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, 2005; or
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________ to ________
COMMISSION FILE NUMBER: 0-11772
SPO MEDICAL INC.
(Exact name of small business issuer as specified in its charter)
Delaware 25-1411971
(State or other jurisdictionof (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 January 27, 2006, SPO Medical Inc. had outstanding 17,029,407 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
Consolidated Balance Sheet June 30, 2005 (unaudited) and 1
December 31, 2004
Unaudited Consolidated Statements of Operations for the six and 2
three months ended June 30, 2005 and 2004
Unaudited Consolidated Statements of Cash Flows for the six and 3
three months ended June 30, 2005 and 2004
Notes to Consolidated Financial Statements 4
Item 2 - Management's Discussion and Analysis of Financial Condition 7
and Results of Operations
Item 3 - Controls and Procedures 11
PART II -- OTHER INFORMATION
Item 1 - Legal Proceedings 12
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds 12
Item 3 - Defaults upon Senior Securities 12
Item 4 - Submission of Matters to a Vote of Security Holders 12
Item 5 - Other Information 12
Item 6 - Exhibits and Reports on Form 8-K 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.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED INTERIM BALANCE SHEET
June 30 December 31
2005 2004
Unaudited Audited
----------- -----------
Assets
Current Assets
Cash and cash equivalents $ 106,247 $ 8,581
Short-term investments -- 32,601
Trade receivables 214,693 153,341
Other receivables 48,897 24,435
Inventory 255,175 --
----------- -----------
625,012 218,958
----------- -----------
Long-Term Investments
Deposits 5,317 5,182
Severance pay fund 95,498 83,135
----------- -----------
100,815 88,317
----------- -----------
Fixed Assets
Cost 86,281 63,841
Less - accumulated depreciation 46,482 43,440
----------- -----------
39,799 20,401
----------- -----------
$ 765,626 $ 327,676
=========== ===========
Liabilities and Shareholders' Deficiency
Current Liabilities
Short-term loans $ 307,097 $ 552,881
Trade payables 200,014 149,906
Other payables and accrued expenses 671,167 279,933
----------- -----------
1,178,278 982,720
----------- -----------
Long Term Liabilities
Accrued severance pay 227,970 118,732
Long Term Loans 826,581 --
----------- -----------
1,054,551 118,732
----------- -----------
Contingencies and Commitments
Shareholders' Deficiency
Share capital: 170,294 599,684
Additional paid-in capital 3,264,621 2,674,606
Deferred compensation (82,500) --
Deficit accumulated during the development stage (4,819,618) (4,048,066)
----------- -----------
(1,467,203) (773,776)
----------- -----------
$ 765,626 $ 327,676
=========== ===========
The accompanying notes are an integral part of the
consolidated financial Statements
1
SPO MEDICAL INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED INTERIM STATEMENTS OF OPERATIONS
Cumulative
from
January 1996
Six months Ended Three months Ended through
June 30, June 30, June 30,
2005 2004 2005 2004 2005
----------- ------------ ----------- ----------- ----------
Unaudited Unaudited Unaudited
-------------------------- ------------------------- ----------
Revenues
Sales of products $ 741,781 $ -- $ 368,431 $ -- $ 906,485
Research and development services -- -- -- -- 546,164
----------- ------------ ----------- ----------- ----------
Total revenues 741,781 -- 368,431 -- 1,452,649
Costs and expenses
Cost of revenues 306,183 -- 151,828 -- 575,860
Research and development, net 288,027 (5,427) 191,272 1,229 1,165,653
Selling and marketing 235,912 18,080 123,879 17,051 729,679
General and administrative 334,115 100,956 227,644 27,745 1,712,569
Merger expenses 250,530 30,191 213030 30,191 1,727,261
----------- ------------ ----------- ----------- ----------
Total costs and expenses 1,414,767 143,800 907,653 76,216 5,911,022
Operating loss 672,986 143,800 539,222 76,216 4,458,373
Financial expenses, net 98,566 137,700 40,994 122,005 361,245
----------- ------------ ----------- ----------- ----------
Loss for the period $ 771,552 $ 281,500 $ 580,216 $ 198,221 $4,819,618
=========== ============ =========== =========== ==========
Basic and diluted loss per ordinary share $ 0.04 $ 0.02 $ 0.03 $ 0.01
=========== ============ =========== ===========
Weighted average number of shares outstanding used
in computation of basic and diluted loss per share 17,475,790 15,303,628 17,475,790 15,303,628
=========== ============ =========== ===========
The accompanying notes are an integral part of the
consolidated financial Statements
2
SPO MEDICAL INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED INTERIM STATEMENTS OF CASH FLOWS
Cumulative
from
January 1996
Six months Ended Three months Ended through
June 30, June 30, June 30,
2005 2004 2005 2004 2005
--------- --------- --------- --------- -----------
Unaudited Unaudited Unaudited
--------- --------- --------- --------- -----------
Cash Flows from Operating Activities
Loss for the period ($771,552) ($281,500) ($580,216) ($198,221) ($4,819,618)
Adjustments to reconcile loss to net cash used
in operating activities:
Depreciation 3,042 356 1,946 606 47,113
Amortization of deferred stock-based compensation 82,500 -- 82,500 -- 1,946,510
Revaluation of short-term credit -- -- 0 -- (307)
Revaluation of long term deposits (136) -- 69 -- (67)
Increase (decrease) in accrued severance pay, net 96,875 (8,712) 105,167 (245) 132,472
Increase in accrued interest payable in
short-term loans 34,998 4,588 23,988 3,755 57,879
Beneficial conversion feature expense -- 115,000 -- 115,000 115,000
Changes in assets and liabilities:
Increase in Inventory (255,175) -- (238,954) -- (255,175)
Decrease (Increase) in trade receivables (61,352) -- 37,210 -- (214,693)
Decrease (increase) in other receivables (10,462) 12,315 (16,763) (24,740) (34,897)
Increase in account payables 50,108 31,935 54,246 37,319 200,014
Increase (decrease) in other payables and
accrued expenses 128,716 46,033 153,751 6,467 408,649
--------- --------- --------- --------- -----------
Net cash used in operating activities (702,438) (79,985) (377,056) (60,059) (2,417,120)
--------- --------- --------- --------- -----------
Cash Flows from Investing Activities
Decrease in short-term investments 32,601 -- 32,439 -- --
Increase in long-term deposits -- (4,964) -- (4,964) (5,250)
Purchase of fixed assets (22,440) (860) (20,013) (860) (88,778)
Proceeds from sale of fixed assets -- -- -- -- 1,866
---------------------------------------------------------------
Net cash provided by (used in) investing activities 10,161 (5,824) 12,426 (5,824) (92,162)
---------------------------------------------------------------
Cash Flows from Financing Activities
Issuance of share capital -- -- -- -- 1,295,280
Receipt of short-term loans -- 215,000 -- 115,000 269,528
Receipt of Long-term loans 814,943 -- 464,428 -- 1,114,943
Repayment of short-term loans (25,000) -- (25,000) -- (64,222)
--------- --------- --------- --------- -----------
Net cash provided by (used in) financing activities 789,943 215,000 439,428 115,000 2,615,529
--------- --------- --------- --------- -----------
Increase (decrease) in cash and cash equivalents 97,666 129,191 74,798 49,117 106,247
Cash and cash equivalents at the beginning of
the period 8,581 5,733 31,449 85,807 --
--------- --------- --------- --------- -----------
Cash and cash equivalents at the end of the period $ 106,247 $ 134,924 $ 106,247 $ 134,924 $ 106,247
========= ========= ========= ========= ===========
The accompanying notes are an integral part of the
consolidated financial Statements
3
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 condensed consolidated financial statements have been
prepared on the basis that the Company is a development stage company.
The accompanying unaudited 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, 2005
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 six and three months ended June 30, 2005, are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2005.
The accompanying unaudited condensed consolidated interim financial
statements have been prepared assuming the Company will continue as a going
concern. For the three months and six months ended June 30, 2005, the Company
incurred net losses of $580,216 and $771,552, respectively, and as of June 30,
2005 had a working capital deficiency of approximately $526,266 million. The
company also had as of June 30, 2005 a shareholders deficiency of $1,467,203. In
addition, management believes that the Company will continue to incur net losses
and cash outflows from operating activities through at least fiscal 2006. The
Company's ability to continue operating as a going concern is substantially
dependent on its ability to generate operating cash flow through the execution
of its business plan or secure funding sufficient to provide for the working
capital needs of its business. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded
assets, or the amounts and classification of liabilities that might be necessary
in the event the Company cannot continue in existence. There can be no assurance
that management will be successful in implementing its business plan or that the
successful implementation of such business plan will actually improve the
Company's operating results. During the six months ended June 30, 2005, the
Company raised approximately $814,943 in gross proceeds from the sale of debt
securities.
4
NOTE 2: - STOCK-BASED COMPENSATION
As permitted under Statement of Financial Accounting Standards ("SFAS")
No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure,"
which amended SFAS No. 123, "Accounting for Stock Based Compensation" ("SFAS
123"), the Company has elected to continue to follow the intrinsic value method
in accounting for its stock-based employee compensation arrangements, as defined
by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25"), and related interpretations including Financial
Accounting Standards Board Interpretations No. 44, "Accounting for Certain
Transactions Involving Stock Compensation," an interpretation of APB No. 25.
Under SFAS No. 123, the Company is required to disclose pro forma
information regarding net loss and loss per share determined as if the Company
had accounted for its employee stock options under the fair value method of that
statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes Option Valuation model with the following weighted-average
assumptions for the six months ended June 30, 2005: weighted-risk-free interest
rate of 3.70% for each the period ended June 30, 2005, with dividend yields of
0% for the period, volatility factors of the expected market price of the
Company's Common Stock of 1.82 and weighted-average expected life of the options
of 1.92 years. Stock compensation, for pro forma purposes, is amortized over the
vesting period.
The following table illustrates the effect on net loss and loss per share
as if the fair value method had been applied to all outstanding and unvested
awards in each period:
Six Three
months months
ended ended
June 30 June 30
2005 2005
-------- --------
Net Loss, as reported $771,552 $580,216
Less: Total stock compensation expense as
determined under fair value method for
all grants 30,833 30,833
-------- --------
Pro-forma net loss 802,385 611,049
======== ========
Basic and fully diluted Loss per share
as reported 0.04 0.03
======== ========
Basic and fully diluted Loss per share
pro-forma 0.05 0.03
======== ========
NOTE 3:- CONVERTIBLE NOTES AND OTHER DEBT
Private Placement
In order to facilitate the Acquisition Transaction and to raise working
capital, on April 21, 2005 the Company commenced a private placement (the "2005
Private Placement") to certain accredited investors to raise up to $1,150,000 by
the sale of units of its securities, with each unit comprised of (i) an 18 month
6% Promissory Note (the "Notes") and (ii) three-year warrants (the "Warrants")
to purchase up to such number of shares of Common Stock of the Company as are
determined by the principal amount of the Note purchased by such investor
divided by $ 0.85, at a per share exercise price of $0.85. As of June 30, 2005,
an aggregate of $514,943 in principal amount of notes were sold to accredited
investors and, in connection therewith, warrants to purchase up to approximately
605,815 shares of the Company's common stock were issued. Subsequently, the
Company increased to $1,500,000 the maximum amount that can be raised under the
2005 Private Placement.
5
The securities were issued in reliance upon an exemption from registration
under the Securities Act of 1933, as amended.
Notes
(i) In January 2005, the Company issued to each of 10 investors its
convertible promissory note (collectively the "Notes") in the aggregate
principal amount of $300,000. The Notes, which were amended in December 2005,
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 the Company's Common
Stock at a per share price (the "Exercise Price") equal to the lesser of (i) 60%
of the per share purchase price of any Company security subsequently sold by the
Company and (ii) $0.705.
In addition, the Company issued to three of the holders of the Notes, as
compensation for the amounts raised from the Notes, warrants, exercisable
through April 21, 2008, to purchase such number of shares of Common Stock as is
determined by dividing $30,000 by the Exercise Price.
(ii) In August 2004 the Company renegotiated with a lender the extension
of the scheduled maturity date of indebtedness in the principal amount of
$140,000 that was originally scheduled to mature on October 12, 2005. The
maturity of $100,000 of the original principal amount of this indebtedness was
extended to March 31, 2006 and, on December 22, 2005, $47,496 of the remaining
principal amount and accrued interest was repaid. In consideration of the
extension of the principal amount of $100,000, the Company paid to the lender a
one time arrangement fee of $19,500 and issued to the holder of the debt a three
year warrant to purchase up to 15,000 shares of Common Stock at a per share
price of $0.75.
(iii) On September 6, 2005 the Company borrowed the principal amount of
$100,000. The principal amount of this loan, plus $10,000 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.
NOTE 4: REPAYMENT OF OUTSTANDING DEBT
In April 2004, prior to the consummation of the Acquisition Transaction,
SPO Ltd. issued to each of two entities its one-year promissory note in the
principal amount of $57,500 in consideration of funds loaned to SPO Ltd. to
cover certain of its costs that were incurred prior to its acquisition by the
Company. Interest accrued on the loans at a per annum rate of 10% through
maturity. The notes were not repaid at maturity.
On November 10, 2005, the Company paid $144,149 to the note holders in
full settlement of all obligations under these notes. This amount included
$26,649 in interest, charged by the lenders at the rate 18% retroactive to
November 2004 as required under the default terms of the notes.
NOTE 5: SUBSEQUENT EVENT
The Company increased to $1,500,000 the maximum amount that can be raised
under the 2005 Private Placement referred to in Note 3. As of January 2006, the
Company has raised the entire gross amount of the 2005 Private Placement.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND 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 COMPANY'S CURRENT REPORT ON FORM 8-K FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 27, 2005, AS AMENDED ON NOVEMBER
9, 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.
There are two methods to measure pulse oximetry by transmission through a
body part or by reflection. In general, the transmission method can only be used
on certain areas of the body, such as fingers, earlobes, etc. Furthermore, in
some instances when the transmission method is used, physiological conditions
such as stress and temperature can adversely affect the accuracy of pulse
oximetry readings.
Since pulse oximetry measurements taken on-site in an emergency, at local
medical practices, and/or in home care can save lives and curtail intervention
costs, mobile units have been developed. However, mobile oximetry units have not
been widely adopted because their power requirements (and hence limited battery
life) often make them impractical. In addition, existing mobile units require
patients to remain absolutely stationary to produce reliable results, further
reducing their practicality.
Responding to the need for life-saving information in the field where
people cannot be absolutely stationary, SPO Ltd. developed patented sensors that
work accurately during mild physical activity. This technique uses a reflectance
method (known as RPO) whereby a very small sensor placed on the body at various
locations has the ability to measure oxygen saturation and heart pulse rate. SPO
Ltd. has incorporated its patented reflectance technology into portable devices
for medical and consumer applications. Moreover, these devices operate at a
power requirement approximately 1/50th of that compared to other commercially
available portable systems. This puts pulse oximetry into the hands medical
practitioners and emergency personnel on-site for the safety and benefit of all
and offers the opportunity to create new commercial and consumer applications.
7
Products
The following are the products of the Company utilizing its unique pulse
oximetry technology.
PulseOx 5500TM -- a stand-alone commercial RPO spot check monitor for SpO2
and heart rate. The PulseOx 5500TM uses SPO patented technology to provide a
medical device which is easier to use for many patients and less expensive to
operate than any other device available. Its main advantages include: (i) long
lasting battery with more than 1,000 hours, using only a fraction of the power
used by competitive devices and (ii) resistance to many forms of motion,
reducing its susceptibility to the motion artifacts which are typical of other
pulse oximetry devices. The PulseOx 5500 was first introduced commercially
during the fourth quarter of 2004. The device was approved and registered by the
Federal Drug Administration (" FDA") in June 2004. The device also carries the
CE (European Directives 93/42/EEC and 90/385/EEC for regulatory and safety
standards of medical equipment) and Canadian Standards Association (CSA) mark
for safety and audited manufacturing processes, all of which were obtained in
February 2005.
Check MateTM--- addresses the sports and aviation markets' demand for a
lightweight, inexpensive monitor for measuring SpO2 and heart rate during
physically active and high-altitude activities. It offers the user a greater
ability to monitor these vital signs under motion and is less expensive than
most other available devices. The Check Mate was first introduced commercially
during third quarter of 2005. The Check Mate does not require FDA approval or
registration. It carries the CE and CSA mark for safety and audited
manufacturing processes.
Products Under Design and Development
The Company currently has in various stages of development other devices
utilizing its oximetry technology. These include the following:
PulseOx 7500TM --a monitor for extended monitoring of SpO2 and heart rate
by means of RPO. It is being designed for maximum user comfort and ease-of-use.
It uniquely places the sensor at the base of the finger so it operates as a ring
sensor which is more comfortable for the user.
PedOMetrixTM -- a monitor being designed specifically for the use with
infants. This unique monitor is being designed for continual non-invasive
monitoring of a baby's SpO2 and heart rate.
Corporate History
SPO Medical Inc. 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." and
on December 23, 1998, the Company changed its name to "United Diagnostic, Inc."
Effective April 21, 2005, SPO Medical Inc. 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 SPO Medical Inc., SPO Ltd. and the shareholders of SPO Ltd., as amended
and restated on April 21, 2005. In exchange for the outstanding capital stock of
SPO Ltd., SPO Medical Inc. issued to the former shareholders of SPO Ltd. a total
of 5,769,106 shares of its 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 our wholly owned subsidiary of the
Company as of April 21, 2005 and, subsequent to the Acquisition Transaction, we
changed our name to "SPO Medical Inc." Upon consummation of the Acquisition
Transaction, we effected a forward subdivision of our Common Stock issued and
outstanding on a 2.65285:1 basis.
8
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. Revenues from product sales are recognized when
delivery has occurred, persuasive evidence of an agreement exists, the vendor's
fee is fixed or determinable, no further obligation exists and collection is
probable. Delivery is considered to have occurred upon delivery of products to
the reseller.
Inventory Valuation. Inventory is valued at the lower of cost or market
value determined on the first-in, first-out (FIFO) basis. Costs include
materials, direct and indirect labor and overhead.
Other Accrued Expenses. We also maintain other accrued expenses. These
accruals are based on a variety of factors including past experience and various
actuarial assumptions and, in many cases, require estimates of events not yet
reported to us. If future experience differs from these estimates, operating
results in future periods would be impacted.
The discussion of financial results for the periods prior to the
Acquisition Transaction refer to the financial results of SPO Ltd.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2005 AND THE THREE
MONTHS AND SIX MONTHS ENDED JUNE 30, 2004
Revenues. Revenues are currently derived primarily from sales of our
PulseOx 5500 TM designed for the medical and homecare markets. Revenues for the
three and six months ended June 30, 2005 were $368,431 and $741,781,
respectively. There were no revenues generated in the corresponding periods in
2004. Revenues in 2004 were first generated in the third quarter primarily from
sales of our PulseOX 5500 product.
Costs of Revenues. Costs of revenues for the three months and six months
ended June 30, 2005 were $151,828 and $306,183, respectively. No revenues were
generated during the corresponding periods in 2004. 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.
9
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 services, supplies used and
consulting and license fees paid to third parties 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, 2005 were $191,272 and
$288,027, respectively, compared to $1,229 and $(5,427) during the corresponding
periods in 2004. The increase in research and development expenses during the
2005 periods as compared to the 2004 periods is primarily attributable to the
increase in employee related compensation costs.
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, 2005 were $123,879 and $235,912, respectively, compared to $17,051 and
$18,080 for the corresponding periods in 2004. The increase in sales and
marketing costs during the 2005 period as compared to the 2004 periods is
primarily attributable to the increased sales costs incurred in connection with
the distribution of our PulseOX 5500 product.
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, 2005 were $227,644 and $334,115 compared to
$27,745 and $100,956 for the corresponding periods in 2004. The increase in
general and administrative expenses during the 2005 periods as compared to the
2004 periods is primarily attributable to higher employee compensation costs and
higher accounting and legal and professional expenses.
FINANCIAL EXPENSES, NET. Financial expense net, for the three months and
six months ended June 30, 2005 were $40,994 and $ 98,566 respectively, compared
to $122,005 and $137,700 for the corresponding periods in 2004. The amounts
recorded during the 2004 periods include a one time charge for beneficial
conversion of $115,000 resulting from the accounting treatment accorded to
certain loans that were incurred prior to the Acquisition Transaction and that
were repaid in November 2005.
Net Loss. For the three months and six months ended June 30, 2005 we had a
net loss of $580,216 and $771,552, respectively, compared with a net loss during
the corresponding periods in 2004 of $198,221 and $281,500, respectively.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2005, we had cash and cash equivalents of approximately
$106,247, compared to $134,924 at June 30, 2004.
We generated negative cash flow from operating activities of approximately
$377,056 during the three months ended June 30, 2005 compared to $60,059 for the
three months ended June 30, 2004. We generated negative cash flow from operating
activities of approximately $702,438 in the six months ended June 30, 2005
compared to $79,985 for the six months ended June 30, 2004.
From inception, we have financed our operations primarily from the sale of
our securities. Our recent financings are discussed below.
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In January 2005, we raised an aggregate of $300,000 from the issuance of
one-year convertible notes. The notes bear interest at an annual rate of 8% and
are convertible into shares of our Common Stock upon certain specified
conditions.
In April 2005, we commenced a private placement (the "2005 Private
Placement") to certain accredited investors of up to $1,150,000 by the sale of
units of our securities, with each unit comprised of (i) its 18 month 6%
Promissory Note and (ii) three year warrants to purchase up to such number of
shares of Common Stock of the Company as are determined by the principal amount
of the Note purchased by such investor divided by $ 0.85, in each case at a per
share exercise price of $0.85. We subsequently increased to $1,500,000 the
amount that can be raised under the 2005 Private Placement. As of January 2006,
we raised the maximum amount of the 2005 Private Placement.
In September 2005 the Company borrowed the principal amount of $100,000.
The principal amount of this loan, plus $10,000 in arrangement fees was repaid
on January 16, 2006.
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 terms or at all. Our auditors included a "going concern"
qualification in their auditors' report for the year ended December 31, 2004.
While we have raised approximately $1.5 million in gross proceeds from the sale
of our debt securities between April 2005 and January 2006, such "going concern"
qualification may make it more difficult for us to raise funds. Additional
equity financings may be dilutive to holders of our Common Stock.
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, 2005, 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.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
During the three months ended June 30, 2005, we issued unregistered
securities as follows:
In connection with the 2005 Private Placement, the Company issued to
investors its 18 month Promissory Note in the aggregate principle amount of
$514,943 and (ii) three-year warrants to purchase up to 605,815 shares of Common
Stock, at a per share exercise price of $0.85 for gross cash proceeds of
$514,943.
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.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.1 Employment Agreement effective as of May 18, 2005 between SPO Medical Inc.
and Michael Braunold.
10.2 Employment Agreement effective as of May 18, 2005 between SPO Medical
Equipment Ltd. and Michael Braunold.
10.3 Employment Agreement effective as of May 18, 2005 between SPO Medical Inc.
and Richard Ryan.
31.1 Rule 13a-14(a) / 15d-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a) / 15d-14(a) Certification 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: JANUARY 31, 2006 SPO MEDICAL INC.
/s/ MICHAEL BRAUNOLD
--------------------
MICHAEL BRAUNOLD
CHIEF EXECUTIVE OFFICER
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER
DATE: JANUARY 31, 2006
BY /s/ JEFF FEUER
-----------------
JEFF FEUER,
CHIEF FINANCIAL OFFICER
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