstein. Dr. Shay Goldstein has been a director of our Company since
April 15, 2005, and has been serving as our Chief Medical Officer since December
7, 2005. From April 15, 2005 until December 6, 2005, Dr. Goldstein served as the
Company's Chairman, Chief Executive Officer, and Secretary. Between April 2003
and January 2005, Dr. Goldstein was the manager of the marketing programs of
Rimed Ltd., an Israeli-based company that specializes in the development of
advanced neuro-diagnostic medical equipment. Between February 2004 and February
2005, Dr. Goldstein was a consultant to Silicom Ventures, a company that
provides financing to businesses involved in the life science and medical
technologies industries. Between June 2002 and September 2003, Dr. Goldstein was
the manager of the business development and marketing programs of Medidactic, an
Israeli-based company that provides marketing services to businesses involved in
the life science and medical technology industries. Between September 2001 and
June 2002, Dr. Goldstein was the manager of the business development and
marketing programs of Medidactic. Ltd, an Israeli-based company that provides
marketing and training services to businesses involved in the life science and
medical technology industries. Between December 2000 and August 2001, Dr.
Goldstein was the manager and a co-founder of Renaissance Biomedical Solutions,
an Israeli-based company involved in the development of a biochemical delivery
system for the treatment of neurodegenerative diseases. Between July 1999 and
December 2000, Dr. Goldstein was a doctor at the Israel National Institute of
Forensic Medicine. Dr. Goldstein has a Doctor of Medicine degree from the Israel
Institute of Technology.
50
Tamar Tzaban Nuhomov. Tamar Tzaban Nuhomov has been a director of our Company
since May 4, 2005 and has been our Chief Financial Officer since October 30,
2005. Ms. Nuhomov has extensive experience in analysis and value assessments for
companies and projects, business plans, credit allocation, financial planning
and analysis, accounting opinion and policy, auditing and investigative auditing
of public corporations; operation and construction of reporting and data
analysis systems, senior-level management, and management of computerized
projects and information systems. Since September 2004, Ms. Nuhomov has been an
independent accountant and business consultant. From November 1999 to January
2004, she was a director of the economics department of Discount Bank, where she
was responsible for, among other duties, analysis of credit requests made by the
bank's major business customers. From November 2001 to January 2004, Ms. Nuhomov
was a project manager for Accenture Company, where she was responsible for
planning the computerized support for various credit processes.
Jean-Pierre Elisha Martinez. Jean-Pierre Elisha Martinez has been a director of
our Company since May 4, 2005. Mr. Martinez has extensive experience in the life
sciences field. He is currently a researcher and lecturer at Tel Aviv University
as a PhD student, with a focus on cellular engineering, biomaterials, and
bio-fluid mechanics in physiology and pathology. From September 1999 until
November 2004, Mr. Martinez was a researcher, assistant and lecturer at Tel Aviv
University as a PhD student in bio-medical engineering. Between March 2002 and
August 2002, Mr. Martinez was a consultant to Barnev, focusing on the
development of biological binding methods of electronic devices to human
tissues. Between October 2001 and August 2002, Mr. Martinez participated in the
marketing initiatives of Statice Sante. From February 2001 until April 2001, Mr.
Martinez was a consultant for PowerPaper, focusing on its medical applications.
In January 2001, Mr. Martinez provided services to Florence Medical relating to
the design and proceeding of measurement of mechanical properties of living
tissues. From September 1999 until October 2001, Mr. Martinez was a project
manager at Slo-Flo, where he was responsible for the development of an
intra-vaginal delivery device. From March 1999 until July 2001, Mr. Martinez was
a project manager and integrator at Meduck, where he was responsible for the
development of multi-disciplinary medical instrumentations (software, hardware
and sensors). Since January 2005, Mr. Martinez has been a director of Gammacan
International Inc., a pharmaceutical company, and has been a member of its audit
committee.
Gilad Yoeli. Gilad Yoeli has been a director of our Company since June 9, 2005.
Mr. Yoeli is a certified public accountant in Israel. Since 2002, he has served
as the Chief Financial Officer of CoreFlow Ltd., an Israeli company engaged in
aeromechanical subsystems for flat panel display and for semiconductors capital
equipment industries. Prior to 2002 Mr. Yoeli was a senior manager at Ernst &
Young Israel (Kost Forer, Gabbay & Kasierer) in the high-tech practice area. Mr.
Yoeli holds a B.A. in economics from Haifa University.
The directors of the Company have been elected to serve until the next annual
meeting of stockholders and until their successor(s) have been elected and
qualified. Officers are appointed by the Board of Directors and serve at the
discretion of the Board.
There are no family relationships among our directors and officers. Except as
otherwise indicated above, our directors and officers are not directors in any
other reporting companies. None of our directors or officers has been affiliated
with any company that has filed for bankruptcy within the last five years. The
Company is not aware of any proceedings to which any of the Company's officers
or directors, or any associate of any such officer or director, is a party
adverse to the Company or any of the Company's subsidiaries or has a material
interest adverse to it or any of its subsidiaries.
Audit Committee Financial Expert. On June 9, 2005 the board of directors
establish an audit commity and designated Mr. Gilad Yoeli and Mr. Elisha
Martinaz as members of the committee.
Compensation Committee. On June 9, 2005, the board of directors established
compensation committee and designated Mr. Gilad Yoeli and Mr. Elisha Martinaz as
members of the committee.
51
Code of Ethics. The Company has not adopted a Code of Ethics because the Company
has only four directors.
Section 16(a) Beneficial Ownership Reporting Compliance. Section 16(a) of the
Securities and Exchange Act of 1934, as amended, requires our directors and
executive officers and persons who beneficially own more than 10% of our Class A
Common Stock to file initial reports of ownership and changes in ownership with
the Securities and Exchange Commission. These persons and entities are also
required by Securities and Exchange Commission regulations to furnish us with
copies of all Section 16(a) forms they file. We believe, based solely on our
review of the copies of such forms and other written representations to us, that
during the fiscal year ended December 31, 2005, all reporting persons complied
with all applicable Section 16(a) filing requirements, except for Shmuel
Shneibalg who did not file a Form 4 following his resignation as a director and
officer of the Company.
Item 10. Executive Compensation
The following table presents certain specific information regarding the
compensation of the Chief Executive Officer of the Company, during the last
three fiscal years. We have not paid any executive officer in excess of $100,000
(including salaries and benefits) during the years ended December 31, 2005, 2004
or 2003.
--------------------------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
--------------------------------------------------------------------------------------------------------------------
Annual compensation Long-term compensation All other
------------------------------------------------------------------------------------------------ compensation
Name and Fiscal Year Salary Bonus Other annual Awards Payouts ($)
principal Covered ($) ($) compensation -----------------------------------
position ($) Restricted Securities LTIP
stock under- payouts
award(s) lying ($)
($) options/
SARs
(#)
(a) (b) (c) (d) (e) (f) (g) (h) (i)
--------------------------------------------------------------------------------------------------------------------
Amnon
Presler 2005(1) $10,219 0 0 0 0 0 0
--------------------------------------------------------------------------------------------------------------------
Dr. Shay
Goldstein 2005(2) $64,774 0 0 0 2,659,449 0 0
--------------------------------------------------------------------------------------------------------------------
Shmuel 2004(3) 0 0 0 0 0 0 0
Shneibalg
--------------------------------------------------------------------------------------------------------------------
2003 0 0 0 0 0 0 0
--------------------------------------------------------------------------------------------------------------------
(1) Mr. Amnon Presler has been serving as the Chief Executive Officer since
December 7, 2005.
(2) Dr. Shay Goldstein served as the Company's Chief Executive Officer,
Chairman, Secretary, and Director from April 15, 2005 until December 7, 2005. On
such date, he resigned as Chief Executive Officer and was appointed as the
Company's Chief Medical Officer. On March 12, 2005, he resigned as the Chairman,
and Secretary. Dr. Shay Goldstein continues to serve as a director of the
Company.
(3) Mr. Shneibalg was the Chief Executive Officer and a director until April 15,
2005, when he was replaced by Dr. Shay Goldstein. Mr. Shneibalg owns 120,000
shares of the Company's common stock.
Employment-Related Agreements
Employment Agreement of Amnon Presler
On December 7, 2005, the Company entered into an employment agreement with Amnon
Presler, pursuant to which Mr. Presler was engaged as the Chief Executive
Officer of each of the Company and its wholly owned subsidiary, Oriens Life
Sciences (Israel), Ltd. (the "Subsidiary"). As compensation for his services,
Mr. Presler shall receive a monthly salary as follows: During the first two
months, the monthly salary shall be $ 7,500; thereafter the monthly salary shall
be $ 8,500. In addition, Mr. Presler shall receive a bonus of $ 8,500 if the
aggregate investments made in the Company and the Subsidiary after the date of
his employment agreement exceed $ 4,000,000. Mr. Presler also shall be entitled
to participate in the employee stock option plan to be adopted by the Company as
well as vacation, insurance benefits, and use of a company automobile.
52
The term of Mr. Presler's employment shall continue until terminated by either
party as provided in the employment agreement. The Company may terminate the
Employment Agreement without notice for cause or in the event Mr. Presler
becomes disabled. Either party may terminate the Employment Agreement without
cause, for any reason whatsoever, upon 30 days notice within the first year of
Mr. Presler's employment and upon 90 days prior written notice thereafter.
During the term of the employment agreement and for a period of one year
thereafter, Mr. Presler shall not compete with the Subsidiary nor solicit any of
the Subsidiary's employees or customers. Mr. Presler agreed to hold the
Subsidiary's confidential information in strict confidence.
Employment Agreement of Dr. Shay Goldstein
On May 31, 2005, Dr. Shay Goldstein entered into an employment agreement with
the Subsidiary. Pursuant to such employment agreement, Dr. Goldstein served as
the Chief Executive Officer of the Subsidiary, commencing as of May 1, 2005 and
continuing until terminated by either party thereto. As compensation for his
services, Dr. Goldstein received a monthly salary equal to $6,000 per month for
the first three months, $7,500 per month during the fourth through sixth months,
and $8,500 per month thereafter. Dr. Goldstein also received various insurance
and retirement benefits. In addition, Dr. Goldstein will receive a bonus of
$8,500 if investments made in the Subsidiary and the Company exceed $4,000,000
in the aggregate.
On December 7, 2005, Dr. Goldstein's employment agreement was amended to provide
that Dr. Goldstein shall be employed as Chief Medical Officer of each of the
Company and its Subsidiary instead of as their Chief Executive Officer. Dr.
Goldstein's salary was changed from $8,500 per month to $8,000 per month,
effective as of December 1, 2005. All other provisions of the employment
agreement remained unchanged.
Employment Agreement of Tamar Tzaban Nuhomov
On June 7, 2005, the Subsidiary entered into a Consulting Agreement with Tamar
Tzaban-Nuhomov. Pursuant to such consulting agreement, Ms. Nuhomov shall be
engaged by the Subsidiary as a consultant to provide the Subsidiary with
advisory services, concerning such financial matters as shall be reasonably
requested by the Subsidiary from time to time. The term of such engagement
commenced as of May 15, 2005, and will continue until terminated by either
party, for any reason whatsoever, upon 30 days' prior written notice. As
compensation for her services, Ms. Nuhomov will be paid a monthly fee equal to
(a) $3,500 for every month in which Ms. Nuhomov performs services for the
Subsidiary for at least 20 weekly working hours, but no more than 25 weekly
working hours; or (b) $5,000 for every month in which Ms. Nuhomov performs
services for the Subsidiary for at least 25 weekly working hours.
On October 30, 2005, the Subsidiary entered into an employment agreement with
Ms. Nuhomov, pursuant to which Ms. Nuhomov shall be employed as the Chief
Financial Officer of the Subsidiary. As compensation for her services, Ms.
Nuhomov shall receive a monthly salary as follows: During the first two months,
the monthly salary shall be US$ 6,000; during the third through fourth months,
the monthly salary shall be US$ 7,000; and thereafter the monthly salary shall
be US$ 7,700. The salary shall be paid in the currency of Israel translated
pursuant to the official representative rate of exchange of the US$ as published
by the Bank of Israel on the payment date. Ms. Nuhomov also shall be entitled to
participate in the employee stock option plan to be adopted by the Company as
well as vacation, insurance benefits, and use of a company automobile. The term
of the employment commenced as of September 1, 2005 and shall continue until
terminated by either party as provided in the employment agreement. The
Subsidiary may terminate Ms. Nuhomov's employment agreement without notice for
cause or in the event Ms. Nuhomov becomes disabled. Either party may terminate
the employment agreement without cause, for any reason whatsoever, upon 30 days
notice within the first year of the employment and upon 90 days prior written
notice thereafter.
53
On December 7, 2005, Ms. Nuhomov's employment agreement was amended for the
purpose of changing Ms. Nuhomov's salary to $8,000 per month, commencing as of
December 1, 2005 and continuing throughout the term of her employment. All other
provisions of the employment agreement remained unchanged.
Indemnity Agreements
On June 7, 2005, the Company entered into a separate Indemnity Agreement (the
"Indemnity Agreements") with each of Dr. Shay Goldstein, Tamar Tzaban-Nahumov,
and Jean Pierre Elisha Martinez. The substantive terms of each Indemnity
Agreement are identical. Pursuant to such Indemnity Agreements, the Company
shall indemnify the indemnitee for all liabilities and damages that may be
incurred by the indemnitee in connection with his or her position as a director
or officer of the Company and/or the Subsidiary, as the case may be. Such
indemnity will be effective unless proved that such liabilities arose as a
result of the indemnitee's breach of his or her fiduciary duties, and such
breach involved intentional misconduct, fraud, or a knowing violation of law.
Stock Options
We did not grant any options to our directors or officers during the fiscal year
ended December 31, 2004.
On September 15, 2005, pursuant to our 2005 Employees/Consultants/Directors
Stock Compensation Plan, we authorized the grant of stock options under Section
102 of the Israeli Income Tax Ordinance for the purchase of an aggregate of
5,318,893 shares of our common stock to each of our directors in the following
amounts set forth next to their names: Jean-Pierre Elisha Martinez - 265,945;
Gilad Yoeli - 265,945; Tamar Tzaban Nuhomov - 2,127,557; and Shay Goldstein -
2,659,446. The exercise price of such stock options is US$0.10 per share. The
granting of such stock options is subject to the approval of the appropriate
Israeli tax authorities and the appointment of a trustee pursuant to Section 102
of the Israeli Income Tax Ordinance. The options are not exercisable for at
least one year after the date of grant.
On January 10, 2006 pursuant to our 2005 Employees/Consultants/Directors Stock
Compensation Plan, we authorized the grant of stock options under Section 102 of
the Israeli Income Tax Ordinance, to add to the current board members' Mr.
Martinez and Mr. Yoeli 137,847 options (0.25% out of 60 138, 923 issued and
outstanding shares of the company), par value US$ 0.0001 each, at an exercise
price per share equal to 90% of the last transaction price quoted for such date
by the NASDAQ system or the NASDAQ National Market, as of theStock Option
Agreement date, according to the company Employees/Consultants/Directors Stock
Compensation Plan; approved by the board of directors on September 15, 2005.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table lists, as of March 23, 2006, the number of shares of Common
Stock beneficially owned by (i) each person or entity known to our Company to be
the beneficial owner of more than 5% of the outstanding common stock; (ii) each
officer and director of our Company; and (iii) all officers and directors as a
group. Information relating to beneficial ownership of common stock by our
principal shareholders and management is based upon information furnished by
each person using "beneficial ownership" concepts under the rules of the
Securities and Exchange Commission. Under these rules, a person is deemed to be
a beneficial owner of a security if that person has or shares voting power,
which includes the power to vote or direct the voting of the security, or
investment power, which includes the power to vote or direct the voting of the
security. The person is also deemed to be a beneficial owner of any security of
which that person has a right to acquire beneficial ownership within 60 days.
Under the Securities and Exchange Commission rules, more than one person may be
deemed to be a beneficial owner of the same securities, and a person may be
deemed to be a beneficial owner of securities as to which he or she may not have
any pecuniary beneficial interest. Except as noted below, each person has sole
voting and investment power.
54
The percentages below are calculated based on 60,138,923 issued and outstanding
shares of Common Stock. Unless otherwise indicated, the business address of each
such person is c/o Safetek International, Inc., Chief Executive Officer, 23
Aminadav Street, Tel Aviv, Israel 67898.
Shares Beneficially Owned
---------------------------------
Officers, Directors, 5% Out standing
Shareholders No. of Shares Right to Acquire Total Percentage
------------ ------------- ---------------- ----- ----------
Dr. Shay Goldstein 0(1)(2) 2,659,449 2,659,449 4.06%
Tamar Tzaban Nuhomov 0(1)(2) 2,127,557 2,127,557 3.25%
Jean-Pierre Elisha Martinez 0(1)(2) 265,945 265,945 0.41%
Gilad Yoeli 0(1)(2) 265,945 265,945 0.41%
All directors and executive 0(1)(2) 5,318,896 5,318,896 8.13%
officers as a group (4 persons)
(1) On September 15, 2005, pursuant to our 2005
Employees/Consultants/Directors Stock Compensation Plan, we
authorized the grant of stock options under Section 102 of the
Israeli Income Tax Ordinance for the purchase of an aggregate of
5,318,893 shares of our common stock to each of our directors in
the following amounts set forth next to their names: Jean-Pierre
Elisha Martinez - 451,041; Gilad Yoeli - 451,041; Tamar Tzaban
Nuhomov - 2,127,557; and Shay Goldstein - 2,659,446. The exercise
price of such stock options is US$0.10 per share. The options vest
over a three year period commencing September 15, 2006 (the first
anniversary of the grant date) and vest over 36 equal parts every
quarter thereafter.
(2) On January 10, 2006 pursuant to our 2005
Employees/Consultants/Directors Stock Compensation Plan, we
authorized the grant of stock options under Section 102 of the
Israeli Income Tax Ordinance, to add to the current board members'
Mr. Martinez and Mr. Yoeli 137,847 options (0.25% out of 60 138,
923 issued and outstanding shares of the company), par value US$
0.0001 each, at an exercise price per share equal to 90% of the
last transaction price quoted for such date by the NASDAQ system
or the NASDAQ National Market, as of the Stock Option Agreement
date, according to the company Employees/Consultants/Directors
Stock Compensation Plan; approved by the board of directors on
September 15, 2005.
Item 12. Certain Relationships and Related Transactions
Agreements with Dr. Yigal Koltin
On February 5, 2006, the Company appointed Dr. Yigal Koltin as a director. On
the same date, Dr. Koltin and the Company entered into a letter agreement, which
set forth Dr. Koltin's duties and compensation for his services as a director,
and an indemnity agreement, pursuant to which the Company agreed to indemnify
Dr. Koltin to the fullest extent permitted by law for liabilities which he may
incur in his service as director. On the same date, Dr. Koltin and the Company's
subsidiary, Oriens Life Sciences (Israel), Ltd., entered into a consulting
agreement, pursuant to which Dr. Koltin shall provide additional consulting
services to Safetek and its Subsidiary, as further described below. Dr. Koltin
resigned from his position as director on March 8, 2006, and the foregoing
agreements were terminated on such date. No payments were made to Dr. Koltin
pursuant to any of the foregoing agreements. Dr. Koltin agreed to act as a
consultant when requested by the Company at the rate of $300 per hour.
55
Employment Agreement of Amnon Presler
On December 7, 2005, the Company entered into an employment agreement with Amnon
Presler, pursuant to which Mr. Presler was engaged as the Chief Executive
Officer of each of the Company and its wholly owned subsidiary, Oriens Life
Sciences (Israel), Ltd. (the "Subsidiary"). As compensation for his services,
Mr. Presler shall receive a monthly salary as follows: During the first two
months, the monthly salary shall be US$ 7,500; thereafter the monthly salary
shall be US$ 8,500. In addition, Mr. Presler shall receive a bonus of $US 8,500
if the aggregate investments made in the Company and the Subsidiary after the
date of his employment agreement exceed US$ 4,000,000. Mr. Presler also shall be
entitled to participate in the employee stock option plan to be adopted by the
Company as well as vacation, insurance benefits, and use of a company
automobile.
The term of Mr. Presler's employment shall continue until terminated by either
party as provided in the employment agreement. The Company may terminate the
Employment Agreement without notice for cause or in the event Mr. Presler
becomes disabled. Either party may terminate the Employment Agreement without
cause, for any reason whatsoever, upon 30 days notice within the first year of
Mr. Presler's employment and upon 90 days prior written notice thereafter.
During the term of the employment agreement and for a period of one year
thereafter, Mr. Presler shall not compete with the Subsidiary nor solicit any of
the Subsidiary's employees or customers. Mr. Presler agreed to hold the
Subsidiary's confidential information in strict confidence.
Employment Agreement of Dr. Shay Goldstein
On May 31, 2005, Dr. Shay Goldstein entered into an employment agreement with
the Subsidiary. Pursuant to such employment agreement, Dr. Goldstein served as
the Chief Executive Officer of the Subsidiary, commencing as of May 1, 2005 and
continuing until terminated by either party thereto. As compensation for his
services, Dr. Goldstein received a monthly salary equal to $6,000 per month for
the first three months, $7,500 per month during the fourth through sixth months,
and $8,500 per month thereafter. Dr. Goldstein also received various insurance
and retirement benefits. In addition, Dr. Goldstein will receive a bonus of
$8,500 if investments made in the Subsidiary and the Company exceed $4,000,000
in the aggregate.
On December 7, 2005, Dr. Goldstein's employment agreement was amended to provide
that Dr. Goldstein shall be employed as Chief Medical Officer of each of the
Company and its Subsidiary instead of as their Chief Executive Officer. Dr.
Goldstein's salary was changed from $8,500 per month to $8,000 per month,
effective as of December 1, 2005. All other provisions of the employment
agreement remained unchanged.
Employment Agreement of Tamar Tzaban Nuhomov
On June 7, 2005, the Subsidiary entered into a Consulting Agreement with Tamar
Tzaban-Nuhomov. Pursuant to such consulting agreement, Ms. Nuhomov shall be
engaged by the Subsidiary as a consultant to provide the Subsidiary with
advisory services, concerning such financial matters as shall be reasonably
requested by the Subsidiary from time to time. The term of such engagement
commenced as of May 15, 2005, and will continue until terminated by either
party, for any reason whatsoever, upon 30 days' prior written notice. As
compensation for her services, Ms. Nuhomov will be paid a monthly fee equal to
(a) $3,500 for every month in which Ms. Nuhomov performs services for the
Subsidiary for at least 20 weekly working hours, but no more than 25 weekly
working hours; or (b) $5,000 for every month in which Ms. Nuhomov performs
services for the Subsidiary for at least 25 weekly working hours.
56
On October 30, 2005, the Subsidiary entered into an employment agreement with
Ms. Nuhomov, pursuant to which Ms. Nuhomov shall be employed as the Chief
Financial Officer of the Subsidiary. As compensation for her services, Ms.
Nuhomov shall receive a monthly salary as follows: During the first two months,
the monthly salary shall be US$ 6,000; during the third through fourth months,
the monthly salary shall be US$ 7,000; and thereafter the monthly salary shall
be US$ 7,700. The salary shall be paid in the currency of Israel translated
pursuant to the official representative rate of exchange of the US$ as published
by the Bank of Israel on the payment date. Ms. Nuhomov also shall be entitled to
participate in the employee stock option plan to be adopted by the Company as
well as vacation, insurance benefits, and use of a company automobile. The term
of the employment commenced as of September 1, 2005 and shall continue until
terminated by either party as provided in the employment agreement. The
Subsidiary may terminate Ms. Nuhomov's employment agreement without notice for
cause or in the event Ms. Nuhomov becomes disabled. Either party may terminate
the employment agreement without cause, for any reason whatsoever, upon 30 days
notice within the first year of the employment and upon 90 days prior written
notice thereafter.
On December 7, 2005, Ms. Nuhomov's employment agreement was amended for the
purpose of changing Ms. Nuhomov's salary to $8,000 per month, commencing as of
December 1, 2005 and continuing throughout the term of her employment. All other
provisions of the employment agreement remained unchanged.
Indemnity Agreements with Certain Directors
On June 7, 2005, the Company entered into a separate Indemnity Agreement (the
"Indemnity Agreements") with each of Dr. Shay Goldstein, Tamar Tzaban-Nahumov,
and Jean Pierre Elisha Martinez. The substantive terms of each Indemnity
Agreement are identical. Pursuant to such Indemnity Agreements, the Company
shall indemnify the indemnitee for all liabilities and damages that may be
incurred by the indemnitee in connection with his or her position as a director
or officer of the Company and/or the Subsidiary, as the case may be. Such
indemnity will be effective unless proved that such liabilities arose as a
result of the indemnitee's breach of his or her fiduciary duties, and such
breach involved intentional misconduct, fraud, or a knowing violation of law.
On January 10, 2006 the Company entered into a separate Indemnity Agreement with
Ammon Presler, which agreement was identical to the terms described above.
Grant of Stock Options to Directors
On September 15, 2005, pursuant to our 2005 Employees/Consultants/Directors
Stock Compensation Plan, we authorized the grant of stock options under Section
102 of the Israeli Income Tax Ordinance for the purchase of an aggregate of
5,318,893 shares of our common stock to each of our directors in the following
amounts set forth next to their names: Jean-Pierre Elisha Martinez - 265,945;
Gilad Yoeli - 265,945; Tamar Tzaban Nuhomov - 2,127,557; and Shay Goldstein -
2,659,446. The exercise price of such stock options is US$0.10 per share. The
granting of such stock options is subject to the approval of the appropriate
Israeli tax authorities and the appointment of a trustee pursuant to Section 102
of the Israeli Income Tax Ordinance. The options are not exercisable for at
least one year after the date of grant.
On January 10, 2006 pursuant to our 2005 Employees/Consultants/Directors Stock
Compensation Plan, we authorized the grant of stock options under Section 102 of
the Israeli Income Tax Ordinance, to add to the current board members' Mr.
Martinez and Mr. Yoeli 137,847 options (0.25% out of 60 138, 923 issued and
outstanding shares of the company), par value US$ 0.0001 each, at an exercise
price per share equal to 90% of the last transaction price quoted for such date
by the NASDAQ system or the NASDAQ National Market, as of the Stock Option
Agreement date, according to the company Employees/Consultants/Directors Stock
Compensation Plan; approved by the board of directors on September 15, 2005.
57
Issuance of Shares to Shmuel Shneibalg - In May 2004, the Company issued
117,000,000 pre-split shares of Common Stock. 100,000,000 pre-split shares were
issued to Shmuel Shneibalg, who at the time was the Company's Chief Executive
Officer, Chairman, Secretary, and Director. The shares were issued to Mr.
Shneibalg as payment for loans made to the Company in the aggregate amount of
$43,000.
Item 13. Exhibits
Exhibit No. Description
----------- -----------
3.1 Certificate of Incorporation (1)
3.2 Certificate of Amendment of Certificate of Incorporation, dated
January 4, 1989 (1)
3.3 Certificate of Amendment of Certificate of Incorporation, dated
June 24, 1991 (1)
3.4 Certificate of Amendment of Certificate of Incorporation, dated
June 8, 2001 (1)
3.5 Bylaws (1)
4.1 Description of Capital Stock (contained in the Certificate of
Incorporation and its amendments, filed as Exhibits 3.1 to 3.4).
10.1
16.1 Letter on Change in Certifying Accountant (2)
31.1 Rule 13a-14(a)/15d14(a) Certifications of Chief Executive Officer
31.2 Rule 13a-14(a)/15d14(a) Certifications of Chief Financial Officer
32.1 Section 1350 Certifications
(1) Previously filed with the Company's Form 10-KSB for the fiscal year ending
December 31, 2001, filed with the SEC on April 17, 2002
(2) Previously filed with the Company's Amended Current Report on Form 8-K/A,
filed with the SEC on December 22, 2005.
Item 14. Principal Accountant Fees and Services
Sherb & Co., LLP. has been serving as the Company's principal independent
accountant from December 14, 2005 until the present. Sherb & Co., LLP had
previously also served as the Company's principal independent accountants from
the quarter ended September 30, 2004 until September 13, 2005. Price Waterhouse
Coopers served as the Company's principal independent accountant from September
27, 2005 until December 13, 2005. Tschopp, Whitcomb & Orr, P.A. served as the
Company's principal independent accountant until August 2004. The pre-approved
fees billed by such accountants to the Company are set forth below:
Fiscal year ending Fiscal year ending
Sherb & Co., LLP December 31, 2005 December 31, 2004
Audit Fees $30,000 $10,000
Audit Related Fees
Tax Fees $ 0 $ 0
All Other Fees $ 3,316 $ 0
Fiscal year ending Fiscal year ending
Pricewaterhouse Coopers December 31, 2005 December 31, 2004
Audit Fees $45,000 $ 0
Audit Related Fees
Tax Fees $ 0 $ 0
All Other Fees $ 0 $ 0
58
The Company's Board of Directors unanimously approved 100% of the fees paid to
Sherb & Co., LLP for audit-related, tax and other fees. The Company's Board of
Directors did not approved the fees that were required by Pricewaterhouse
Coopers because of the unanticipated increased cost and delay in filing the
Company's quarterly report for the nine months ended September 30, 2005. The
requested fee is still in negotiation. The company recored in its book the whole
requested fee. The Company's Board of Directors pre-approves all permissible
non-audit services to be performed by the auditor. The percentage of hours
expended on the principal accountant's engagement to audit our financial
statements for the most recent fiscal year that were attributed to work
performed by persons other than the principal accountant's full-time, permanent
employees was 0%.
59
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Dated: April 17, 2006
SAFETEK INTERNATIONAL, INC.
By: /s/ Amnon Presler
----------------------------------------
Name: Amnon Presler
Title: Chief Executive Officer
By: /s/ Tamar Tzaban Nuhomov
----------------------------------------
Name: Tamar Tzaban Nuhomov
Title: Chief Financial Officer
60