**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 10-KSB**

(Mark One)
| x      | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|--------|--------------------------------------------------------------------------------------|
|   | For the fiscal year ended  **June 30, 2005**                               |  
[  

]

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 
 

For the transition period from [  

] to [  

]

 
Commission file number  **001-31392**

**PLURISTEM LIFE SYSTEMS, INC.**

(Name of small business issuer in its charter)

 

**Nevada**

 

**98-0351734**

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

**MATAM Advanced Technology Park,****Building No. 20, Haifa, Israel**

 

**31905**

(Address of principal executive offices)

 

(Zip Code)

Issuer's telephone number  **011-972-4-850-1080**

Securities registered pursuant to Section 12(b) of the Act:

Title of each class**Nil**

 

Name of each exchange on which registered**Nil**

Securities registered pursuant to Section 12(g) of the Act:

**Common Shares, par value $0.00001**

(Title of class)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x  

No [  

]

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [   ]

State issuer's revenues for its most recent fiscal year.   Nil

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-b-2 of the *Exchange Act*).

 

Yes [  

]  

No x

 

 

 

 

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State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked prices of such common equity, as of a specified date within 60 days.  (See definition of affiliate in Rule 12b-2 of the Exchange Act.)

Note:  If determining whether a person is an affiliate will involve an unreasonable effort and expense, the issuer may calculate the aggregate market value of the common equity held by non-affiliates on the basis of reasonable assumptions, if the assumptions are stated.

**55,451,483 common shares @ $0.12(1) = $6,654,177.96**

(1)  Average of bid and ask closing prices on September 1, 2005.

**(ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS)**

Check whether the issuer has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court.     Yes [   ]     No [   ]

**(APPLICABLE ONLY TO CORPORATE REGISTRANTS)**

State the number of shares outstanding of each of the issuer's classes of equity stock, as of the latest practicable date.

**63,653,483 common shares issued and outstanding as of September 1, 2005.**

**DOCUMENTS INCORPORATED BY REFERENCE**

If the following documents are incorporated by reference, briefly describe them and identify the part of the Form 10-KSB (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) any annual report to security holders; (2) any proxy or information statement; and (3) any prospectus filed pursuant to Rule 424(b) or (c) of the Securities Act of 1933 ("Securities Act").  The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1990).

Transitional Small Business Disclosure Format (Check one):  

Yes [  

]  

No x.

 

 

 

 

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**PART I**

**Item 1.**

**Description of Business.**

This annual report contains forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995.  These statements relate to future events or our future financial performance.  In some cases, you can identify forward-looking statements by terminology such as "may", "should", "expects", "plans", "anticipates", "believes", "estimates", "predicts", "potential" or "continue" or the negative of these terms or other comparable terminology.  These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks in the section entitled "Risk Factors", that may cause our company's or our industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.  Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.

Our financial statements are stated in United States Dollars (US$) and are prepared in accordance with United States Generally Accepted Accounting Principles.

In this annual report, unless otherwise specified, all dollar amounts are expressed in United States dollars and all references to "common shares" refer to the common shares in our capital stock.

As used in this annual report, the terms "we", "us", "our", and "Pluristem" mean Pluristem Life Systems, Inc. and our wholly owned subsidiary, unless otherwise indicated.

*Corporate History*

We were incorporated in the State of Nevada under the name A.I. Software, Inc. on May 11, 2001 and commencing July 2001, we were engaged in software development.  Our initial business plan at the time of our incorporation was premised on the use of artificial intelligence in computer programming technology and in many areas of the computer, Internet, robotics, and games industries.  On July 1, 2001 we entered into a software development agreement with Empire Group, a software development firm, to develop for us the software algorithm program for an artificial intelligence software called "Randomix."  We were not successful in fully implementing our initial business plan in regards to our Randomix software.  As a result, during March and April of 2003, our board of directors conducted an in-depth analysis of our business plan and related future prospects for software development companies.  To better protectstockholder interests and provide future appreciation, it was decided to concurrently pursue initiatives in the biotech industry as an extension to our business.

On May 5, 2003, we entered into a license agreement with the Weizmann Institute of Science and the Technion-Israel Institute of Technology to acquire an exclusive license for an innovative stem cell expansion technology.  This technology, if fully developed and commercialized, will offer novel solutions to make procedures like bone marrow transplants and other methods of cell therapy more accessible to patients suffering from leukemia, lymphoma, myaloma and a broad range of complicated diseases and disorders.  Under this license agreement, we agreed to pay $400,000 cash over time and we will pay royalties on our future sales and product or rights distribution transactions.  Also, the licensors of the license agreement have an option to assign all of their patent rights in the license agreement to our company in exchange for an aggregate of 5% of all of the issued and outstanding share capital of our company.This option may only be exercised within a 60-day period commencing from the date when we notify the licensors that the market capital of our company has exceeded $25,000,000.  The option will expire if it is not exercised within this period.

To enable us to conduct further research and development of the exclusive license for the stem cell expansion technology we acquired from the Weizmann Institute of Science and the Technion-Israel Institute of Technology, on June 10, 2003, 100% of the issued and outstanding shares of a research and development company based in Israel 

 

 

 

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called Pluristem, Ltd.  Pluristem, Ltd. was incorporated under the law of Israel on January 22, 2003 and has the facilities and personnel to conduct research and development in the field of stem cell research.  As consideration for the shares of Pluristem, Ltd., we paid to the shareholder of Pluristem, Ltd. cash in the amount of $1,000 and provided Pluristem, Ltd. with a line of credit in the amount of $500,000.  Accordingly, Pluristem, Ltd. became our wholly-owned subsidiary as of June 10, 2003.

On June 25, 2003, we changed our name from "A.I. Software, Inc." to "Pluristem Life Systems, Inc."  The name change was effected with the Nevada Secretary of State on June 25, 2003 and took effect with the OTCBB at the opening of trading on June 30, 2003 under our new stock symbol "PLRS".

*Our Current Business*

With the acquisition of Pluristem, Ltd., we aim to become a leader in expansion of hematopoietic stem cells outside of the human body.  Stem cells are unspecialized cells that can renew themselves for long periods through cell division.  Scientists have developed sufficient fundamental understanding to use stem cells for cell therapy and bone marrow transplants for the potential treatment of a broad range of complicated diseases.  Cell therapy is the use of living cells in the treatment of medical disorders.  Cell therapy is still in its beginning stages of research and development and only a few potential products are already in clinical studies.

We plan to specialize initially in the expansion of hematopoietic stem cells found in umbilical cord blood, using the technology platform we acquired under the license agreement with the Weizmann Institute of Science and the Technion-Israel Institute of Technology.  We intend to improve this technology platform and develop it into a functional stem cell expansion system that we can sell or license to other research laboratories, umbilical cord blood banks, or clinics in the future.  We have named this system the PluriXTM Bioreactor system.  

**Brief Introduction on Stem Cell Research and Cell Therapy**

Since 1998, when embryonic human stem cells were first isolated, research on stem cells has received much public attention.  Stem cells have two important characteristics that distinguish them from other types of cells.  First, they are unspecialized cells that renew themselves for long periods through cell division.  Second, under certain physiologic or experimental conditions, stem cells can be induced to become cells with special functions, such as the beating cells of the heart muscle or the insulin-producing cells of the pancreas. 

Scientists primarily work with two kinds of stem cells from animals and humans: embryonic stem cells and adult stem cells, which have different functions and characteristics.  In some adult tissues, such as bone marrow, muscle, and brain, discrete populations of adult stem cells generate replacements for cells that are lost through normal wear and tear, injury, or disease.

Cell therapy is the use of living cells in the treatment of medical disorders.  Stem cells, progenitors and differentiated functional cells of various tissues are evolving as potential treatment modality for life threatening diseases and major clinical indications lacking effective cures.  Cell therapy is still in its beginning stages of research and development and only a few potential products are already in clinical studies.

Even though we have the capability to work with embryonic stem cells, we have chosen to concentrate our efforts on hematopoietic stem cells.  Hematopoietic stem cells can be found in every adult's bone marrow, which is the spongy tissue found in the cavities of our bones.  Hematopoietic stem cells are the precursors of the various types of blood cells in the human body.  These cells include: 

**•**

White cells that fight infections and inflammations (leukocytes) and form the basis of the immune system (lymphocytes); 

**•**

Red cells that carry oxygen through our bodies (erythrocytes); and

**•**

Platelets that help blood to clot. 

Scientists have developed sufficient understanding to actually use hematopoietic stem cells for therapy, such as 

 

 

 

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through the procedure of bone marrow transplant.  Thus, this class of human stem cell holds the promise of being able to repair or replace cells or tissues that are damaged or destroyed by many of our most devastating diseases and disabilities.  Furthermore, bone marrow transplants are ultimate treatments in many pathological disorders, including: 

**•**

Malignant blood system diseases, such as leukemia, lymphoma and myaloma,

**•**

Diseases characterized by the lack of, or defective, production of bone marrow, such as aplastic anemia, 

**•**

Severe combined immune deficiency,

**•**

Non-hematopoietic malignancies (solid tumors), or bone marrow disorders, following chemotherapy and radiation, and

**•**

Metabolic diseases or congenital hemoglobinopathies, such as thalessemia.

For stem cell transplants to succeed, the donated stem cells must repopulate and/or engraft the recipient's bone marrow, where they will provide a new source of essential blood and immune system cells.  Within the hematopoietic cell system, only a special type of stem cells called pluripotent hematopoietic stem cells have extensive capacities to expand, differentiate and self-renew.  Accordingly, pluripotent hematopoietic stem cells are exclusively required for repopulation and engraftment of donated stem cells following transplantation.  In spite of the key role of pluripotent hematopoietic stem cells in maintaining the hematopoietic cell system, they appear in extremely low frequency in the bone marrow tissue.  The current technology limitation on maintaining or expanding undifferentiated stem cells outside of human body is a major drawback to essential clinical applications of these cells.  This currentunavailability of technology to expand the number of stem cells outside of human body reflects the need for novel stem cell regulators.  However, in spite of all the challenges involved in hematopoietic stem cell transplants, physicians are now trying, sometimes successfully, to assist in hematopoietic and immune system recovery following high-dose chemotherapy and/or radiation therapy treatment for malignant and non-malignant diseases such as leukemia and certain immune and genetic disorders.  

**Brief Introduction on Bone Marrow Transplants**

Bone marrow transplantation is a relatively new medical procedure being used to treat diseases once thought incurable.  Since its first successful use in 1968, bone marrow transplants have been used to treat patients diagnosed with leukemia, aplastic anemia, lymphomas such as Hodgkin's disease, multiple myeloma, immune deficiency disorders and some solid tumors such as breast and ovarian cancer.  The bone marrow transplant procedure generally involves three phases.  In the first phase, lasting 5 to 14 days, the bone marrow recipient is prepared for the graft.  Immunosuppressive and cytotoxic chemotherapy administered with or without irradiation are used to enable the recipient to accept the graft, to prevent graft rejection, and in cases of acute leukemia, to eliminate residual leukemia.

In the second phase, bone marrow is procured from a compatible donor and intravenously administered to the graft recipient. 

The third phase is a period of waiting for the bone marrow to engraft and function normally in the recipient.  During the time required for engraftment (approximately 2 to 4 weeks), the graft recipient is vulnerable to infection, bleeding, severe weight loss, rejection of the graft and graft-versus-host disease.  Graft-versus-host disease occurs in approximately 50% of bone marrow transplant patients.  If the marrow engrafts and the patient survives the immediate post-transplant period (first 3 to 6 weeks), the patient faces another set of complications, including graft-versus-host disease and interstitial pneumonia.  Interstitial pneumonia occurs in 60% of bone marrow transplant patients, typically 4 to 6 weeks post transplant.  The disease progresses rapidly and is fatal in approximately 50% of the cases.  50%-60% of patients survive where the bone marrow transplant is made during disease remission, andonly 10%-25% survive in cases where the bone marrow transplant is done outside of remission.  (Source: The Cost Effectiveness of BMT Therapy and Its Policy Implications, School of Public Health, UCLA).

 

 

 

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There are several types of bone marrow transplants.  They are distinguished according to the source of the stem cells.  An autologus bone marrow transplant means the transplant stem cells come from the patient.  An allogenic bone marrow transplant means the stem cells come from a donor.  A syngeneic bone marrow transplant means the stem cells come from an identical twin. 

Research and clinical work in the field of bone marrow transplants is presently limited due to: 

**•**

The average number of active pluripotent hematopoietic stem cells in any given bone marrow is extremely low, less than 0.5% of total mononuclear cells;

**•**

The difficulties of the human body to accept bone marrow transplants from donors, and the ensuing damaging reactions;

**•**

The patient is quite prone to infections following radiation and/or chemotherapy treatments, and may have been infected even prior to the transplant; 

**•**

Sorting of healthy cells from cancerous cells has not proven 100% successful; 

**•**

The great complications in storing and enriching these cells in the absence of *in vitro* differentiation; 

**•**

The absence of a large-scale and sustainable model that enables the testing of the ability of hematopoietic stem cells to renew the hematopoietic cell system; and 

**•**

There are some clinical situations where autologus bone marrow after tumor purging provides insufficient numbers of hematopoietic stem cells for the bone marrow transplant.

Transplantation experts believe that the ideal approach to a successful stem cell transplant is to use a large number of stem cells to maximize the probability of bone marrow repopulation and minimize the time needed for the return of normal numbers of hematopoietic and immune cells in the patient.

One of the major efforts in developing hematopoietic stem cell technologies has been to identify new and better sources for stem cells.  The majority of transplantable hematopoietic stem cells in adults currently come primarily from peripheral blood or adult donor bone marrow.  Another important and attainable source of transplantable and lasting hematopoietic stem cells is from umbilical cord blood.  Such blood is drawn from the umbilical cord after birth, but before the discharge of the placenta, giving way to the following advantages:

**•**

The standard procedure at birth is that umbilical cord blood is discarded with the placenta.  No morbidity is involved, making this option free of ethical controversy;

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Collection of umbilical cord blood is simple and non-invasive both to the mother and the baby;

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Use of umbilical cord blood is already approved by the Federal Drug Administration and does not require further clinical testing;

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The hematopoietic stem cells drawn from umbilical cord blood can differentiate into primary hematopoietic precursors and create hematopoietic clones in cultures better than those hematopoietic stem cells taken from adult bone marrow; 

**•**

Umbilical cord blood has lower levels of contamination with common viral pathogens, such as Cytomegalovirus, and is more tolerant of alloantigens; and

**•**

Umbilical cord blood hematopoietic stem cells have high tolerance levels, giving way to lower graft-versus-host diseases.

It is important to note that scientists have found no difference in the functionality of hematopoietic stem cells drawn from bone marrow, peripheral blood or umbilical cord blood.  However, owing to the small volume of blood 

 

 

 

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collected from umbilical cords (typically less than 100 ml), use of umbilical cord blood has been limited to date to transplants in babies and children weighing less than 45 kg.  Moreover, there are no existing hematopoietic stem cell expansion technologies for umbilical cord blood that can increase. to the best of our knowledge, the number of hematopoietic stem cells without causing differentiation of the hematopoietic stem cells.  Once the hematopoietic stem cells have differentiated, they cannot be transplanted into the patient.  Therefore, the development of a system that will facilitate the proliferation of hematopoietic stem cells in an appropriate culture media or substrate could enable the use of such hematopoietic stem cells drawn from umbilical cord blood for transplanting in adults where insufficient hematopoietic stem cells are available. 

In summary, transplants of hematopoietic stem cells derived from umbilical cord blood are a novel alternative to conventional bone marrow transplants and have several unique advantages, in spite of their present quantitative limitations.  Umbilical cord blood lends itself to sorting and storing in cord blood banks and transplant clinics, leading to the ability to build data bases of expanded umbilical cord blood for national and worldwide access and use, making search of bone marrow transplant donors easily facilitated and making autologus bone marrow transplants in adults potentially feasible.  We believe that the advantages in use of umbilical cord blood hematopoietic stem cells, combined with our platform technology have the potential to change the ways bone marrow transplants are conducted in the future.  

**Our Core Technology – the PluriXTM Bioreactor System**

For decades, scientists have attempted to "grow" stem cells outside of human body in culture to increase the number of stem cells for transplantation.  The challenge of this undertaking lies in overcoming stem cells' predisposition to differentiate.  Adult hematopoietic stem cells tend to produce other cells with limited repopulating properties when grown in culture rather than to replicate and regenerate additional stem cells.  Current stem cell expansion techniques are complicated by the diverse mix of differentiated cells generated in stem cell cultures.  Existing scientific methods considered in increasing the number of stem cells include culturing the stem cells on two dimensional stromal layers and growing in the presence of cytokines.  To the best of our knowledge, none of these existing methods to grow stem cells outside of patients' bodies are able to prevent differentiation of stem cells whilepromoting their proliferation.

Through the license agreement we entered with the Weizmann Institute of Science and the Technion-Israel Institute of Technology, we acquired an exclusive license for an innovative stem cell expansion technology.  This technology, if fully developed and commercialized, will offer novel solutions to expand hematopoietic stem cells taken from umbilical cord blood.  We intend to improve this technology and develop it into a functional stem cell expansion system that we can sell or license to other research laboratories, umbilical cord blood banks, or clinics in the future.  We have named this system the PluriXTM Bioreactor system.

The PluriXTM Bioreactor system is a system of stromal cell cultures and substrates that create an artificial physiological environment in which hematopoietic stem cells can grow and reproduce outside of the human body.  The system mimics the environment which exists in human bones, in which stem cells reproduce in nature.  The stem cells are “tricked” into growing and reproducing in the PluriXTM Bioreactor in the same way they would in living bone, and because the size and scale of the PluriXTM Bioreactor can be much bigger than a human bone, the stem cell growth can be greatly expanded.  We expect that the three dimensional PluriXTM Bioreactor system has the potential to bring about the expansion of umbilical cord blood hematopoietic stem cells to proportions that will be enough for transplants in adults, without promoting differentiation. 

We are designing and developing the PluriXTM Bioreactor system to perform controlled expansion of hematopoietic stem cells for bone marrow transplants.  The general idea is to cause self-renewal of early stage stem cells and prevent them from differentiating through use of the PluriXTM Bioreactor system.  The PluriXTM Bioreactor system creates an artificial physiological environment in which hematopoietic stem cells can grow and reproduce.  This system is in direct contrast to standard teflon bags or culture flasks, which cannot promote hematopoietic stem cells self-renewal and prevent their differentiation.  In the PluriXTM Bioreactor system, hematopoietic stem cells are influenced by contact with the surrounding environment, made up of stromal cell cultures and substrates.  Therefore, by keeping the hematopoietic stem cells in the closed environment of the PluriXTM Bioreactor system, thehematopoietic stem cells maintain their original form, which means that they can proliferate without differentiating.  

 

 

 

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We believe that the PluriXTM Bioreactor system, once fully developed, will**enable the production of certain stem cells, such as umbilical cord blood hematopoietic stem cells, for which there might otherwise be insufficient quantities available for transplants in adults. **Having access to a sufficient number of hematopoietic stem cells is essential to successful clinical outcomes.  This is particularly the case with umbilical cord blood transplants.  The limited quantities of available hematopoietic stem cells in umbilical cord blood and difficulties in expanding the starting volumes to therapeutic quantities have restricted the widespread practice of umbilical cord blood transplants.  The PluriXTM Bioreactor system is designed to solve this dilemma by providing the capability to easily and cost-effectivelyexpand umbilical cord blood hematopoietic stem cells to higher quantities for therapeutic treatments. 

The PluriXTM Bioreactor system is comprised of several components, including ******(1) a reservoir, (2) gas mixture, (3) a gas filter, (4) an injection point, (5) a Plug Flow Bioreactor, (6) a flow monitor and a flow valve, (7) a separating container, (8) a container for medium exchange, (9) a peristaltic pump, (10) a sampling point, (11) a container for medium exchange and (12) an oxygen monitor.  The PluriXTM Bioreactor system is designed to be operated with minimal operator activity by a medical or laboratory technician.  Operation of the PluriXTM Bioreactor system is intended to be relatively simple, and therefore, a trained lab technician will be able to operate and monitor between 10 to 20 PluriXTM Bioreactor systems at any one time.  In other words, one lab technician will operate 70 to 100 PluriXTM Bioreactor systems per year.  

**Primary Advantages of PluriXTM Bioreactor System**

We believe our core technology, the PluriXTM Bioreactor system, once fully developed, will have the following advantages:

**•**

Our PluriXTM Bioreactor system can be used to expand umbilical cord blood hematopoietic stem cells for use in adult transplants.  This means that healthy autologus umbilical cord blood hematopoietic stem cells can be taken at the time of birth, expanded into mature hematopoietic stem cells and stored by a cell bank in the instance that it may be needed by that specific patient at a later date.  This will eliminate the current practice of transplanting cancerous cells back into the patient.  

**•**

Our PluriXTM Bioreactor system can be used for allogenic expansion, i.e. to expand the hematopoietic stem cells from donors other than the patient himself.  Allogenic stem cells can also be expanded for use as a transplant source for adults in the instances that enough stem cells are not attainable from a particular donor.

**•**

Our PluriXTM Bioreactor system may also be used for autologus proliferation, i.e. to expand the hematopoietic stem cells taken from the transplant patients themselves.  Contrary to any existing available technologies known to us, our PluriXTM Bioreactor system might allow the use of autologus bone marrow transplantation in the case that healthy cells are not clearly attainable from the patient. 

**•**

Our PluriXTM Bioreactor system can be used to produce a high number of hematopoietic stem cells, which might result in increased potential for faster, successful engraftment of stem cells in transplant patients. 

**•**

By making the option of expanding hematopoietic stem cells taken from transplant patients themselves available, we believe that costs related to donor searches for bone marrow transplants will be reduced significantly.

Alongside our research process on the PluriXTM Bioreactor system, we have also identified characterization processes of new proteins that are important to the differentiation of stem cells, both within and without patients' bodies.  We plan to continue in the cleaning and characterization of these proteins with the intention of making them into commercial products.

*Markets for Our Product and Services*

There are presently between 40,000 to 50,000 bone marrow transplants performed annually****worldwide.  Approximately 18,000 of these bone marrow transplants are performed in the United States and approximately 25,000 are performed in Europe.  We have not taken steps to determine the number of bone marrow transplants 

 

 

 

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performed elsewhere.  Of the 40,000 to 50,000 bone marrow transplants performed, only 5,000 are performed on babies and children.  Furthermore, most of these 40,000 to 50,000 bone marrow transplants are allogeneic transplants, requiring patients to locate donors with compatible hematopoietic stem cells.  Based on the fact that only one in three patients actually finds a compatible donor, we estimate that the number of potential bone marrow transplants should exceed 150,000 annually.  Based on these statistics, we believe that the existing methods of transplanting human bone marrow have not been perfected and are far from reaching an ideal level of success.

Presently, the standard bone marrow transplant procedure costs approximately $100,000 per patient.  This translates into approximately $5 billion annually****that patients and their medical insurers around the world are spending currently for this procedure alone.  In addition, to manage the risk of incompatibility between donor and patient stem cells, a separation procedure of the stem cells is frequently also performed at a cost of $70,000.  We believe that 15% to 20%, or 15,000 to 20,000 of the patients require this stem cell separation procedure as well, adding a further $700 million to the current spending on bone marrow transplants in the United States.  Combining these figures with similar expenditures in Europe and Asia, we estimate the current worldwide spending on bone marrow transplants to exceed $7 billion per year.

We estimate that there are more than 50 cord blood banks in the world, most of them located in the United States.  In 2001, they collected cryo-preserved (frozen) and stored cord blood from some 34,000 to 36,000 donors and they project that the annual rate of growth of cord blood preserved will be over 15%.  Due to the increased use of umbilical cord blood hematopoietic stem cells in bone marrow transplants, we expect that the number of cord blood banks will also grow significantly around the world.  We also expect that, in developed countries, in the near future, umbilical cord blood may be drawn at the time of every birth and stored for later use.  We believe that the stem cell expansion technology that we will make available through our PluriXTM Bioreactor system, together with proper marketing efforts, will increase the number of umbilical cord blood donors for personal use, i.e., parents storing theumbilical cord blood for their children's future, by increasing the existing growth rate.  This will also provide a full base of hematopoietic stem cells donor opportunities to patients throughout the world.  We project that the global market for the provision of stem cell expansion services can reach approximately $4 billion.

*Intellectual Property*

Our success will depend in part on our ability, and the ability of our licensors, to obtain patent protection for our technology and processes we acquired under the license agreement with the Weizmann Institute of Science and the Technion-Israel Institute of Technology.  Under the license agreement we have exclusive rights to the technology covered a patent application entitled "Method and Apparatus for Maintenance and Expansion of Hematopoietic Stem Cells and/or Progenitor Cells" filed with the World Intellectual Property Organization under the Patent Cooperation Treaty (PCT) patent number PCT/US00/02688.  Corresponding patent application have also been filed in a number of countries including the United States under patent application number 09/890,401.  On January 4, 2005, we received notice from the U.S. Patent and Trademark Office that it has allowed the U.S. patent application number 09/890,401, butchanging the title of the patent from “Method and Apparatus for Maintenance and Expansion of Hemopoietic Stem Cells and/or Progenitor Cells” to “Method of Producing Undifferentiated Hemopoietic Stem Cells Using a Stationary Phase Plug-Flow Bioreactor.”  This patent allowance provides coverage to our concept of creating a three-dimensional bone-like environment that supports stem cell expansion without differentiation.  Our other issued patent presents claims to: (i) certain apparatus for cell culturing, including a bioreactor suitable for culturing human hematopoietic stem cells or hematopoietic progenitors cells; (ii)three dimensional stromal cells based bioreactor.  A patent was issued in South Africa in October, 2002, and is due to expire in approximately 2020.  Patents were approved in Australia and New Zealand in July 2003 and are due to expire in approximately 2020.  In addition, we and our exclusive licensors plans to file applications for patents in theUnited States and equivalent applications in certain other countries claiming other aspects of our technology and processes, including a number of U.S. patent applications and corresponding applications in other countries relating to various components of the PluriXTM Bioreactor system. 

The validity and breadth of claims in medical technology patents involve complex legal and factual questions and, therefore, may be highly uncertain.  No assurance can be given that any patents based on pending patent applications or any future patent applications by us, or our licensors, will be issued, that the scope of any patent protection will exclude competitors or provide competitive advantages to us, that any of the patents that have been or may be issued to us or our licensors will be held valid if subsequently challenged or that others will not claim rights in or ownership of the patents and other proprietary rights held or licensed by us.  Furthermore, there can be 

 

 

 

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no assurance that others have not developed or will not develop similar products, duplicate any of our technology or design around any patents that have been or may be issued to us or our licensors.  Since patent applications in the United States are maintained in secrecy until patents issue, we also cannot be certain that others did not first file applications for inventions covered by our, and our licensors' pending patent applications, nor can we be certain that we will not infringe any patents that may be issued to others on such applications. 

We rely on the license granted by Weizmann Institute of Science and Technion-Israel Institute of Technology and others for the patent rights related to our core technology, the PluriXTM Bioreactor system.  If we breach the license agreement or otherwise fail to comply with the license agreements, or if the License agreement expires or is otherwise terminated, we may lose our rights in such patents, which would have a material adverse affect on our business, financial condition and results of operations. 

We also rely on trade secrets and unpatentable know-how that we seek to protect, in part, by confidentiality agreements.  It has not been, but is now our intended policy to require our employees, consultants, contractors, manufacturers, outside scientific collaborators and sponsored researchers, board of directors, technical review board and other advisors to execute confidentiality agreements upon the commencement of employment or consulting relationships with us.  These agreements will provide that all confidential information developed or made known to the individual during the course of the individual's relationship with us is to be kept confidential and not disclosed to third parties except in specific limited circumstances.  We also will commence to require signed confidentiality or material transfer agreements from any company that is to receive our confidential information.  In the case of employees,consultants and contractors, the agreements will generally provide that all inventions conceived by the individual while rendering services to us shall be assigned to us as the exclusive property of Pluristem, Ltd.  There can be no assurance, however, that all persons who we desire to sign such agreements will sign, or if they do, that these agreements will not be breached, that we would have adequate remedies for any breach, or that our trade secrets or unpatentable know-how will not otherwise become known or be independently developed by competitors. 

Our success will also depend in part on our ability to commercialize our technology without infringing the proprietary rights of others.  We have not conducted freedom of use patent searches and no assurance can be given that patents do not exist or could not be filed which would have an adverse affect on our ability to market our technology or maintain our competitive position with respect to our technology.  If our technology components, devices, designs, products, processes or other subject matter are claimed under other existing United States or foreign patents or are otherwise protected by third party proprietary rights, we may be subject to infringement actions.  In such event, we may challenge the validity of such patents or other proprietary rights or we may be required to obtain licenses from such companies in order to develop, manufacture or market our technology.  There can be no assurances that wewould be able to obtain such licenses or that such licenses, if available, could be obtained on commercially reasonable terms.  Furthermore, the failure to either develop a commercially viable alternative or obtain such licenses could result in delays in marketing our proposed technology or the inability to proceed with the development, manufacture or sale of products requiring such licenses, which could have a material adverse affect on our business, financial condition and results of operations.  If we are required to defend ourselves against charges of patent infringement or to protect our proprietary rights against third parties, substantial costs will be incurred regardless of whether we are successful.  Such proceedings are typically protracted with no certainty of success.  An adverse outcome could subject us to significant liabilities to third parties and force us to curtail or cease our development and commercialization of our technology.

*Research and Development*

Foundational Research

For the last five years, our Chief Executive Officer, Dr. Shai Meretzki, has made the initial strides in the development of our core technology, the PluriXTM Bioreactor system.  Research was performed by Dr. Meretzki and his team in the laboratory of Dr. Shosh Merchav at the Technion - Israel Institute of Technology's Rappaport Faculty of Medicine.  Dr. Meretzki also worked in close collaboration with Professor Dov Zipori and Dr. Avinoam Kadouri, both from the Weizmann Institute of Science.  Professor Zipori specializes in cultures and stromal cells and Dr. Kadouri specializes in the planning and creation of bioreactors.  Special carriers were used in our research and development process.  In addition, this foundational research was conducted in joint cooperation with the laboratory of SCID-NOD mice at the Weizmann Institute of Science and with Plumacher Laboratories in Rotterdam.  To this end, PlumacherLaboratories allocated a research physician to the project for over two years.  

 

 

 

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The technology resulting from this research is the subject of our license agreement (see “Intellectual Property”).

Ongoing Research and Development Plan

For the next three to four years, we intend to continue developing our stem cell expansion technology based on the PluriXTM Bioreactor system, which will consist of four broad stages:

3D Stroma Culture Optimization – During this stage, we are collecting stroma cells from donor bone marrow and growing them within the PluriXTM 3-D culture.  We intend to focus on optimizing the capacity of the PluriXTM system to support the growth and long-term maintenance of our high-density three dimensional stromal cells cultures.

Stem-cells/Stromal cells Co-Culture Development & Optimization - At this stage we intend to focus on the establishment of the PluriXTM Bioreactors containing high-density cell and pluripotent hematopoietic stem cells co-cultures; maintenance of common cells on high-density cell-coated carriers and testing of expanded stem cells outside a host body using mice without immune systems repopulating cells assay.

Regulatory Approval - We intend to prepare and file with the Food and Drug Administration and other relevant health authorities an Investigational New Drug or an Investigational Device Exemption application to initiate human clinical trials designed to demonstrate the safety, efficacy and clinical benefits of selectively expanded stem cell populations from umbilical cord blood.  All research and development activities will be carried out under the advice of a Food and Drug Administration advisor.

*Employees*

We presently have ten employees in research and development and five employees in management through our wholly owned subsidiary, Pluristem, Ltd. 

*Competition*

The biotechnology and medical device industries are characterized by rapidly evolving technology and intense competition.  Our competitors include major pharmaceutical, medical device, medical products, chemical and specialized biotechnology companies, many of which have financial, technical and marketing resources significantly greater than ours.  In addition, many biotechnology companies have formed collaborations with large, established companies to support research, development and commercialization of products that may be competitive with ours.  Academic institutions, governmental agencies and other public and private research organizations are also conducting research activities and seeking patent protection and may commercialize products on their own or through joint ventures.  We are aware of certain other products manufactured or under development by competitors that are used for the prevention ortreatment of certain diseases and health conditions that we have targeted for product development.  There can be no assurance that developments by others will not render our technology obsolete or noncompetitive, that we will be able to keep pace with new technological developments or that our technology will be able to supplant established products and methodologies in the therapeutic areas that are targeted by us.  The foregoing factors could have a material adverse affect on our business, financial condition and results of operations. 

Our competition will be determined in part by the potential indications for which our technology is developed and ultimately approved by regulatory authorities.  In addition, the first product to reach the market in a therapeutic or preventive area is often at a significant competitive advantage relative to later entrants to the market.  Accordingly, the relative speed with which we, or our potential corporate partners, can develop products, complete the clinical trials and approval processes and supply commercial quantities of the products to the market are expected to be important competitive factors.  Our competitive position will also depend on our ability to attract and retain qualified scientific and other personnel, develop effective proprietary products, develop and implement production and marketing plans, obtain and maintain patent protection and secure adequate capital resources.  We expect ourtechnology, if approved for sale, to compete primarily on the basis of product efficacy, safety, patient convenience, reliability, value and patent position. 

We believe we compete with the following larger and more established specialized biotechnology companies that 

 

 

 

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are developing devices and products to be used for the prevention or treatment of certain diseases and health conditions that we have targeted for product development:  Aastrom Biosciences, Inc., ViaCell Inc., Gamida-Cell Ltd., Advanced Cell Technology, Inc., BioTransplant Inc.,****and CellGenix.  However, to the best of our knowledge none of these companies have developed a platform that can support expansion of hematopoietic stem cells without promoting their differentiation in cytokines free conditions.  

*Government Regulations and Supervision*

Once fully developed, we intend to market our technology, the PluriXTM Bioreactor system, to research laboratories, clinics and umbilical blood banks primarily in the United States and in Europe.  Accordingly, we believe our research and development activities and the manufacturing and marketing of our technology are subject to the laws and regulations of governmental authorities in the United States and other countries in which our technology will be marketed.  Specifically, in the United States, the Food and Drug Administration, among other agencies, regulates new product approvals to establish safety and efficacy of these products.  Governments in other countries have similar requirements for testing and marketing. 

**Regulatory Process in the United States**

Regulatory approval of new medical devices and biological products is a lengthy procedure leading from development of a new product through pre-clinical and clinical testing.  This process takes a number of years and requires the expenditure of significant resources.  There can be no assurance that our technology will ultimately receive regulatory approval. 

We may develop our PluriXTM Bioreactor system into a GMP-compliant cell culture system for production of**human cells outside of the human body to be sold for therapeutic applications.  “GMP” is a standard set for laboratories by the World Health Organization and other health regulatory authorities.  Therefore, to a certain degree, the manner in which the Food and Drug Administration will regulate our PluriXTM Bioreactor system is uncertain.  While normally there is extreme caution in allowing matter to be transplanted into the human body, the severity of the diseases our applications will treat may result in certain leniency from the Food and Drug Administration for terminally ill patients (see “Product Approval”).

We understand that the Food and Drug Administration is still in the process of developing its requirements with respect to somatic cell therapy and gene cell therapy products and has issued draft documents concerning the regulation of cellular and tissue-based products.  If the Food and Drug Administration adopts the regulatory approach set forth in the draft document, the Food and Drug Administration will require regulatory approval for certain human cellular or tissue based products, including cells produced in the PluriXTM Bioreactor system, through a biologic license application. 

In addition, the output of expanded human stem cells from our PluriXTM Bioreactor system is potentially subject to regulation as medical products under the Federal Food, Drug and Cosmetic Act, and as biological products under the Public Health Service Act.  Different regulatory requirements may apply to our technology depending on how they are categorized by the Food and Drug Administration under these laws. 

Furthermore, the Food and Drug Administration has published regulations which require registration of certain facilities, which may include our future clinics, and is in the process of publishing regulations for the manufacture or manipulation of human cellular or tissue based products which may impact our future clinics. 

Regardless of how our technology is regulated, the Federal Food, Drug, and Cosmetic Act and other Federal statutes and regulations govern or influence the research, testing, manufacture, safety, labeling, storage, record-keeping, approval, distribution, use, reporting, advertising and promotion of our future products.  Noncompliance with applicable requirements can result in civil penalties, recall, injunction or seizure of products, refusal of the government to approve or clear product approval applications or to allow us to enter into government supply contracts, withdrawal of previously approved applications and criminal prosecution. 

**Product Approval**

We are currently only in the developmental stage of our technology, PluriXTM Bioreactor system and have not 

 

 

 

begun the process of seeking regulatory approval from the Food and Drug Administration.  Once our PluriXTM Bioreactor system is fully developed, we intend to consult with a Food and Drug Administration advisor to assist us in determining our path in the process toward gaining regulatory approval from the Food and Drug Administration.  Obtaining regulatory approval of new medical devices and biological products from the Food and Drug Administration is a lengthy procedure leading from development of a new product through pre-clinical and clinical testing.  This process takes a number of years and requires the expenditure of significant resources.  There can be no assurance that our technology will ultimately receive regulatory approval.  We summarize below our understanding of the regulatory approval requirements that may be applicable to us if we begin the process of seeking an approval from the Food andDrug Administration.  

Generally, in order to obtain an approval from the Food and Drug Administration of a new medical product, an applicant must submit proof of safety and efficacy.  In some cases, such proof entails extensive pre-clinical and clinical laboratory tests.  The testing, preparation of necessary applications and processing of those applications by the Food and Drug Administration is expensive and may take several years to complete.  There can be no assurance that the Food and Drug Administration will act favorably or in a timely manner in reviewing submitted applications, and an applicant may encounter significant difficulties or costs in its efforts to obtain Food and Drug Administration approvals, in turn, which could delay or preclude the applicant from marketing any products it may develop.  The Food and Drug Administration may also require post-marketing testing and surveillance of approved products, or placeother conditions on the approvals.  These requirements could cause it to be more difficult or expensive to sell the products, and could therefore restrict the commercial applications of such products.  Product approvals may be withdrawn if compliance with regulatory standards is not maintained or if problems occur following initial marketing.  For patented technologies, delays imposed by the governmental approval process may materially reduce the period during which an applicant will have the exclusive right to exploit such technologies. 

If human clinical trials of a proposed medical product are required, the manufacturer or distributor of the product will have to file an Investigational Device Exemption or Investigational New Drug submission with the Food and Drug Administration prior to commencing human clinical trials.  The submission must be supported by data, typically including the results of pre-clinical and laboratory testing.  Following submission of the Investigational Device Exemption or Investigational New Drug, the Food and Drug Administration has 30 days to review the application and raise safety and other clinical trial issues.  If an applicant is not notified of objections within that period, clinical trials may be initiated, and human clinical trials may commence at a specified number of investigational sites with the number of patients approved by the Food and Drug Administration. 

The Food and Drug Administration categorizes medical devices into three regulatory classifications subject to varying degrees of regulatory control.  In general, Class I devices require compliance with labeling and record keeping regulations, Quality System Regulation, 510(k) pre-market notification, and are subject to other general controls.  Class II devices may be subject to additional regulatory controls, including performance standards and other special controls, such as post-market surveillance.  Class III devices, which are either invasive or life-sustaining products, or new products never before marketed (for example, non-"substantially equivalent" devices), require clinical testing to demonstrate safety and effectiveness and the approval of the Food and Drug Administration prior to marketing and distribution.

Because the technology represented by our PluriXTM Bioreactor system has never before been marketed, we believe that our PluriXTM Bioreactor system, if successfully developed, will be classified as Class III medical devices and be subject to the requirements of clinical testing to demonstrate safety and effectiveness and the approval of the Food and Drug Administration prior to marketing and distribution.

 

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In addition, we, and any contract manufacturer, may be required to be registered as a medical device manufacturer with the Food and Drug Administration.  These manufacturers will be inspected on a routine basis by the Food and Drug Administration for compliance with the Food and Drug Administration's Quality System Regulations.  The regulations of the Food and Drug Administration would require that we, and any contract manufacturer, design, manufacture and service products and maintain documents in a prescribed manner with respect to manufacturing, testing, distribution, storage, design control and service activities.  The Medical Device Reporting regulation requires that we provide information to the Food and Drug Administration on deaths or serious injuries alleged to be 

associated with the use of our devices, as well as product malfunctions that are likely to cause or contribute to death 

 

 

 

 

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or serious injury if the malfunction were to recur.  In addition, the Food and Drug Administration prohibits a company from promoting an approved device for unapproved applications and reviews company labeling for accuracy. 

Also, if we are able to successfully develop our PluriXTM Bioreactor system, we believe that the stem cells produced in the PluriXTM Bioreactor system may be regulated by the Food and Drug Administration as a licensed biologic, although there can be no assurance that the Food and Drug Administration will not choose to regulate these stem cells in a different manner.  The Food and Drug Administration categorizes human cell or tissue based products as either minimally manipulated or more than minimally manipulated, and has proposed that more than minimally manipulated products be regulated through a "tiered approach intended to regulate human cellular and tissue based products only to the extent necessary to protect public health." For products which may be regulated as biologics, the Food and Drug Administration requires: (i) preclinical laboratory and animal testing; (ii) submission to the Food andDrug Administration of an Investigational Device Exemption or Investigational Device Exemption New Drug application which must be effective prior to the initiation of human clinical studies; (iii) adequate and well-controlled clinical trials to establish the safety and efficacy of the product for its intended use; (iv) submission to the Food and Drug Administration of a biologic license application; and (v) review and approval of the biologic license application as well as inspections of the manufacturing facility by the Food and Drug Administration prior to commercial marketing of the product. 

Generally, pre-clinical testing covers laboratory evaluation of product chemistry and formulation as well as animal studies to assess the safety and efficacy of the product.  The results of these tests are submitted to the Food and Drug Administration as part of the Investigational Device Exemption.  Following the submission of an Investigational Device Exemption, the Food and Drug Administration has 30 days to review the application and raise safety and other clinical trial issues.  If an applicant is not notified of objections within that period, clinical trials may be initiated.  Clinical trials are typically conducted in three sequential phases.  Phase I represents the initial administration of the drug or biologic to a small group of humans, either healthy volunteers or patients, to test for safety and other relevant factors.  Phase II involves studies in a small number of patients to assess the efficacyof the product, to ascertain dose tolerance and the optimal dose range and to gather additional data relating to safety and potential adverse affects.  Once an investigational drug is found to have some efficacy and an acceptable safety profile in the targeted patient population, multi-center Phase III studies are initiated to establish safety and efficacy in an expanded patient population and multiple clinical study sites.  The Food and Drug Administration reviews both the clinical plans and the results of the trials and may request an applicant to discontinue the trials at any time if there are significant safety issues. 

The results of the pre-clinical tests and clinical trials are submitted to the Food and Drug Administration in the form of a biologic license application for marketing approval.  The testing and approval process is likely to require substantial time and effort and there can be no assurance that any approval will be granted on a timely basis, if at all.  Additional animal studies or clinical trials may be requested during the Food and Drug Administration review period that may delay marketing approval.  After the Food and Drug Administration approval for the initial indications, further clinical trials may be necessary to gain approval for the use of the product for additional indications.  The Food and Drug Administration requires that adverse affects be reported to the Food and Drug Administration and may also require post-marketing testing to monitor for adverse affects, which can involve significant expense. 

Under current requirements, facilities manufacturing biological products must also be licensed.  To accomplish this, a biologic license application must be filed with the Food and Drug Administration.  The biologic license application describes the facilities, equipment and personnel involved in the manufacturing process.  An establishment license is granted on the basis of inspections of the applicant's facilities in which the primary focus is on compliance with regulations and procedures****and the ability to consistently manufacture the product in the facility in accordance with the Investigational Device Exemption.  If the Food and Drug Administration finds the inspection unsatisfactory, it may decline to approve the biologic license application, resulting in a delay in production of products. 

As part of the approval process for human biological products, each manufacturing facility must be registered and inspected by the Food and Drug Administration prior to marketing approval.  In addition, state agency inspections and approvals may also be required for a biological product to be shipped out of state. 

 

 

 

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**Regulatory Process in Europe**

If we successfully develop our PluriXTM bioreactor system and seek regulatory approval in Europe, we believe our PluriXTM Bioreactor system may be regulated in Europe as a Class I Sterile, Class IIb or Class III medical device, under the authority of the Medical Device Directives being implemented by European Union member countries.  These classifications apply to medical laboratory equipment and supplies including, among other products, many devices that are used for the collection and processing of blood for patient therapy. 

The Medical Device Directives regulations vest the authority to permit affixing of the CE Mark with various notified bodies.  These are private and state organizations which operate under license from the member states of the European Union to certify that appropriate quality assurance standards and compliance procedures are followed by developers and manufacturers of medical device products or, alternatively, that a manufactured medical product meets a more limited set of requirements.  Notified bodies are also given the responsibility for determination of the appropriate standards to apply to a medical product.  Receipt of permission to affix the CE Mark enables a company to sell a medical device in all European Union member countries.  Other registration requirements may also need to be satisfied in certain countries.  We have not received permission from a notified body to affix the CE Mark to ourPluriXTM Bioreactor system. 

**RISK FACTORS**

Much of the information included in this current report includes or is based upon estimates, projections or other "forward looking statements".  Such forward-looking statements include any projections or estimates made by us and our management in connection with our business operations.  While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested herein.

Such estimates, projections or other "forward looking statements" involve various risks and uncertainties as outlined below.  We caution the reader that important factors in some cases have affected and, in the future, could materially affect actual results and cause actual results to differ materially from the results expressed in any such estimates, projections or other "forward looking statements".

Our common shares are considered speculative during the development of our new business operations.  Prospective investors should consider carefully the risk factors set out below.

*We have not earned any revenues since our incorporation and only have a limited operating history in our current business of developing and commercializing stem cell expansion technology, which raise doubt about our ability to continue as a going concern.*

Our company has a limited operating history in our current business of developing and commercializing stem cell expansion technology and must be considered in the development stage.  We were incorporated on May 11, 2001 with a business plan to develop an artificial intelligence software called Randomix.  We were not successful in implementing our original business plan in regard to our Randomix software and as a result we decided in April of 2003 to pursue initiatives in the biotechnology industry as an extension to our business.  In May of 2003 we entered into a license agreement with the Weizmann Institute of Science and the Technion-Israel Institute of Technology to acquire an exclusive license for a stem cell expansion technology.  In June of 2003, we acquired our wholly-owned subsidiary, Pluristem, Ltd., based in Israel to conduct further research and development of the exclusive stem cell expansiontechnology licensed to us.    

We have not generated any revenues since our inception and we will, in all likelihood, continue to incur operating expenses without significant revenues until we successfully develop and commercialise our stem cell expansion technology.  Our primary source of funds has been the sale of our common stock.  We cannot assure that we will be able to generate any significant revenues or income.  These circumstances make us dependent on additional financial support until profitability is achieved.  There is no assurance that we will ever be profitable, and we have a going concern note as described in an explanatory paragraph to our consolidated financial statements for the year ended June 30, 2005. 

 

 

 

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*Our likelihood of profit depends on our ability to develop and commercialize our stem cell expansion technology, which is currently in the development stage.  If we are unable to complete the development and commercialization of our stem cell expansion technology successfully, our likelihood of profit will be limited severely.*

We are engaged in the business of developing and commercializing a technology and proposed device called the PluriXTM Bioreactor system.  The proposed function of our PluriXTM Bioreactor system is to allow researchers and physicians to expand hematopoietic stem cells outside of the human body without differentiation so they may be used in bone marrow transplants and other methods of cell therapy.  Our PluriXTM Bioreactor system is in the development stage and we have not begun the regulatory approval process for our PluriXTM Bioreactor system.  We have not realized a profit from our operations to date and there is little likelihood that we will realize any profits in the short or medium term.  Any profitability in the future from our business will be dependent upon successful commercialization of our PluriXTM Bioreactor system, which will require significant additional research anddevelopment as well as substantial clinical trials.  

*If we encounter problems or delays in the research and development of our PluriXTM Bioreactor system, we may not be able to raise sufficient capital to finance our operation during the period required to resolve the problems or delays.*

Our PluriXTM Bioreactor system is currently in the development stage and we anticipate that we will continue to incur operating expenses without significant revenues until we have successfully completed all necessary research and clinical trials.  We, and any of our potential collaborators, may encounter problems and delays relating to research and development, regulatory approval and intellectual property rights of our technology.  Our research and development programs may not be successful, and our cell culture technology may not facilitate the production of cells outside the human body with the expected result.  Our PluriXTM Bioreactor system may not prove to be safe and efficacious in clinical trials.  If any of these events occur, we may not have adequate resources to continue operations for the period required to resolve the issue delaying commercialization and we may not be able to raisecapital to finance our continued operation during the period required for resolution of that issue.  Accordingly, we may be forced to discontinue or suspend our operations. 

*We need to raise additional financing to support the research and development of our PluriXTM Bioreactor system in the future but we cannot be sure we will be able to obtain additional financing on terms favourable to us when needed.  If we are unable to obtain additional financing to meet our needs, our operations may be adversely affected or terminated.*

We raised proceeds of approximately $3,250,000 in three private placement offerings of our securities in October of 2004 and January of 2005 to support the development and commercialization of our PluriXTM Bioreactor system.  These funds are expected to fund operations until Spring of 2006.  Our ability to continue to develop and commercialize the PluriXTM Bioreactor system is dependent upon our ability to raise significant additional financing when needed.  If we are unable to obtain such financing, we will not be able to fully develop and commercialize our technology.  Our future capital requirements will depend upon many factors, including: 

**•**

continued scientific progress in our research and development programs;

**•**

costs and timing of conducting clinical trials and seeking regulatory approvals and patent prosecutions;

**•**

competing technological and market developments;

**•**

our ability to establish additional collaborative relationships; and

**•**

the effect of commercialization activities and facility expansions if and as required.

We have limited financial resources and to date, no cash flow from operations and we are dependent for funds on our ability to sell our common stock, primarily on a private placement basis.  There can be no assurance that we will be able to obtain financing on that basis in light of factors such as the market demand for our securities, the state of financial markets generally and other relevant factors.  Any sale of our common stock in the future will result in dilution to existing shareholders.  Furthermore, there is no assurance that we will not incur debt in the future, that 

 

 

 

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we will have sufficient funds to repay our future indebtedness or that we will not default on our future debts, jeopardizing our business viability.  Finally, we may not be able to borrow or raise additional capital in the future to meet our needs or to otherwise provide the capital necessary to conduct the development and commercialization of our PluriXTM Bioreactor system, which might result in the loss of some or all of your investment in our common stock.

*If we fail to obtain and maintain required regulatory approvals for our PluriXTM Bioreactor system, our ability to commercialize our PluriXTM Bioreactor system will be limited severely.*

Once fully developed, we intend to market our PluriXTM Bioreactor system primarily in the United States, Europe and Japan.  We must obtain the approval of the Food and Drug Administration before commercialization of our technology may commence in the United States and similar agencies in Europe.  We may also be required to obtain additional approvals from foreign regulatory authorities to commence our marketing activities in those jurisdictions.  If we cannot demonstrate the safety, reliability and efficacy of our PluriXTM Bioreactor system, or of the cells produced in the PluriXTM Bioreactor system, including long-term sustained cell engraftment, or if one or more patients die or suffer severe complications in future clinical trials, the Food and Drug Administration or other regulatory authorities could delay or withhold regulatory approval of our technology. 

Furthermore, even if we obtain regulatory approval for our PluriXTM Bioreactor system, that approval may be subject to limitations on the indicated uses for which it may be marketed.  Even after granting regulatory approval, the Food and Drug Administration, other regulatory agencies, and governments in other countries will continue to review and inspect marketed products, manufacturers and manufacturing facilities.  Later discovery of previously unknown problems with a product, manufacturer or facility may result in restrictions on the product or manufacturer, including a withdrawal of the product from the market.  Further, governmental regulatory agencies may establish additional regulations which could prevent or delay regulatory approval of our technology. 

*Even if we obtain regulatory approvals to commercialize our technology, we may encounter a lack of commercial acceptance of our PluriXTM Bioreactor system, which would impair the profitability of our business.*

Our research and development efforts are primarily directed toward obtaining regulatory approval to market the PluriXTM Bioreactor system as an alternative to, or as an improvement for, the traditional bone marrow harvest and peripheral blood progenitor cell stem cell collection methods.  These stem cell collection methods have been widely practiced for a number of years, and our technology may not be accepted by the marketplace as readily as these or other competing processes and methodologies.  Additionally, our PluriXTM Bioreactor system may not be employed in all potential applications being investigated, and any reduction in applications would limit the market acceptance of our technology and our potential revenues.  As a result, even if we obtain all required regulatory approvals, we cannot be certain that our PluriXTM Bioreactor system will be adopted at a level that would allow us tooperate profitably. 

*If we do not keep pace with our competitors and with technological and market changes, our technology may become obsolete and our business may suffer.*

The market for our technology is very competitive, is subject to rapid technological changes and varies for different individual products.  We believe that there are potentially many competitive approaches being pursued in competition to our technology, including some by private companies for which information is difficult to obtain. 

Many of our competitors have significantly greater resources, more product candidates and have developed product candidates and processes that directly compete with our technology.  Our competitors may have developed, or could in the future develop, new technologies that compete with our technology or even render our technology obsolete.  Our technology is designed to expand hematopoietic stem cells outside of the human body without differentiation so they may be used in bone marrow transplants and other methods of cell therapy.  Even if we are able to demonstrate improved or equivalent results, researchers and practitioners may not use our technology and we will suffer a competitive disadvantage.  Finally, to the extent that others develop new technologies that address the targeted application for our PluriXTM Bioreactor system, our business will suffer. 

 

 

 

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*We depend to a significant extent on certain key personnel, the loss of any of whom may materially and adversely affect our company.*

Our success depends on a significant extent to the continued services of certain highly qualified scientific and management personnel, including our Chief Executive Officer, Dr. Shai Meretzki and our Chief Financial Officer, Yossi Keret.  We face competition for qualified personnel from numerous industry sources, and there can be no assurance that we will be able to attract and retain qualified personnel on acceptable terms.  The loss of service of any of our key personnel could have a material adverse effect on our operations or financial condition.  In the event of the loss of services of such personnel, no assurance can be given that we will be able to obtain the services of adequate replacement personnel.  We do not maintain key person insurance on the lives of any of our officers or employees.  

*Our success depends in large part on our ability to develop and protect our PluriXTM Bioreactor system technology.  If our patents and proprietary right agreements do not provide sufficient protection for our PluriXTM Bioreactor system technology, our business and competitive position will suffer.*

We rely on an exclusive, world-wide license relating to the production of human cells granted to us by the Weizmann Institute of Science and Technion-Israel Institute of Technology for certain of our patent rights.  If we materially breach such agreement or otherwise fail to materially comply with such agreement, or if such agreement expires or is otherwise terminated by us, we may lose our rights under the patents held by the Weizmann Institute of Science and Technion-Israel Institute of Technology.  At the latest, the license will terminate when the patents underlying the license expire.  The underlying patents will expire in approximately 2020.  Also, the scope of the patents licensed to us may not be sufficiently broad to offer meaningful protection.  In addition, the patents licensed to us could be successfully challenged, invalidated or circumvented so that our patent rights would not create aneffective competitive barrier.  Significantly, we do not as yet have patents in the United States or Europe or any other major market, although patents have been applied for.

We also rely on trade secrets and unpatentable know-how that we seek to protect, in part, by confidentiality agreements with our employees, consultants, suppliers and licensees.  These agreements may be breached, and we might not have adequate remedies for any breach.  If this were to occur, our business and competitive position would suffer. 

*We may be subject to intellectual property litigation such as patent infringement claims, which could adversely affect our business.*

Our success will also depend in part on our ability to develop commercially viable technology without infringing the proprietary rights of others.  Although we have not been subject to any filed infringement claims, other patents could exist or could be filed which would prohibit or limit our ability to develop and market our PluriXTM Bioreactor system in the future.  In the event of an intellectual property dispute, we may be forced to litigate.  Intellectual property litigation would divert management's attention from developing our technology and would force us to incur substantial costs regardless of whether we are successful.  An adverse outcome could subject us to significant liabilities to third parties, and force us to curtail or cease the development and commercialization of our PluriXTM Bioreactor system. 

*Potential product liability claims could adversely affect our future earnings and financial condition.*

We face an inherent business risk of exposure to product liability claims in the event that the use of the PluriXTM Bioreactor system during research and development efforts, including future clinical trials, or after commercialization results in adverse affects.  As a result, we may incur significant product liability exposure.  We may not be able to maintain adequate levels of insurance at reasonable cost and/or reasonable terms.  Excessive insurance costs or uninsured claims would add to our future operating expenses and adversely affect our financial condition. 

 

 

 

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*Our principal research and development facilities are located in Israel and the unstable military and political conditions of Israel may cause interruption or suspension of our business operations without warning.*

Our principal research and development facilities are located in Israel.  As a result, we are directly influenced by the political, economic and military conditions affecting Israel.  Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors and, since September 2000, involving the Palestinian population, and a state of hostility, varying in degree and intensity, has led to security and economic problems for Israel and companies based in Israel.  Acts of random terrorism periodically occur which could affect our operations or personnel.  

In addition, Israeli-based companies and companies doing business with Israel, have been the subject of an economic boycott by members of the Arab League and certain other predominantly Muslim countries since Israel's establishment.  Although Israel has entered into various agreements with certain Arab countries and the Palestinian Authority, and various declarations have been signed in connection with efforts to resolve some of the economic and political problems in the Middle East, we cannot predict whether or in what manner these problems will be resolved.  Also, since the end of September 2000, there has been a marked increase in the level of terrorism in Israel, which has significantly damaged both the Israeli economy and levels of foreign and local investment. 

Furthermore, certain of our officers and employees may be obligated to perform annual reserve duty in the Israel Defense Forces and are subject to being called up for active military duty at any time.  All Israeli male citizens who have served in the army are subject to an obligation to perform reserve duty until they are between 45 and 54 years old, depending upon the nature of their military service. 

*Because some of our officers and directors are located in non-U.S. jurisdictions, you may have no effective recourse against the management for misconduct and may not be able to enforce judgement and civil liabilities against our officers, directors, experts and agents.*

Most of our directors and officers are nationals and/or residents of countries other than the United States, and all or a substantial portion of their assets are located outside the United States.  As a result, it may be difficult for investors to enforce within the United States any judgments obtained against our officers or directors, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any U.S. state.

*Because we do not intend to pay any dividends on our common stock, investors seeking dividend income or liquidity should not purchase shares of our common stock.*

We have not declared or paid any dividends on our common stock since our inception, and we do not anticipate paying any such dividends for the foreseeable future.  Investors seeking dividend income or liquidity should not invest in our common stock.

*Our stock is considered a “penny stock” and certain securities rules may hamper the tradability of our shares in the market.*

Shares of our common stock are subject to rules adopted by the Securities and Exchange Commission that regulate broker-dealer practices in connection with transactions in "penny stocks".  "Penny stock" is defined to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions.  Our common stock are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and "accredited investors."  The term "accredited investor" refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse.  The penny stock rules require a broker-dealer, prior to a transaction in a penny stock nototherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC which provides information about penny stocks and the nature and level of risks in the penny stock market.  The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer's account.  The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer's confirmation. In 

 

 

 

- 20 -

 

 

addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction.  These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules.  Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities.

**Item 2.**

**Description of Property.**

Our principal offices are located at MATAM Advanced Technology Park, Building No. 20, Haifa, Israel  31905.  Our telephone number is 011-972-4-850-1080. We lease our office space from MATAM Advanced Technology Park on a month to month basis and our monthly rental is approximately $6,700.  During the fiscal year ending June 30, 2005, we paid $84,573 for rent.

**Item 3.**

**Legal Proceedings.**

We are not a party to any pending litigation and none is contemplated or threatened.

**Item 4.**

**Submissions of Matters to a Vote of Security Holders.**

There were no matters submitted to a vote of our security holders either through solicitation of proxies or otherwise in the fourth quarter of the fiscal year ended June 30, 2005.

**PART II**

**Item 5.**

**Market for Common Equity and Related Stockholder Matters.**

On December 19, 2002, our common stock received approval for quotation on the National Association of Securities Dealers Inc.'s Over-the-Counter Bulletin Board under the name "A.I. Software, Inc." and under the symbol "AISF".  On April 8, 2003, we effected a fourteen (14) for one (1) forward stock split.  Accordingly, our symbol was changed to "ASOW".  On June 30, 2003, we effected a name change to "Pluristem Life Systems, Inc." and our symbol was changed to "PLRS".  The following table reflects the high and low bid information for our common stock obtained from Yahoo! Finance and reflects inter-dealer prices, without retail mark-up, markdown or commission, and may not necessarily represent actual transactions.

The high and low bid prices of our common stock for the periods indicated below are as follows:

**National Association of Securities Dealers****OTC Bulletin Board**

**Quarter Ended(1)**

**High(2)**

**Low(2)**

June 30, 2005

$0.29

$0.17

March 31, 2005

$0.37

$0.22

December 31, 2004

$0.32

$0.20

September 30, 2004

$0.40

$0.16

June 30, 2004

$0.75

$0.34

March 31, 2004

$1.12

$0.59

December 31, 2003

$1.24

$0.55

September 30, 2003

$1.88

$1.07

June 30, 2003

$2.29

$0.05

(1)  Our common stock received approval for quotation on December 19, 2002. The first trade occurred January 21, 2003.

(2)  On April 8, 2003, we effected a 14 for 1 forward split of our common stock, as a result all stock prices have been adjusted on a post-split basis.

 

 

 

- 21 -

 

 

On September1, 2005, the closing price for the common stock as reported by the quotation service operated by the OTC Bulletin Board was $0.20.

As of September 1, 2005, there were 84 holders of record of our common stock.  As of such date, 63,653,483 common shares were issued and outstanding.  

Our common shares are issued in registered form.  The Nevada Agency and Trust Company, Suite 880, Bank of America Plaza, 50 West Liberty Street, Reno, Nevada  89501 (Telephone:  775.322.0626; Facsimile:  775.322.5623) is the registrar and transfer agent for our common shares.

*Dividend Policy*

We have not paid any cash dividends on our common stock and have no present intention of paying any dividends on the shares of our common stock.  Our current policy is to retain earnings, if any, for use in our operations and in the development of our business.  Our future dividend policy will be determined from time to time by our board of directors.

*Recent Sales of Unregistered Securities*

All information relating to sales of unregistered securities in the fiscal year ended June 30, 2005 have been included in current reports on Form 8-K and quarterly reports on Form 10-QSB previously filed with the Securities and Exchange Commission.  

*Equity Compensation Plan Information*

On November 25, 2003, our board of directors adopted our 2003 Stock Option Plan.  Under the 2003 Stock Option Plan, options may be granted to our officers, directors, employees and consultants or the officers, directors, employees and consultants of our subsidiary.  Pursuant to the Plan, we reserved for issuance 4,100,000 shares of our common stock.  As of September 1, 2005, there were 604,704 shares of our common stock still available for future grant under the plan.

The following table summarizes certain information regarding our equity compensation plan:

 

**Plan  Category**

**Number  of securities to be issued upon exercise of outstanding options, warrants  and rights**

**Weighted-average  exercise price of outstanding options, warrants and rights**

**Number  of securities remaining available for future issuance under equity  compensation plans**

**2003 Stock Option Plan** (equity compensation plan not approved by security holders)

3,495,296

$0.30

604,704

Equity compensation plan approved by security holders

Nil

Nil

Nil

Total

3,495,296

$0.30

604,704

 
**Item 6.**

**Plan of Operation.**

 
*Overview*

You should read the following discussion of our financial condition and results of operations together with the consolidated audited financial statements and the notes to consolidated audited financial statements included elsewhere in this filing prepared in accordance with accounting principles generally accepted in the United States.  

 

 

 

- 22 -

 

 

This discussion contains forward-looking statements that reflect our plans, estimates and beliefs.  Our actual results could differ materially from those anticipated in these forward-looking statements.

From our inception on May 11, 2001 to April, 2003, we had been engaged in software development, premised on the use of artificial intelligence in computer programming technology and in many areas of the computer, Internet, robotics, and games industries, and as well, a software application to assist in finding domain names.  In May 2003, our board of directors conducted an in-depth analysis of our business plan and related future prospects for software development companies.  To better protect stockholder interests and provide future appreciation, it was decided to concurrently pursue initiatives in the biotech industry as an extension to our existing business.  On May 5, 2003, we entered into a license agreement with Weizmann Institute to Science and the Technion-Israel Institution of Technology to acquire an exclusive license for a stem cell expansion technology.  To better develop this exclusively licensedtechnology, we purchased 100% of the issued and outstanding shares of Pluristem, Ltd. on June 10, 2003.  Pluristem, Ltd. is a research and development company based in Israel.  As of July 1, 2003, we have suspended our efforts to further develop artificial intelligence in computer programming and other software applications.

*Plan of Operations*

Our primary objective over the next twelve months will be to further develop the expanded hematopoietic stem cell product and process.  We will perform the development of the production process performed in the PluriXTM Bioreactor.  Methods for the preparation of the cord blood seed, its freezing and thawing, development of the stromal cells and establishment of a master cell bank and working cell bank will be developed first.  Following bioprocess development, fill and finish and development of analytical methods will be performed.  In parallel, we will set up a quality assurance plan and implement it.  A documentation center and compliance procedures will be established.  In parallel, we will execute pre-clinical studies to demonstrate the expanded hematopoietic stem cell product activity in repopulating mice bone marrow.  Regulatory activities will start by crystallizing the regulatory strategy,preparing a pre-filing document and perform a pre-filing meeting with the Food and Drug Administration.

Concurrently, we will initiate contact with research centers and cord blood banks to establish cooperative relations for future business development.

We will continue our cooperation with the Technion Institute of Technology in Israel regarding the Magneton grant received from the Israeli government.  Within this grant we, together with the Technion researchers will further develop the PluriXTM Bioreactor using biodegradable scaffold structure which imitates the human bone.

We intend to consult with Food and Drug Administration consultants to assist us in determining the process toward gaining Food and Drug Administration regulatory approval.

We have not generated any revenues and our operating activities have used cash resources of over $1,791,836 for the year ended June 30, 2005.  This negative cash flow is attributable to our operation expenses, including but not limited to, research and development expense and the payment of our audit fees and legal fees.  We anticipate that our operating expenses will increase as we intend to conduct detailed development of our first product - expanded hematopoietic stem cell product, animal pre-clinical trials and experiments and clinical trials and work towards its completion.  We estimate our expenses in the next twelve months will be approximately $2,000,000, generally falling in two major categories: research and development costs and general and administrative expenses.

Research and Development Costs

For the next twelve months, we estimate that our research and development costs will be approximately $1,050,000.  We intend to spend our research and development costs on optimizing the 3-D bioreactor operations, developing the expanded hematopoietic stem cell product, implanting stem cells from cord blood into the stromal cell cultures of PluriXTM Bioreactors for expansion and on conducting studies on mice to examine stem cell development and expansion.

General and Administrative Expenses

For the next twelve months, we estimate that our general and administrative expenses will be approximately $950,000.  These expenses will include office and miscellaneous charges, which consist primarily of charges 

 

 

 

- 23 -

 

 

incurred for purchase of office supplies and other administrative expenses.  These expenses will also include professional fees, which consist primarily of accounting and auditing fees for the year-end audit and legal fees for securities advice, directors liability insurance and cost of fundraising.

We do not expect to generate any revenues in the next twelve months.  Our products will not be ready for sale for up to five years.

In our management's opinion, we need to achieve the following events or milestones in the next twelve months in order for us to begin generating revenues as planned within five years:

**•**

Raise equity or debt financing or a combination of equity and debt financing of at least $10,000,000.

**•**

Optimize 3-D PluriXTM Bioreactor operations – Using the 3-D environment of the PluriXTM, a dense population of stromal supporting cells (cells) has been reached to provide the basis for stem cell in vitro expansion without differentiation.  Optimization of the bioreactor system is a continuous process to enable the stem cells self-renew while remaining in their original state.

**•**

Development of expanded hematopoietic stem cell product process and analytical methods.

**•**

Studies to analyze the hematopeoietic stem cell to reconstitute the hematopoietic system within animal model.  Trials will be conducted using SCID mice which are mice with insufficient immune systems that can be used to simulate human blood and immune systems.  Using this model, the human hematopoietic stem cell may develop and differentiate Pluristem's in vitro expansion process to be analyzed in vivo.  

**•**

Crystallize the regulatory and medical strategy prior to meeting with the Food and Drug Administration.

**•**

Establish relations with research centres and cord blood banks.  

*Liquidity and Capital Resources*

During the year ended June 30, 2005, we incurred a net loss of $2,098,108, as compared to a net loss of $2,010,350 in the year ended June 30, 2004.  This resulted from moving forward with our research and development plan.  We obtained funds to carry on our business from private placements we conducted in October of 2004 and January of 2005, which raised gross proceeds of approximately $3,250,000 through the issuance of 32,500,000 units comprising one common share and one common share purchase warrants.  As at June 30, 2005 we had cash of $1,889,438, which will be sufficient to fund our operations for approximately 9 months.

On October 25, 2004, we commenced a private placement offering with a group of investors who subscribed for units of our securities pursuant to common stock and warrant purchase agreements dated for reference on October 25, 2004.  For the sake of clarity, we have referred to this private placement offering as the October 25, 2004 Private Placement.  The October 25, 2004 Private Placement closed in four different tranches:

On November 30, 2004, we closed the first tranche of the October 25, 2004 Private Placement and issued 3,250,000 units at a price of $0.10 per unit to seven investors for total gross proceeds of $325,000.  Each unit consists of one common share and one share purchase warrant.  Each warrant shall entitle the holder to purchase one additional common share at a price of $0.30 per share until November 30, 2006.

On January 26, 2005, we closed the second tranche of the October 25, 2004 Private Placement and issued 4,300,000 units at a price of $0.10 per unit to nine investors for total gross proceeds of $430,000.  Each unit consists of one common share and one share purchase warrant.  Each warrant shall entitle the holder to purchase one additional common share at a price of $0.30 per share until November 30, 2006.

On March 3, 2005, we closed the third tranche of the October 25, 2004 Private Placement and issued 750,000 units at a price of $0.10 per unit to four investors for total gross proceeds of $75,000.  Each unit consists of one common share and one share purchase warrant.  Each warrant shall entitle the holder to purchase one additional common share at a price of $0.30 per share until November 30, 2006.

 

 

 

- 24 -

 

 

On March 23, 2005, we closed the fourth tranche of the October 25, 2004 Private Placement and issued 200,000 units at a price of $0.10 per unit to one investor for total gross proceeds of $20,000.  Each unit consists of one common share and one share purchase warrant.  Each warrant shall entitle the holder to purchase one additional common share at a price of $0.30 per share until November 30, 2006.

We paid certain placement agents cash in the amount of $24,500 and issued to them 245,000 warrants, each exercisable for one common share at a price of $0.10 until November 30, 2006.

On January 24, 2005, we commenced another private placement offering with a group of investors who subscribed for units of our securities pursuant to common stock and warrant purchase agreements dated for reference January 24, 2005.  For the sake of clarity, we have referred to this private placement offering as the January 24, 2005 Private Placement.  We closed the January 24, 2005 Private Placement on March 3, 2005 and issued 12,000,000 units at a price of $0.10 per unit to fifteen investors for total gross proceeds of $1,200,000.  Each unit consists of one common share and one share purchase warrant.  Each warrant shall entitle the holder to purchase one additional common share at a price of $0.30 per share until November 30, 2006.  

We paid certain placement agents fees consisting of 1,845,000 common shares and 475,000 common share purchase warrants. These warrants are exercisable at a per share exercise price equal to $2.50.  The warrants expire on November 30, 2006.

On January 31, 2005, we commenced a private placement offering with a group of investors who subscribed for units of our securities pursuant to private placement subscription agreements dated for reference on January 31, 2005.  For the sake of clarity, we have referred to this private placement offering as the January 31, 2005 Private Placement.  The January 31, 2005 Private Placement closed in three different tranches:   

On February 16, 2005, we completed the first tranche of the January 31, 2005 Private Placement effective January 31, 2005 and issued 7,000,000 units at a price of $0.10 per unit to two investors for total gross proceeds of $700,000.  Each unit consists of one common share and one share purchase warrant.  Each warrant shall entitle the holder to purchase one additional common share at a price of $0.30 per share until November 30, 2006.

On February 16, 2005, we closed the second tranche of the January 31, 2005 Private Placement and issued 4,500,000 units at a price of $0.10 per unit to six investors for total gross proceeds of $450,000.  Each unit consists of one common share and one share purchase warrant.  Each warrant shall entitle the holder to purchase one additional common share at a price of $0.30 per share until November 30, 2006.

On February 17, 2005, we closed the third tranche of the January 31, 2005 Private Placement and issued 500,000 units at a price of $0.10 per unit to one investor for total gross proceeds of $50,000.  Each unit consists of one common share and one share purchase warrant.  Each warrant shall entitle the holder to purchase one additional common share at a price of $0.30 per share until November 30, 2006.

We paid a placement agent a fee of $60,000 and issued 600,000 common share purchase warrants, each warrant exercisable into one common share at a price of $0.10. The warrants expire on November 30, 2006.

While we expect that we have sufficient funds to operate until Spring of 2006, we will have to raise additional funds from the market before we have any cash flow from operations.  The approval process for our products in the United States and other jurisdictions is protracted and we believe will take several years.  In addition, any acquisitions that we may plan or product development that is beyond the scope of what is described in our Plan of Operations below will require additional capital, which must be raised through the issuance of our securities.

*Research and Development*

Since June 10, 2003, the date we acquired Pluristem, Ltd., we set up and began research activities in our clean rooms and laboratory.  We built bioreactors to conduct research and development in a 3-D environment and seeded stromal cells into the bioreactors to produce the stromal cell culture where the stem cells will be implanted. Throughout this period and into 2005, we will continue with the research and development activities referenced above.

 

 

 

- 25 -

 

 

*Purchase or Sale of Equipment*

With the acquisition of Pluristem Ltd., we obtained much of the specialized laboratory equipment that we need to conduct our research. This equipment included incubators, freezers, computers, hot plates, generators, microscopes, and other equipment. We expect that we now own most of the laboratory equipment that we will need to conduct our planned research and development for the next twelve months.

*Going Concern*

Due to our being a development stage company and not having generated revenues, in the consolidated financial statements for the year ended June 30, 2005, we included an explanatory paragraph regarding concerns about our ability to continue as a going concern.  Our consolidated financial statements contain additional note disclosures describing the circumstances that lead to this disclosure.

The continuation of our business is dependent upon us raising additional financial support.  The issuance of additional equity securities by us could result in a significant dilution in the equity interests of our current stockholders.  Obtaining commercial loans, assuming those loans would be available, will increase our liabilities and future cash commitments.

*Recently Issued Accounting Standards*

In May 2005, the FASB issued Statement of Financial Accounting Standard No. 154 ("FAS 154"), "Accounting Changes and Error Corrections" – a replacement of APB No. 20, "Accounting Changes" and FAS No. 3, "Reporting Accounting Changes in Interim Financial Statements".  FAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections.  APB Opinion 20 previously required that most voluntary changes in accounting principle to be recognized by including in the net income of the period of the change the cumulative effect of changing to the new accounting principle.  FAS 154 requires retrospective application to prior periods' financial statements of a voluntary change in accounting principle unless it is impracticable.  FAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.  We estimate that theadoption of FAS 154 will not have a significant impact on our results of operations, financial condition and liquidity.

On December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123 (revised 2004) "Share-Based Payment" ("123(R)"), which in revision of FASB Statement No. 123, "Accounting For Stock-Based Compensation".  Statement 123(R) supersedes APB Opinion No. 25, "Accounting For Stock Issued To Employees", and amends FASB Statements No. 95, "Statement of Cash Flows".  Generally the approach in FASB Statement 123(R) is similar to the approach described in Statement 123.  However, Statement 123(R) requires all share-based payments to employees, including grant of employees stock options, to be recognized in the income statements based on their fair value.  Pro-forma disclosure is no longer an alternative.  Statement 123(R) must be adopted no later than the period beginning after December 15, 2005.  Early adoption will be permitted in periods in which financial statements have not yet beenissued.  We expect to adopt Statement 123(R) on January 1, 2006.

Statement 123(R) permits public companies to adopt its requirements using one of two methods:

 

**•**

A "Modified Prospective" method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of Statement 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of Statement 123 for all awards granted to employees prior to the effective date of Statement 123(R) that remains unvested on the effective date.

 

**•**

A "Modified Retrospective" method which includes the requirements of the modified prospective method described above but also permits entities to restate, based on the amounts previously recognized under Statement 123 for purpose of pro-forma disclosure, all periods presented.

We plan to adopt Statement 123(R) using the modified prospective method.

 

 

 

- 26 -

 

 

We are unable to estimate the future impact that Statement 123(R) will have on our financial position, results of operations or cash flows due to unknown events, such as the type and number of share-based payments that will be granted, their terms, and their vesting periods.

In March 2005, the SEC released SEC Staff Accounting Bulletin No. 107, "Share-Based Payment" ("SAB 107").  SAB-107 provides the SEC staff's position regarding the application of Statement 123(R), which contains interpretive guidance related to the interaction between Statement 123R and certain SEC rules and regulations, and also provides the staff's views regarding the valuation of share-based payment arrangements for public companies.  SAB 107 highlights the importance of disclosures made related to the accounting for share-based payment transactions.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

Our financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles in the United States.  Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management's application of accounting policies.  We believe that understanding the basis and nature of the estimates and assumptions involved with the following aspects of our consolidated financial statements is critical to an understanding of our financials.

*Acquisition of technology rights*

In the acquisition of stem cell expansion technology rights through the license agreement, we considered whether these rights meet the criteria of an asset or should be expensed.  As a result of the negative cash flows that have occurred and are expected to continue in the foreseeable future, the PluriXTM Bioreactor system and license agreement technology assets which we acquired in the 2003 fiscal year were written off during the 2004 fiscal year.

*Going Concern*

Our annual financial statements have been prepared on the going concern basis, which assumes the realization of assets and liquidation of liabilities in the normal course of operations.  The financial statements have been prepared assuming we will continue as a going concern.  However, certain conditions exist which raise doubt about our ability to continue as a going concern.  We have suffered recurring losses from operations and have accumulated losses of approximately $4,649,356 since inception through the year ended June 30, 2005.

*Off Balance Sheet Arrangements*

Our company has no off balance sheet arrangements that are not disclosed in our Annual Report on Form 10-KSB as filed with the Securities and Exchange Commission on September 28, 2004.

**Item 7.**

**Financial Statements.**

Our financial statements are stated in United States dollars (US$) and are prepared in accordance with United States Generally Accepted Accounting Principles.

The following consolidated financial statements are filed as part of this annual report:

Report of Independent Registered Public Accounting Firm, dated September 21, 2005

Consolidated Balance Sheets 

Consolidated Statements of Operations 

Consolidated Statements of Changes in Stockholders' Equity (Deficiency) 

Consolidated Statements of Cash Flows

Notes to the Consolidated Financial Statements

 

 

F-1

 

 

 

 

**PLURISTEM LIFE SYSTEMS INC. AND ITS SUBSIDIARY**

**(A Company in the Development Stage)**

**(Previous Name - A. I. SOFTWARE INC.)**

**CONSOLIDATED FINANCIAL STATEMENTS**

**AS OF JUNE 30, 2005**

 

 

 

 

 

 

F-2

 

 

 

 

 

 

 

**PLURISTEM LIFE SYSTEMS INC. AND ITS SUBSIDIARY**

**(A Company in the Development Stage)**

**(Previous Name - A. I. SOFTWARE INC.)**

**CONSOLIDATED FINANCIAL STATEMENTS**

**AS OF JUNE 30, 2005**

 

**IN U.S. DOLLARS**

 

 

 

INDEX

 

**Page**

 

 

Report of Independent Registered Public Accounting Firm

F-3

Consolidated Balance Sheets

F-4-5

Consolidated Statements of Operations

F-6

Statements of Changes in Stockholders' Equity (Deficiency)

F-7-10

Consolidated Statements of Cash Flows

F-11-13

Notes to Consolidated Financial Statements

F-14-27

   

 

 

 

 

 

 

 

F-3

 

 

 

 

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

**To The Stockholders Of**

 

**PLURISTEM LIFE SYSTEMS INC.**

**(A Development Stage Company)**

**(Previous Name - A. I. SOFTWARE INC.)**

 

We have audited the accompanying consolidated balance sheet of Pluristem Life Systems Inc. (a development stage company) ("the Company") (formerly - A. I. Software Inc.), and its subsidiary as of June 30, 2005 and 2004 and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the two years in the period ended June 30, 2005 and for the period from May 11, 2001 (inception date) through June 30, 2005. These consolidate financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidate financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. 

In our opinion, the consolidated financial statements referred to above, present fairly, in all material respects, the financial position of the Company and its subsidiary as of June 30, 2005 and 2004, and the consolidated results of their operations and their cash flows for each of the two years in the period ended June 30, 2005 and for the period from May 11, 2001 (inception date) through June 30, 2005, in conformity with U.S. generally accepted accounting principles. 

As discussed in Note 1b to the financial statements, the Company has not yet generated revenues from its operations and is dependent on external sources for financing its operations. These factors, among others discussed in Note 1b, raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

/s/ Kost Forer Gabbay & Kasierer

Kost Forer Gabbay & Kasierer

A member of Ernst & Young Global

Haifa, Israel

September 21,  2005

 

 

 

 

 

 

 

 

 

F-4

 

 

**PLURISTEM LIFE SYSTEMS INC. AND ITS SUBSIDIARY**

**(A Development Stage Company)**

**(Previous Name - A. I. SOFTWARE INC.)**

**CONSOLIDATED BALANCE SHEETS**

 

**In U.S. Dollars**

 

 

 

 

 

**June 30,**

 

 

 

 

 

 

 

**Note**

 

**2005**

 

**2004**

 

 

 

 

 

 

**ASSETS**

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

Cash and cash equivalents

3

 

 

$1,889,438

 

$668,867

Prepaid expenses 

 

 

61,299

 

56,910

Other accounts receivable

 

 

147,781

 

15,332

 

 

 

 

 

 

Total current assets

 

 

2,098,518

 

741,109

 

 

 

 

 

 

 

 

 

 

 

 

LONG-TERM RESTRICTED LEASE DEPOSIT

 

 

27,216

 

20,959

 

 

 

 

 

 

 

 

 

 

 

 

SEVERANCE PAY FUND

 

 

27,846

 

31,575

 

 

 

 

 

 

 

 

 

 

 

 

PROPERTY AND EQUIPMENT, NET 

4

 

249,090

 

226,449

 

 

 

 

 

 

 

 

 

 

 

 

DEFERRED ISSUANCE EXPENSES

 

 

217,370

 

357,106

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

 

$2,620,040

 

$1,377,198

 

 

 

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

 

 

 

F-5

 

 

**PLURISTEM LIFE SYSTEMS INC. AND ITS SUBSIDIARY**

**(A Development Stage Company)**

**(Previous Name - A. I. SOFTWARE INC.)**

**CONSOLIDATED BALANCE SHEETS**

 

**In U.S. Dollars (except share data)**

 

 

 

 

 

**June 30,**

 

**Note**

 

**2005**

 

**2004**

 

 

 

 

 

 

**LIABILITIES AND STOCKHOLDERS' EQUITY**

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

Short-term bank credit

 

 

$-

 

$23

Current maturities of liabilities to know-how licensors

5

 

18,750

 

100,000

Trade payables

 

 

185,073

 

112,875

Accrued expenses

 

 

175,814

 

109,048

Other accounts payable

 

 

71,352

 

69,667

 

 

 

 

 

 

Total current liabilities

 

 

450,989

 

391,613

 

 

 

 

 

 

 

 

 

 

 

 

LONG-TERM LIABILITIES

 

 

 

 

 

Know-how licensors, net of current maturities

5

 

181,209

 

168,877

Liability in respect of warrants 

7(f)

 

150,000

 

420,000

Accrued severance pay

 

 

34,716

 

39,698

 

 

 

 

 

 

Total long-term liabilities

 

 

365,925

 

628,575

 

 

 

 

 

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES

6

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS' EQUITY 

 

 

 

 

 

Share capital:

7

 

 

 

 

Common stock $0.00001 par value: Authorized: 1,400,000,000 shares; Issued and outstanding: 63,653,483 shares and 26,858,493 shares as of June 30, 2005 and 2004,  respectively 

 

 

636

 

268

Additional paid-in capital

 

 

6,451,846

 

2,907,990

Deficit accumulated during the development stage

 

 

(4,649,356)

 

(2,551,248)

 

 

 

 

 

 

Total stockholders equity

 

 

1,803,126

 

357,010

 

 

 

 

 

 

 

 

 

$2,620,040

 

$1,377,198

 

 

 

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

 

F-6

 

 

**PLURISTEM LIFE SYSTEMS INC. AND ITS SUBSIDIARY**

**(A Development Stage Company)**

**(Previous Name - A. I. SOFTWARE INC.)**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

 

**In U.S. Dollars (except share and per share data)**

 

 

 

 

 

**Year ended June 30,**

 

**Period from May 11, 2001 (inception) through****June 30,**

 

 

 

 

 

 

 

 

 

**Note**

 

**2005**

 

**2004**

 

**2005**

 

 

 

 

 

 

 

 

Research and development costs 

 

 

$1,984,125

 

$907,642

 

$2,986,823

Less - participation by the Office of the Chief Scientist

 

 

(196,641)

 

___-___

 

(196,641)

Research and development costs, net

 

 

1,787,484

 

907,642

 

2,790,182

General and administrative expenses

 

 

873,649

 

2,096,882

 

3,160,419

In-process research and developmentwrite-off

1

 

 

-

 

 

-

 

 

246,470

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,661,133)

 

(3,004,524)

 

(6,197,071)

 

 

 

 

 

 

 

 

Financial income, net

8

 

563,025

 

994,174

 

1,547,715

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

$(2,098,108)

 

$(2,010,350)

 

$(4,649,356)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per share

 

 

$(0.05)

 

$ (0.083)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares used in computing basic and diluted net loss per share:

 

 

40,804,788

 

24,341,271

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

 

 

 

 

 

 

F-7

 

 

**PLURISTEM LIFE SYSTEMS INC. AND ITS SUBSIDIARY**

**(A Development Stage Company)**

**(Previous Name - A. I. SOFTWARE INC.)**

**STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)**

 

**In U.S. Dollars (except shares data)**

 

 

 

 

**Common Stock**

 

**Additional****paid-in**

**Receipts****on account****of**

 

 

**Deficit****Accumulated****during the****Development**

 

**Total****Stockholders'****Equity**

 

 

**Shares**

 

**Amount**

 

**capital**

 

**shares**

 

**Stage**

 

**(Deficiency)**

 
 

 

 

 

 

 

 

 

 

 

 

 

 

 
 

 

 

 

 

 

 

 

 

 

 

 

 

 
 

 

 

 

 

 

 

 

 

 

 

 

 

 
Issuance of common stock 

 

 

 

 

 

 

 

 

 

 

 

 

 
July 9, 2001 

 

**35,000,000**

 

**$350**

 

**$2,150**

 

**$-**

 

**$-**

 

**$2,500**

 
 

 

 

 

 

 

 

 

 

 

 

 

 

 
 

 

 

 

 

 

 

 

 

 

 

 

 

 
**Balance as of June 30, 2001**

 

**35,000,000**

 

**350**

 

**2,150**

 

**-**

 

**-**

 

**2,500**

 
Loss for the year ended June 30, 2002

 

-

 

-

 

-

 

-

 

(77,903)

 

(77,903)

 
 

 

 

 

 

 

 

 

 

 

 

 

 

 
 

 

 

 

 

 

 

 

 

 

 

 

 

 
**Balance as of June 30, 2002**

 

**35,000,000**

 

**350**

 

**2,150**

 

**-**

 

**(77,903)**

 

**(75,403)**

 
Issuance of common stock

 

 

 

 

 

 

 

 

 

 

 

 

 
on October 14, 2002, net ofissuance costs of $17,359

 

14,133,000

 

141

 

83,450

 

-

 

-

 

83,591

 
Forgiveness of debt

 

-

 

-

 

11,760

 

-

 

-

 

11,760

 
Stocks cancelled onMarch 19, 2003

 

(27,300,000)

 

(273)

 

273

 

-

 

-

 

-

 
Receipts on account of stock and warrants, net of finders fee and legal fees of $56,540

 

-

 

-

 

-

 

933,464

 

-

 

933,464

 
Loss for the year ended

June 30, 2003

 

-

 

-

 

-

 

-

 

(462,995)

 

(462,995)

 
 

 

 

 

 

 

 

 

 

 

 

 

 

 
 

 

 

 

 

 

 

 

 

 

 

 

 

 
**Balance as of June 30, 2003**

 

**21,833,000**

 

**$ 218**

 

**$ 97,633**

 

**$933,464**

 

**$ (540,898)**

 

**$ 490,417**

 
 

 

 

 

 

 

 

 

 

 

 

 

 

 
The accompanying notes are an integral part of the consolidated financial statements.

 

 

 

 

 

 

 

F-8

 

 

**PLURISTEM LIFE SYSTEMS INC. AND ITS SUBSIDIARY**

**(A Development Stage Company)**

**(Previous Name - A. I. SOFTWARE INC.)**

**STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY**

 

**In U.S. Dollars (except shares data)**

 

 

 

 

**Common Stock**

 

**Additional****paid-in**

 

**Receipts****on account**

 

**Deficit****accumulated****During the****development**

 

**Total****Shareholders'**

 

 

**Shares**

 

**Amount**

 

**capital**

 

**of shares**

 

**stage**

 

**Equity**

 

 

 

 

 

 

 

 

 

 

 

 

 

**Balance as of July 1, 2003**

 

**21,833,000**

 

**$ 218**

 

**$ 97,633**

 

**$933,464**

 

**$ (540,898)**

 

**$ 490,417**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock and warrants on

 

 

 

 

 

 

 

 

 

 

 

 

July 16, 2003, net of  issuance costs of $70,110

 

725,483

 

7

 

1,235,752

 

(933,464)

 

-

 

302,295

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock on

 

 

 

 

 

 

 

 

 

 

 

 

January 20, 2004

 

3,000,000

 

30

 

-

 

-

 

-

 

30

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of warrants on January 20, 2004 as finder’s fee

 

-

 

-

 

192,000

 

-

 

-

 

192,000

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock granted to consultants on February 11, 2004

 

1,000,000

 

10

 

799,990

 

-

 

-

 

800,000

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock based compensation related to warrants granted to

 

 

 

 

 

 

 

 

 

 

 

 

consultant on December 31, 2003

 

-

 

-

 

357,618

 

-

 

-

 

357,618

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of warrants on 

 

 

 

 

 

 

 

 

 

 

 

 

April 19, 2004 (see Note 7f)

 

300,000

 

3

 

224,997

 

-

 

-

 

225,000

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss for the year ended 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2004

 

-

 

-

 

-

 

-

 

(2,010,350)

 

(2,010,350)

 

 

 

 

 

 

 

 

 

 

 

 

 

**Balance as of June 30, 2004**

 

**26,858,483**

 

**$ 268**

 

**$2,907,990**

 

**$ -**

 

**$ (2,551,248****)**

 

**$ 357,010**

The accompanying notes are an integral part of the consolidated financial statements.

 

 

 

 

 

 

 

 

F-9

 

 

**PLURISTEM LIFE SYSTEMS INC. AND ITS SUBSIDIARY**

**(A Development Stage Company)**

**(Previous Name - A. I. SOFTWARE INC.)**

**STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY**

 

**In U.S. Dollars (except shares data)**

 

 

 

 

**Common Stock**

 

**Additional****paid-in**

 

**Receipts****on account**

 

**Deficit****accumulated****During the****development**

 

**Total****Shareholders'**

 

 

**Shares**

 

**Amount**

 

**capital**

 

**of shares**

 

**stage**

 

**Equity**

 

 

 

 

 

 

 

 

 

 

 

 

 

**Balance as of July 1, 2004**

 

**26,858,483**

 

**$268**

 

**$2,907,990**

 

**$  -**

 

**$(2,551,248)**

 

**$357,010**

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation related to warrants granted to consultants on September 30, 2004

 

-

 

-

 

161,641

 

-

 

-

 

161,641

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock and warrants on November 30, 2004 related to the October 2004 Agreement net of issuance costs of $28,908

 

3,250,000

 

33

 

296,059

 

-

 

-

 

296,092

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock and warrants on January 26, 2005 related to the October 2004 Agreement net of issuance costs of $4,975

 

4,300,000

 

43

 

424,982

 

-

 

-

 

425,025

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock and warrants on January 31, 2005 related to the January 31, 2005 Agreement 

 

7,000,000

 

70

 

-

 

-

 

-

 

70

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock and options on February 15, 2005 to a former director of the Company 

 

50,000

 

-(*)

 

14,500

 

-

 

-

 

14,500

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock and warrants onFebruary 16, 2005 related to the January 31, 2005 Agreement 

 

5,000,000

 

50

 

-

 

-

 

-

 

50

 

 

 

 

 

 

 

 

 

 

 

 

 

(*) Less then one dollar

The accompanying notes are an integral part of the consolidated financial statements.

 

 

 

 

 

 

 

 

F-10

 

 

**PLURISTEM LIFE SYSTEMS INC. AND ITS SUBSIDIARY**

**(A Development Stage Company)**

**(Previous Name - A. I. SOFTWARE INC.)**

**STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY**

 

**In U.S. Dollars (except shares data)**

 

 

 

 

**Common Stock**

 

**Additional****paid-in**

 

**Receipts****on account**

 

**Deficit****accumulated****During the****development**

 

**Total****Shareholders'**

 

 

**Shares**

 

**Amount**

 

**capital**

 

**of shares**

 

**stage**

 

**Equity**

Issuance of warrants on February 16, 2005 for finder fee related to the January 31, 2005 Agreement

 

-

 

-

 

144,000

 

-

 

-

 

144,000

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock and warrants onMarch 3, 2005 related to the January 24, 2005 Agreementnet of issuance costs of $24,000

 

12,000,000

 

120

 

1,175,880

 

-

 

-

 

1,176,000

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock on March 3, 2005 for finder fee related to the January 24, 2005 Agreement

 

1,845,000

 

18

 

(18)

 

-

 

-

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock and warrants onMarch 3, 2005 related to the October 2004 Agreementnet of issuance costs of $6,038

 

750,000

 

8

 

68,954

 

-

 

-

 

68,962

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock and warrants to the Chief Executive Officer on March 23, 2005

 

2,400,000

 

24

 

695,976

 

-

 

-

 

696,000

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock on March 23, 2005 related to the October 2004 Agreement

 

200,000

 

2

 

19,998

 

-

 

-

 

20,000

 

 

 

 

 

 

 

 

 

 

 

 

 

Classification of a liability in respect of warrants to additional paid in capital, net of issuance costs of $178,116

 

-

 

-

 

541,884

 

-

 

-

 

541,884

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss for the year ended June 30, 2005

 

-

 

-

 

-

 

-

 

(2,098,108)

 

(2,098,108)

 

 

 

 

 

 

 

 

 

 

 

 

 

**Balance as of June 30, 2005**

 

**63,653,483**

 

**$636**

 

**$6,451,846**

 

**-**

 

**$(4,649,356)**

 

**$1,803,126**

The accompanying notes are an integral part of the consolidated financial statements.

 

 

 

F-11

 

 

**PLURISTEM LIFE SYSTEMS INC. AND ITS SUBSIDIARY**

**(A Development Stage Company)**

**(Previous Name – A. I. SOFTWARE INC.)**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 

**In U.S. Dollars**

 

 

 

**Year ended June 30,**

**Period from May 11, 2001 (inception)****through****June 30**

 
 

**2005**

 

**2004**

**2005**

**CASH FLOWS FROM OPERATING ACTIVITIES:**

 

 

 

 

 
Net loss 

$(2,098,108)

 

$(2,010,350)

$(4,649,356)

 
 

 

 

 

 

 
Adjustments to reconcile net loss to net cash used in operating activities: 

 

 

 

 

 
Depreciation and amortization 

34,232

 

91,540

144,033

 
Capital gain

(16,373)

 

-

(16,373)

 
Impairment of know-how 

-

 

264,807

264,807

 
Amortization of deferred issuance costs 

168,620

 

62,104

230,724

 
Stock-based compensation to consultants 

161,641

 

1,157,618

1,319,259

 
In-process research and development write-off 

-

 

-

246,470

 
Know-how licensors - imputed interest 

12,332

 

20,699

35,809

 
Salary grant in shares and warrants

710,500

 

-

710,500

 
Increase in accounts receivable 

(132,449)

 

(5,051)

(138,945)

 
Increase in prepaid expenses

(4,389)

 

(56,910)

(61,299)

 
Increase (decrease) in trade payables 

72,198

 

(10,534)

175,666

 
Increase (decrease) in other accounts payable and accrued expenses 

52,201

 

46,121

(195,693)

 
Increase in accrued interest due to related parties 

-

 

-

3,450

 
Linkage differences and interest on long-term restricted lease deposit 

(1,108)

 

54

(2,084)

 
Change in fair value of liability in respect of  warrants 

(749,880)

 

(1,079,970)

(1,829,850)

 
Accrued severance pay, net 

(1,253)

 

8,123

6,870

 
 

 

 

 

 

 
Net cash used in operating activities 

$(1,791,836)

 

$(1,511,749)

$(3,756,012)

 
 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

 

 

 

 

 

F-12

 

 

**PLURISTEM LIFE SYSTEMS INC. AND ITS SUBSIDIARY**

**(A Development Stage Company)**

**(Previous Name – A. I. SOFTWARE INC.)**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 

**In U.S. Dollars**

 

 

 
 

**Year ended June 30,**

**Period from May 11, 2001 (inception)****through****June 30**

 
 

**2005**

 

**2004**

**2005**

 
**CASH FLOWS FROM INVESTING  ACTIVITIES:**

 

 

 

 

 
Acquisition of Pluristem Ltd. (1) 

$-

 

$-

$31,899

 
Purchase of property and equipment 

(68,975)

 

(125,657)

(194,632)

 
Proceed from sale of property and equipment

28,475

 

-

28,475

 
Purchase of long-term restricted lease deposit

19,851

 

-

19,581

 
Repayment of long-term restricted lease deposit 

(25,000)

 

(1,176)

(26,176)

 
Purchase of know-how 

-

_______

 

-

_______

(100,000)

_________

 
Net cash used in investing activities 

(45,649)

 

(126,833)

(240,583)

 

 

 

 

 

 
**CASH FLOWS FROM FINANCING ACTIVITIES:**

 

 

 

 

 
Issuance of common stock and warrants, net of issuance costs 

3,139,329

 

1,800,115

5,958,999

 
 

 

 

 

 

 
 

 

 

 

 

 
Short-term bank credit, net 

(23)

 

(3)

(26)

 
Repayment of liability to know-how licensor 

 (81,250)

 

-

(81,250)

 
Proceeds from notes and loan payable to related parties 

-

 

-

78,195

 
Repayments of notes and loan payable to related parties 

-

_______

 

-

________

(69,885)

__________

 
 

 

 

 

 

 
Net cash provided by financing activities 

3,058,056

 

1,800,112

5,886,033

 
 

 

 

 

 

 
Increase in cash and cash equivalents 

1,220,571

 

161,530

1,889,438

 
 

 

 

 

 

 
Cash and cash equivalents at the beginning of the period 

668,867

 

507,337

-

 
 

 

 

 

 

 
Cash and cash equivalents at the end of the period 

$1,889,438

 

$ 668,867

$1,889,438

 
The accompanying notes are an integral part of the consolidated financial statements.

 

 

 

F-13

 

 

**PLURISTEM LIFE SYSTEMS INC. AND ITS SUBSIDIARY**

**(A Development Stage Company)**

**(Previous Name - A. I. SOFTWARE INC.)**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 

**In U.S. Dollars**

 

 

 

**Year ended June 30,**

**Period from May 11, 2001 (inception) through****June 30,**

 

**2005**

 

**2004**

**2005**

**Non-cash investing and financing information:**

 

 

 

 

Unpaid know-how

$ -

 

$ -

$ 199,959

 

 

 

 

 

 

 

 

 

 

**Supplemental disclosure with respect to cash flows:**

 

 

 

 

Cash paid for interest

$ -

 

$ -

$ 92

 

 

 

 

 

 (1)Acquisition of Pluristem Ltd.

 

Estimated fair value of assets acquired and liabilities assumed at the acquisition date:

 

 

 

 

**Period from May 11, 2001 (inception)****through June 30, 2005**

 

 

 

 

 

 

 

 

Working capital (excluding cash and cash equivalents)

 

 

$ 427,176

 

 

 

 

Long-term restricted lease deposit

 

 

(18,807)

Property and equipment

 

 

(130,000)

In-process research and development write-off

 

 

(246,470)

 

 

 

 

 

 

 

$ 31,899

 

 

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

 

 

 

F-14

 

 

**PLURISTEM LIFE SYSTEMS INC. AND ITS SUBSIDIARY**

**(A Development Stage Company)**

**(Previous Name - A. I. SOFTWARE INC.)**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**In U.S. Dollars**

**NOTE 1:-GENERAL**

a.             Pluristem Life Systems Inc. ("***the Company")*** was incorporated on May 11, 2001 under the laws of Nevada in the United States of America under the name A. I. Software Inc. that was changed as of June 30, 2003 to Pluristem Life Systems Inc. 

The Company was engaged in the development of artificial intelligence software through May 2003. The Company has not been successful in fully implementing its business plan and therefore, it was decided to concurrently pursue initiatives in the Biotech Industry as an extension to the existing activity.

On May 5, 2003 the Company entered into a license agreement with Weizmann Institute of Science and the Technion-Israel Institute of Technology to acquire an exclusive license for an innovative stem cell expansion technology ("the Technology").

On June 10, 2003, the Company acquired all of the issued and outstanding shares of Pluristem Ltd. ("the subsidiary") in consideration of $1,000. Pluristem Ltd. is engaged in the research and development of expansion of cord blood hematopoetic stem cells, which was in line with the Technology, the rights which the Company had purchased on May 1, 2003. The purchase price has been allocated to identifiable assets and liabilities of which an amount of $246,470 has been allocated to in-process research and development. The acquisition was accounted under the purchase method of accounting  in accordance with Statement of Financial Accounting Standards No. 141 "Business Combinations" ("SFAS" No. 141). The results of the subsidiary’s operations have been included in the consolidated financial statements since that date.

The amount of $246,470 that was assigned to in-process research and development activities was written off at the date of acquisition in accordance with FASB Interpretation No. 4, "Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method" ("FIN 4").

b.             The Company is devoting substantially all of its efforts towards conducting research and development of critical cell expansion services to cord blood banks. In the course of such activities, the Company and its subsidiary have sustained operating losses and expect such losses to continue in the foreseeable future. The Company and its subsidiary have not generated any revenues or product sales and have not achieved profitable operations or positive cash flows from operations. The Company's deficit accumulated during the development stage aggregated to $4,649,356 through June 30, 2005. There is no assurance that profitable operations, if ever achieved, could be sustained on a continuing basis.

The Company plans to continue to finance its operations with a combination of stock issuance and private placements and in the longer term, revenues from product sales. There are no assurances, however, that the Company will be successful in obtaining an adequate level of financing needed for the long-term development and commercialization of its planned products.

These conditions raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

 

 

 

 

 

 

 

 

 

F-15

 

 

**PLURISTEM LIFE SYSTEMS INC. AND ITS SUBSIDIARY**

**(A Development Stage Company)**

**(Previous Name - A. I. SOFTWARE INC.)**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**In U.S. Dollars**

**NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES****** 

The consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles ("U.S. GAAP").

**a. Use of estimates**

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

**b. Functional currency of the subsidiary**

It is anticipated that the majority of the subsidiary's revenues will be generated outside Israel and will be determined in U.S. Dollars ("dollars"). In addition, most of the financing of the subsidiary's operations has been made in dollars. The subsidiary's management believes that the currency of the primary economic environment in which its operations are conducted is the dollar. Thus, the functional and reporting currency of the subsidiary is the dollar. Accordingly, monetary accounts maintained in currencies other than the dollar are remeasured into dollars in accordance with Statement of Financial Accounting Standards No. 52 "Foreign Currency Translation" ("SFAS" No. 52). All transaction gains and losses from the remeasurement of monetary balance sheet items are reflected in the statement of operations as financial income or expenses, as appropriate.

**c. Principles of consolidation**

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. Intercompany transactions and balances have been eliminated upon consolidation.

**d. Cash equivalents**

Cash equivalents are short-term highly liquid investments that are readily convertible to cash with maturities of three months or less at the date acquired.

**e. Long-term restricted lease deposit**

Long-term restricted lease deposit with maturities of more than one year used to secure lease agreement is presented at cost. The deposit is in dollars and bears an average annual interest of approximately 2%. 

**f. Property and Equipment****** 

Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated by the straight-line method over the estimated useful lives of the assets, at the following annual rates: 

 

**%**

 

 

Laboratory equipment

10

Computers and peripheral equipment

33

Office furniture and equipment

6-15

 

 

**g. Impairment of long-lived assets**

The Company's long-lived assets and identifiable intangibles are reviewed for impairment in accordance with Statement of Financial Accounting Standard No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144") whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to the future undiscounted cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. As of June 30, 2004, due to the on-going losses and negative cash flows, the Company recognized an impairment of its know-how in the amount of $264,807.

 

 

F-16

 

 

**PLURISTEM LIFE SYSTEMS INC. AND ITS SUBSIDIARY**

**(A Development Stage Company)**

**(Previous Name - A. I. SOFTWARE INC.)**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**In U.S. Dollars**

 **NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (continued)**

**h.****Non-royalty-bearing grants**

The Company receives non-royalty-bearing grants from the European Union Research and Development Program, and from the MOST and STRIMM consortiums, which are part of the Office of the Chief Scientist Magnet program. These grants are recognized at the time the Company is entitled to such grants on the basis of the costs incurred and are recorded as a reduction of research and development costs.

 

**i. Accounting for stock-based compensation:**

The Company's Board of Directors has adopted an Employee Stock Option Plan. (See Note 7l). The Company has elected to follow Accounting Principles Board Statement No. 25 "Accounting for Stock Option Issued to Employees” ("APB No. 25") and Financial Accounting Standards Board Interpretation No. 44 "Accounting for Certain Transactions Involving Stock Compensation" ("FIN No. 44") in accounting for its employee stock option plan. Under APB 25, when the exercise price of an employee stock option is equivalent to or is above the market price of the underlying stock on the date of grant, no compensation expense is recognized.

The Company adopted the disclosure provisions of Statement of Financial Accounting Standard No. 148, "Accounting for Stock-Based Compensation - transition and disclosure" ("SFAS No. 148"), which amended certain provisions of Statement of Financial Accounting Standard No. 123 "Accounting for Stock-Based Compensation" ("SFAS No. 123"). The Company continues to apply the provisions of APB No. 25, in accounting for stock-based compensation.

Pro forma information regarding the Company's net loss and net loss per share is required by SFAS No. 123 and has been determined as if the Company had accounted for its employee stock options under the fair value method presented by SFAS No. 123.

The fair value for options granted in the year ended June 30, 2005 and 2004 is amortized over their vesting period of two years and was estimated at the date of grant using a Black-Scholes options pricing model with the following weighted average assumptions:

 

 

2005

2004

Expected dividend yield

 

0%

0%

Expected volatility

 

102%

92%

Risk-free interest rate

 

4.2%

4.2%

Expected life of up to

 

8-10 years

10 years

 

 

 

 

 

 

 

 

 

 

F-17

 

 

**PLURISTEM LIFE SYSTEMS INC. AND ITS SUBSIDIARY**

**(A Development Stage Company)**

**(Previous Name - A. I. SOFTWARE INC.)**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**In U.S. Dollars**

**NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (continued)**

Pro forma information under SFAS No. 123, is as follows:

 

 

**Year ended****June 30,**

 

**Period from May 11, 2001 (inception through****June 30)**

 

 

 

 

 

 

 

 

 

**2005**

 

**2004**

 

**2005**

 

 

 

 

 

 

 

Net loss available to Common stock- as reported

 

$2,098,108

 

$2,010,350

 

$4,649,356

Deduct - stock based employee compensation - intrinsic value

 

 

 

-

 

-

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Add - stock-based employeecompensation - fair value

 

558,628

 

109,885

 

668,513

 

 

 

 

 

 

 

Pro forma net loss

 

$2,656,736

 

$2,120,235

 

$5,317,869

 

 

 

 

 

 

 

Earning per share:

 

 

 

 

 

 

Basic and diluted net loss per share as reported

 

$(0.05)

 

$ (0.083)

 

 

 

 

 

 

 

 

 

Pro forma basic and diluted net loss per share

 

$(0.065)

 

$ (0.087)

 

 

 

The Company applies SFAS No. 123 and Emerging Issues Task Force No. 96-18 "Accounting for Equity Instruments that are Issued to other than Employees for Acquiring, or in conjunction with selling, goods or services" ("EIFT 96-18"), with respect to options and warrants issued to non-employees. SFAS No. 123 requires the use of option valuation models to measure the fair value of the options and warrants at the date of grant.

**j. Research and Development costs**

Research and development costs, net of grants, are charged to the statement of operations as incurred.

 

 

 

 

 

 

 

F-18

 

 

**PLURISTEM LIFE SYSTEMS INC. AND ITS SUBSIDIARY**

**(A Development Stage Company)**

**(Previous Name - A. I. SOFTWARE INC.)**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**In U.S. Dollars**

**NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (continued)**

**k. Basic and diluted net loss per share**

Basic net loss per share is computed based on the weighted average number of shares of common stock outstanding during each year. Diluted net loss per share is computed based on the weighted average number of shares of Common stock outstanding during each year, plus dilutive potential shares of common stock and warrants considered outstanding during the year, in accordance with Statement of Financial Accounting Standard No. 128, "Earnings Per Share." ("SFAS No. 128")

All outstanding stock options and warrants have been excluded from the calculation of the diluted net loss per common share because all such securities are anti-dilutive for all periods presented. The total weighted average number of shares related to the outstanding options and warrants excluded from the calculations of diluted net loss per share was 4,548,024 and 21,290,534 for the years ended June 30, 2004 and 2005. 

**l. Income taxes**

The Company and its subsidiary accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). This Statement prescribes the use of the liability method, whereby deferred tax assets and liability account balances are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company and its subsidiary provide a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value.

**m. Concentration of credit risk**

Financial instruments that potentially subject the Company and its subsidiary to concentrations of credit risk consist principally of cash and cash equivalents, which are invested in major banks in Israel. Management believes that the financial institutions that hold the Company's investments are financially sound and accordingly, minimal credit risk exits with respect to these investments.

The Company has no off-balance-sheet concentration of credit risk such as foreign exchange contracts, option contracts or other foreign hedging arrangements.

**n. Severance pay fund**

The subsidiary's liability for severance pay is calculated pursuant to Israeli severance pay law based on the most recent salary of the employees multiplied by the number of years of employment, as of the balance sheet date. Employees are entitled to one month's salary for each year of employment or a portion thereof. The Company's liability for all of its employees is fully provided by monthly deposits with insurance policies and by an accrual. The value of these policies is recorded as an asset in the Company's balance sheet.

The deposited funds include profits accumulated up to the balance sheet date. The deposited funds may be withdrawn only upon the fulfillment of the obligation pursuant to Israeli severance pay law or labor agreements. The value of the deposited funds is based on the cash surrendered value of these policies, and includes immaterial profits.

Severance expenses for the year ended June 30, 2004 and 2005 amounted to approximately $36,000 and $19,257, respectively.

**o. Fair value of financial instruments**

The carrying amounts of cash and cash equivalents, accounts receivable, short-term bank credit, trade payables and other accounts payable, approximate their fair value due to the short-term maturity of such instruments.

Long-term know-how liability is estimated by the discounting the future cash flow using current interest rates for liabilities of similar terms and maturities. The carrying amount of the long-term liability approximates its fair value. Liability in respect of the warrants issued is presented at fair value estimated using the Black-Scholes option pricing model.

**p. Reclassification**

Certain amounts from prior years have been reclassified to conform to current period presentation.

**q. Impact of recently issued accounting standards**

In May 2005, the FASB issued Statement of Financial Accounting Standard No. 154 ("FAS 154"), "Accounting Changes and Error Corrections"- a replacement of APB No. 20, "Accounting changes" and FAS No. 3, "Reporting Accounting Changes in Interim Financial Statements". FAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. APB Opinion 20 previously required that most voluntary changes in accounting principle be recognized by including in the net income of the period of the change the cumulative effect of changing to the new accounting principle. FAS154 require retrospective application to prior periods' financial statements of a voluntary change in accounting principle unless it is impracticable. FAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company estimates that the adoption ofFAS 154 will not have a significant impact on its results of operations, financial condition and liquidity.

 

 

 

F-19

 

 

**PLURISTEM LIFE SYSTEMS INC. AND ITS SUBSIDIARY**

**(A Development Stage Company)**

**(Previous Name - A. I. SOFTWARE INC.)**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**In U.S. Dollars**

**NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (continued)**

On December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123 (revised 2004) “Share-Based Payment” (“123 (R)”), which is a revision of FASB Statement No. 123, “Accounting For Stock- Based Compensation”. Statement 123(R) supersedes APB Opinion No. 25, “Accounting For Stock Issued To Employees”, and amends FASB Statements No.95, "Statement of cash flows". Generally the approach in FASB statement 123 (R) is similar to the approach describe in statement 123. However, Statement 123 (R) requires all share-based payments to employees, including grant of employees stock options, to be recognized in the income statements based on their fair value .Pro forma discloser is no longer an alternative.  Statement 123 (R) must be adopted no later than period beginning after December 15, 2005. Early adoption will be permitted in periods in whichfinancial statements have not yet been issued. The Company expects to adopt statement 123 (R) on January 1, 2006. 

Statement 123(R), permits public companies to adopt its requirements using one of two methods:

 

**•**

A “Modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of statement 123 (R) for all share-based payments granted after the effective date and (b) based on the requirements of statements 123 for all awards granted to employees prior to the effective date of statements 123 (R) that remains unvested on the effective date. 

 

**•**

A “Modified retrospective”  method which includes the requirements of the modified prospective method describe above but also permits entities to restate, based on the amounts previously recognized under statements 123 for purpose of Pro forma disclosure, all periods presented. 

The Company plans to adopt statement No. 123 (R) using the modified prospective method.

The Company is unable to estimate the future impact that Statement 123R will have on its financial position, results of operations or cash flows due to unknown events, such as the type and number of share-based payments that will be granted, their terms, and their vesting periods. 

In March 2005, the SEC released SEC Staff Accounting Bulletin No. 107, “Share-Based Payment” (“SAB 107”). SAB 107 provides the SEC staff’s position regarding the application of Statement 123R, which contains interpretive guidance related to the interaction between Statement 123R and certain SEC rules and regulations, and also provides the staff’s views regarding the valuation of share-based payment arrangements for public companies. SAB 107 highlights the importance of disclosures made related to the accounting for share-based payment transactions 

 

 

 

 

 

 

 

 

 

 

F-20

 

 

**PLURISTEM LIFE SYSTEMS INC. AND ITS SUBSIDIARY**

**(A Development Stage Company)**

**(Previous Name - A. I. SOFTWARE INC.)**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**In U.S. Dollars**

 

 

**NOTE 3:-CASH AND CASH EQUIVALENTS**

 

**Annual**

**June 30,**

 

**Interest**

 

 

 

 

**%**

**2005**

 

**2004**

 

 

 

 

 

In dollars

2%

$1,858,298

 

$ 647,425

In New Israeli Shekels (NIS)

 

-

 

31,140

 

 

21,442

 

 

 

 

 

 

 

$1,889,438

 

$ 668,867

 

 

 

 

 

 

 

**NOTE 4:-PROPERTY AND EQUIPMENT, NET**

 

**June 30,**

 

 

 

 

 

**2005**

 

**2004**

 

 

 

 

**Cost:**

 

 

 

Laboratory equipment

$262,934

 

$231,364

Computers and peripheral equipment

34,467

 

18,044

Office furniture and equipment

7,869

 

6,249

 

 

 

 

 

305,270

 

255,657

 

 

 

 

**Accumulated depreciation:**

 

 

 

Laboratory equipment

44,857

 

22,482

Computers and peripheral equipment

10,586

 

6,038

Office furniture and equipment

737

 

688

 

 

 

 

 

56,180

 

29,208

 

 

 

 

 

 

 

 

**Depreciated cost**

$249,090

 

$226,449

 

 

 

 

Depreciation expenses amounted to $34,232 and, $22,163 for the years ended June 30, 2005 and 2004, respectively.

 

 

 

 

 

F-21

 

 

**PLURISTEM LIFE SYSTEMS INC. AND ITS SUBSIDIARY**

**(A Development Stage Company)**

**(Previous Name - A. I. SOFTWARE INC.)**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**In U.S. Dollars**

 

**NOTE 5 - KNOW-HOW LICENSORS**

**a.**

On May 1, 2003, the Company entered into a License Agreement with the Weizmann Institute of Science and Technion-Israel Institute of Technology and other individuals, including two stockholders of the Company (the "Licensor") to acquire a license of stem cell expansion technology related to bone marrow transplants. The Company received an exclusive, worldwide license to use the technology over the life of the related patent. The patent is currently in the application stage. The license grants exclusivity over all products, uses and related intellectual property, and grants the Company the right to enter into sub-licenses. According to the License Agreement, the Company is committed to pay the Licensor the aggregate amount of $400,000 of which $181,250 has been paid as of the balance sheet date and the remainder is to be paidunder the following terms:

1.An additional $18,750 - in the short term. 

2.The balance of $200,000 on the earlier of the date FDA approval is received for a product, or December 15, 2006.

**b.**

A royalty of 5% of monthly gross sales and a 12.5% royalty on any other payments received by the Company for one time payments, such as distribution or sub-license rights, is payable to the Licensor. The Company may also elect to pay 25% of all payments received under sub-licenses, in lieu of the 5% royalty on sales and the 12.5% royalty on lump sum payments.

**c.**

The Company is responsible for any costs incurred for the enforcement of the patent and related intellectual property.

**d.**

The Licensor has the option to assign the patent to the Company in exchange for issuance by the Company of additional common shares to the Licensor. This option is only exercisable by the Licensor within 60 days of the date on which the aggregate market capitalization of the Company's share capital reaches $25 million or more. If the Licensor exercises this option, the Company will issue 5% of the Company's fully diluted and outstanding share capital on the date of exercise to the Licensor.

As of June 30, 2004 due to an ongoing losses and negative cash flows, the Company recognized an impairment of its know-how License in the amount of $264,807.  Amortization expenses amounted to $69,080 in the year ended June 30, 2004.

 

 

 

 

 

 

 

F-22

 

 

**PLURISTEM LIFE SYSTEMS INC. AND ITS SUBSIDIARY**

**(A Development Stage Company)**

**(Previous Name - A. I. SOFTWARE INC.)**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**In U.S. Dollars**

**NOTE 5 - KNOW-HOW LICENSORS  (continued)**

 

 
**f.**

Know-how licensors

 
 

**June 30,**

 
 

 

 

 

 

**2005**

 

**2004**

 

 

 

 

 

Due in the short term

 

$18,750

 

$100,000

Due at December 15, 2006, without interest

200,000

 

200,000

Less: unamortized discount based on interest rate of 7%

(18,791)

 

(31,123)

 

 

 

 

 

199,959

 

268,877

Less - current maturities

(18,750)

 

(100,000)

 

 

 

 

 

$ 181,209

 

$ 168,877

 

 

 

 

 

 

 

 

 

 

 

 

**NOTE 6:-COMMITMENTS AND CONTINGENCIES**

 

**a.**

The subsidiary leases facilities under operating lease agreements, which expire on January 2006 . The average monthly payment is NIS 31,740 (approximately $7,300) and is linked to the Israeli Consumer Price Index ("CPI"). In order to secure these agreements, the subsidiary pledged a deposit with the bank in the amount of $25,000.

Lease expenses amounted $80,655 and $84,573 for the years ended June 30, 2004 and 2005, respectively.

**b.**

The subsidiary leases a car under operating lease agreement, which expire in May 2007. The average monthly payment is NIS 3,850 (approximately $880) and is linked to the CPI.  In order to secure this agreement, the subsidiary pledged a deposit with the bank in the amount of $2,216.

Lease expenses amounted to, $750 and $15,042 for the years ended June 30,  2004 and 2005, respectively.

**c.**

As to commitments in respect of know-how acquired - see Note 5.

 

 

 

 

 

 

F-23

 

 

**PLURISTEM LIFE SYSTEMS INC. AND ITS SUBSIDIARY**

**(A Development Stage Company)**

**(Previous Name - A. I. SOFTWARE INC.)**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**In U.S. Dollars**

**NOTE 7:-SHARE CAPITAL**

**a.**

The Company's authorized common stock consists of 1,400,000,000 shares with a par value of $0.00001 per share. All shares have equal voting rights and are entitled to one non-cumulative vote per share in all matters to be voted upon by stockholders. The shares have no pre-emptive, subscription, conversion or redemption rights and may be issued only as fully paid and non-assessable shares. Holders of the common stock are entitled to equal ratable rights to dividends and distributions with respect to the common stock, as may be declared by the Board of Directors out of funds legally available. The common stocks are registered and publicly traded on the Over-the-Counter Bulletin Board service of the National Association of Securities Dealers, Inc. under the symbol PLRS.OB.

**b.**

On July 9, 2001, the Company issued 35,000,000 shares of common stock in consideration of $2,500, which was received on July 27, 2001.

On October 14, 2002, the Company issued 14,133,000 shares of common stock at a price of $0.007 per common share in consideration of $100,950 before offering costs of $17,359.

**c.**

On March 19, 2003, two directors each returned 13,650,000 shares of common stock with a par value of $0.01 per share, for cancellation for no consideration.

**d.**

On March 27, 2003 the Company's Board of Directors authorized a 14:1 split of the common stock. Accordingly, all references to number of shares, common stock and per share data in the accompanying financial statements have been adjusted to reflect the stock split on a retroactive basis.

**e.**

In July 2003, the Company issued an aggregate of 725,483 units comprised of 725,483 common stock and 1,450,966 warrants to a group of investors, for total consideration of $1,235,752 (net of issuance costs of $70,110), under a private placement. The consideration was paid partly in the year ended June 30, 2003 ($933,464) and the balance was paid in the year ended June 30, 2004. 

In this placement each unit was comprised of one common stock and two warrants, the first warrant is exercisable for one common stock at a price of $2.25 per stock, and may be exercised within one year. The second warrant is exercisable for one common stock at a price of $2.70 per stock, and may be exercised within five years. As of June 30, 2005, 725,483 warrants were expired unexercised. 

**f.**

On January 20, 2004, the Company consummated a private equity placement with a group of investors (the "investors"). The Company issued 3,000,000 units in consideration for net proceeds of $1,272,790 (net of issuance costs of $227,210), each unit is comprised of 3,000,000 common stock and 3,000,000 warrants. Each warrant is exercisable into one common stock at a price of $0.75 per stock, and may be exercised until January 31, 2007. If the price of the common stock will be more than $1 within 10 consecutive trading days, then the Company may, by notice to the warrants' holders, reduce the expiry date of 1,500,000 warrants to 60 days from the day of notice. In case the Company fails to register the above-mentioned shares and the related shares resulting from the exercise of the warrants, it will be subject to penalties as detailedin the private placement agreement. On March 18, 2004, a registration statement on Form SB-2 has been declared affective and the above-mentioned common stocks have been registered for trading. If the effectiveness of the Registration Statement is suspended subsequent to the effective date of registration (March 18, 2004), for more than certain permitted periods, as described in the private equity placement agreement, the Company shall pay penalties to the investors in respect of the liquidated damages.

According to EITF 00-19, "Accounting for derivative financial instruments indexed to, and potentially settled in, a Company's own stock", the Company classified the warrants as liabilities according to their fair value as remeasured at each reporting period until exercised or expired. Changes in the fair value of the warrants will be reported in the statements of operations as financial income or expense. 

As of June 20, 2004, the Company allocated the gross amount received of $1.5 million to the par value of the shares issued ($30) and to the liability in respect of the warrants issued ($1,499,970). The amount allocated to the liability was less than the fair value of the warrants at grant date. As of June 30, 2005, the fair value of the liability in respect for the warrants issued was $150,000. The fair value as of June 30, 2005 was estimated using the Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rate of 3.75%, expected dividend yield of 0%, expected volatility of 107%, and expected life of 1.58 years.

The change in the carrying amount of the liability in respect of the warrants in the amount of $1,079,970 and $270,000, for the years ended June 30, 2004 and June 30, 2005, respectively, was recognized in the statements of operations as financial income.

The Company is obligated to adjust the exercise price of the above mentioned warrants and to issue the investors additional shares if the Company enters into certain transactions, such as sale of its common stock to a third party on any date which is earlier than 180 days after the effective date of registration.

In addition, the Company issued 300,000 warrants to finders in connection with this private placement, exercisable into 300,000 common shares at a price of $0.75 per common share until January 31, 2007. The fair value of the warrants issued in the amounts of $192,000 was recorded as deferred issuance costs and is amortized over a period of 3 years. On April 19, 2004, the finders exercised the warrants. 

 

 

F-24

 

 

**PLURISTEM LIFE SYSTEMS INC. AND ITS SUBSIDIARY**

**(A Development Stage Company)**

**(Previous Name - A. I. SOFTWARE INC.)**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**In U.S. Dollars**

**NOTE 7:-SHARE CAPITAL (continued)**

**g.**

In October 2004 the Company commenced a private placement offering (“the October 2004 Agreement”) accordingly to which it issued 8,500,000 units. Each unit is compromised of one common stock and one warrant. The warrant is exercisable for one common stock at an exercise price of $0.30 per stock, subject to certain adjustments, and may be exercised until November 30, 2006.  The units were issued as follows:  

In November 2004, the Company issued according to the October 2004 Agreement 3,250,000 units comprised of 3,250,000 common stock and 3,250,000 warrants to a group of investors, for total consideration of $296,092 (net of cash issuance costs of  $28,908), and additional 120,000 warrants to finders as finders’ fee.

In January 2005 the Company issued according to the October 2004 Agreement an additional 4,300,000 units for total consideration of $425,025 (net of cash issuance costs of $4,975), and additional 90,000 warrants were issued to finders as finders’ fee. 

In March 2005 the Company issued according to the October 2004 Agreement an additional 750,000 units for total consideration of $68,962 (net of cash issuance costs of $6,038),  and additional 35,000 warrants were issued to finders as finders’ fee. 

In March 2005 the Company issued, according to the October 2004 Agreement 200,000 common shares and 200,000 share purchase warrants to one Investor for total consideration of $20,000 which were paid to the Company in May 2005.

h.

On January 24, 2005 the Company commenced a private placement offering (the “January 24, 2005 Agreement”) which was closed on March 3, 2005 and issued 12,000,000 units in consideration for $1,176,000 (net of cash issuance costs of $24,000). Each unit is compromised of one common stock and one warrant. The warrant is exercisable for one common stock at a price of $0.30 per stock and may be exercised until November 30, 2006. Under this agreement the Company issued to finders 1,845,000 shares and 475,000 warrants with exercise price of $2.5 per stock exercisable until November 2007.

 

**i.**       On January 31, 2005, the Company consummated a private equity placement offering (the “January 31, 2005 Agreement”) with a group of investors (the "Investors") according to which it issued 12,000,000 units in consideration for net proceeds of $1,137,000 (net of issuance costs of $63,000).  Each unit is comprised of one common stock and one warrant. Each warrant is exercisable into one common stock at a price of $0.30 per stock, and may be exercised until November 30, 2006.  If the Registration Statement covering the Registrable Securities was not filed as contemplated by 70 days and if the Registration Statement covering the Registrable Securities was not effective until August 31, 2005, The Company would have paid the Investor 2% of the purchase price for each 30 day period beyond the applicable date until the filing or theregistration is completed. The January 31, 2005 Agreement includes a finder’s fee of a cash amount equal to 5% of the amount invested ($60,000) and issuance of warrants for  number of shares equal to 5%  of the number of shares that were issued (600,000) with an exercise price  of $0.1 per stock, subject to certain adjustments, exercisable until November 30, 2006.

According to EITF 00-19, "Accounting for derivative financial instruments indexed to, and potentially settled in, a Company's own stock", the Company classified the warrants as liabilities according to their fair value as determined at each reporting period until exercised, expired or registered. Changes in the fair value of the warrants are reported in the statements of operations as financial income or expense. 

As of the date of the issuance the Company allocated the gross amount received of $1.2 million to the par value of the shares issued ($120) and to the liability in respect of the warrants issued ($1,199,880). Issuance expenses in the amount of $63,000 and finders fee in the amount of $144,000 were recorded as deferred issuance costs. The amount allocated to the liability was less than the fair value of the warrants at grant date. On May 13, 2005 the Registration Statement became effective and the Company became no longer under possible penalties. As such, the liability and the deferred issuance costs related to the agreement has been classified to the Stockholders Equity as Additional Paid in Capital. As of May 13, 2005, the fair value of the liability in respect of the warrants issued was $720,000 and the amount of the deferred issuance costs was $178,116. The change in the carrying amountof the liability in respect of the warrants, recoded as income, in the year ended June 30, 2005 amounted to $479,880. 

The fair value as of May 13, 2005 was estimated using the Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rate of 3.75%, expected dividend yield of 0%, expected volatility of 104%, and expected life of 1.54 years.

 

 

 

F-25

 

 

**PLURISTEM LIFE SYSTEMS INC. AND ITS SUBSIDIARY**

**(A Development Stage Company)**

**(Previous Name - A. I. SOFTWARE INC.)**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**In U.S. Dollars**

**NOTE 7:-SHARE CAPITAL (continued)**

 

**j.**       On March 23, 2005, the Company issued 2,400,000 shares of common stock and 2,400,000 common stock purchase warrants as a bonus to the chief executive officer, Dr. Shai Meretzki, in connection with the issuance of a Notice of Allowance by the United States Patent Office for patent application number 09/890,401. Each warrant is exercisable until November 30, 2006 into one common share at a price of $0.30 per share.  Salary expenses of $696,000 were recognized during the nine month period ended March 31, 2005 in respect of this bonus based on the quoted market price of the Company's stock.

**k.**

Following the Board resolutions and authorizations from January 28, 2004, the Company issued on February 11, 2004, an aggregate amount of 1,000,000 common stock to a number of consultants and service providers as compensation for carrying out investor relations activities during the year 2004.

Total compensation, measured as the grant date fair market value of the stock, amounted to $800,000 and was recorded as an operating expense in the statement of operations in the year ended June 30, 2004. 

**l.**

Stock Option Plan ("ESOP")

Under the Company's 2003 Stock Option Plan (the "Plan"), options may be granted to officers, directors, employees and consultants of the Company or its subsidiary.

Pursuant to the Plan, the Company reserved for issuance 4,100,000 of its common stock. As of June 30 2005, 604,704 common stock of the Company are still available for future grant under the terms of the Plan.

Each option granted under the Plan is exercisable through the expiration date of the Plan which is December 2013 unless stated otherwise. The exercise price of the options granted under the plan may not be less than the nominal value of the stock into which such options are exercised. The options vest primarily over two years. Any option, which are canceled or forfeited before expiration, become available for future grants.

Options to employees:

On December 2003, the Company granted 2,976,591 options to employees and directors at an exercise price of $0.76. All options were granted with an exercise price that exceeded the quoted market price of the Company's stock on the date of grant. Fair value (determined using the Black-Scholes valuation model) of options granted was $0.29 at date of grant. During the period ended June 30, 2004, 156,734 options to employees were forfeited. 

During the year ended June 30, 2005, 451,170 options with an exercise price of  $0.3 per share were granted to the Company’s Chief Financial Officer. On February 15, 2005 the Company issued 50,000 shares and 70,495 options to former director and Chief Executive Officer of the Company. The exercise price of the options is $0.3 per share and they are fully vested and exercisable till February 15, 2008. Compensation expenses of $14,500 were recognized during the period ended June 30, 2005 in accordance with APB 25.

During the year ended June 30, 2005, 15,415 options to employees were forfeited. As of June 30, 2005, 3,122,140 options to employees are exercisable. 

On October 17, 2004 the Board of Directors decided to reduce the exercise price of the options that were granted to the Company’s employees and directors from $0.76 to $0.3. According to APB Opinion No. 25 and FIN 44 when the exercise price of a fixed stock option award is reduced, the award shall be accounted for as a variable plan from the date of modification to the date the award is exercised, forfeited, or expires unexercised. The reduction of the exercise price did not result in compensation expenses in the reported period.

Options to consultants:

In the framework of the stock option plan, the Company issues warrants to consultants, for carrying out investor relation's activities over a period of two years.

On December 2003, the Company granted 669,189 options to consultants at an at a weighted average exercise price of $0.92.

 

 

 

 

 

F-26

 

 

**PLURISTEM LIFE SYSTEMS INC. AND ITS SUBSIDIARY**

**(A Development Stage Company)**

**(Previous Name - A. I. SOFTWARE INC.)**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**In U.S. Dollars**

**NOTE 7:-SHARE CAPITAL (continued)**

In July 2004, the Company's board of directors approved to modify the terms of 500,000 options granted to a consultant on December 2003 (of which 250,000 are with an exercise price of $1 and 250,000 with an exercise price of $1.25) to provide for a cashless exercise of the options. The board of directors also resolved that the options' exercise price will be reduced to $0.4 and that the options will be fully vested and cashless exercise feature. In addition, it was resolved to grant the consultant additional 500,000 options with an exercise price of $0.4, vested immediately and with a cashless exercise feature. The additional 500,000 options were granted outside of the terms of the options plan. In June 2005 the consultant agreed to cancel the 1,000,000 options and to be granted 600,000 shares of the Company’s common stock that he got as a finder’s fee for the last investment inthe Company. Since the fair value of the options that were canceled and the shares that were issued were equal, no additional compensation expenses were recorded.

As of June 30, 2005, 169,189 options to consultants are exercisable.

The Company accounted for its options to consultants under the fair value method in accordance of SFAS 123 and EITF 96-18. The fair value for these warrants was estimated using Black-Scholes option-pricing model with the following weighted-average assumptions for June 30, 2004: risk-free interest rates of 4.2%, expected dividend yield of 0%, expected volatility of 84%, and a weighted-average contractual life of the warrants of up to 10 years. Compensation expenses of $357,618 and $161,641 were recognized during the year ended June 30, 2004 and 2005, respectively, in accordance with EITF 96-18.

 

**NOTE 8:-FINANCIAL INCOME, NET**

 

**Year ended June 30,**

 

**For the period from****May 11, 2001****(date of incorporation) through****June 30,**

 

 

 

 

 

 

 

**2005**

 

**2004**

 

**2005**

Foreign currency translation differences 

 

$ 8,921

 

$ 8,126

 

$ 20,534

Interest on short-term bank credit

9,449

 

724

 

13,622

Interest accrued on know-how licensors

12,332

 

20,699

 

46,181

Interest income on deposits

(12,467)

 

(5,857)

 

(28,926)

Deferred issuance expenses amortization

168,620

 

62,104

 

230,724

Change in fair value of warrants

(749,880)

 

(1,079,970)

 

(1,829,850)

 

 

 

 

 

 

 

$(563,025)

 

$ (994,174)

 

$( 1,547,715)

 

 

 

 

 

 

 

 

 

 

F-27

 

 

 

**PLURISTEM LIFE SYSTEMS INC. AND ITS SUBSIDIARY**

**(A Development Stage Company)**

**(Previous Name - A. I. SOFTWARE INC.)**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**In U.S. Dollars**

**NOTE 9:-INCOME TAXES**

**Reconciliation of the theoretical tax expense (benefit) to the actual tax expense (benefit):**

In the year ended June 30, 2005, the main reconciling items from the statutory tax rate of the Company (34%-35%) to the effective tax rate (0%) is carryforward tax losses and tax exempt financial income, for which a full valuation allowance was provided.

**Net operating losses carryforwards**

The Company has accumulated losses for tax purposes as of June 30, 2005 of approximately $2 million, which may be carried forward and offset against taxable income until 2021- 2024. 

The subsidiary has accumulated losses for tax purposes as of June 30, 2005 in the amount of approximately $2.5 million that may be carried forward and offset against taxable income in the future for an indefinite period.

Utilization of U.S. net operating losses may be subject to a substantial annual limitation due to the "change in ownership" provisions of the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating losses before utilization.

**Deferred Income taxes**

As of June 30, 2005, the Company and its subsidiary have provided valuation allowances of approximately $1 million in respect of deferred tax assets resulting from tax loss carryforwards. Management currently believes that since the Company and its subsidiary have a history of losses it is more likely than not that the deferred tax regarding the loss carryforwards and other temporary differences will not be realized in the foreseeable future.

**Subsequent tax event**

On July 25, 2005, the Knesset (Israeli Parliament) passed the Law for the Amendment of the Income Tax Ordinance (No. 147), 2005, which prescribes, among others, a gradual decrease in the corporate tax rate in Israel to the following tax rates:  in 2006 – 31%, in 2007 – 29%, in 2008 – 27%, in 2009 – 26% and in 2010 and thereafter – 25%.  The amendment is not expected to have a material effect on the Company's financial position and results operations.

**NOTE 10:-TRANSACTIONS AND BALANCES WITH RELATED PARTIES**

**Balances with related parties**

 

**June 30,**

 

**2005**

 

**2004**

 

 

 

 

 

 

 

 

Know-how licensors (included current maturities)

$ 199,959

 

$ 268,877

 

 

 

 

Accrued expenses

$29,493

 

$6,328

 

 

 

 

Salary expenses to the Chief Executive Officer

$888,293

 

$105,000

 

 

 

 

 

 

#  #  #  #  #  #  #  #  #  #  #

 

 

 

 

 

- 27 -

 

 

 

**Item 8.**

**Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.**

None.

**Item 8A.**

**Disclosure Controls and Procedures**

As required by Rule 13a-15 under the Exchange Act, we have carried out an evaluation of the effectiveness of the design and operation of our company's disclosure controls and procedures as of the end of the period covered by this annual report, being June 30, 2005.  This evaluation was carried out under the supervision and with the participation of our company's management, including our company's president and chief executive officer.  Based upon that evaluation, our company's president and chief executive officer concluded that our company's disclosure controls and procedures are effective as at the end of the period covered by this report.  There have been no significant changes in our company's internal controls or in other factors, which could significantly affect internal controls subsequent to the date we carried out our evaluation.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our company's reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures  designed to ensure that information required to be disclosed in our company's reports filed under the Exchange Act is accumulated and communicated to management, including our company's president and chief executive officer as appropriate, to allow timely decisions regarding required disclosure.

**PART III**

**Item 9.**

**Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act.**

*Directors and Executive Officers, Promoters and Control Persons*

As at August 31, 2005, our directors and executive officers, their ages, positions held, and duration of such, are as follows: 

**Name**

**Position Held with our Company**

**Age**

**Date First****Elected or Appointed**

Dr. Shai Meretizki

Chief Executive Officer

37

October 17, 2004

Yossi Keret

Chief Financial Officer

39

May 30, 2004

Doron Shorrer

Chairman of the Board, Director

52

October 2, 2003

Hava Meretzki

Director

37

October 2, 2003

Isaac Braun

Director

52

July 6, 2005

Israel Ben-Yoram

Director

42

January 26, 2005

*Business Experience*

The following is a brief account of the education and business experience of each director and executive officer during at least the past five years, indicating each person's principal occupation during the period, and the name and principal business of the organization by which he was employed.

 

 

 

- 28 -

 

 

**Dr. Shai Meretzki**

Dr. Shai Meretzki was the founder and the chief technology officer of our wholly owned subsidiary, Pluristem, Ltd.  He received his Ph.D. in biotechnology at the Technion-Israel Institute of Technology in 2002.  Dr. Meretzki has conducted extensive research on the subject of stem cell expansion.  His research project for his Ph.D. thesis was “Stationary packed bed bioreactor for propagation of transplantable human haemopoietic stem cells.”  From 1995 to 1996, Dr. Meretzki was employed at the Department of Chemical Engineering at the Technion-Israel Institute of Technology.  From 1997 to 2001, he was an instructor teaching medical students cell biology and hematology at the Rappaport Faculty of Medicine in Haifa, Israel.  From 2001 to 2002, Dr. Meretzki was in charge of biological and chemical research and development for Polyheal, Ltd. in Nesher, Israel.  

**Yossi Keret**

Mr. Keret was appointed as our Chief Financial Officer on May 30, 2004.  Before his appointment as our Chief Financial Officer, Mr. Keret acted as the Chief Financial Officer of M.L.L. Software and Computers Industries Ltd. (TASE:MLL) where he oversaw the company's three subsidiaries. Prior to his employment at M.L.L., he was the Chief Financial Officer of Internet-Zahav Group, Ltd. (NASDAQ:IGLD) the leading Israeli ISP with revenues in excess of $45 million, 900 employees and three subsidiaries.  As the Chief Financial Officer of Top Image Systems Ltd. (NASDAQ:TISA), Mr. Keret directed all activities that led to a NASDAQ listing, formulated systems which increased sales growth 60% during his 5 year term and opened branches and subsidiaries in Europe and USA.  He began his career at Kost Forer and Gabai Accountants - a member of E&Y International.

Mr. Keret holds a B.A. from Haifa University in Economics and Accounting, is a Certified Accountant in Israel and is working toward an MBA from Heriot-Watt University.

**Doron Shorrer**

Mr. Shorrer was appointed a director on October 2, 2003.  Mr. Shorrer, ISR (CPA) was Chairman of the Board of Phoenix Insurance Company, one of the largest insurance companies in Israel and Mivtachim Pension Benefit Group, the largest pension fund in Israel. Prior to these positions, Mr. Shorrer held senior appointments that included Arbitrator at the Claims Resolution Tribunal for Dormant Accounts in Switzerland; Economic and Financial Advisor, Commissioner of Insurance and Capital Markets for the State of Israel; Member of the board of directors of "Nechasim" of the State of Israel; Member Committee for the Examination of Structural Changes in the Capital Market (The Brodet Committee); General Director of the Ministry of Transport; Co-Founder and director of an accounting firm with offices in Jerusalem, Tel-Aviv and Haifa; Member of the Lecture Staff of the Amal School Chain; Chairman of a Public Committeefor Telecommunications; and Economic Consultant to the Ministry of Energy.

Among many areas of expertise, Mr. Shorrer formulates, implements and administers business planning in the private and institutional sector in addition to consulting on economic, accounting and taxation issues to a large audience ranging from private concerns to government ministries.  Mr. Shorrer holds a B.A. in Economics and Accounting and an M.A. in Business Administration (specialization in finance and banking) from the Hebrew University of Jerusalem and is a Certified Public Accountant (ISR).

**Hava Meretzki**

Ms. Meretzki was appointed a director on October 2, 2003. Ms. Meretzki, Adv. is a partner in the law firm of Ben-Noun Meretzki in Haifa, Israel.  Ms. Meretzki specializes in civil, trade and labor law and is presently Vice-Chairman for the National Council of the Israel Bar Association.  Ms. Meretzki previously was a director of the Israel Electric Company.  Ms. Meretzki received a Bachelors Degree in Law from the Hebrew University in 1991, and in 1992 was admitted to the Israel Bar Association.

 

 

 

- 29 -

 

 

**Isaac Braun**

Mr. Braun was appointed a director on July 6, 2005.  Mr. Braun is a business veteran with entrepreneurial, industrial and manufacturing experience. He has been a co-founder and board member of several hi-tech start-ups in the areas of e-commerce, security, messaging, search engines and biotechnology. Mr. Braun is involved with advising private companies on raising financing and business development.

**Israel Ben-Yoram**

Mr. Ben-Yoram was appointed a director on January 26, 2005.  Mr. Ben-Yoram has been a director and partner in the accounting firm of Mor, Ben-Yoram and Partners in Israel since 1985 to now.  This accounting firm currently employs over 15 employees in the field of auditing, consulting, and accompanying projects.  Since 1992 to now, Mr. Ben-Yoram has also served as a shareholder and the head director of Mor, Ben-Yoram Ltd., a private company in Israel in parallel to the operation of the Mor, Ben-Yoram and Partners accounting firm.  This company provides management services, economic consulting services and other professional services to businesses. Mr. Ben-Yoram received a B.A. in accounting from the University of Tel Aviv, an M.A. in Economics from the Hebrew University of Jerusalem, an LLB and an MBA from Tel Aviv University and an LLM from Bar Ilan University.

*Audit Committee and Audit Committee Financial Expert*

On October 2, 2003, our board of directors created an audit committee and adopted an audit committee charter.  On July 6, 2005 we appointed Hava Meretzki, Israel Ben-Yoram and Isaac Braun as members of our Audit Committee.  However, our board of directors has determined that we do not have a member of our audit committee that qualifies as an "audit committee financial expert" as defined in Item 401(e) of Regulation S-B.  Mr. Israel Ben-Yoram and Mr. Isaac Braun are "independent" as the term is used in Item 7(d)(3)(iv) of Schedule 14A under the Securities Exchange Act of 1934, as amended.  Ms. Hava Meretzki is not considered independent as she is married to our Chief Executive Officer, Dr. Shai Meretzki.  We believe that the members of our audit committee are collectively capable of analyzing and evaluating our financial statements and understanding internal controls and procedures for financial reporting.During the fiscal year 2005, the audit committee met a total of 4 times. 

*Other Committees of the Board*

On October 2, 2003, our board of directors also created a compensation committee and a corporate governance committee.  Our board of directors adopted a compensation committee charter and appointed Doron Shorrer and Hava Meretzki as members of our compensation committee.  Our board of directors also adopted a corporate governance committee charter and appointed Doron Shorrer and Hava Meretzki as members of our corporate governance committee.

*Family Relationships*

Shai Meretzki and Hava Meretzki are husband and wife.

*Involvement in Certain Legal Proceedings*

None of our directors, executive officers, promoters or control persons have been involved in any of the following events during the past five years:

1.  any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;

2.  any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offences);

3.  being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or

 

 

 

- 30 -

 

 

4.  being found by a court of competent jurisdiction (in a civil action), the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.

*Code of Ethics*

Effective October 2, 2003, our board of directors adopted a Code of Business Conduct and Ethics that applies to, among other persons, members of our board of directors, our officers including our Chief Executive Officer (being our principal executive officer) and our Chief Financial Officer (being our principal financial and accounting officer), contractors, consultants and advisors.

Our Code of Business Conduct and Ethics is filed with the Securities and Exchange Commission as Exhibit 14.1 to this annual report for the year ended June 30, 2005.  We will provide a copy of the Code of Business Conduct and Ethics to any person without charge, upon request.  Requests can be sent to:  Pluristem Life Systems Inc. c/o Clark Wilson LLP, Suite 800 – 885 West Georgia Street, Vancouver, British Columbia, V6C 3H1.

*Section 16(a) Beneficial Ownership Compliance*

Section 16(a) of the Securities Exchange Act requires our executive officers and directors, and persons who own more than 10% of our common stock, to file reports regarding ownership of, and transactions in, our securities with the Securities and Exchange Commission and to provide us with copies of those filings.  Based solely on our review of the copies of such forms received by us, or written representations from certain reporting persons, we believe that during fiscal year ended June 30, 2005, all filing requirements applicable to its officers, directors and greater than ten percent beneficial owners were complied with, with the exception of the following:

**Name**

**Number of****Late Reports**

**Number of Transactions Not****Reported on a Timely Basis**

**Failure  to File****Requested Forms**

Israel Ben-Yoram

1(1)

Nil

Nil

Isaac Braun(2)

1(1)

Nil

Nil

Yoram Druker(3)

1(1)

Nil

Nil

John Bakos(4)

1(1)

Nil

Nil

(1)             The named officer, director or greater than 10% stockholder, as applicable, filed a late Form 3 – Initial Statement of Beneficial Ownership of Securities.

(2)

Mr. Braun was appointed as a director of our company on July 6, 2005.

(3)

Mr. Druker resigned as a director of our company on July 6, 2005.

 
(4)                   Mr. Bakos was appointed as our President on February 18, 2005.  He resigned as our President on May 31, 2005 and was appointed as our Vice President, Corporate Development on May 31, 2005 for one month.  Mr. Bakos is now a part time consultant to our Company.

**Item 10.**

**Executive Compensation.**

The following table summarizes, to the end of fiscal year ended June 30, 2005, the compensation of Shai Meretzki, who has served as our Chief Executive Officer since October 17, 2004, Dr. Ze’evi Mendi, who served as our Chief Executive Officer from June 10, 2004 to October 17, 2004, Dr. Irit Arbel, who served as our Chief Executive Officer and a director from May 30, 2003 to June 10, 2004, and Mr. Harvey M.J. Lawson, who served as our Chief Executive Officer from May 11, 2001 to May 30, 2003 and as a director from May 11, 2001 to February 11, 2004.  No other officers or directors received annual compensation in excess of $100,000 during the most recently completed fiscal year and are considered to be named executive officers for the purposes of our executive compensation disclosure on this annual report.

 

 

 

- 31 -

 

 

 

SUMMARY  COMPENSATION TABLE

 

 

Annual  Compensation

Long Term  Compensation

 

 

 

 

 

 

Awards

Payouts

 

Name and PrincipalPosition

Year

Salary(US$)

Bonus(US$)

OtherAnnualCompen-sation  (US$)

SecuritiesUnderlyingOptions/SARsGranted

RestrictedShares  orRestrictedShareUnits

LTIPPayouts(US$)

All OtherCompen-sation

Shai MeretzkiChief Executive Officer

200520042003

163,869105,00018,500

NilNilNil

NilNilNil

NilNilNil

NilNilNil

NilNilNil

NilNilNil

Ze’evi MendiChief Executive Officer

200520042003

47,236NilNil

NilNilNil

$10,000(1)NilNIl

70,495(1)NilNil

NilNilNil

NilNilNil

NilNilNil

Dr. Irit ArbelFormer Chief Executive Officer and Director

200520042003

N/A108,000Nil

N/ANilNil

N/ANil$20,000

N/A563,962Nil

N/ANilNil

N/ANilNil

N/ANilNil

Harvey LawsonFormer Chief Executive Officer & Director

200520042003

N/AN/ANil

N/AN/ANil

N/AN/ANil

N/A56,396N/A

N/AN/ANil

N/AN/ANil

N/AN/ANil

(1)            Dr. Mendi was issued 50,000 common shares upon his termination as a director at a deemed price of $0.20 per share for his services as our Chief Executive Officer and 70,495 options to purchase shares of our common stock, exercisable at a price of $0.30 per share until February 15, 2008, for his services as a director of our company.

OPTION GRANTS IN THE LAST FISCAL YEAR

During the fiscal year ended June 30, 2005, there were no stock options granted to our named executive officers.

AGGREGATED OPTION/EXERCISES IN LAST FISCAL YEAR AND 2004 FISCAL YEAR END OPTION/VALUES

During the fiscal year ended June 30, 2005, no stock options were exercised by our named executive officers. 

REPRICING OF OPTIONS/SARS

During the year ended June 30, 2005 our board of directors resolved to reduce the exercise price of the outstanding stock options granted to the directors, employees and consultants of our company under our 2003 Stock Option Plan to $0.30 per share.

LONG-TERM INCENTIVE PLANS-AWARDS IN LAST FISCAL YEAR

We have no long-term incentive plans, other than the Stock Option Plan described below.

 

 

 

- 32 -

 

 

STOCK OPTION PLAN

On November 25, 2003, we adopted our 2003 Stock Option Plan, under which options to purchase up to 4,100,000 shares of our common stock can be granted to our directors, officers, employees and consultants.  We granted a total of 3,645,780 options on December 30, 2003 with various exercise prices and expiration dates, to directors, officers, employees and consultants. On June 10, 2004 the former chief executive officer left our company and 156,734 of her options expired and were returned to the option pool. As at June 30, 2004, there were 610,954 unallocated options remaining under the 2003 Stock Option Plan.  On July 6, 2004 we granted 451,170 options to the company's new chief financial officer. On February 15, 2005 we granted 70,495 options to Mendi Ze'evi, our former director and chief executive officer, exercisable at a price of $0.30 per share until February 15, 2008.  During the last quarter of 2004,15,415 options expired and were returned to the option pool.  On September 1, 2005, there were 604,724 of our common stock still available for future grant under the Plan. 

On July 22, 2004 we granted 500,000 options exercisable at a price of $0.40 per share until July 22, 2014 outside of our stock option plan. These options and an additional 500,000 options included in the 2003 Stock Option Plan expired, unexercised, on March 30, 2005.

COMPENSATION OF DIRECTORS

We reimburse our directors for expenses incurred in connection with attending board meetings and on April 15, 2004, we approved of the following compensation for directors: annual compensation of $8,400 plus applicable taxes; meeting participation fees of $750 plus taxes; and for meeting participation by telephone, 50% of the regular meeting compensation.  During the fiscal year ended June 30, 2005 we paid a total of $57,445 to directors as compensation.

Other than as described in the paragraph above, we have no present formal plan for compensating our directors for their service in their capacity as directors.  Directors are entitled to reimbursement for reasonable travel and other out-of-pocket expenses incurred in connection with attendance at meetings of our board.  The board may award special remuneration to any director undertaking any special services on behalf of our company other than services ordinarily required of a director.  Other than indicated in this annual report, no director received and/or accrued any compensation for his or her services as a director, including committee participation and/or special assignments during the fiscal year ended June 30, 2005.

We did not grant any stock options to directors of our company during the year ended June 30, 2005. 

EXECUTIVE EMPLOYMENT AGREEMENTS

There are no written employment or consulting agreements between our company and any of our directors and executive officers, except an agreement with Yossi Keret dated May 29, 2004, under which Mr. Keret is paid 33,000 New Israeli Shekels per month (US$7,290 at a conversion rate of 4.52645 NIS to the $US).  For a portion of fiscal 2005, we paid Dr. Mendi Ze'evi, our former Chief Executive Officer, a monthly gross compensation of $15,000.  During the year ended June 30, 2005, we paid Dr. Ze’evi a total of $47,236.  On October 17, 2004, Dr. Mendi Ze’evi ceased to be CEO of our company and his contract was not renewed.

Arrangements and plans to provide pension, retirement or similar benefits for directors or executive officers will be decided upon by the compensation committee.  We do not have any material bonus or profit sharing plans pursuant to which cash or non-cash compensation is or may be paid to our directors or executive officers.  We have no plans or arrangements in respect of remuneration received or that may be received by our executive officers to compensate such officers in the event of termination of employment (as a result of resignation, retirement, change of control) or a change of responsibilities following a change of control, where the value of such compensation exceeds $60,000 per executive officer.

*Pension, Retirement or Similar Benefit Plans*

There are no arrangements or plans in which we provide pension, retirement or similar benefits for directors or executive officers, except that our directors and executive officers may receive stock options at the discretion of our board of directors.  We do not have any material bonus or profit sharing plans pursuant to which cash or non-cash 

 

 

 

- 33 -

 

 

compensation is or may be paid to our directors or executive officers, except that stock options may be granted at the discretion of our board of directors.

**Item 11.**

**Security Ownership of Certain Beneficial Owners and Management.**

The following table sets forth, as of September 1, 2005, certain information with respect to the beneficial ownership of our common stock by each security holder known by us to be the beneficial owner of more than 5% of our common stock and by each of our current directors and executive officers.  Each person has sole voting and investment power with respect to the shares of common stock, except as otherwise indicated.  Beneficial ownership consists of a direct interest in the shares of common stock, except as otherwise indicated.

**Title of Class**

**Name and Address of  Beneficial Owner**

**Amount  and Nature of Beneficial Owner**

**Percentage  of Class(1)**

Common Shares

CEDE & Co.PO Box 20Bowling Green StationNew York, NY  10004

16,315,470

25.63%

Common Shares

Shai Meretzki38 Raul WallenbergHaifa, Israel

10,053,170(2)

15.17%

Common Shares

Joseph Corso15 Ottavio PromenadeStaten Island, NY 10307

7,000,000

11.00%

Common Shares

Stonestreet Limited Partnership#1300 – 320 Bay StreetToronto, ON M5H 4A6Canada

4,000,000

6.28%

Common Shares

Hava Meretzki38 Raul WallenbergHaifa, Israel

338,377(3)

0.53%

Common Shares

Doron Shorrer33 Koreh Hadorot StreetJerusalem, Israel

451,170(4)

0.70%

Common Shares

Israel Ben-Yoram24 Barkan StreetRishon Lezion, Israel

Nil

0%

Common Shares

Isaac Braun9 Zeharia Street, POB 402Bene Barak, Israel

2,000,000(5)

3.09%

Common Shares

Directors and Officers (as a group)

12,842,717(6)

18.80%

(1)   Based on 63,653,483 shares of common stock issued and outstanding as of September 1, 2005.  Except as otherwise indicated, we believe that the beneficial owners of the common stock listed above, based on information furnished by such owners, have sole investment and voting power with respect to such shares, subject to community property laws where applicable.  Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities.  Shares of common stock subject to options or warrants currently exercisable, or exercisable within 60 days, are deemed outstanding for purposes of computing the percentage ownership of the person holding 

 

 

 

- 34 -

 

 

such option or warrants, but are not deemed outstanding for purposes of computing the percentage ownership of any other person.

(2)  4,802,000 of which are registered under the name of A.R.Y. Holdings Ltd., which are owned and controlled by Dr. Shai Meretzki.  451,170 of which are options to purchase shares of common stock granted on December 30, 2003 that are currently exercisable or exercisable within 60 days.  2,400,000 are common shares granted in connection with the issuance of Notice of Allowance by the United States Patent Office for our patent application number 09/890,401.  An additional 2,400,000 are warrants to purchase shares of common stock granted in connection with the issuance of Notice of Allowance by the United States Patent Office for our patent application number 09/890,401.

(3)  Representing options to purchase shares of our common stock granted on December 30, 2003 that are currently exercisable or exercisable within 60 days.

(4)  Representing options to purchase shares of our common stock granted on December 30, 2003 that are currently exercisable or exercisable within 60 days.

(5)  Includes warrants exercisable into 1,000,000 shares of our common stock that are currently exercisable or exercisable within 60 days.

(6)  Includes options to purchase 1,240,717 shares of our common stock and warrants to purchase 3,400,000 shares of our common stock, that are currently exercisable or exercisable within 60 days.

*Changes in Control*

We are unaware of any contract or other arrangement the operation of which may at a subsequent date result in a change of control of our company.

**Item 12.**

**Certain Relationships and Related Transactions.**

Except as otherwise indicated below, we have not been a party to any transaction, proposed transaction, or series of transactions in which the amount involved exceeds $60,000, and in which, to our knowledge, any of our directors, officers, five percent beneficial security holder, or any member of the immediate family of the foregoing persons has had or will have a direct or indirect material interest.

Dr. Shai Meretzki is a signatory of the license agreement with the Weizmann Institute of Science and the Technion-Israel Institute of Technology because he was an inventor of the technology listed in the license agreement.  Dr. Meretzki is our Chief Executive Officer and an affiliate of our company through his indirect acquisition of shares of our common stock.

**Item 13.**

**Exhibits**

*Exhibits required by Item 601 of Regulation S-B*

**(3)**

**Articles of Incorporation and Bylaws**

3.1

Articles of Incorporation (incorporated by reference from our registration statement on Form SB-2 filed September 10, 2001).

3.2

Bylaws (incorporated by reference from our registration statement on Form SB-2 filed September 10, 2001).

3.3

Restated Bylaws (incorporated by reference from our Quarterly Report on Form 10-QSB filed November 19, 2003).

**(10)**

**Material Contracts**

10.1

Software Development Agreement (incorporated by reference from our registration statement on Form SB-2 filed September 10, 2001). 

10.2

Exclusive, World Wide Patent and Technology License and Assignment Agreement (incorporated by reference from our Current Report on Form 8-K filed May 6, 2003). 

 

 

 

- 35 -

 

 

10.3

Form of Common Stock and Warrant Purchase Agreement between our company and each of the following investors who participated in the October 25, 2004 Private Placement (incorporated by reference from our registration statement on Form SB-2 filed April 27, 2005):

**Name**

**Amount of Common Shares and Warrants Purchased**

 

 

Park Ridge Investments A.V.V.

1,000,000

Shaya Britz

500,000

GlenRock Israel Ltd.

600,000

Bezalel Ziv Ron

100,000

Alshuler-Shaham Ltd.

300,000

ROLFE Investments Ltd.

250,000

Eshed Dash Ltd.

500,000

Dahav Financial Systems Ltd.

300,000

Platinum Partners Value Arbitrage Fund L.P.

1,000,000

Yosef Solt

250,000

Ori Ackerman

250,000

Iris Nehoray

600,000

Elazar Nehoray

600,000

Ilana Nehoray

600,000

Osnat Nehoray

600,000

Avinoam Rapaport

100,000

Kopelman Ltd.

250,000

Tibo Marcovich

200,000

Shlomo Shmuelov

250,000

Ilana Rachmilovitz

50,000

Rockwell Invest Ltd.

200,000

10.4

Form of Investors’ Rights Agreement between our company and each of the following investors who participated in the October 25, 2004 Private Placement (incorporated by reference from our registration statement on Form SB-2 filed April 27, 2005):

**Name**

 

 

 

Park Ridge Investments A.V.V.

 

Shaya Britz

 

GlenRock Israel Ltd.

 

Bezalel Ziv Ron

 

Alshuler-Shaham Ltd.

 

ROLFE Investments Ltd.

 

Eshed Dash Ltd.

 

Dahav Financial Systems Ltd.

 

Platinum Partners Value Arbitrage Fund L.P.

 

Yosef Solt

 

Ori Ackerman

 

Iris Nehoray

 

Elazar Nehoray

 

Ilana Nehoray

 

Osnat Nehoray

 

Avinoam Rapaport

 

Kopelman Ltd.

 

Tibo Marcovich

 

Shlomo Shmuelov

 

Ilana Rachmilovitz

 

Rockwell Invest Ltd.

 

 

 

 

 

- 36 -

 

 

10.5

Form of Escrow Agreement between our company and each of the following investors who participated in the October 25, 2004 private placement (incorporated by reference from our registration statement on Form SB-2 filed April 27, 2005):

**Name**

 

 

 

Park Ridge Investments A.V.V.

 

Shaya Britz

 

GlenRock Israel Ltd.

 

Bezalel Ziv Ron

 

Alshuler-Shaham Ltd.

 

ROLFE Investments Ltd.

 

Eshed Dash Ltd.

 

Dahav Financial Systems Ltd.

 

Platinum Partners Value Arbitrage Fund L.P.

 

Yosef Solt

 

Ori Ackerman

 

Iris Nehoray

 

Elazar Nehoray

 

Ilana Nehoray

 

Osnat Nehoray

 

Avinoam Rapaport

 

Kopelman Ltd.

 

Tibo Marcovich

 

Shlomo Shmuelov

 

Ilana Rachmilovitz

 

Rockwell Invest Ltd.

 

10.6

Form of Warrants between our company and each of the following investors who participated in the October 25, 2004 private placement (incorporated by reference from our registration statement on Form SB-2 filed April 27, 2005):

**Name**

**Amount of Warrants**

 

 

Park Ridge Investments A.V.V.

1,000,000

Shaya Britz

500,000

GlenRock Israel Ltd.

600,000

Bezalel Ziv Ron

100,000

Alshuler-Shaham Ltd.

300,000

ROLFE Investments Ltd.

250,000

Eshed Dash Ltd.

500,000

Dahav Financial Systems Ltd.

300,000

Platinum Partners Value Arbitrage Fund L.P.

1,000,000

Yosef Solt

250,000

Ori Ackerman

250,000

Iris Nehoray

600,000

Elazar Nehoray

600,000

Ilana Nehoray

600,000

Osnat Nehoray

600,000

Avinoam Rapaport

100,000

Kopelman Ltd.

250,000

Tibo Marcovich

200,000

Shlomo Shmuelov

250,000

Ilana Rachmilovitz

50,000

Rockwell Invest Ltd.

200,000

 

 

 

 

- 37 -

 

 

10.7

Form of Agents’ Warrants between our company and each of the following agents who participated in the October 25, 2004 private placement (incorporated by reference from our registration statement on Form SB-2 filed April 27, 2005):

**Name**

**Amount of Warrants Exercisable****at $0.10 per Share**

 

 

Yokim Asset Management Corp.

50,000

Yosef Solt

12,500

Ori Ackerman

25,000

David Buch

30,000

Shmuel Even

30,000

(pursuant to two separate agreements)

Avinoam Rapaport

10,000

Izhak Brown

75,000

Amnon Dardik

12,500

10.8*

Agreement dated January 12, 2005 between our company and Carlthon Corp. in respect of the January 24, 2005 private placement.

10.9

Form of Common Stock and Warrant Purchase Agreement between our company and each of the investors who participated in the January 24, 2005 private placement (incorporated by reference from our registration statement on Form SB-2 filed April 27, 2005):

**Name**

**Amount of Common Shares and Warrants Purchased**

 

 

Joseph Corso

7,000,000

Kevin Klier

1,500,000

Frank Santo JR.

800,000

Danielle Inserra

500,000

Michelle Inserra

500,000

Christopher Short

250,000

Robert V. Clark

250,000

Gina M. Brody

200,000

Joseph De Francesco

200,000

Joseph Greco SR.

200,000

Sean Walter

200,000

Joseph Greco JR.

100,000

Candace Lee

100,000

Mauricio Perez

100,000

David P. Johnson

100,000

10.10

Form of Investors’ Rights Agreement between our company and each of the following investors who participated in the January 24, 2005 private placement (incorporated by reference from our registration statement on Form SB-2 filed April 27, 2005): 

**Name**

 

 

 

Joseph Corso

 

Kevin Klier

 

Frank Santo JR.

 

Danielle Inserra

 

Michelle Inserra

 

Christopher Short

 

Robert V. Clark

 

Gina M. Brody

 

Joseph De Francesco

 

Joseph Greco SR.

 

 

 

 

 

- 38 -

 

 

 

Sean Walter

 

Joseph Greco JR.

 

Candace Lee

 

Mauricio Perez

 

David P. Johnson

 

10.11

Form of Escrow Agreement between our company and each of the following investors who participated in the January 24, 2005 private placement (incorporated by reference from our registration statement on Form SB-2 filed April 27, 2005):

**Name**

 

 

 

Joseph Corso

 

Kevin Klier

 

Frank Santo JR.

 

Danielle Inserra

 

Michelle Inserra

 

Christopher Short

 

Robert V. Clark

 

Gina M. Brody

 

Joseph De Francesco

 

Joseph Greco SR.

 

Sean Walter

 

Joseph Greco JR.

 

Candace Lee

 

Mauricio Perez

 

David P. Johnson

 

10.12

Form of Warrants between our company and each of the following investors who participated in the January 24, 2005 private placement (incorporated by reference from our registration statement on Form SB-2 filed April 27, 2005): 

**Name**

**Amount of Warrants Exercisable****at $0.10 per Share**

 

 

Joseph Corso

7,000,000

Kevin Klier

1,500,000

Frank Santo JR.

800,000

Danielle Inserra

500,000

Michelle Inserra

500,000

Christopher Short

250,000

Robert V. Clark

250,000

Gina M. Brody

200,000

Joseph De Francesco

200,000

Joseph Greco SR.

200,000

Sean Walter

200,000

Joseph Greco JR.

100,000

Candace Lee

100,000

Mauricio Perez

100,000

David P. Johnson

100,000

10.13

Form of Common Stock Purchase Agreement between our company and each of the following financial advisers who participated in the January 24, 2005 private placement (incorporated by reference from our registration statement on Form SB-2 filed April 27, 2005):

 

- 39 -

 

 

 

**Name**

**Amount of Common Shares**

 

 

Mark Zegal

600,000

David Buch

15,000

Kanyanei Bar-Reket Ltd.

20,000

Eretz Hacarmel Ltd.

10,000

10.14

Form of Agents’ Warrants between our company and each of the following agents who participated in the January 24, 2005 private placement (incorporated by reference from our registration statement on Form SB-2 filed April 27, 2005): 

**Name**

**Amount of Warrants****Exercisable at $2.50**

 

 

Ori Ackerman

440,000

David Buch

10,000

Amir Uziel

25,000

10.15

Finder’s Fee Agreement for 1,200,000 shares between our company and Carlthon Corp. in respect of the January 24, 2005 private placement. (incorporated by reference from our registration statement on Form SB-2 filed April 27, 2005)

10.16

Form of Private Placement Subscription Agreement between our company and each of the following investors who participated in the January 31, 2005 private placement (incorporated by reference from our registration statement on Form SB-2 filed April 27, 2005):

**Name**

**Amount of Common Shares**

 

 

Stonestreet Limited Partnership

4,000,000

Whalehaven Capital Fund Limited

3,000,000

Alpha Capital AG

1,000,000

Bristol Capital Advisors LLC

1,500,000

Shimon Vogel

500,000

Tower Paper Co Inc. Retirement Plan

250,000

Mordechai Vogel

250,000

Yokim Asset Management Corp.

1,000,000

David Klugman Associates Inc.

500,000

10.17

Form of Investors’ Rights Agreement between our company and each of the following investors who participated in the January 31, 2005 private placement (incorporated by reference from our registration statement on Form SB-2 filed April 27, 2005): 

**Name**

 

 

 

Stonestreet Limited Partnership

 

Whalehaven Capital Fund Limited

 

Alpha Capital AG

 

Bristol Capital Advisors LLC

 

Shimon Vogel

 

Tower Paper Co Inc. Retirement Plan

 

Mordechai Vogel

 

Yokim Asset Management Corp.

 

David Klugman Associates Inc.

 

10.18

Form of Escrow Agreement between our company and each of the following investors who participated in the January 31, 2005 private placement (incorporated by reference from our registration statement on Form SB-2 filed April 27, 2005):

 

- 40 -

 

 

 

**Name**

 

 

 

 

Stonestreet Limited Partnership

 

Whalehaven Capital Fund Limited

 

Alpha Capital AG

 

Bristol Capital Advisors LLC

 

Shimon Vogel

 

Tower Paper Co Inc. Retirement Plan

 

Mordechai Vogel

 

Yokim Asset Management Corp.

 

David Klugman Associates Inc.

 

10.19

Form of Warrants between our company and each of the following investors who participated in the January 31, 2005 private placement (incorporated by reference from our registration statement on Form SB-2 filed April 27, 2005): 

**Name**

**Amount of Warrants Exercisable at $0.30 per Share (unless otherwise indicated)**

 

 

Stonestreet Limited Partnership

4,000,000

Whalehaven Capital Fund Limited

3,000,000

Alpha Capital AG

1,000,000

Bristol Capital Advisors LLC

1,500,000

Shimon Vogel

500,000

Tower Paper Co Inc. Retirement Plan

250,000

Mordechai Vogel

250,000

Yokim Asset Management Corp.

1,000,000

David Klugman Associates Inc.

500,000

10.20

Agent’s Purchase Agreement between our company and Yokim Asset Management Corp. in respect of the January 31, 2005 private placement. (incorporated by reference from our registration statement on Form SB-2 filed April 27, 2005)

 

10.21

Agent’s Warrant for 600,000 warrants between our company and Yokim Asset Management Corp. in respect of the January 31, 2005 private placement. (incorporated by reference from our registration statement on Form SB-2 filed April 27, 2005)

**14.**

**Code of Ethics**

 
14.1*

Code of Business Conduct and Ethics and Compliance Program adopted by the Board of Directors

**(21)**

**Subsidiaries**

Pluristem, Ltd., an Israeli company.

**(31)**

**Rule 13a-14(a)/15d-14(a) Certifications**

31.1*

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Shai Meretzki.

31.2*

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Yossi Keret.

**(32)**

**Section 1350 Certifications**

32.1*

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 

 

 

 

- 41 -

 

 

*Filed herewith.

**Item 14.**

**Principal Accountant Fees and Services**

*Audit Fees*

The aggregate fees billed by Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global, for professional services rendered for the audit of our annual financial statements included in our annual report on Form 10-KSB for the fiscal year ended June 30, 2005 and for the review of quarterly financial statements included in our quarterly reports on Form 10-QSB for the quarters ending September 30, 2004, December 31, 2004 and March 31, 2005 were $50,000. The aggregate fees billed by Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global for services rendered for our annual financial statements included in our annual report on Form 10-KSB and for review of quarterly reports on Form 10-QSB for the year ended June 30, 2004 was $44,000. 

*Non-Audit Related Fees*

For the fiscal year ended June 30, 2005, the aggregate fees billed for  other services by Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global, not relating to the performance of the audit of our financial statements which are not reported under the caption "Audit Fees" above, was $0, and for the fiscal year ended June 30, 2004, was $5,000. 

We do not use Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global, for financial information system design and implementation.  These services, which include designing or implementing a system that aggregates source data underlying the financial statements or generates information that is significant to our financial statements, are provided internally or by other service providers.  We do not engage Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global, to provide compliance outsourcing services.

Effective May 6, 2003, the Securities and Exchange Commission adopted rules that require that before Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global, is engaged by us to render any auditing or permitted non-audit related service, the engagement be:

1.

approved by our audit committee; or

2.

entered into pursuant to pre-approval policies and procedures established by the audit committee, provided the policies and procedures are detailed as to the particular service, the audit committee is informed of each service, and such policies and procedures do not include delegation of the audit committee's responsibilities to management.

The audit committee pre-approves all services provided by our independent auditors. All of the above services and fees were reviewed and approved by the audit committee before the services were rendered.

The audit committee has considered the nature and amount of fees billed by Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global, and believes that the provision of services for activities unrelated to the audit is compatible with maintaining Kost Forer Gabbay & Kasierer's independence.

 

 

 

- 42 -

 

 

**SIGNATURES**

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

**PLURISTEM LIFE SYSTEMS, INC.**

 

By:  

/s/ Shai Meretzki

Shai Meretzki, Chief Executive Officer

(Principal Executive Officer)

 

Date:  September 23, 2005

 

By:  /s/ Yossi Keret

Yossi Keret, Chief Accounting Officer

(Principal Financial Officer and Principal Accounting Officer)

 

Date:  September 23, 2005

 

By:  /s/ Doron Shorrer

Doron Shorrer, Director

 

Date:  September 23, 2005

 

By:  /s/ Hava Meretzki

Hava Meretzki, Director

 

Date:  September 23, 2005

 

By:  /s/ Israel Ben-Yoram

Israel Ben-Yoram, Director

 

Date:  September 23, 2005

 

By:  /s/ Isaac Braun

Isaac Braun, Director

 

Date:  September 23, 2005

 

 

 

 

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