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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 OR
 o
    
    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: 000-51905
 OMRIX BIOPHARMACEUTICALS, INC.
  Delaware
    
    52-2147005(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 630 Fifth Avenue, New York, New York
    
    10111(Address of principal executive offices)
    
    (Zip Code)
 (212) 887-6509
   Title of Class
    
    Name of Each Exchange on Which RegisteredCommon Stock
    
    The NASDAQ Global Market under($0.01 par value)
    
    the symbol OMRI
 o þ
 o þ
 þ o
 o
  o o þ
 o þ




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##### 



OMRIX BIOPHARMACEUTICALS, INC.
REPORT ON FORM 10-K
TABLE OF CONTENTS
 PagePART I
    
    
    3Item 1.
    
    Business
    
    
    3Item 1A.
    
    Risk Factors
    
    
    25Item 1B.
    
    Unresolved Staff Comments
    
    
    41Item 2.
    
    Properties
    
    
    42Item 3.
    
    Legal Proceedings
    
    
    42Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    42PART II
    
    
    42Item 5.
    
    Market for the Registrants Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
    
    
    42Item 6.
    
    Selected Financial Data
    
    
    44Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    45Item 7A.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    66Item 8.
    
    Financial Statements and Supplementary Data
    
    
    66Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    101Item 9A.
    
    Controls and Procedures
    
    
    101Item 9B.
    
    Other Information
    
    
    102PART III
    
    
    102Item 10.
    
    Directors, Executive Officers and Corporate Governance
    
    
    102Item 11.
    
    Executive Compensation
    
    
    102Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
    
    
    102Item 13.
    
    Certain Relationships and Related Transactions, and Director Independence
    
    
    102Item 14.
    
    Principal Accountant Fees and Services
    
    
    102PART IV
    
    
    102Item 15.
    
    Exhibits and Financial Statement Schedules
    
    
    102EX-23.1: CONSENT OF KOST, FORER, GABBAY & KASIEREREX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32: CERTIFICATION
  2




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PART I
   
 Item 1. Business
 Overview
   Biosurgical products and product candidates
    
    
    are readily available for spraying and dripping because they can be prepared from thawed product in
approximately one minute in the operating room;
    
    result in a clot that we believe has better adherence to tissue and greater elasticity;
 3




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
    
    avoid the possibility of an adverse reaction associated with bovine proteins because they are free of
animal-derived components; and
    
    can be refrigerated in a liquid form, thereby avoiding waste of unused product, for up to 30 days after
thawing.
   
    
    Evicel, with an expanded label for general hemostasis;
    
    thrombin stand-alone and flowable thrombin, for specific surgical applications; and
    
    a Fibrin Patch, comprised of our BAC II and thrombin embedded in a biodegradable device, designed for the
management and rapid control of bleeding, including severe or brisk bleeding, and for use on active bleeding sites
in trauma and surgical patients.
  Passive immunotherapy products and product candidates
  
    
    IVIG, marketed in Israel primarily for the treatment of patients with immune deficiencies;
    
    VIG, supplied under government contracts for the treatment of smallpox vaccine-related complications;
    
    HBIG, marketed in Israel for the prevention of reinfection of transplanted livers in patients with HBV;
    
    HT-VIG, a more concentrated form of VIG, which we are developing for the treatment of smallpox vaccine-related
complications and treatment of side effects and the prevention of the side effects of vaccination against smallpox;
    
    WNIG and HT-WNIG, which we are developing for the treatment of severe infection
with West Nile virus; and
    
    Avian Influenza IG, which we are developing under a CRADA agreement with the NIH.
  4




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Our Protein Purification Technology
     Our Products
  Biosurgical products and product candidates
  5




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Product
    
    Status
    
    Indication
    
    CollaboratorEvicel
    
    Commercially available in the U.S.
    
    Adjunct to
hemostasis in liver
surgery in the U.S.
    
    Currently marketed
through Ethicon in
the U.S.sBLA submitted for an adjunct to
hemostasis in peripheral vascular
surgery and for an adjunct to
hemostasis in kidney surgery, as
part of approval as an adjunct to
hemostasis for general surgical
use in the U.S. and the EU
    
    Adjunct to
hemostasis for
general surgical
use in the U.S. and
the EU
    
    Under development
with EthiconQuixil
    
    Commercially available in the EU,
several other European countries,
Mexico and Israel
    
    Adjunct to
hemostasis for
general surgical
use in Germany, UK,
France, Italy,
Brazil and Mexico
Adjunct to
hemostasis in liver
and orthopedic
surgeries in
certain EU
countries and
Israel
    
    Currently marketed through Ethicon in the EUFibrin Patch
    
    Commenced a Phase 1 clinical
trial as an adjunct to hemostasis
    
    For the management
and rapid control
of bleeding,
including severe or
brisk bleeding, and
for use on active
bleeding sites, in
the U.S. and the EU
    
    Under development with EthiconThrombin
stand-alone and
flowable thrombin
    
    Thrombin stand-alone: completed
Phase 3 clinical trial in the
U.S. and submitted BLA for
thrombin stand-alone
Flowable thrombin: may file
510(k) application after thrombin
stand-alone is approved in the
U.S.
    
    Adjunct to
hemostasis for
general surgical
use, primarily for
use in
neurosurgery, in
the U.S.
    
    Under development with EthiconAdhexil
    
    IND filed with the FDA
    
    Prevention
and/or reduction of
post-operative
adhesions in
patients undergoing
pelvic surgery
 Our fibrin sealant products
    6




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
    
    Ease-of-use.Fibrin sealants are used in time-critical
situations and therefore must be easy to use and readily
available for spraying and dripping. Our Evicel and Quixil are
sold as a frozen liquid and require approximately one minute
preparation time in the operating room after thawing. Many
other fibrin sealants require approximately 20 minutes to
prepare and cannot be prepared in advance because the
fibrinogen breaks down after four hours at room temperature.
In addition, unlike most other fibrin sealants, Evicel and
Quixil are transparent, making it easy for the surgeon to see
the underlying surface after the sealant has been applied to
determine whether hemostasis has been achieved.
    
    Efficacy.We believe that the naturally occurring suite
of proteins in the BAC II in Evicel and BAC in Quixil results
in a clot with better adherence to tissue and greater
elasticity.
    
    Safety.Evicel and Quixil are the first, and currently
the only, commercially available liquid fibrin sealant
products free of animal-derived components, thereby avoiding
the possibility of an adverse reaction associated with
exposure to bovine proteins contained in other commercially
available fibrin sealants.
    
    Economy.Evicel and Quixil can be refrigerated in liquid
form for up to 30 days after thawing. They come in one, two or
five milliliter vials. In addition, these products in unopened
vials are stable at room temperature for up to 24 hours.
Evicel and Quixil can also be kept frozen for up to two years.
This design and packaging allow for tailored application
without waste of unused product.
 Evicel
    7




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Quixil
     Fibrin Patch
     Thrombin stand-alone and flowable thrombin
  8




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Non-Hemostasis Products
  Passive
immunotherapy products and product candidates
   Product
    
    Status
    
    Indication
    
    Target marketVIG
    
    Sales in Israel and two
European countries
    
    Smallpox vaccine-related complications
    
    GovernmentsHT-VIG*
    
    In development
    
    Smallpox vaccine-related
complications and treatment of side
effects and the prevention of the
side effects of vaccination against
smallpox
    
    GovernmentsIVIG
    
    Commercial sales in
Israel; began Phase 3
clinical trial in the
U.S.**
    
    Immune deficiency
    
    Medical communityHBIG
    
    Commercial sales in Israel
    
    Prevention of HBV reinfection of
transplanted liver
    
    Medical communityWNIG/HT-WNIG*
    
    Completed enrollment for
Phase 1/2 clinical trial
in the U.S.
    
    West Nile fever
    
    Medical communityAvian Influenza IG
    
    In development
    
    Avian influenza
    
    Governments/Medical community
 
 *
    
    We have received NIH grants for the development of these product candidates.**
    
    FFF is conducting the Phase 3 clinical trial. 9




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VIG
   HT-VIG
   IVIG
   HBIG
   10




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WNIG
  Avian Influenza
  11




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Research and Development
    Sales and Marketing
    Manufacturing
and Production
  12




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
    
    nanofiltration filters, which we use for virus removal and purchase from Asahi Kasei Pharma Corporation;
    
    a resin, which we use to remove plasminogen and produce BAC II and purchase from Amersham Biosciences AB;
    
    the specialized application device, which we sell as part of our Evicel and Quixil product packages and
purchase from PlastMed; and
    
    tranexamic acid, which we use as a stabilizing agent in the current version of Quixil and purchase from
Daiichi Pharmaceuticals Co., Ltd.
  13




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Material Agreements
 Ethicon, Inc.
  Development agreement
        14




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Distribution and supply agreement
        15




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Talecris
    FFF Enterprises, Inc. and DCI Management Group LLC
   16




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
    
    out-of-pocket expenses for conducting the clinical trial exceed an agreed upon amount;
    
    the BLA is not approved by September 1, 2007 due to the fact that the clinical trial has not demonstrated the
effectiveness of IVIG; or
    
    we have not completed the limited expansion of our facility to enable expanded production of IVIG by an agreed
upon date.
     S&A Design and Construction Ltd.
   17




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Medimop Medical Projects Ltd.
  PlastMed Ltd.
  18




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Magen David Adom in Israel
     Lease and manufacturing
  19




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Investments in the manufacturing facility
 Compulsory Investments.
   Discretionary Investments.
 Plasma
  20




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Intellectual
property
    Intellectual Property
    Competition
  21




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Biosurgical competition
    Passive immunotherapy competition
  Government Regulation
  22




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23




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24




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Employees
    Available Information
  www.sec.gov
 www.omrix.com info@omrix.com, www.omrix.com
 
 25




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Item 1A. Risk Factors
 RISKS RELATED TO OUR BUSINESS AND INDUSTRY
 We have a history of operating losses and may not maintain profitability.
  We have an exclusive relationship with Ethicon relating to the distribution and development of our
fibrin sealant and other hemostasis products, and our resulting dependence on Ethicon exposes us to
significant product commercialization and development risks.
    
    
    for any or no reason at any time after March 23, 2006 by
providing us with at least six months prior written notice and
complying with certain other conditions;
    
    upon our material breach or non-compliance with
applicable law and if such breach or non-compliance is not
cured; or
    
    upon our bankruptcy or similar insolvency event.
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
    
    we would experience significant delays in the development of any product candidate then in development,
including our Fibrin Patch;
    
    we would have to assume full responsibility for further development, including funding these programs; and
    
    we would lose access to Ethicon intellectual property that relates to products covered by the development
agreement, and as a result we might be unable to develop these products at all.
   If our products do not achieve market acceptance, we will be unable to generate significant
revenues from them.
  27




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
    
    convenience and ease of use;
    
    availability of alternative and competing products or therapies;
    
    effectiveness of our or our collaborators marketing, distribution and pricing strategies; and
    
    publicity concerning our products as well as our competitors products.
  We may not be able to successfully develop and commercialize our product candidates, including
Evicel or Fibrin Patch.
  
    
    second generation fibrin sealant, Evicel, as an adjunct to general hemostasis;
    
    Fibrin Patch, for the management and rapid control of bleeding, including severe or brisk bleeding, and for
use on active bleeding sites;
    
    thrombin stand-alone and a flowable thrombin, for specific surgical applications; and
    
    HT-VIG for smallpox vaccine-related complications and treatment of side effects and the prevention of the side
effects of vaccination against smallpox.
     28




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If the third parties with which we contract for preclinical studies and clinical trials do not
perform in an acceptable manner, or if we suffer setbacks in these clinical trials, we may be
unable to develop and commercialize our product candidates as anticipated.
  If the limited number of suppliers on which we rely fail to supply us with the raw materials and
other components we use in manufacturing our products, we might be unable to satisfy product
demand.
  
    
    nanofiltration filters, which we use for virus removal and purchase from Asahi Kasei Pharma Corporation;
    
    a resin, which we use to remove plasminogen and produce BAC II, and purchase from Amersham Biosciences
AB;
    
    the specialized application device, which we sell as part of our Evicel and Quixil product packages and
purchase from PlastMed Ltd., or Plastmed; and
    
    tranexamic acid, which we use as a stabilizing agent in Quixil and purchase from Daiichi
Pharmaceuticals Co., Ltd.
  
    
    be unable or unwilling to provide us with sufficient materials to meet our demands;
    
    fail to meet our standards of quality or other specifications;
    
    increase significantly the prices they charge us for materials; or
    
    not carry out their contractual duties or meet anticipated deadlines, which could result in delays in
obtaining or maintaining regulatory approvals or in satisfying customer orders.
  29




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A disruption at our sole manufacturing site would significantly interrupt our production
capabilities, which could have drastic consequences to us, including threatening our financial
viability.
   If we are unable to expand our manufacturing capacity as planned, we may be unable to satisfy
demand for our products.
   30




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If our competitors develop and market products faster than we do or if those products are more
effective than our products, our commercial opportunities will be reduced or eliminated.
   Our products are derived from human plasma, and are therefore subject to the risk of biological
contamination inherent in plasma-derived products. This risk could adversely affect our ability to
obtain raw materials and market our products.
    If our sole supplier of plasma for manufacture of our WNIG product candidate on which we rely fails
to supply us with plasma, we might be unable to manufacture our WNIG product candidate.
  31




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Our international operations expose us to the risk of fluctuations in currency exchange rates.
  Currency
    
    Revenues
    
    ExpensesU.S. dollars
    
    
    61
    %
    
    
    67
    %NIS
    
    
    
    
    
    
    24
    %Euros
    
    
    6
    %
    
    
    7
    %GBP
    
    
    33
    %
    
    
    1
    %Other
    
    
    
    
    
    
    1
    %
    If we lose the services of our key management or scientific personnel, scientific collaborators or
other advisors, our business would suffer.
  32




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If product liability lawsuits are brought against us, we might incur substantial liabilities and
could be required to limit the commercialization of our products.
   Our operations involve biological and hazardous materials that may cause injury for which we could
be liable for damages.
   Variable demand by governments for passive immunotherapy products for biodefense applications or
our inability to obtain additional government contracts for such products may reduce our revenues
from this area of our passive immunotherapy product line.
  
    
    fluctuations in government demand for passive immunotherapy products for biodefense applications influenced by
budgetary preference and shifts in the perception of the relevance of a bioterrorism threat;
    
    the termination of key government contracts;
    
    our success in obtaining additional government contracts through a bidding process; and
    
    the development of new biodefense products that are superior to or eliminate the need for our products.
 33




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RISKS RELATED TO GOVERNMENT REGULATION
 The regulatory approval process for our product candidates is lengthy, and we may not be able to
obtain all of the regulatory approvals required to manufacture and commercialize our product
candidates.
    
    
    regulatory officials might interpret data from
pre-clinical and clinical testing in different ways than we
and our collaboration partners interpret it and conclude that
the product candidate is not safe and effective;
    
    regulatory agencies might not approve our manufacturing
processes or facilities or the processes or facilities of our
collaboration partners; or
    
    regulatory agencies might change their approval polices
or adopt new regulations which can delay approval and add
significant additional costs.
  34




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Post-approval manufacturing and marketing of our products is subject to substantial government
regulation and failure to comply with such regulation could result in fines and withdrawal of
approvals.
   We and our partners are prohibited from marketing our products for indications other than those
specifically approved by regulatory agencies. We could be subject to enforcement actions if we fail
to adhere to these restrictions.
   35




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If we and our third-party suppliers do not maintain high standards of manufacturing in accordance
with cGMP and other manufacturing regulations, our development and commercialization activities
could suffer significant interruptions or delays.
  RISKS RELATED TO OUR INTELLECTUAL PROPERTY
 We are dependent in part on our patents. The validity, enforceability and commercial value of our
rights under our patents are highly uncertain.
     For many of the technologies we employ in our business, we rely on maintaining competitively
sensitive know-how and other information as trade secrets, which may not sufficiently protect this
information. Disclosure of this information could impair our competitive position.
  36




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Our commercial success depends significantly on our ability to operate without infringing the
patents and other proprietary rights of third parties.
   
    
    we may become liable for substantial damages for past
infringement if a court decides that our technologies infringe
upon a competitors patent;
    
    a court may prohibit us from selling or licensing our
product without a license from the patent holder, which may
not be available on commercially acceptable terms or at all,
or which may require us to pay substantial royalties or grant
cross-licenses to our patents; and
    
    we may have to redesign our product so that it does not
infringe upon others patent rights, which may not be possible
or could require substantial funds or time.
   We may incur substantial costs as a result of litigation or other proceedings relating to patent
and other intellectual property rights.
   37




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RISKS RELATED TO OUR COMMON STOCK
 The price of our common stock may be highly volatile or may decline regardless of our operating
performance.
   
    
    developments concerning Evicel, Quixil, the Fibrin Patch or any of our product candidates;
    
    new products introduced or announced by us or our competitors;
    
    announcements of technological innovations by us or our competitors;
    
    expiration or termination of licenses, research contracts or other collaboration agreements;
    
    conditions or trends in the regulatory climate in the biopharmaceutical industry;
    
    intellectual property, product liability or other litigation against us;
    
    actual or anticipated variations in our operating results;
    
    changes in financial estimates by securities analysts;
    
    changes in the market valuations of similar companies; and
    
    sales of shares of our common stock, particularly sales by our officers, directors and significant stockholders.
  38




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The ownership interests of our officers, directors and largest stockholders could conflict with the
interests of our other stockholders.
  Certain provisions of Delaware law and our organizational documents could delay or discourage
takeover attempts that stockholders may consider favorable.
  
    
    allow the authorized number of directors to be changed only by resolution of our board of directors,
    
    allow our board of directors to designate the terms of and issue, without stockholder approval, series of
preferred stock with voting or other rights or preferences that could operate to dilute the stock ownership of a
potential hostile acquirer to prevent an acquisition that is not approved by our board of directors;
    
    require that stockholder action must be effected at a duly called stockholder meeting and prohibit stockholder
action by written consent;
    
    limit who may call meetings of our stockholders;
    
    require our stockholders to comply with advance notice procedures to nominate candidates for election to our
board of directors or to place stockholders proposals on the agenda for consideration at meetings of stockholders;
and
    
    require the approval of the holders of 80% of the outstanding shares of our capital stock entitled to vote to
amend certain provisions of our certificate of incorporation and bylaws.
  39




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Future sales of our common stock may cause the market price of our common stock to fall.
  Prior to our initial public offering, or IPO, we did not operate as a public company and fulfilling
our obligations incident to being a public company is expensive and time consuming.
   RISKS RELATED TO OUR OPERATIONS IN ISRAEL
 Political and military instability and other factors may adversely affect our operations in Israel.
  40




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Our operations could be disrupted as a result of the obligation of key personnel in Israel to
perform military service.
  The Israeli government programs and tax benefits in which we have participated and in which we
currently participate, or from which we may receive benefits, require us to meet certain
conditions. These programs or benefits may be terminated or reduced in the future, which could
increase our costs.
   It may be difficult to enforce a U.S. judgment against us, our officers and the Israeli experts
named in this prospectus outside the U.S., or to assert U.S. securities laws claims outside of the
U.S.
  
 41




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Item 1B. Unresolved Staff Comments
  
 Item 2. Properties
   
  
 Item 3. Legal Proceedings
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 PART II
 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
 Market Information
  High
    
    Low2006April 20, 2006 through June 30, 2006
    
    $
    14.99
    
    
    $
    9.53July 1, 2006 through September 30, 2006
    
    $
    19.57
    
    
    $
    11.50October 1, 2006 through December 31, 2006
    
    $
    34.60
    
    
    $
    16.75
 42




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Holders of Common Stock
  Dividends
  Securities Authorized For Issuance Under Equity Compensation Plans
  Number of securitiesremaining available forWeighted- average
    
    future issuance underNumber of securities to
    
    exercise
    
    equity compensationbe issued upon exercise
    
    price of outstanding
    
    plans (excludingof outstanding options,
    
    options, warrants and
    
    securities reflected inPlan category
    
    warrants and rights
    
    rights
    
    the first column)Equity compensation plans approved by security holders
    
    
    769,190
    
    
    $
    11.09
    
    
    
    890,317Equity compensation plans not approved by security holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    769,190
    
    
    $
    11.09
    
    
    
    890,317
 43




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Item 6. Selected Financial Data
  Year ended December 31,Consolidated statement of operations data:
    
    2004
    
    
    2005
    
    
    2006(in thousands, except share and per share data)Revenues:Product sales
    
    $
    17,567
    
    
    $
    22,478
    
    
    $
    56,925Development revenues and grants
    
    
    2,381
    
    
    
    5,021
    
    
    
    6,840Total revenues
    
    
    19,948
    
    
    
    27,499
    
    
    
    63,765Cost of revenues:Product sales
    
    
    15,421
    
    
    
    17,378
    
    
    
    24,405Development revenues and grants
    
    
    2,121
    
    
    
    3,969
    
    
    
    5,112Total cost of revenues
    
    
    17,542
    
    
    
    21,347
    
    
    
    29,517Gross profit
    
    
    2,406
    
    
    
    6,152
    
    
    
    34,248Operating expenses:Research and development, clinical and
regulatory expenses, net
    
    
    2,980
    
    
    
    2,828
    
    
    
    3,397Selling, marketing, general and
administrative expenses
    
    
    4,790
    
    
    
    5,514
    
    
    
    9,902Total operating expenses
    
    
    7,770
    
    
    
    8,342
    
    
    
    13,299Operating income (loss)
    
    
    (5,364
    )
    
    
    (2,190
    )
    
    
    20,949Financial income (expenses), net
    
    
    (2,466
    )
    
    
    (25,522
    )
    
    
    1,319Other income, net
    
    
    1,226
    
    
    
    
    
    
    
    790Net income (loss)
    
    
    (6,604
    )
    
    
    (27,712
    )
    
    
    23,058Accrued dividend and induced conversion
of preferred stock and warrants
    
    
    (121
    )
    
    
    6,491
    
    
    
    Net income (loss) for common stockholders
    
    $
    (6,725
    )
    
    $
    (21,221
    )
    
    $
    23,058Basic net income (loss) per share of
common stock
    
    $
    (1.93
    )
    
    $
    (2.01
    )
    
    $
    1.68Diluted net income (loss) per share of
common stock
    
    $
    (1.93
    )
    
    $
    (2.45
    )
    
    $
    1.65Weighted average number of shares of
common stock outstanding basic
    
    
    3,469,451
    
    
    
    10,562,885
    
    
    
    13,689,768Weighted average number of shares of
common stock outstanding diluted
    
    
    3,469,451
    
    
    
    10,578,620
    
    
    
    14,011,558
 As of December 31,Consolidated balance sheet data:
    
    2004
    
    
    2005
    
    
    2006(in thousands)Cash and cash equivalents
    
    $
    5,489
    
    
    $
    6,494
    
    
    $
    45,892Working capital
    
    
    (8,214
    )
    
    
    3,478
    
    
    
    94,925Total assets
    
    
    24,735
    
    
    
    26,290
    
    
    
    121,645Total debt
    
    
    38,442
    
    
    
    11,105
    
    
    
    1,195Temporary equity
    
    
    10,019
    
    
    
    
    
    
    
    Accumulated deficit
    
    
    (70,851
    )
    
    
    (92,072
    )
    
    
    (69,014
    )Stockholders equity (deficiency)
    
    
    (46,146
    )
    
    
    (5,563
    )
    
    
    96,084
 44




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##### Table of Contents



Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operation
 The following discussion and analysis of our financial condition and results of operations should
be read in conjunction with Selected consolidated financial data and our consolidated financial
statements and the related notes appearing elsewhere in this prospectus. This discussion and
analysis may contain forward-looking statements based on assumptions about our future business. Our
actual results could differ materially from those anticipated in these forward-looking statements
as a result of certain factors, including but not limited to those set forth under Risk factors
and elsewhere in this prospectus.
 Overview
       45




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##### Table of Contents



FDA Approvals and Related Developments
     Factors Affecting Results of Operations
 Revenues
  Product sales
  46




---



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Development revenues and grants
  Cost of revenues and gross margin
  Cost of product sales and gross margin
  47




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
    
    Sales price: the dollar amount we receive for sales of
products in each of our product lines is determined by the per
unit price charged to the health care provider. The transfer
price paid to us by Ethicon is computed as a percentage of the
sales price that Ethicon charges its customers, as we describe
in the section of this prospectus entitled Factors
affecting results of operations Revenues above. Our gross
margin on our biosurgical product sales to Ethicon should be
considered with the understanding that we do not bear selling
and marketing expenses in connection with such sales.
    
    Cost of production:
 
    
    Production efficiency (measured as the cost of a saleable unit), which increases or decreases
as a result of either (a) a change in batch size because the fixed costs associated with the
manufacturing process (such as direct labor costs and quality control) are allocated over all of
the saleable units in a batch or (b) a change in the number of batches we produce in a given
period because plant overhead costs (such as rent and maintenance) are allocated over all of the
batches produced in such period. We expect the annual number of batches we produce to increase
to the extent that demand for our products grows.
    
    Raw material costs, primarily plasma or plasma fractions, which we purchase at market prices.
We endeavor to increase the cost efficiency of our raw materials and therefore we constantly
make decisions regarding purchasing either plasma or plasma fractions based on manufacturing
economics. These purchasing decisions are driven by the cost of the raw material unit (either
plasma or plasma fractions), the processing costs and the total sales value that can be
generated from the different products that we can manufacture from a single unit of raw
material. Our ability to use specific raw materials depends, in part, on regulatory approvals
obtained by suppliers.
 Cost of development revenues and grants
  Research and development, clinical and regulatory expenses, net
   Evicel
 48




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Fibrin Patch
 Thrombin stand-alone and flowable
 HT-VIG
 WNIG
 Avian Influenza
  49




---



##### Table of Contents



Evicel
    
    Fibrin Patch
    
    Thrombin
    
    HT-VIG
    
    WNIG(in thousands)2004
    
    $
    692
    
    
    $
    907
    
    
    $
    386
    
    
    $
    431
    
    
    $
    2005
    
    
    581
    
    
    
    2,423
    
    
    
    172
    
    
    
    1,031
    
    
    
    562006
    
    
    713
    
    
    
    2,351
    
    
    
    191
    
    
    
    852
    
    
    
    363
 Selling, marketing, general and administrative expenses
  Financial income, net
  50




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##### Table of Contents



Other income (expense), net
  CRITICAL ACCOUNTING POLICIES AND ESTIMATES
  
    
    revenue recognition;
    
    income taxes;
    
    inventory reserves; and
    
    accounting for stock-based compensation and fair value of our common stock.
 Revenue recognition
  
    
    there is persuasive evidence of an arrangement;
    
    delivery has occurred and title has passed to our customer;
    
    the fee is fixed and determinable and no further obligation exists; and
    
    collectibility is reasonably assured.
  51




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52




---



##### Table of Contents



Income taxes
  Inventory reserves
  Accounting for stock-based compensation and fair value of our common stock
     53




---



##### Table of Contents




    
    the award of an approximately $20 million supply agreement for our VIG from the UK government in the second
half of 2005;
    
    the results of Ethicons launch of Crosseal in the U.S.;
    
    the progress made in the development of our biosurgical product candidates, in particular Fibrin Patch;
    
    the progress made in the development of our immunotherapy product candidates, in particular HT-VIG; and
    
    the reduction in the illiquidity discount applicable to the fair value of our common stock as the uncertainty
associated with successfully completing our IPO was reduced.
    54




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55




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RESULTS OF OPERATIONS
 Years ended December 31, 2004, 2005 and 2006
 Revenues
   Year ended December 31,2004
    
    
    2005
    
    
    2006(in millions)Biosurgical products:Product sales
    
    $
    5.2
    
    
    $
    7.0
    
    
    $
    13.4Development revenues
    
    
    2.0
    
    
    
    4.0
    
    
    
    5.7Total
    
    
    7.2
    
    
    
    11.0
    
    
    
    19.1Passive immunotherapy products:Product sales
    
    
    10.4
    
    
    
    14.2
    
    
    
    43.3Grants
    
    
    0.4
    
    
    
    1.0
    
    
    
    1.2Total
    
    
    10.8
    
    
    
    15.2
    
    
    
    44.5Other products
    
    
    1.9
    
    
    
    1.3
    
    
    
    0.2Total
    
    $
    19.9
    
    
    $
    27.5
    
    
    $
    63.8
 
   56




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Biosurgical
 General.
 Product sales.
 Development revenues and grants.
 Passive immunotherapy
 General.
 Product sales.
 Grants.
 Cost of revenues
 General.
 Cost of product sales and gross margin.
 57




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Cost of development revenues and grants.
  Selling, marketing, general and administrative expenses
  Financial expenses, net
    Other income, net
  58




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Quarterly Results of Operations
  Year ended December 31,(Unaudited)U.S. dollars in thousands, except per share amount)Fiscal Years by Quarter
    
    2005
    
    2006Quarterly Data
    
    1st
    
    2nd
    
    3rd
    
    4th
    
    1st
    
    2nd
    
    3rd
    
    4thRevenue
    
    $
    5,901
    
    
    $
    5,545
    
    
    $
    7,725
    
    
    $
    8,328
    
    
    $
    11,303
    
    
    $
    16,079
    
    
    $
    18,339
    
    
    $
    18,044Gross profit
    
    
    742
    
    
    
    841
    
    
    
    2,020
    
    
    
    2,549
    
    
    
    5,155
    
    
    
    9,086
    
    
    
    10,904
    
    
    
    9,103Net income (loss)
    
    
    (23,817
    )
    
    
    (3,665
    )
    
    
    (323
    )
    
    
    93
    
    
    
    3,234
    
    
    
    5,311
    
    
    
    8,123
    
    
    
    6,390Net earnings (loss) per
shareBasic
    
    
    (1.80
    )
    
    
    (0.34
    )
    
    
    (0.03
    )
    
    
    0.01
    
    
    
    0.30
    
    
    
    0.38
    
    
    
    0.54
    
    
    
    0.42Net earnings (loss) per
share- Diluted
    
    
    (2.27
    )
    
    
    (0.34
    )
    
    
    (0.03
    )
    
    
    0.01
    
    
    
    0.29
    
    
    
    0.38
    
    
    
    0.53
    
    
    
    0.41
 3 months ended December 31,2005
    
    
    2006(U.S. dollars in thousands,except share and per share data)Revenues:Product sales
    
    $
    6,459
    
    
    $
    15,684Development revenues and grants
    
    
    1,869
    
    
    
    2,360Total revenues
    
    
    8,328
    
    
    
    18,044Cost of revenues:Product sales
    
    
    4,451
    
    
    
    6,845Development revenues and grants
    
    
    1,328
    
    
    
    2,096Total cost of revenues
    
    
    5,779
    
    
    
    8,941Gross profit
    
    
    2,549
    
    
    
    9,103Research and development, clinical and regulatory expenses, net
    
    
    1,119
    
    
    
    807Selling, marketing, general and administrative expenses
    
    
    797
    
    
    
    2,768Operating income (loss)
    
    
    633
    
    
    
    5,528Financial income (expenses), net
    
    
    (540
    )
    
    
    862Other income
    
    
    
    
    
    
    Net income (loss)
    
    $
    93
    
    
    $
    6,390Net income per shareBasic net income per share of common stock
    
    $
    0.01
    
    
    $
    0.42Diluted net income per share of common stock
    
    $
    0.01
    
    
    $
    0.41Weighted average number of shares of common stock outstanding during the period used
to compute basic net income per share
    
    
    10,871,295
    
    
    
    15,193,390Weighted
average number of shares of common stock outstanding during the period used
to compute diluted net income per share
    
    
    10,871,295
    
    
    
    15,601,221
 59




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Three monthsPeriod EndedDecember 30,2005
    
    
    2006$US thousandsBiosurgical productsProduct sales
    
    $
    1,900
    
    
    $
    4,260Development revenues
    
    
    1,261
    
    
    
    1,8093,161
    
    
    
    6,069Passive immunotherapy productsProduct sales
    
    
    4,447
    
    
    
    11,424Grants
    
    
    609
    
    
    
    5515,056
    
    
    
    11,975Other products
    
    
    111
    
    
    
    Total
    
    $
    8,328
    
    
    $
    18,044
  LIQUIDITY AND CAPITAL RESOURCES
  
    
    unsecured convertible notes and secured convertible promissory notes and other secured and unsecured third
party debt consisting mainly of loans and credit lines;
    
    private sales of our equity securities;
    
    a combination of cash from product sales, upfront fees and milestone payments from our collaborators, revenues
for performance of development revenues and government grants;
    
    interest earned on cash and investments; and
    
    an initial public offering and a follow-on offering of our common stock.
   60




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Cash flows
          61




---



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Obligations and commitments
  Israel Discount Bank credit facility
   62




---



##### Table of Contents




    
    a three-year loan in an initial principal amount of NIS 5
million maturing in May 2008 and bearing interest at a fixed
rate of 7.32% with a quarterly repayment schedule, of which a
principal amount of NIS 2.5 million was outstanding; and
    
    a three-year loan in an initial principal amount of NIS 5
million maturing in May 2008 and bearing interest at a
floating rate of the Israeli prime rate plus 1.20% with a
quarterly repayment schedule, of which a principal amount of
NIS 2.5 million was outstanding.
  Bank Leumi facility
   63




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Minimum payments due by periodLess than
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    1 Year
    
    1-3 Years
    
    3-5 Years
    
    5 Years(in millions)Contractual obligationsLong term liabilities(1)
    
    
    1.2
    
    
    
    0.8
    
    
    
    0.4
    
    
    
    
    
    
    
    Operating leases(2)
    
    
    10.2
    
    
    
    2.1
    
    
    
    3.8
    
    
    
    2.4
    
    
    
    1.9Purchase obligations(3)
    
    
    40.2
    
    
    
    13.7
    
    
    
    12.5
    
    
    
    9.2
    
    
    
    4.8Total
    
    
    51.6
    
    
    
    16.6
    
    
    
    16.7
    
    
    
    11.6
    
    
    
    6.7
 
 (1)
    
    Consists of long term principal repayment of loans.(2)
    
    Consists of operating leases for our facilities and motor vehicles and assumes no exercise of
any option to extend these leases.(3)
    
    The amounts included in open purchase order commitments are subject to performance under the
purchase order by the supplier of the goods or services and do not become our obligation until
such performance is rendered. The amount shown is principally for the purchase of certain raw
materials under long term agreements only. Off-balance sheet arrangements
  Capital requirements
  CORPORATE TAXATION
   64




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RECENT ACCOUNTING PRONOUNCEMENTS
      65




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Item 7A.
    
    Quantitative and Qualitative Disclosures
   Amount at
    
    Interest Rate atDecember 31,
    
    December 31,Term and Currency
    
    2006
    
    2006(amount in thousands)Long term NIS credit fixed interest rate
    
    $
    592
    
    
    
    7.32
    %Long term NIS credit variable interest rate
    
    $
    592
    
    
    
    7.2
    %
  Amount at
    
    Interest Rate atDecember 31,
    
    December 31,Term and Currency
    
    2006
    
    2006(amounts in thousands)Cash and cash equivalents U.S. $ deposits
    
    $
    42,990
    
    
    
    3.95
    %Cash and cash equivalents Euro deposit
    
    $
    1,767
    
    
    
    3.34
    %Cash and cash equivalents NIS deposits
    
    $
    1,125
    
    
    
    3.17
    %Cash and cash equivalents GBP deposits
    
    $
    7
    
    
    
    0.00
    %Short term U.S. $ deposits Bonds
    
    $
    26,100
    
    
    
    5.29
    %Short term U.S. $ deposits auction rate securities
    
    $
    8,830
    
    
    
    5.34
    %Long term U.S. $ deposits
    
    $
    2,308
    
    
    
    5.32
    %Long term NIS deposits
    
    $
    171
    
    
    
    4.20
    %Long term Euro deposits
    
    $
    48
    
    
    
    1.85
    %
   
 Item 8.
    
    Financial Statements and Supplementary Data
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 PageAudited Consolidated Financial Statements at December 31, 2006Report of Independent Registered Public Accounting Firm
    
    
    67Consolidated balance sheets
    
    
    68Consolidated statements of operations
    
    
    70Statements of changes in stockholders equity (deficiency)
    
    
    71Consolidated statements of cash flows
    
    
    72Notes to consolidated financial statements
    
    
    74
 66




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Tel-Aviv, Israel
    
    /s/ KOST FORER GABBAY & KASIERERMarch 8, 2007
    
    A Member of Ernst & Young Global
 67




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##### Table of Contents



December 31,Note
    
    
    2005
    
    
    2006(U.S. dollars in thousands)ASSETSCurrent assetsCash and cash equivalents
    
    
    
    
    
    $
    6,494
    
    
    $
    45,892Short term investment
    
    
    3
    
    
    
    
    
    
    
    34,930Trade receivables, net of allowance for
doubtful accounts of $22 and $15 at
December 31, 2005 and 2006, respectively.
    
    
    
    
    
    
    5,344
    
    
    
    9,748Prepaid expenses and other current assets
    
    
    4
    
    
    
    2,200
    
    
    
    2,716Inventory
    
    
    5
    
    
    
    6,793
    
    
    
    17,419Total current assets
    
    
    
    
    
    
    20,831
    
    
    
    110,705Long-term receivables
    
    
    
    
    
    
    404
    
    
    
    2,751Property, plant and equipment, net
    
    
    6
    
    
    
    4,352
    
    
    
    7,692Deferred charges and other assets
    
    
    7
    
    
    
    703
    
    
    
    497Total assets
    
    
    
    
    
    $
    26,290
    
    
    $
    121,645
  68




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##### Table of Contents



December 31,Note
    
    
    2005
    
    
    2006(U.S. dollars in thousands,except share data)LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIENCY)Current liabilities:Short-term credit from banks and current maturities of long-term loans
    
    
    10
    
    
    $
    5,079
    
    
    $
    801Accounts payable and accruals:Trade
    
    
    
    
    
    
    5,995
    
    
    
    7,498Other
    
    
    9
    
    
    
    6,279
    
    
    
    7,481Total current liabilities
    
    
    
    
    
    
    17,353
    
    
    
    15,780Long-term liabilities:Long-term loans, net of current maturities
    
    
    10
    
    
    
    3,878
    
    
    
    394Convertible promissory notes
    
    
    8
    
    
    
    2,148
    
    
    
    Deferred revenues
    
    
    
    
    
    
    7,526
    
    
    
    8,472Other long-term liabilities
    
    
    11
    
    
    
    948
    
    
    
    915Total long-term liabilities
    
    
    
    
    
    
    14,500
    
    
    
    9,781Total liabilities
    
    
    
    
    
    
    31,853
    
    
    
    25,561Commitments and contingent liabilities
    
    
    12STOCKHOLDERS EQUITY (DEFICIENCY):Common stock of $0.01 par value
    
    
    13Authorized: 14,545,454 and 43,636,364 shares at December 31, 2005
and 2006, respectively; Issued: 10,885,996 and 16,576,159 shares at
December 31, 2005 and 2006, respectively; Outstanding:10,878,871and 16,583,284 shares at December 31, 2005 and 2006,
respectively;
    
    
    
    
    
    
    109
    
    
    
    166Preferred stock of $0.01 par valueAuthorized: 909,090 and 7,272,727 shares at December 31, 2005 and
at December 31, 2006, respectively; Issued and outstanding: None at
December 31, 2005 and at December 31, 2006;
    
    
    
    
    
    
    
    
    
    
    Additional paid-in capital
    
    
    
    
    
    
    87,314
    
    
    
    167,546Deferred stock-based compensation
    
    
    
    
    
    
    (104
    )
    
    
    Treasury stock, at cost (7,125 shares at December 31, 2005 and 2006)
    
    
    
    
    
    
    (44
    )
    
    
    (44
    )Accumulated other comprehensive loss
    
    
    
    
    
    
    (766
    )
    
    
    (2,570
    )Accumulated deficit
    
    
    
    
    
    
    (92,072
    )
    
    
    (69,014
    )Total stockholders equity (deficiency)
    
    
    
    
    
    
    (5,563
    )
    
    
    96,084Total liabilities and stockholders equity
    
    
    
    
    
    $
    26,290
    
    
    $
    121,645
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Year ended December 31,Note
    
    
    2004
    
    
    2005
    
    
    2006(U.S. dollars in thousands,except share and per share data)Revenues:Product sales
    
    
    
    
    
    $
    17,567
    
    
    $
    22,478
    
    
    $
    56,925Development revenue and grants
    
    
    
    
    
    
    2,381
    
    
    
    5,021
    
    
    
    6,840Total revenues
    
    
    
    
    
    
    19,948
    
    
    
    27,499
    
    
    
    63,765Cost of revenues:Product sales
    
    
    
    
    
    
    15,421
    
    
    
    17,378
    
    
    
    24,405Development revenue and grants
    
    
    
    
    
    
    2,121
    
    
    
    3,969
    
    
    
    5,112Total cost of revenues
    
    
    
    
    
    
    17,542
    
    
    
    21,347
    
    
    
    29,517Gross profit
    
    
    
    
    
    
    2,406
    
    
    
    6,152
    
    
    
    34,248Research and development, clinical and regulatory expenses, net
    
    
    
    
    
    
    2,980
    
    
    
    2,828
    
    
    
    3,397Selling, marketing, general and administrative expenses
    
    
    
    
    
    
    4,790
    
    
    
    5,514
    
    
    
    9,902Operating income (loss)
    
    
    
    
    
    
    (5,364
    )
    
    
    (2,190
    )
    
    
    20,949Financial income (expenses), net
    
    
    15
    
    
    
    (2,466
    )
    
    
    (25,522
    )
    
    
    1,319Other income
    
    
    16
    
    
    
    1,226
    
    
    
    
    
    
    
    790Net income (loss)
    
    
    
    
    
    $
    (6,604
    )
    
    $
    (27,712
    )
    
    
    23,058Accrued
dividend and induced conversion of Preferred Stock and
warrants
    
    
    13
    
    
    
    (121
    )
    
    
    6,491
    
    
    
    Net income (loss) for common stockholders
    
    
    
    
    
    $
    (6,725
    )
    
    $
    (21,221
    )
    
    $
    23,058Net income (loss) per share
    
    
    17Basic net income (loss) per share of common stock
    
    
    
    
    
    $
    (1.93
    )
    
    $
    (2.01
    )
    
    $
    1.68Diluted net income (loss) per share of common stock
    
    
    
    
    
    $
    (1.93
    )
    
    $
    (2.45
    )
    
    $
    1.65Weighted average number of shares of common stock outstanding
during the year used to compute basic net income (loss) per
share
    
    
    
    
    
    
    3,469,451
    
    
    
    10,562,885
    
    
    
    13,689,768Weighted average number of shares of common stock outstanding
during the year used to compute diluted net income (loss) per
share
    
    
    
    
    
    
    3,469,451
    
    
    
    10,578,620
    
    
    
    14,011,558
  70




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AccumulatedCommon stock
    
    
    Additional
    
    
    Deferred
    
    
    
    
    
    
    other
    
    
    
    
    
    
    TotalNumber of
    
    
    Share
    
    
    paid-in
    
    
    stock-based
    
    
    Treasury
    
    
    comprehensive
    
    
    Accumulated
    
    
    comprehensiveshares
    
    
    capital
    
    
    capital
    
    
    compensation
    
    
    stock
    
    
    income (loss)
    
    
    deficit
    
    
    Income (loss)
    
    
    Total(U.S. dollars in thousands, except share and per share data)Balance at January 1, 2004
    
    
    3,469,451
    
    
    
    35
    
    
    
    28,623
    
    
    
    
    
    
    
    (44
    )
    
    
    (2,177
    )
    
    
    (64,126
    )
    
    
    
    
    
    
    (37,689
    )Deferred stock-based
compensation
    
    
    
    
    
    
    
    
    
    
    30
    
    
    
    (30
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of deferred
stock- based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5Stock-based compensation to
non- employees
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,604
    )
    
    $
    (6,604
    )
    
    
    (6,604
    )Foreign currency translation
Adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,745
    )
    
    
    
    
    
    
    (1,745
    )
    
    
    (1,745
    )Accrued dividend on Preferred
stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (121
    )
    
    
    
    
    
    
    (121
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (8,349
    )Balance at December 31, 2004
    
    
    3,469,451
    
    
    
    35
    
    
    
    28,661
    
    
    
    (25
    )
    
    
    (44
    )
    
    
    (3,922
    )
    
    
    (70,851
    )
    
    
    
    
    
    
    (46,146
    )Recapitalization Agreement:Conversion of convertible
notes
    
    
    6,518,641
    
    
    
    65
    
    
    
    54,623
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    54,688Conversion of Preferred stock
    
    
    875,197
    
    
    
    9
    
    
    
    5,329
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,338Conversion of warrants
    
    
    8,006
    
    
    
    
    
    
    
    (1,785
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,785
    )Issuance of restricted shares
of common
stock
    
    
    7,576
    
    
    
    
    
    
    
    104
    
    
    
    (104
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of deferred
stock- based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50Deferred compensation related
to employee stock option
grants
    
    
    
    
    
    
    
    
    
    
    25
    
    
    
    (25
    )
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation to
non- employees
    
    
    
    
    
    
    
    
    
    
    282
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    282Warrants that were issued in
contemplation with long-term
loan
    
    
    
    
    
    
    
    
    
    
    75
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    75Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (27,712
    )
    
    $
    (27,712
    )
    
    
    (27,712
    )Foreign currency translation
Adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,156
    
    
    
    
    
    
    
    3,156
    
    
    
    3,156Induced conversion of
Preferred stock and warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,491
    
    
    
    
    
    
    
    6,491Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (24,556
    )Balance at December 31, 2005
    
    
    10,878,871
    
    
    $
    109
    
    
    $
    87,314
    
    
    $
    (104
    )
    
    $
    (44
    )
    
    $
    (766
    )
    
    $
    (92,072
    )
    
    
    
    
    
    $
    (5,563
    )
  71




---



##### Table of Contents



AccumulatedCommon stock
    
    
    Additional
    
    
    Deferred
    
    
    
    
    
    
    other
    
    
    
    
    
    
    TotalNumber of
    
    
    Share
    
    
    paid-in
    
    
    stock-based
    
    
    Treasury
    
    
    comprehensive
    
    
    Accumulated
    
    
    comprehensiveshares
    
    
    capital
    
    
    capital
    
    
    compensation
    
    
    stock
    
    
    income (loss)
    
    
    deficit
    
    
    Income (loss)
    
    
    Total(U.S. dollars in thousands, except share and per share data)Exercise of Options and
Warrants
    
    
    214,924
    
    
    
    2
    
    
    
    782
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    784Issuance of shares in IPO
    
    
    3,953,125
    
    
    
    40
    
    
    
    34,085
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34,125Issuance of
shares in Follow-on offering
    
    
    1,500,000
    
    
    
    15
    
    
    
    44,318
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    44,333Stock-based payment to
employees
    
    
    36,364
    
    
    
    *
    
    
    
    510
    
    
    
    104
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    614Stock-based payment to
non-employees
    
    
    
    
    
    
    
    
    
    
    537
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    537Comprehensive loss:Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,058
    
    
    
    23,058
    
    
    
    23,058Foreign currency translation
adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,804
    )
    
    
    
    
    
    
    (1,804
    )
    
    
    (1,804
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    21,608Balance at December 31, 2006
    
    
    16,583,284
    
    
    
    166
    
    
    
    167,546
    
    
    
    
    
    
    $
    (44
    )
    
    
    (2,570
    )
    
    
    (69,014
    )
    
    
    
    
    
    
    96,084
   72




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##### Table of Contents



Year ended December 31,2004
    
    
    2005
    
    
    2006(U.S. dollars in thousands)Cash flows from operating activities:Net income (loss)
    
    $
    (6,604
    )
    
    $
    (27,712
    )
    
    $
    23,058Adjustments
required to reconcile net income (loss) to net cash provided
by (used in) operating activities:Depreciation of property, plant and equipment
    
    
    659
    
    
    
    762
    
    
    
    910Amortization of intangible assets
    
    
    
    
    
    
    29
    
    
    
    59Amortization of deferred charges
    
    
    96
    
    
    
    148
    
    
    
    148Gain from sale of property, plant and equipment
    
    
    (11
    )
    
    
    
    
    
    
    (5
    )Increase (decrease) in accrued severance pay, net
    
    
    56
    
    
    
    (52
    )
    
    
    36Accrued interest and exchange rates differences, net
    
    
    35
    
    
    
    70
    
    
    
    104Non cash stock-based payment
    
    
    13
    
    
    
    332
    
    
    
    1,151Non cash other income
    
    
    
    
    
    
    
    
    
    
    (790
    )Inventory write-offs
    
    
    177
    
    
    
    100
    
    
    
    95Unrealized foreign exchange differences, net
    
    
    (1,694
    )
    
    
    3,007
    
    
    
    (1,545
    )Interest and amortization of discount on convertible notes
    
    
    2,649
    
    
    
    296
    
    
    
    (181
    )Financing charges related to inducement and extinguishment of
convertible notes and warrants
    
    
    
    
    
    
    20,932
    
    
    
    Decrease (increase) in trade receivables, net
    
    
    (738
    )
    
    
    171
    
    
    
    (4,384
    )Decrease (increase) in prepaid expenses and other current assets
    
    
    (228
    )
    
    
    542
    
    
    
    (1,253
    )Decrease (increase) in inventory
    
    
    1,495
    
    
    
    (53
    )
    
    
    (9,868
    )Increase (decrease) in accounts payable and accruals:Trade
    
    
    (2,035
    )
    
    
    (2,086
    )
    
    
    373Other
    
    
    2,082
    
    
    
    (176
    )
    
    
    1,382Deferred revenues
    
    
    6,429
    
    
    
    277
    
    
    
    1,130Net cash provided by (used in) operating activities
    
    
    2,381
    
    
    
    (3,413
    )
    
    
    10,420Cash flows from investing activities:Purchase of property, plant and equipment
    
    
    (2,661
    )
    
    
    (973
    )
    
    
    (4,039
    )Proceeds from sale of property, plant and equipment
    
    
    11
    
    
    
    3
    
    
    
    13Investment in available for sale securities
    
    
    
    
    
    
    
    
    
    
    (29,100
    )Redemption of available for sale securities
    
    
    
    
    
    
    
    
    
    
    3,000Investment in short term deposits
    
    
    
    
    
    
    
    
    
    
    (17,950
    )Redemption of short term deposits
    
    
    
    
    
    
    
    
    
    
    9,120Investment in long term deposits and available for sale security
    
    
    (3
    )
    
    
    279
    
    
    
    (2,291
    )Investment in intangible assets
    
    
    
    
    
    
    (585
    )
    
    
    Net cash used in investing activities
    
    
    (2,653
    )
    
    
    (1,276
    )
    
    
    (41,247
    )
  73




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Year ended December 31,2004
    
    
    2005
    
    
    2006(U.S. dollars in thousands)Cash flows from financing activities:Short-term credit from banks, net
    
    
    1,446
    
    
    
    129
    
    
    
    (2,243
    )Debt issuance costs
    
    
    
    
    
    
    (161
    )Proceeds from Initial Public Offering (IPO)
    
    
    
    
    
    
    
    
    
    
    36,764Proceeds from follow-on offering
    
    
    
    
    
    
    
    
    
    
    45,120Costs relating to IPO and the Follow-on
    
    
    
    
    
    
    (493
    )
    
    
    (2,147
    )Proceeds from long-term loans
    
    
    464
    
    
    
    7,100Repayment of long-term loans
    
    
    (309
    )
    
    
    (1,024
    )
    
    
    (5,643
    )Issuance of convertible preferred stock, net
    
    
    4,892
    
    
    
    
    
    
    
    Repayment of convertible promissory notes
    
    
    (2,500
    )
    
    
    
    
    
    
    (1,967
    )Proceeds from exercise of options and warrants
    
    
    
    
    
    
    75
    
    
    
    784Net cash provided by financing activities
    
    
    3,993
    
    
    
    5,626
    
    
    
    70,668Translation differences from cash balances of subsidiary
    
    
    (45
    )
    
    
    68
    
    
    
    (443
    )Increase in cash and cash equivalents
    
    
    3,676
    
    
    
    1,005
    
    
    
    39,398Balance of cash and cash equivalents at beginning of period
    
    
    1,813
    
    
    
    5,489
    
    
    
    6,494Balance of cash and cash equivalents at end of period
    
    $
    5,489
    
    
    $
    6,494
    
    
    $
    45,892(1) In connection with the Recapitalization Agreement, the Company
recorded the following:Issuance of common stock
    
    
    
    
    
    $
    74Conversion of convertible promissory notes
    
    
    
    
    
    
    (9,501
    )Conversion of convertible notes
    
    
    
    
    
    
    (24,407
    )Conversion of preferred stock
    
    
    
    
    
    
    (5,313
    )Conversion of warrants
    
    
    
    
    
    
    1,785Common stock issuance costs
    
    
    
    
    
    
    127Additional paid-in capital
    
    
    
    
    
    
    58,167Financing charges related to inducement and extinguishment of
convertible notes
    
    
    
    
    
    $
    20,932(2) Supplemental disclosure of cash flow information:Cash paid during the period for:Interest
    
    $
    1,251
    
    
    $
    428
    
    
    $
    2,337(3) Non-cash investing and financing activities:Non-cash investments in property, plant and equipment
    
    $
    
    
    
    $
    
    
    
    $
    218Non-cash
investments in costs relating to IPO and Follow-on deferred charges
    
    $
    
    
    
    $
    605
    
    
    $
    788
  74




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##### Table of Contents



U.S. dollars in thousands except share and per share data
 NOTE 1: GENERAL
       
      75




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##### Table of Contents



76




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##### Table of Contents



NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
                77




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##### Table of Contents



%Machinery and equipment
    
    
    10-33Office furniture and equipment
    
    
    7-20Computers and software
    
    
    33Vehicles
    
    
    15
  78




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##### Table of Contents



Revenue from Product Sales
   Collaborative Arrangements Revenue
   79




---



##### Table of Contents



Development revenue
    Grants
  Deferred revenue
        80




---



##### Table of Contents



81




---



##### Table of Contents



82




---



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83




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##### Table of Contents



NOTE 3: SHORT-TERM INVESTMENTS
  December 31, 2005
    
    
    December 31, 2006Auction rate securities
    
    $
    
    
    
    $
    8,830Short-term deposits
    
    
    
    
    
    
    26,100$
    
    
    
    $
    34,930
 NOTE 4: PREPAID EXPENSES AND OTHER CURRENT ASSETS
 December 31,2005
    
    
    2006Restricted cash(1)
    
    $
    250
    
    
    $
    250Government and regulatory authorities
    
    
    487
    
    
    
    653Interest receivable
    
    
    
    
    
    
    263Advances to suppliers
    
    
    36
    
    
    
    123Deferred IPO charges
    
    
    1,097Prepaid expenses and other(2)
    
    
    330
    
    
    
    1,427$
    2,200
    
    
    $
    2,716
 
 (1)
    
    Restricted cash related to a bank guarantee issued by a bank to suppliers. See Note 12(e).(2)
    
    Include $1,000 upfront refundable payment to supplier, see also note 12(k). NOTE 5: INVENTORY
 December 31,2005
    
    
    2006Raw materials
    
    $
    2,691
    
    
    $
    9,996Products in progress
    
    
    394
    
    
    
    849Finished products(1)
    
    
    3,708
    
    
    
    6,574$
    6,793
    
    
    $
    17,419
 
 (1)
    
    At December 31, 2005 and 2006, includes inventory at a customer site, for which revenue was
not yet recognized, in a total amount of $1,421 and $392, respectively.  84




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##### Table of Contents



NOTE 6: PROPERTY, PLANT AND EQUIPMENT, NET
 December 31,2005
    
    
    2006Cost:Machinery and equipment
    
    $
    6,228
    
    
    $
    7,012Office furniture and equipment
    
    
    417
    
    
    
    647Computers and software
    
    
    779
    
    
    
    756Vehicles
    
    
    151
    
    
    
    95Leasehold improvements
    
    
    223
    
    
    
    3517,798
    
    
    
    8,861Accumulated depreciation:Machinery and equipment
    
    
    3,254
    
    
    
    3,970Office furniture and equipment
    
    
    317
    
    
    
    525Computers and software
    
    
    600
    
    
    
    472Vehicles
    
    
    137
    
    
    
    66Leasehold improvements
    
    
    172
    
    
    
    2354,480
    
    
    
    5,268Payments on account of property, plant and equipment(1)
    
    
    1,034
    
    
    
    4,099Depreciated cost
    
    $
    4,352
    
    
    $
    7,692
 
 (1)
    
    The Company intends to expand its production capacity by building a new production facility
in Israel. At December 31, 2005 and 2006, balances in a total amount of $1,034 and $4,099,
respectively, mainly related to payments to a subcontractor of the new plant facility, were not
subject to depreciation.   NOTE 7: DEFERRED CHARGES AND OTHER ASSETS
      NOTE 8: CONVERTIBLE PROMISSORY NOTES
  December 31,2005
    
    
    2006Principal
    
    $
    1,967
    
    
    $Accrued interest
    
    
    181$
    2,148
    
    
    $
    
 85




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##### Table of Contents



NOTE 9: ACCOUNTS PAYABLE AND ACCRUALS OTHER
 December 31,2005
    
    
    2006Deferred revenues
    
    $
    3,913
    
    
    $
    4,096Payroll and related expenses
    
    
    997
    
    
    
    2,049Government authorities
    
    
    463
    
    
    
    355Accrued expenses and other
    
    
    906
    
    
    
    981$
    6,279
    
    
    $
    7,481
 NOTE 10: SHORT-TERM CREDIT FROM BANKS AND LONG-TERM LOANS
  Annualinterest rate atDecember 31,
    
    
    December 31,2006
    
    
    2005
    
    
    2006Bank loans(1)
    
    
    7.2-7.32
    %
    
    $
    2,011
    
    
    $
    1,195Hercules loans(2)
    
    
    
    
    
    
    4,703
    
    
    
    Less current maturities
    
    
    
    
    
    
    (2,836
    )
    
    
    (801
    )$
    3,878
    
    
    $
    394
 
 (1)
    
    Loans are denominated in NIS.(2)
    
    See d below. 86




---



##### Table of Contents



December 31,2007 (current maturity)
    
    $
    8012008
    
    
    394$
    1,195
  December 31,2005
    
    
    2006Short-term credit from bank
    
    $
    2,243
    
    
    $
    Short-term loan
    
    
    
    
    
    
    Current maturities of long-term loans
    
    
    2,836
    
    
    
    801$
    5,079
    
    
    $
    801
       NOTE 11: OTHER LONG-TERM LIABILITIES
 December 31,2005
    
    
    2006MDA (see
Note 12d)
    
    
    750
    
    
    
    650Accrued severance pay
    
    
    198
    
    
    
    265Total
    
    $
    948
    
    
    $
    915
 87




---



##### Table of Contents



NOTE 12: COMMITMENTS AND CONTINGENT LIABILITIES
   2007
    
    $
    1,7662008
    
    $
    1,8712009
    
    $
    1,7132010
    
    $
    1,7272011 and thereafter
    
    $
    2,519
  2007
    
    $
    2862008
    
    $
    2002009
    
    $
    512010 and thereafter
    
    $
    2
    The Amended Lease Agreement
  88




---



##### Table of Contents



Investments in the manufacturing facility
   Guarantee
       89




---



##### Table of Contents



NOTE 13: STOCKHOLDERS EQUITY
     90




---



##### Table of Contents



91




---



##### Table of Contents



92




---



##### Table of Contents



Year ended December 31,2006Exercise prices
    
    $
    10-31.44Expected term (years)
    
    
    5.75-6.25Interest rates
    
    
    4.51-5.20
    %Volatility
    
    
    56%-57
    %Forfeiture rate
    
    
    4%-28
    %Dividend yield
    
    
    0
    %Fair value at grant date
    
    $
    6.27-18.42
  93




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##### Table of Contents



Year Ended December 31,2004
    
    
    2005
    
    
    2006Weighted
    
    
    
    
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    
    
    
    
    Weightedaverage
    
    
    Aggregate
    
    
    
    
    
    
    average
    
    
    Aggregate
    
    
    
    
    
    
    average
    
    
    Aggregateexercise
    
    
    Intrinsic
    
    
    
    
    
    
    exercise
    
    
    Intrinsic
    
    
    
    
    
    
    exercise
    
    
    IntrinsicNumber
    
    
    price
    
    
    Value
    
    
    Number
    
    
    price
    
    
    Value
    
    
    Number
    
    
    price
    
    
    ValueBalance outstanding at
beginning of year
    
    
    227,818
    
    
    $
    8.47
    
    
    
    
    
    
    
    226,363
    
    
    $
    8.39
    
    
    
    
    
    
    
    591,927
    
    
    $
    8.84Changes during the year:Granted
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    373,200
    
    
    $
    9.35
    
    
    
    
    
    
    
    204,092
    
    
    $
    16.99
    
    
    $
    46Forfeited
    
    
    (1,455
    )
    
    $
    20.24
    
    
    
    
    
    
    
    (7,636
    )
    
    $
    20.30
    
    
    
    
    
    
    
    (120,504
    )
    
    $
    8.08
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (127,786
    )
    
    
    6.14
    
    
    
    Balance outstanding at end
of year
    
    
    226,363
    
    
    $
    8.39
    
    
    
    
    
    
    
    591,927
    
    
    $
    8.84
    
    
    
    
    
    
    
    547,729
    
    
    $
    12.01
    
    
    $
    46Balance exercisable at
end of year
    
    
    118,909
    
    
    $
    12.35
    
    
    
    
    
    
    
    252,172
    
    
    $
    8.61
    
    
    
    
    
    
    
    253,046
    
    
    $
    7.31Vested and expected to vest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    427,069
    
    
    $
    12.22
  Weighted
    
    
    
    
    
    
    
    
    
    WeightedOptions
    
    average
    
    
    
    
    
    Options
    
    averageoutstanding
    
    remaining
    
    Weighted
    
    exercisable
    
    exerciseat
    
    contractual
    
    average
    
    at
    
    price ofDecember 31,
    
    life (in
    
    exercise
    
    December 31,
    
    options2006
    
    years)
    
    price
    
    2006
    
    exercisableExercise price$19.41-31.34
    
    
    79,364
    
    
    
    7.45
    
    
    $
    26.43
    
    
    
    21,818
    
    
    $
    21.34$12.53-16.33
    
    
    176,455
    
    
    
    8.35
    
    
    $
    14.24
    
    
    
    33,864
    
    
    $
    13.75$10-12.27
    
    
    94,546
    
    
    
    8.88
    
    
    $
    11.09
    
    
    
    
    
    
    $2.75-6.19
    
    
    197,364
    
    
    
    5.39
    
    
    $
    4.65
    
    
    
    197,364
    
    
    $
    4.65547,729
    
    
    
    
    
    
    $
    12.01
    
    
    
    253,046
    
    
    $
    7.31
    94




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##### Table of Contents



Options and
    
    
    Exercisewarrants for
    
    
    price
    
    
    Options andcommon
    
    
    per
    
    
    warrantsIssuance date
    
    stock
    
    
    share
    
    
    exercisableFebruary 1998
    
    
    28,541
    
    
    $
    15.59
    
    
    
    28,539March 2003
    
    
    18,182
    
    
    $
    2.75
    
    
    
    18,182October 2004
    
    
    36,364
    
    
    $
    11.50
    
    
    
    36,364October 2004
    
    
    5,437
    
    
    $
    11.50
    
    
    
    5,437January 2005
    
    
    5,437
    
    
    $
    11.50
    
    
    
    5,437January 2005
    
    
    109,091
    
    
    $
    6.19
    
    
    
    109,091December 2005
    
    
    10,909
    
    
    $
    13.75
    
    
    
    2,727June 2006
    
    
    7,500
    
    
    $
    12.27
    
    
    
    221,461
    
    
    
    
    
    
    
    205,777
   NOTE 14: TAXES ON INCOME
        95




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##### Table of Contents



96




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##### Table of Contents



December 31,2005
    
    
    2006Deferred tax assets, reserves and allowance
    
    $
    1,743
    
    
    $
    2,051Net operating loss carryforwardU.S
    
    
    10,630
    
    
    
    10,466Net operating loss carryforwardBelgium
    
    
    8,086
    
    
    
    5,732Deferred tax asset before valuation allowance
    
    
    20,459
    
    
    
    18,249Valuation allowance
    
    
    (20,459
    )
    
    
    (18,249
    )Net deferred tax asset
    
    $
    
    
    
    $
    
  97




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##### Table of Contents



Year ended December 31,2004
    
    
    2005
    
    
    2006Domestic
    
    $
    (5,094
    )
    
    $
    (23,050
    )
    
    $
    (6,188
    )Foreign
    
    
    (1,510
    )
    
    
    (4,662
    )
    
    
    29,246Total
    
    $
    6,604
    
    
    $
    (27,712
    )
    
    $
    23,058
  NOTE 15: FINANCIAL INCOME (EXPENSES), NET
 Year ended December 31,2004
    
    
    2005
    
    
    2006Financial expenses:Interest on
loans, bank credit and other
    
    $
    (203
    )
    
    $
    (347
    )
    
    $
    (590
    )Interest and amortization of discount on
Convertible notes and convertible Promissory
Notes
    
    
    (3,804
    )
    
    
    (600
    )
    
    
    (1,591
    )Foreign currency translation adjustments, net
    
    
    
    
    
    
    (3,149
    )
    
    
    Financing charges related to inducement and
extinguishment of convertible notes
and warrants
    
    
    
    
    
    
    (20,932
    )
    
    
    Amortization of deferred issuance costs
    
    
    (96
    )
    
    
    (651
    )
    
    
    (201
    )(4,103
    )
    
    
    (25,679
    )
    
    
    (2,382
    )Financial income:Interest on short-term investments
    
    
    95
    
    
    
    157
    
    
    
    1,345Foreign currency translation adjustments, net
    
    
    1,542
    
    
    
    
    
    
    
    2,3561,637
    
    
    
    157
    
    
    
    3,701Net income
(expenses)
    
    $
    (2,466
    )
    
    $
    (25,522
    )
    
    $
    1,319
 NOTE 16: OTHER INCOME
 Year endedDecember 31,2004
    
    
    2005
    
    
    2006Gain from a distributor agreement termination (1)
    
    $
    1,226
    
    
    $
    
    
    
    $
    790$
    1,226
    
    
    $
    
    
    
    $
    790
 
 (1)
    
    In 2002, the Company entered into a distribution agreement with the American Red
Cross (ARC) for distribution of Crosseal products in the U.S. and Canada. 98




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##### Table of Contents



NOTE 17: NET INCOME (LOSS) PER SHARE
   Year ended December 31,2004
    
    
    2005
    
    
    2006Net income (loss) available to
common stockholders for basic net
income (loss) per share
    
    $
    (6,725
    )
    
    $
    (21,221
    )
    
    $
    23,058Induced conversion of Preferred stock
    
    
    
    
    
    
    (4,706
    )
    
    
    Net income (loss) available to
common stockholders for diluted net
loss per share
    
    $
    (6,725
    )
    
    $
    (25,972
    )
    
    $
    23,058
  Year ended December 31,2004
    
    
    2005
    
    
    2006Number of sharesWeighted average number of shares of common stock for basic net
income (loss) per share of common stock
    
    
    3,469,451
    
    
    
    10,562,885
    
    
    
    13,689,768Effect of dilutive securities: shares of preferred stock
    
    
    *)
    
    
    
    15,735
    
    
    
    Options and warrants to employees and non-employees service providers
    
    
    
    
    
    
    
    
    
    
    321,790Denominator for diluted net income (loss) per share of common stock
    
    
    3,469,451
    
    
    
    10,578,620
    
    
    
    14,011,558
 
 *)
    
    Anti-dilutive. 99




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##### Table of Contents



NOTE 18: MAJOR CUSTOMERS AND GEOGRAPHIC INFORMATION
   Year ended December 31,2004
    
    
    2005
    
    
    2006Revenues from unaffiliated customers:Israel
    
    $
    12,127
    
    
    $
    13,656
    
    
    $
    21,118United States
    
    
    4,147
    
    
    
    9,545
    
    
    
    15,433Europe
    
    
    1,916
    
    
    
    3,831
    
    
    
    25,882Central and Latin America
    
    
    1,700
    
    
    
    410
    
    
    
    1,255Others
    
    
    58
    
    
    
    57
    
    
    
    77Total
    
    $
    19,948
    
    
    $
    27,499
    
    
    $
    63,765
 December 31,2005
    
    
    2006Long-lived assets:Israel
    
    $
    4,894
    
    
    $
    8,169United States
    
    
    1
    
    
    
    7Europe
    
    
    13
    
    
    
    13Total
    
    $
    4,908
    
    
    $
    8,189
 100




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##### Table of Contents



Year ended December 31,2004
    
    
    2005
    
    
    2006Biosurgical productsProduct sales
    
    $
    5,211
    
    
    $
    6,979
    
    
    $
    13,443Development revenues
    
    
    1,950
    
    
    
    4,000
    
    
    
    5,6657,161
    
    
    
    10,979
    
    
    
    19,108Passive immunotherapy productsProduct sales
    
    
    10,447
    
    
    
    14,195
    
    
    
    43,321Grants
    
    
    431
    
    
    
    1,021
    
    
    
    1,17510,878
    
    
    
    15,216
    
    
    
    44,496Other products
    
    
    1,909
    
    
    
    1,304
    
    
    
    161Total
    
    $
    19,948
    
    
    $
    27,499
    
    
    $
    63,765
   2004
    
    2005
    
    2006% of consolidated revenuesCustomer A
    
    
    25
    
    
    
    21
    
    
    
    14Customer B
    
    
    14
    
    
    
    12
    
    
    
    *
    )Customer C
    
    
    24
    
    
    
    36
    
    
    
    27Customer D
    
    
    
    
    
    
    
    
    
    
    33
 
 *)
    
    Less than 10% of the Companys consolidated revenues. NOTE 19: CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)
 Year ended December 31,(Unaudited, U.S. dollars in thousands, except per share amount)Fiscal Years by Quarter
    
    2005
    
    2006Quarterly Data
    
    1st
    
    2nd
    
    3rd
    
    4th
    
    1st
    
    2nd
    
    3rd
    
    4thRevenue
    
    $
    5,901
    
    
    $
    5,545
    
    
    $
    7,725
    
    
    $
    8,328
    
    
    $
    11,303
    
    
    $
    16,079
    
    
    $
    18,339
    
    
    $
    18,044Gross profit
    
    
    742
    
    
    
    841
    
    
    
    2,020
    
    
    
    2,549
    
    
    
    5,155
    
    
    
    9,086
    
    
    
    10,904
    
    
    
    9,103Net income (loss)
    
    
    (23,817
    )
    
    
    (3,665
    )
    
    
    (323
    )
    
    
    93
    
    
    
    3,234
    
    
    
    5,311
    
    
    
    8,123
    
    
    
    6,390Net earnings
(loss) per shareBasic
    
    
    (1.80
    )
    
    
    (0.34
    )
    
    
    (0.03
    )
    
    
    0.01
    
    
    
    0.30
    
    
    
    0.38
    
    
    
    0.54
    
    
    
    0.42Net earnings (loss)
per share- Diluted
    
    
    (2.27
    )
    
    
    (0.34
    )
    
    
    (0.03
    )
    
    
    0.01
    
    
    
    0.29
    
    
    
    0.38
    
    
    
    0.53
    
    
    
    0.41
 NOTE 20: SUBSEQUENT EVENT
  101




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##### Table of Contents



Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
       
 Item 9A. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
   102




---



##### Table of Contents



Changes in Internal Controls
  
 Item 9B. Other Information
  
 Part III
 
  
 Part IV
 
 Item 15. Exhibits and Financial Statement Schedules
   PageReport of Independent Registered Public Accounting Firm on the
Consolidated Financial Statements
    
    
    67Consolidated Balance Sheets as of December 31, 2006 and 2005
    
    
    68Consolidated Statements of Operations for the years ended December
31, 2006, 2005 and 2004
    
    
    70Consolidated Statements of Changes in Stockholders Deficiency for
the years ended December 31, 2006, 2005, and 2004
    
    
    71Consolidated Statements of Cash Flows for the years ended December
31, 2006, 2005 and 2004
    
    
    72Notes to Consolidated Financial Statements
    
    
    74
  Schedule II  Valuation of Qualifying Accounts
    
    
    S-1
   103




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##### Table of Contents



Exhibitnumber
    
    Exhibit3.1
    
    Second Amended and Restated Certificate of Incorporation (incorporated by
reference to Exhibit 3.1 to Omrixs Registration Statement on Form S-1
(File No. 333-131107))3.2
    
    Second Amended and Restated Bylaws (incorporated by reference to Exhibit
3.2 to Omrixs Registration Statement on Form S-1 (File No. 333-131107))4.1
    
    Specimen Common Stock Certificate (incorporated by reference to Exhibit
4.1 to Omrixs Registration Statement on Form S1 (File No. 333-131107))4.2
    
    Investor Rights Agreement dated January 13, 2005 (incorporated by
reference to Exhibit 4.2 to Omrixs Registration Statement on Form S-1
(File No. 333-131107))4.3
    
    Warrant Agreement between Omrix Biopharmaceuticals, Inc. and Hercules
Technology Growth Capital, Inc. dated March 31, 2005 (incorporated by
reference to Exhibit 4.3 to Omrixs Registration Statement on Form S-1
(File No. 333-131107))4.4
    
    Common Stock Purchase Warrant between Omrix Biopharmaceuticals, Inc. and
Capricorn Venture Partners N.V. dated December 31, 1998 (incorporated by
reference to Exhibit 4.4 to Omrixs Registration Statement on Form S-1
(File No. 333-131107))4.5
    
    Common Stock Purchase Warrant between Omrix Biopharmaceuticals, Inc. and
Wolfgang Stoiber dated December 31, 1998 (incorporated by reference to
Exhibit 4.5 to Omrixs Registration Statement on Form S-1 (File No.
333-131107))4.6
    
    Common Stock Purchase Warrant between Omrix Biopharmaceuticals, Inc. and
T. Scott Johnson dated September 19, 2000 (incorporated by reference to
Exhibit 4.6 to Omrixs Registration Statement on Form S-1 (File No.
333-131107))4.7
    
    Common Stock Purchase Warrant between Omrix Biopharmaceuticals, Inc. and
The Marwood Group dated January 20, 2004 (incorporated by reference to
Exhibit 4.7 to Omrixs Registration Statement on Form S-1 (File No.
333-131107))4.8
    
    First Amendment to Common Stock Purchase Warrant between Omrix
Biopharmaceuticals, Inc. and Marwood Group LLC dated December 1, 2005
(incorporated by reference to Exhibit 4.8 to Omrixs Registration
Statement on Form S-1 (File No. 333-131107))4.9
    
    First Amendment to Warrant Agreement between Omrix Biopharmaceuticals,
Inc. and Asanté Partners LLC dated March 20, 2006 (incorporated by
reference to Exhibit 4.9 to Omrixs Registration Statement on Form S-1
(File No. 333-131107))4.10
    
    Common Stock Purchase Warrant between Omrix Biopharmaceuticals, Inc. and
Johnson & Johnson Development Corporation dated August 11, 2004
(incorporated by reference to Exhibit 4.10 to Omrixs Registration
Statement on Form S-1 (File No. 333-131107))4.11
    
    Waiver and Amendment Agreement between certain warrantholders and Omrix
Biopharmaceuticals, Inc. dated January 13, 2005 (incorporated by reference
to Exhibit 4.11 to Omrixs Registration Statement on Form S-1 (File No.
333-131107))4.12
    
    First Amendment and Waiver between Omrix Biopharmaceuticals, Inc. and
Johnson & Johnson Development Corporation dated January 13, 2005
(incorporated by reference to Exhibit 4.12 to Omrixs Registration
Statement on Form S-1 (File No. 333-131107))4.13
    
    Waiver Agreement between certain warrantholders and Omrix
Biopharmaceuticals, Inc. dated February 22, 2005 (incorporated by
reference to Exhibit 4.13 to Omrixs Registration Statement on Form S-1
(File No. 333-131107))4.14
    
    Amended and Restated Senior Convertible 2005 Series A Promissory Note of
Omrix Biopharmaceuticals, Inc. in the amount of $752,148 dated January 29,
2005 (incorporated by reference to Exhibit 4.14 to Omrixs Registration
Statement on Form S1 (File No. 333-131107))
 104




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##### Table of Contents



Exhibitnumber
    
    Exhibit4.15
    
    Amended and Restated Senior Convertible 2005 Series B Promissory Note of
Omrix Biopharmaceuticals, Inc. in the amount of $154,555 dated January 29,
2005 (incorporated by reference to Exhibit 4.15 to Omrixs Registration
Statement on Form S1 (File No. 333-131107))10.1**
    
    Lease and Operation Agreement between Omrix Biopharmaceuticals Ltd. and
Magen David Adom in Israel dated July 20, 2000 (incorporated by reference
to Exhibit 10.1 to Omrixs Registration Statement on Form S-1 (File No.
333-131107))10.2
    
    Lease Agreement between Omrix Biopharmaceuticals Ltd. and Nichsei Har
Hozvim Ltd., became effective as of May 15, 2006 (incorporated by
reference to Exhibit 10.2 to Omrixs Quarterly Report on Form 10-Q, filed
on August 10, 2006)10.3
    
    Construction Agreement between Omrix Biopharmaceuticals Ltd. and S&A
Design and Construction Ltd., dated as of August 2, 2006 (incorporated by
reference to Exhibit 10.3 to Omrixs Quarterly Report on Form 10-Q, filed
on August 10, 2006)10.4**
    
    Addendum to an Agreement between Magen David Adom in Israel and Omrix
Biopharmaceuticals, Inc. dated as of December 16, 2004 (incorporated by
reference to Exhibit 10.2 to Omrixs Registration Statement on Form S-1
(File No. 333-131107))10.5**
    
    Agreement between Omrix Biopharmaceuticals Ltd. and Medimop Medical
Projects Ltd. dated June 26, 2005 (incorporated by reference to Exhibit
10.3 to Omrixs Registration Statement on Form S-1 (File No. 333-131107))10.6**
    
    Development Agreement between Omrix Biopharmaceuticals, Inc. and Ethicon,
Inc. dated September 22, 2003 (incorporated by reference to Exhibit 10.4
to Omrixs Registration Statement on Form S-1 (File No. 333-131107))10.7**
    
    Amendment No. 1 to Development Agreement between Omrix Biopharmaceuticals,
Inc. and Ethicon, Inc. dated July 15, 2004 (incorporated by reference to
Exhibit 10.5 to Omrixs Registration Statement on Form S-1 (File No.
333-131107))10.8**
    
    Distribution and Supply Agreement between Omrix Biopharmaceuticals, Inc.
and Ethicon, Inc. dated September 22, 2003 (incorporated by reference to
Exhibit 10.6 to Omrixs Registration Statement on Form S-1 (File No.
333-131107))10.9**
    
    Amendment No. 1 to Distribution and Supply Agreement between Omrix
Biopharmaceuticals, Inc. and Ethicon, Inc. dated July 15, 2004
(incorporated by reference to Exhibit 10.7 to Omrixs Registration
Statement on Form S-1 (File No. 333-131107))10.10**
    
    Letter Agreement between Omrix Biopharmaceuticals, Inc. and FFF
Enterprises, Inc., dated as of August 10, 2006 (incorporated by reference
to Exhibit 10.10 to Omrixs Registration Statement on Form S-1 (File No.
333-139094))10.11**
    
    Supply and Distribution Agreement: Investigational Phase between Omrix
Biopharmaceuticals, Inc. and FFF Enterprises, Inc., dated as of December
21, 2005 (incorporated by reference to Exhibit 10.11 to Omrixs
Registration Statement on Form S-1 (File No. 333-139094))10.12**
    
    Supply and Distribution Agreement: Commercial Phase between Omrix
Biopharmaceuticals, Inc. and FFF Enterprises, Inc., dated as of December
21, 2005 (incorporated by reference to Exhibit 10.12 to Omrixs
Registration Statement on Form S-1 (File No. 333-139094))10.13**
    
    Plasma Supply Agreement between Omrix Biopharmaceuticals, Inc. and DCI
Management Group LLC, dated as of January 3, 2006 (incorporated by
reference to Exhibit 10.13 to Omrixs Registration Statement on Form S-1
(File No. 333-139094))10.14**
    
    Patent and Know-How License Agreement between Omrix Biopharmaceuticals
Ltd. and Amersham Biosciences AB dated February 18, 2003 (incorporated by
reference to Exhibit 10.8 to Omrixs Registration Statement on Form S-1
(File No. 333-131107))10.15**
    
    Supply Agreement between Omrix Biopharmaceuticals Ltd. and PlastMed Ltd.
dated March 25, 2004 (incorporated by reference to Exhibit 10.9 to Omrixs
Registration Statement on Form S-1 (File No. 333-131107))
 105




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##### Table of Contents



Exhibitnumber
    
    Exhibit10.16**
    
    Addendum to Supply Agreement between Omrix Biopharmaceuticals Ltd. and
PlastMed Ltd. dated June 30, 2004 (incorporated by reference to Exhibit
10.10 to Omrixs Registration Statement on Form S-1 (File No. 333-131107))

10.17
    
    Supply Agreement between Daiichi Pharmaceutical Co., Ltd and Omrix
Biopharmaceuticals S.A. dated August 24, 1999 (incorporated by reference
to Exhibit 10.11 to Omrixs Registration Statement on Form S-1 (File No.
333-131107))10.18**
    
    Supply Agreement by and between Omrix Biopharmaceuticals Ltd. and Talecris
Biotherapeutics, Inc. effective as of October 8, 2006 (incorporated by
reference to Exhibit 10.18 to Omrixs Registration Statement on Form S-1
(File No. 333-139094))10.19
    
    Planova Sales Agreement between Omrix Biopharmaceuticals Ltd. and Asahi
Kasei Pharma Corporation dated March 1, 2004 (incorporated by reference to
Exhibit 10.12 to Omrixs Registration Statement on Form S-1 (File No.
333-131107))10.20
    
    Contract for the Supply of Vaccinia Immunoglobulin between Omrix
Biopharmaceuticals S.A. and NHS Purchasing and Supply Agency dated
December 12, 2005 (incorporated by reference to Exhibit 10.13 to Omrixs
Registration Statement on Form S-1 (File No. 333-131107))10.21
    
    Senior Loan and Security Agreement between Omrix Biopharmaceuticals, Inc.
and Hercules Technology Growth Capital, Inc. dated March 31, 2005
(incorporated by reference to Exhibit 10.14 to Omrixs Registration
Statement on Form S-1 (File No. 333-131107))10.22
    
    First Amendment to Senior Loan and Security Agreement between Omrix
Biopharmaceuticals, Inc. and Hercules Technology Growth Capital, Inc.
dated March 31, 2005 (incorporated by reference to Exhibit 10.15 to
Omrixs Registration Statement on Form S-1 (File No. 333-131107))10.23
    
    Guaranty between Hercules Technology Growth Capital, Inc. and Omrix
Biopharmaceuticals, S.A. dated March 31, 2005 (incorporated by reference
to Exhibit 10.16 to Omrixs Registration Statement on Form S-1 (File No.
333-131107))10.24
    
    Guaranty between Hercules Technology Growth Capital, Inc. and Omrix
Biopharmaceuticals Ltd. dated March 31, 2005 (incorporated by reference to
Exhibit 10.17 to Omrixs Registration Statement on Form S-1 (File No.
333-131107))10.25
    
    Account Control Agreement between Hercules Technology Growth Capital, Inc.
and Omrix Biopharmaceuticals, Inc. dated July 6, 2005 (incorporated by
reference to Exhibit 10.18 to Omrixs Registration Statement on Form S-1
(File No. 333-131107))10.26
    
    Form of Indemnification Agreement between Omrix Biopharmaceuticals, Inc.
and its directors and officers (incorporated by reference to Exhibit 10.19
to Omrixs Registration Statement on Form S-1 (File No. 333-131107))10.27
    
    2004 Equity Incentive Plan (incorporated by reference to Exhibit 10.20 to
Omrixs Registration Statement on Form S-1 (File No. 333-131107))10.28
    
    2005 Equity Incentive Plan for Israeli Employees (incorporated by
reference to Exhibit 10.21 to Omrixs Registration Statement on Form S-1
(File No. 333-131107))10.29
    
    2006 Equity Incentive Plan (incorporated by reference to Exhibit 10.22 to
Omrixs Registration Statement on Form S-1 (File No. 333-131107))10.30
    
    Form of Non-Qualified Stock Option Agreement (incorporated by reference to
Exhibit 10.29 to Omrixs Current Report on Form 8-K, filed on June 30,
2006)10.31
    
    Employment Agreement between Omrix Biopharmaceuticals, Inc. and Robert
Taub dated March 20, 2006 (incorporated by reference to Exhibit 10.23 to
Omrixs Registration Statement on Form S-1 (File No. 333-131107))10.32
    
    Employment Agreement between Omrix Biopharmaceuticals Ltd. and Nissim
Mashiach dated September 21, 1997 (incorporated by reference to Exhibit
10.24 to Omrixs Registration Statement on Form S-1 (File No. 333-131107))
 106




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##### Table of Contents



Exhibitnumber
    
    Exhibit10.33
    
    Amended and Restated Employment Agreement between Omrix Biopharmaceuticals
Ltd. and Michael Burshtine dated January 1, 2006 (incorporated by
reference to Exhibit 10.25 to Omrixs Registration Statement on Form S-1
(File No. 333-131107))

10.34
    
    Employment Agreement between Omrix Biopharmaceuticals, Inc. and Harold
Safferstein dated March 18, 2006 (incorporated by reference to Exhibit
10.26 to Omrixs Registration Statement on Form S-1 (File No. 333-131107))10.35
    
    Consulting Agreement between Omrix Biopharmaceuticals, Inc. and Philippe
Romagnoli dated October 1, 2002 (incorporated by reference to Exhibit
10.27 to Omrixs Registration Statement on Form S-1 (File No. 333-131107))10.36
    
    Consulting Agreement, as amended in September 2004 between Omrix
Biopharmaceuticals, Inc. and Philippe Romagnoli dated September 23, 2004
(incorporated by reference to Exhibit 10.28 to Omrixs Registration
Statement on Form S-1 (File No. 333-131107))10.37
    
    Director Agreement between Omrix Biopharmaceuticals, Inc. and Fredric
Price dated January 13, 2006 (incorporated by reference to Exhibit 10.29
to Omrixs Registration Statement on Form S-1 (File No. 333-131107))10.38
    
    Employment Agreement between Omrix Biopharmaceuticals, Inc. and Nanci
Prado dated August 28, 2006 (incorporated by reference to Exhibit 10.38 to
Omrixs Registration Statement on Form S-1 (File No. 333-139094))10.39
    
    Form of Undertaking to Maintain Confidentiality between Omrix
Biopharmaceuticals Ltd. and its employees (incorporated by reference to
Exhibit 10.30 to Omrixs Registration Statement on Form S-1 (File No.
333-131107))10.40
    
    Letter from RCPI Landmark Properties, L.L.C. to Antigenics, Inc. and Omrix
Biopharmaceuticals, Inc. re: Consent to Sublease dated February 16, 2006
(incorporated by reference to Exhibit 10.31 to Omrixs Registration
Statement on Form S-1 (File No. 333-131107))21.1
    
    List of subsidiaries of Omrix Biopharmaceuticals, Inc. (incorporated by
reference to Exhibit 21.1 to Omrixs Registration Statement on Form S-1
(File No. 333-131107))23.1
    
    Consent of Kost, Forer, Gabbay & Kasierer, a member of Ernst & Young Global31.1
    
    Certification of Principal Executive Officer pursuant to Section 302 of
the Sarbanes  Oxley Act of 200231.2
    
    Certification of Principal Financial Officer pursuant to Section 302 of
the Sarbanes  Oxley Act of 200232
    
    Certification of Principal Executive Officer and Principal Financial
Officer Pursuant to Section 906 of the Sarbanes  Oxley Act of 2002
 
 **
    
    Portions of this document have been omitted and filed separately with the Commission
pursuant to requests for confidential treatment pursuant to Rule 24b-2.
    
    Filed herein. 107




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##### Table of Contents



SIGNATURES
  OMRIX BIOPHARMACEUTICALS, INCDated: March 12, 2007
    By:
    /s/ Robert TaubRobert TaubPresident, Chief Executive Officer and Director
(Principal Executive Officer) Dated: March 12, 2007
    By:
    /s/ Michael BurshtineMichael Burshtine
Executive Vice President and Chief Financial
Officer
(Principal Financial and Accounting Officer)  Signature
    
    Title
    
    Date/s/ Robert Taub

Robert Taub
    
    President, Chief
Executive Officer and
Director
    
    March 12, 2007/s/ Michael Burshtine

Michael Burshtine
    
    Executive Vice President, Chief
Financial Officer (Chief Accounting
Officer)
    
    March 12, 2007/s/ Fredric D. Price

Fredric D. Price
    
    Chairman of the Board
of Directors
    
    March 12, 2007/s/ Larry Ellberger

Larry Ellberger
    
    Director
    
    March 12, 2007/s/ Bernard Horowitz

Bernard Horowitz
    
    Director
    
    March 12, 2007/s/ Kevin Rakin

Kevin Rakin
    
    Director
    
    March 12, 2007/s/ Philippe Romagnoli

Philippe Romagnoli
    
    Director








    
    March 12, 2007/s/ Steven St. Peter

Steven St. Peter
    
    Director
    
    March 12, 2007
 108




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##### Table of Contents



Three years ended December 31, 2006
(U.S. $ in thousands)
 Column B
    
    Column C
    
    
    
    
    
    
    
    
    
    Column FBalance at
    
    Charged to
    
    
    
    
    
    Column E
    
    Balancebeginning
    
    cost and
    
    Column D
    
    Translation
    
    at end ofColumn A
    
    of period
    
    expenses
    
    Deductions
    
    differences
    
    periodAllowance for doubtful accounts:Year ended December 31, 2004
    
    
    1,466
    
    
    
    16
    
    
    
    1,466
    
    
    
    
    
    
    
    16Year ended December 31, 2005
    
    
    16
    
    
    
    11
    
    
    
    4
    
    
    
    (1
    )
    
    
    22Year ended December 31, 2006
    
    
    22
    
    
    
    
    
    
    
    6
    
    
    
    (1
    )
    
    
    15Allowance for inventory write-offs:Year ended December 31, 2004
    
    
    741
    
    
    
    177
    
    
    
    269
    
    
    
    
    
    
    
    649Year ended December 31, 2005
    
    
    649
    
    
    
    100
    
    
    
    258
    
    
    
    
    
    
    
    491Year ended December 31, 2006
    
    
    491
    
    
    
    95
    
    
    
    41
    
    
    
    
    
    
    
    545
 S-1