SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
MARK ONE
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarterly Period ended June 30, 2006; or
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________ to ________
COMMISSION FILE NUMBER: 0-11772
SPO MEDICAL INC.
(Exact name of small business issuer as specified in its charter)
Delaware 25-1411971
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
21860 BURBANK BLVD., NORTH BUILDING, SUITE 380
Woodland Hills, CA 91367
(Address of principal executive offices, including zip code)
818-888-4380
(Issuer's telephone number, including area code)
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
|_|
Indicate by a check mark whether the registrant is a shell company (as
defined in Rule 1b-2 of the Exchange Act). Yes |_| No |X|.
As of September 15, 2006, SPO Medical Inc. had outstanding 18,386,576
shares of common stock, par value $0.01 per share.
Transitional Small Business Disclosure Format (Check one) Yes |_| No |X|
INDEX PAGE
PART I -- FINANCIAL INFORMATION
PAGE
Forward Looking Statements (ii)
Item 1 - Financial Statements
Unaudited Consolidated Balance Sheet June 30, 2006 1
Unaudited Consolidated Statements of Operations for the
six and three months ended June 30, 2006 and 2005 2
Unaudited Consolidated Statements of Changes in Stockholders'
Deficiency 3
Unaudited Consolidated Statements of Cash Flows for
the six and three months ended June 30, 2006 and 2005 4
Notes to Consolidated Financial Statements 5
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 3 - Controls and Procedures 11
PART II -- OTHER INFORMATION
Item 1 - Legal Proceedings 11
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds 11
Item 3 - Defaults upon Senior Securities 11
Item 4 - Submission of Matters to a Vote of Security Holders 11
Item 5 - Other Information 12
Item 6 - Exhibits 12
SIGNATURES 13
FORWARD LOOKING STATEMENTS
The following discussion and explanations should be read in conjunction with the
financial statements and related notes contained elsewhere in this quarterly
report on Form 10-QSB. Certain statements made in this discussion are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements can be identified by
terminology such as "may", "will", "should", "expects", "intends",
"anticipates", "believes", "estimates", "predicts", or "continue" or the
negative of these terms or other comparable terminology and include, without
limitation, statements below regarding: the Company's intended business plans;
expectations as to product performance; intentions to acquire or develop other
technologies; and belief as to the sufficiency of cash reserves. Because
forward-looking statements involve risks and uncertainties, there are important
factors that could cause actual results to differ materially from those
expressed or implied by these forward-looking statements. Although the Company
believes that expectations reflected in the forward-looking statements are
reasonable, it cannot guarantee future results, performance or achievements.
Moreover, neither the Company nor any other person assumes responsibility for
the accuracy and completeness of these forward-looking statements. The Company
is under no duty to update any forward-looking statements after the date of this
report to conform such statements to actual results.
(ii)
SPO MEDICAL INC.
AND ITS SUBSIDIARY
CONDENSED INTERIM CONSOLIDATED BALANCE SHEET
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
JUNE 30, 2006
UNAUDITED
---------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 575
Trade receivables 451
Other accounts receivable and prepaid expenses 48
Inventories 502
---------
$ 1,576
LONG-TERM INVESTMENTS
Deposits 11
Severance pay fund 167
---------
178
PROPERTY AND EQUIPMENT, NET 70
---------
TOTAL ASSETS $ 1,824
=========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Short-term loans $ 1,165
Short-term convertible loans 722
Trade payables 317
Employees and payroll accruals 191
Other payables and accrued expenses 601
---------
2,996
LONG-TERM LIABILITIES
Accrued severance pay 290
STOCKHOLDERS' DEFICIENCY
Stock capital 184
Additional paid-in capital 6,146
Accumulated deficit (7,792)
---------
(1,462)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 1,824
=========
The accompanying notes to these financial statements are an integral part
thereof.
1
SPO MEDICAL INC.
AND ITS SUBSIDIARY
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS EXCEPT SHARE DATA
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- -----------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
REVENUES $ 1,591 $ 742 $ 890 $ 368
Cost of revenues 829 335 459 166
------------ ------------ ------------ ------------
Gross profit 762 407 431 202
------------ ------------ ------------ ------------
Operating expenses
Research and development, net 345 259 193 177
Selling and marketing 302 236 161 124
General and administrative 519 334 299 228
Merger expenses -- 251 -- 213
------------ ------------ ------------ ------------
Total operating expenses 1,166 1,080 653 742
------------ ------------ ------------ ------------
OPERATING LOSS 404 673 222 540
Financial expenses, net 1,302 99 363 41
------------ ------------ ------------ ------------
LOSS FOR THE PERIOD $ 1,706 $ 772 $ 585 $ 581
============ ============ ============ ============
Basic and diluted loss per ordinary share $ (0.09) $ (0.04) $ (0.03) $ (0.03)
============ ============ ============ ============
Weighted average number of shares
outstanding used in computation of basic and
diluted loss per share 18,410,096 17,475,790 18,487,477 17,475,790
============ ============ ============ ============
The accompanying notes to these financial statements are an integral part
thereof.
2
SPO MEDICAL INC.
AND ITS SUBSIDIARY
CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS DEFICIENCY
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
ADDITIONAL
SHARE PAID-IN DEFERRED ACCUMULATED
CAPITAL CAPITAL COMPENSATION DEFICIT TOTAL
------- ------- ------- ------- -------
BALANCE AS OF JANUARY 1, 2004 $ 501 $ 927 $ -- $(1,512) $ (84)
Issuance of ordinary shares to consultants 99 1,272 -- -- 1,371
Stock-based compensation related to
options granted to employee -- 283 -- -- 283
Stock-based compensation related to
warrant granted to lender -- 78 -- -- 78
Beneficial conversion feature of
convertible notes -- 115 -- -- 115
Net Loss -- -- -- (2,536) (2,536)
------- ------- ------- ------- -------
BALANCE AS OF DECEMBER 31, 2004 600 2,675 -- (4,048) (773)
Issuance of ordinary shares upon
conversion of loans 35 224 -- -- 259
Warrants issued in private placements -- 949 -- -- 949
Warrants issued in connection with loans -- 22 -- -- 22
Deferred stock-based compensation related
to options granted to employees and
consultants -- 762 (762) -- --
Amortization of deferred Stock-based
compensation related to options granted
to employees -- -- 187 -- 187
Amortization of deferred Stock-based
compensation related to options granted to
consultant -- -- 348 -- 348
Reverse merger transaction and forward
split of issued share capital (465) 201 -- -- (264)
Net Loss -- -- -- (2,038) (2,038)
------- ------- ------- ------- -------
BALANCE AS OF DECEMBER 31, 2005 170 4,833 (227) (6,086) (1,310)
Deferred compensation reclassified due to
FAS 123R implementation for the first time -- (227) 227 -- --
Warrants issued in connection with loan -- 66 -- -- 66
Amortization of deferred stock-based
compensation related to options granted to
consultants -- 749 -- -- 749
Exercise of warrants by consultant 5 -- -- -- 5
Amortization of deferred Stock-based
compensation related to options granted to
employees -- 83 -- -- 83
Amortization of deferred Stock-based
compensation related to options granted to
directors -- 71 -- -- 71
Issuance of ordinary shares 9 571 -- -- 580
Net Loss -- -- -- (1,706) (1,706)
------- ------- ------- ------- -------
BALANCE AS OF JUNE 30, 2006 $ 184 $ 6,146 $ -- $(7,792) $(1,462)
------- ------- ------- ------- -------
The accompanying notes to these financial statements are an integral part
thereof
3
SPO MEDICAL INC.
AND ITS SUBSIDIARY
CONDENSED INTERIM STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
2006 2005 2006 2005
------- ------- ------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Loss for the period $(1,706) $ (772) $ (585) $ (581)
Adjustments to reconcile loss to net cash used in
operating activities:
Depreciation 12 3 5 2
Stock-based compensation expenses 902 82 117 82
Amortization of loan discounts 477 312
Increase (decrease) in accrued severance pay, net (6) 97 (2) 105
Increase in accrued interest payable on loans 69 35 34 24
Changes in assets and liabilities:
Increase in trade receivables (252) (61) (133) (238)
Decrease (increase) in other receivables (6) (11) 4 37
Decrease (Increase) in inventories (42) (255) 50 (16)
Increase (decrease) in accounts payable 92 50 (32) 54
Decrease in other payables and accrued expenses 103 129 143 154
------- ------- ------- -------
Net cash used in operating activities (357) (703) (87) (377)
CASH FLOWS FROM INVESTING ACTIVITIES
Decrease (Increase) in short-term investments (1) 33 -- 32
Purchase of property and equipment (34) (23) -- (20)
------- ------- ------- -------
Net cash used in investing activities (35) 10 -- 12
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of stock capital 580 -- 95 --
Exercise of warrants by consultant 5 -- -- --
Receipt of short-term loan 84 -- -- --
Proceeds on grant of exercisable warrants 66 -- -- --
Receipt of long-term loan -- 815 -- 464
Repayment of short-term loans (261) (25) (39) (25)
------- ------- ------- -------
Net cash provided by financing activities 474 790 56 439
Increase (decrease) in cash and cash equivalents 82 97 (31) 74
Cash and cash equivalents at the beginning of the period 493 9 606 32
------- ------- ------- -------
Cash and cash equivalents at the end of the period $ 575 $ 106 $ 575 $ 106
======= ======= ======= =======
The accompanying notes to these financial statements are an integral part
thereof.
4
NOTE 1 - BASIS OF PRESENTATION
SPO Medical Inc. (hereinafter referred to as "SPO" or the "Company") was
originally organized under the laws of the State of Delaware in September 1981
under the name "Applied DNA Systems, Inc." On November 16, 1994, the Company
changed its name to "Nu-Tech Bio-Med, Inc." On December 23, 1998, the Company
changed its name to "United Diagnostic, Inc." Effective April 21, 2005, the
Company acquired (the "Acquisition Transaction") 100% of the outstanding capital
stock of SPO Medical Equipment Ltd., a company incorporated under the laws of
the State of Israel ("SPO Ltd."), pursuant to a Capital Stock Exchange Agreement
dated as of February 28, 2005 among the Company, SPO Ltd. and the shareholders
of SPO Ltd., as amended and restated on April 21, 2005 (the "Exchange
Agreement"). In exchange for the outstanding capital stock of SPO Ltd., the
Company issued to the former shareholders of SPO Ltd. a total of 5,769,106
shares of the Company's common stock, par value $0.01 per share ("Common
Stock"), representing approximately 90% of the Common Stock then issued and
outstanding after giving effect to the Acquisition Transaction. As a result of
the Acquisition Transaction, SPO Ltd. became a wholly owned subsidiary of the
Company as of April 21, 2005 and, subsequent to the Acquisition Transaction, the
Company changed its name to "SPO Medical Inc." Upon consummation of the
Acquisition Transaction, the Company effectuated a forward subdivision of the
Company's Common Stock issued and outstanding on a 2.65285:1 basis.
The accompanying financial statements included in this report for the periods
prior to the Acquisition Transaction are the financial statements of SPO Ltd.
The Company and its subsidiary, SPO Ltd., are collectively referred to as the
"Company".
The accompanying un-audited condensed consolidated interim financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States of America for interim financial information and the
instructions to Form 10-QSB and Article 10 of Regulation S-X. These financial
statements reflect all adjustments, consisting of normal recurring adjustments
and accruals, which are, in the opinion of management, necessary for a fair
presentation of the financial position of the Company as of June 30, 2006 and
the results of operations and cash flows for the interim periods indicated in
conformity with generally accepted accounting principles applicable to interim
periods. Accordingly, certain information and footnote disclosures normally
included in annual financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. Operating results
for the three and six months ended June 30, 2006, are not necessarily indicative
of the results that may be expected for the year ended December 31, 2006.
Certain prior years' amounts have been reclassified in conformity with
current year's financial statements.
NOTE 2 -GOING CONCERN
As reflected in the accompanying financial statements, the Company's operations
for the six and three months ended June 30, 2006, resulted in a net loss of
$1,706 and $585 respectively, and the Company's balance sheet reflects a net
stockholders' deficit of $1,462. The Company's ability to continue operating as
a "going concern" is dependent on its ability to raise sufficient additional
working capital. Management's plans in this regard include raising additional
cash from current and potential stockholders and lenders and increasing the
marketing of its current and new products.
5
NOTE 3 - STOCK-BASED COMPENSATION
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123 (revised 2004),
"Share-Based Payment." SFAS No. 123(R) which requires the Company to measure all
employee stock-based compensation awards using a fair value method and record
such expense in its consolidated financial statements. In March 2005, the SEC
issued Staff Accounting Bulletin (SAB) 107, which provides the Staff's views
regarding interactions between SFAS No. 123(R) and certain SEC rules and
regulations and provides interpretations of the valuation of share-based
payments for public companies. The adoption of SFAS No. 123(R) requires
additional accounting related to the income tax effects and additional
disclosure regarding the cash flow effects resulting from share-based payment
arrangements. The adoption of SFAS No. 123(R) in the six and three months ended
June 30, 2006, had a material impact on the Company's consolidated results of
operations, financial position and statement of cash flows.
SPO adopted the provisions of SFAS No. 123(R), "Share-Based Payment". SFAS No.
123(R) establishes accounting for stock-based awards exchanged for employee
services. Accordingly, stock-based compensation cost is measured at grant date,
based on the fair value of the award, and is recognized as expense over the
employee requisite service period. The Company previously applied Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations and provided the required pro forma
disclosures of SFAS No. 123, "Accounting for Stock-Based Compensation". Prior to
the adoption of SFAS No. 123(R), the Company provided the disclosures required
under SFAS No. 123, "Accounting for Stock-Based Compensation," as amended by
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosures."
The pro-forma information for the six months and three months ended June 30,
2005 is as follows:
SIX MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
--------- ---------
2005 2005
--------- ---------
UNAUDITED UNAUDITED
--------- ---------
Net loss, as reported $ 772 $ 581
Deduct: Total stock-based compensation
expense determined under fair value
method for all awards 31 31
------- -------
Pro forma net loss $ 803 $ 612
======= =======
Basic and diluted net loss per share, as
reported $ 0.04 $ 0.03
======= =======
Basic and diluted net loss per share, pro forma $ 0.05 $ 0.03
======= =======
6
NOTE 4:- NOTE
On February 1, 2006 the Company borrowed the principal amount of $150. This loan
bears interest at an annual rate of prime plus 4% and is repayable in four equal
installments every three calendar months (commencing June 30, 2006) through
January 31, 2007. The Company issued to the holder of this indebtedness a
three-year warrant to purchase up to 60,000 shares of Common Stock at a per
share exercise price of $0.85. As of June 30, 2006, the Company repaid $39
representing principal and accrued interest then due.
NOTE 5: REPAYMENT OF OUTSTANDING DEBT
On September 6, 2005 the Company borrowed the principal amount of $100. The
principal amount of this loan, plus $10 in respect of the arrangement fees was
repaid on January 16, 2006. The Company issued to the holder of this
indebtedness a three-year warrant to purchase up to 25,000 shares of Common
Stock at a per share exercise price of $0.75.
In August 2004 the Company negotiated with a lender the extension of the
scheduled maturity date of indebtedness in the principal amount of $140 that was
originally scheduled to mature on October 12, 2005. The maturity date of $100 of
the original principal amount of this indebtedness was extended to March 31,
2006 and, on December 22, 2005, $47 of the remaining principal amount and
accrued interest was repaid. In consideration of the extension of the principal
amount of $100, the Company paid to the lender a one time arrangement fee of $20
and issued to the holder of the debt a three-year warrant to purchase up to
15,000 shares of the Company's Common Stock at a per share price of $0.75. On
March 31, 2006 the principal amount of $100 was repaid in full.
NOTE 6: PRIVATE PLACEMENT
In January 2006, the Company entered into an agreement with an institutional
investor for the private placement of 857,143 shares of its Common Stock for
gross proceeds of $600 (prior to the payment of placement related expenses
aggregating approximately to $20). The private placement was completed in June
and the Common Stock has been issued is fully paid.
NOTE 7: SUBSEQUENT EVENT
In July 2006, the Company commenced a private placement of units of securities,
with each unit comprised of (i) the Company's 8% month promissory note due 12
months from the date of issuance and (ii) warrants as described below. The
principal and accrued interest are due in one balloon payment at the end of the
twelve month period. Each purchaser of the note would receive warrants,
exercisable over a period of two years from the date of issuance, to purchase
16,250 shares of Common Stock for each $25 of principal loaned, at a per share
exercise price equal to the lower of $1.50 or 35% less than any the offering
price at an initial public offering of the Company's Common Stock during the
warrant exercise period. The maximum amount that can be raised under the
offering is $550. As of the date of the filing of this quarterly report on Form
10-QSB, the Company has raised $385 in gross proceeds from this offering.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR FINANCIAL
STATEMENTS AND THE NOTES RELATED TO THOSE STATEMENTS. SOME OF OUR DISCUSSION IS
FORWARD-LOOKING AND INVOLVES RISKS AND UNCERTAINTIES. FOR INFORMATION REGARDING
RISK FACTORS THAT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, REFER TO
THE RISK FACTORS SECTION OF THE ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED
DECEMBER 31, 2005.
OVERVIEW
SPO Medical Inc. is engaged in the design, development and marketing of
non-invasive pulse oximetry technologies to monitor blood oxygen saturation and
heart rate for a variety of markets, including medical, homecare, sports and
search & rescue. Pulse oximetry is a non-invasive process used to measure blood
oxygen saturation levels and is an established procedure in medical practice. We
utilize proprietary and patented technologies to deliver oximetry functionality
through innovative commercial products that address such applications as
emergency care, home monitoring, sleep apnea, cardiovascular performance,
cardiac rehabilitation and the physiological monitoring of military personnel
and safety care workers. We have developed and patented proprietary technology
that enables the use of pulse oximetry in a reflectance mode of operation (i.e.
a sensor that can be affixed to a single side of a body part). This technique is
known as Reflectance Pulse Oximetry (RPO). Using RPO, a sensor can be positioned
on various body parts, hence minimizing problems of motion and poor profusion.
The unique design features contribute to substantially lower electric power
requirements and enable a wireless, stand-alone configuration with expanded
commercial possibilities.
We were originally organized under the laws of the State of Delaware in
September 1981 under the name "Applied DNA Systems, Inc." On November 16, 1994,
we changed our name to "Nu-Tech Bio-Med, Inc." On December 23, 1998, we changed
our name to "United Diagnostic, Inc." Effective April 21, 2005, we acquired 100%
of the outstanding capital stock of SPO Ltd. pursuant to a Capital Stock
Exchange Agreement dated as of February 28, 2005 among the Company, SPO Ltd. and
the shareholders of SPO Ltd., as amended and restated on April 21, 2005 pursuant
to which we issued to the former shareholders of SPO Ltd. a total of 5,769,106
shares of the Company's Common Stock representing approximately 90% of the
Common Stock then issued and outstanding.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of
operations are based upon our unaudited consolidated financial statements, which
have been prepared in accordance with generally accepted accounting principles
in the United States. The preparation of these financial statements requires
management to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, we evaluate our estimates,
including those related to revenue recognition, bad debts, investments,
intangible assets and income taxes. Our estimates are based on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances. Actual results may differ from these estimates.
We have identified the accounting policies below as critical to our
business operations and the understanding of our results of operations.
REVENUE RECOGNITION
We generate revenues from sales of our products. Revenues are recognized
when delivery has occurred, persuasive evidence of an arrangement exists, the
vendor's fee is fixed or determinable, no further obligation exists and
collection of is probable and there are no remaining significant obligations.
Delivery is considered to have occurred upon delivery of products to the
reseller.
INVENTORY VALUATION
Inventories are stated at the lower of cost or market. Cost is determined
as follows: raw materials, components and finished products - on the first in
first out (FIFO) basis. Work-in-process - on the basis of direct manufacturing
costs.
8
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.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND THE THREE AND SIX
MONTHS ENDED JUNE 30, 2005 REVENUES.
Revenues are currently derived primarily from sales of our PulseOX 5500 TM
and Check Mate TM designed for the medical, homecare and sports markets.
Revenues for the three and six months ended June 30, 2006 were $890 and $1,591,
respectively. Revenues for the corresponding periods in 2005 were $368 and $742,
respectively. The increase in revenues during the 2006 periods reflected
increased sales of our products.
Under our current marketing strategy we rely on a limited number of
resellers in the United States, Europe and Asia to distribute our products. One
of these resellers accounted for a significant part of the revenues that we have
recorded to date. The loss of, or the significant decrease in purchases by this
reseller could have a material adverse effect on our results of operation.
COSTS OF REVENUES. Costs of revenues for the three and six months ended
June 30, 2006 were $459 and $829, respectively. Cost of revenues for the
corresponding periods in 2005 were $166 and $335, respectively. Cost of revenues
include all costs related to manufacturing and selling products and services and
consist primarily of direct material costs and salaries and related expenses for
personnel and royalties paid and accrued to third parties or government
agencies. This increase in cost of revenues during the 2006 periods is primarily
attributable to the increase in sales of our products and costs associated with
additional quality control processes on the introduction of new components into
the products.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
consist primarily of expenses incurred in the design, development and testing of
our products. These expenses consist primarily of salaries and related expenses
for personnel, contract design and testing and regulatory services, supplies
used and consulting and license fees and are net of any government grants and
development fees charged to third parties. Research and development expenses for
the three and six months ended June 30, 2006 were $193 and $345, respectively.
Research and development expenses for the corresponding periods in 2005 were
$177 and $259, respectively. The increase in research and development expenses
during the 2006 periods as compared to the 2005 periods is also attributable to
increased salary expenses and non cash expenses that we recorded as a result of
the implementation of FAS123R as well as expenses incurred in connection with
our continuing product enhancement efforts as well development costs associated
with new product development.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses consist
primarily of costs relating to compensation attributable to employees engaged in
sales and marketing activities, promotion, sales support, travel and related
expenses. Selling and marketing expenses for the three and six months ended June
30, 2006 were $161 and $302, respectively. Selling and marketing expenses for
the corresponding periods in 2005 were $124 and $236, respectively. The increase
in selling and marketing expenses during the 2006 periods is also attributable
to non cash expenses that we recorded as a result of the implementation of
FAS123R as well as increases in compensation costs.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
primarily consist of salaries and other related costs for personnel in executive
and other administrative functions. Other significant costs include professional
fees for legal, accounting services. General and administrative expenses for the
three and six months ended June 30, 2006 were $299 and $519 respectively.
General and administrative expenses for the corresponding periods in 2005 were
$228 and $334, respectively. The increase in general and administrative expenses
during the 2006 periods as compared to the 2005 period is primarily attributable
to higher compensation costs that we incurred in connection with the hiring of
new employees during 2005 and 2006 and other increased compensation costs and
non cash expenses that we recorded as a result of the implementation of FAS123R.
9
FINANCIAL EXPENSES, NET. Financial expense net, for the three and six
months ended June 30, 2006 were $363 and $1,302 respectively. Financial expenses
for the corresponding periods in 2005 were $41 and $99, respectively. The
increase in financial expenses, net, during the 2006 periods is primarily
attributable to non-cash expenses that we recorded in respect of stock based
compensation benefits as well the interest accrued on the loans advanced to the
company since April 2005.
NET LOSS. For the three and six months ended June 30, 2006 we had a net
loss of $585 and $1,706, respectively. Net loss for the corresponding periods in
2005 were $581 and $772, respectively. The increase in net loss during the 2006
periods is primarily attributable to the non-cash expense s that we recorded in
respect of deferred compensation benefits during these periods and which are
discussed above under "Financial Expenses, Net".
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2006, we had cash and cash equivalents of approximately $575,
compared to $493 at December 31, 2005.
We generated negative cash flow from operating activities of approximately
$357 during the six months ended June 30, 2006 compared to $703 for the
corresponding period in 2005.
From inception, we have financed our operations primarily from the sale of
our securities. Our recent financings are discussed below.
On February 1, 2006 the Company borrowed the principal amount of $150.
This loan bears interest at an annual rate of prime plus 4% and is repayable in
four equal installments every three calendar months through January 31, 2007.
The Company issued to the holder of this indebtedness a three year warrant to
purchase up to 60,000 shares of Common Stock at a per share exercise price of
$0.85. As of June 30, 2006, the Company repaid $39, representing principal and
accrued interest then due.
In January 2006 we and an institutional investor entered into an agreement
pursuant to which we agreed to sell to such investor shares of our Common Stock
at $0.70 per share for aggregate gross proceeds of $600. The private placement
was completed in June, and the Common Stock has been issued is fully paid.
In July 2006, we commenced a private placement of units of our securities
comprised of our (i) 8% promissory note that becomes due 12 months following
issuance and (ii) warrants as described below. The principal and accrued
interest on the promissory is scheduled to be paid in one balloon payment at the
end of the twelve month period. Each purchaser of the note would receive
warrants, exercisable over a period of two years form the date of issuance, to
purchase 16,250 shares of our Common Stock for each $25 of principal loaned, at
per share exercise price equal to the lower of $1.50 or 35% less than any the
offering price at an initial public offering of our Common Stock during the
warrant exercise period. The maximum amount that we can raise under the offering
is $550. As of the date of the filing of this quarterly report on Form 10-QSB,
we have raised $385 in gross proceeds from this offering.
In addition to the $1,500 we raised in December 2005 from the private
placement of our debt instruments and warrants, we obtained an extension of nine
months to the scheduled maturity of our convertible promissory notes
(collectively the "Notes") in the aggregate principal amount of $300. The Notes
bear interest at an annual rate of 8% and are payable on September 30, 2006. At
the election of the holder, the Notes are convertible into our Common Stock at a
per share price equal to the lesser of (i) 60% of the per share purchase price
of any security subsequently sold by us and (ii) $0.705.
We need to raise additional funds to be able to satisfy our cash
requirements over the next twelve months. Product development, corporate
operations and marketing expenses will continue to require additional capital.
Our current revenue from operations is insufficient to cover our current
operating expenses and projected expansion plans. We therefore are aggressively
seeking additional financing through the sale of our equity and/or debt
securities to satisfy future capital requirements until such time as we are able
to generate sufficient cash flow from revenues to finance on-going operations.
No assurance can be provided that additional capital will be available to us on
commercially acceptable or at all. Our auditors included a "going concern"
qualification in their auditors' report for the year ended December 31, 2005.
While we have raised approximately $985 in gross proceeds from the issuance of
our debt and equity securities since the beginning of 2006, such "going concern"
qualification may make it more difficult for us to raise funds when needed.
Additional equity financings may be dilutive to holders of our Common Stock.
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ITEM 3. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. We maintain disclosure
controls and procedures that are designed to ensure that information required to
be disclosed in our Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms, and
that such information is accumulated and communicated to management, including
our Chief Executive Officer and Chief Financial Officer, as appropriate, to
allow timely decisions regarding required disclosure based closely on the
definition of "disclosure controls and procedures" in Rule 13a-14(c).
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with participation of management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on the foregoing, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were
effective.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING. During the quarter
ended June 30, 2006, there have been no changes in our internal controls over
financial reporting that have materially affected, or are reasonably likely to
materially affect, these controls.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
During the six months ended June 30, 2006, we issued unregistered
securities as follows:
(i) In June 2006, we issued 857,143 shares of our Common Stock to an
accredited investor in consideration of $600 in gross proceeds.
All of the securities above were issued in transactions not involving a
public offering and were issued without registration in reliance upon the
exemption from registration afforded by Section 4(2) of the Securities Act of
1933, as amended, and Regulation D promulgated thereunder.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Our annual meeting of stockholders was held on June 12, 2006. The
following matters were voted on: (i) election of directors; and (ii) appointment
of auditors. The vote tally was as follows:
(i) Proposal to Elect Directors to Serve until the 2007 Annual Meeting of
Stockholders.
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FOR WITHHOLD
---------- --------
Michael Braunold 15,113,907 1,240
Sidney Braun 15,114,661 486
Pauline Dorfman 15,114,661 486
(ii) Proposal to ratify the appointment of Brightman Almagor & Co., a member of
Deloitte Touche Tohmatsu, as the Company's auditors for the year ending December
31, 2006.
FOR AGAINST ABSTAIN BROKER NON VOTES
---------- ------- ------- ----------------
15,114,935 149 63 0
All Proposals received the requisite number of votes and were carried.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS.
31.1 Certifications of Chief Executive Officer
31.2 Certifications of Chief Financial Officer
32.1 Section 1350 Certification
32.2 Section 1350 Certification
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SIGNATURES
In accordance with the requirements of the Exchange Act, the small business
issuer has caused this report to be signed by the undersigned thereunto duly
authorized.
DATE: September 19, 2006 SPO MEDICAL INC.
/s/ MICHAEL BRAUNOLD
--------------------------------------------
MICHAEL BRAUNOLD
PRESIDENT AND CHIEF EXECUTIVE OFFICER
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER
DATE: September 19, 2006
BY /s/ JEFF FEUER
--------------------------------------------
JEFF FEUER,
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
13