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 September 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 November 13, 2006, SPO Medical Inc. had outstanding 19,335,525 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 September 30, 2006 3
Unaudited Consolidated Statements of Operations for the
nine and three months ended September 30, 2006 and 2005 4
Unaudited Statements of Changes in Stockholders'
Deficiency 5
Unaudited Consolidated Statements of Cash Flows for
the nine and three months ended September 30, 2006 and 2005 6
Notes to Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3 - Controls and Procedures 13
PART II -- OTHER INFORMATION
Item 1 - Legal Proceedings 13
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds 13
Item 3 - Defaults upon Senior Securities 13
Item 4 - Submission of Matters to a Vote of Security Holders 13
Item 5 - Other Information 13
Item 6 - Exhibits 14
SIGNATURES 15
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
September 30,
2006
Unaudited
---------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 854
Trade receivables 534
Other accounts receivable and prepaid expenses 89
Inventories 662
--------
$ 2,139
LONG-TERM INVESTMENTS
Deposits 11
Severance pay fund 190
--------
201
PROPERTY AND EQUIPMENT, NET 86
--------
Total assets $ 2,426
----- ========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities
Short-term loans $ 245
Trade payables 318
Employees and payroll accruals 211
Other payables and accrued expenses 809
--------
1,583
Long-Term Liabilities
Long-term loans 1,293
Accrued severance pay 306
--------
1,599
STOCKHOLDERS' DEFICIENCY
Stock capital 193
Additional paid-in capital 9,653
Accumulated deficit (10,602)
--------
(756)
Total liabilities and stockholders' deficiency $ 2,426
----- ========
The accompanying notes to these financial statements are an integral part
thereof.
3
SPO MEDICAL INC.
AND ITS SUBSIDIARY
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
U.S. dollars in thousands except share data
Nine months ended Three months ended
---------------------------- ----------------------------
September 30, September 30
2006 2005 2006 2005
------------ ------------ ------------ ------------
Unaudited Unaudited
---------------------------- ----------------------------
Revenues $ 2,520 $ 1,224 $ 929 $ 482
Cost of revenues 1,264 528 435 193
------------ ------------ ------------ ------------
Gross profit 1,256 696 494 289
------------ ------------ ------------ ------------
Operating expenses
Research and development, net 549 399 204 140
Selling and marketing 463 377 161 141
General and administrative 716 545 197 211
Merger expenses -- 251 -- --
------------ ------------ ------------ ------------
Total operating expenses 1,728 1,572 562 492
------------ ------------ ------------ ------------
Operating loss 472 876 68 203
Financial expenses, net 4,044 182 2,742 83
------------ ------------ ------------ ------------
Loss for the period $ 4,516 $ 1,058 $ 2,810 $ 286
============ ============ ============ ============
Basic and diluted loss per ordinary share $ (0.24) $ (0.06) $ (0.15) $ (0.02)
============ ============ ============ ============
Weighted average number of shares outstanding used in
computation of basic and diluted loss per share 18,690,751 17,475,790 19,239,858 17,475,790
============ ============ ============ ============
The accompanying notes to these financial statements are an integral part
thereof.
4
SPO MEDICAL INC.
AND ITS SUBSIDIARY
CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS DEFICIENCY
--------------------------------------------------------------------------------
U.S. dollars in thousands
Additional
Stock 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 loans -- 429 -- -- 429
Deferred stock-based compensation related to
options granted to consultants -- 752 -- -- 752
Exercise of warrant by consultant 5 -- -- -- 5
Exercise of convertible note 9 560 -- -- 569
Benefit resulting from changes to warrant terms -- 2,534 -- -- 2,534
Amortization of deferred Stock-based compensation
related to options granted to employees -- 130 -- -- 130
Amortization of deferred Stock-based compensation
related to options granted to directors -- 71 -- -- 71
Issuance of ordinary shares 9 571 -- -- 580
Net Loss -- -- -- (4,516) (4,516)
-------- -------- -------- -------- --------
Balance as of September 30, 2006, Unaudited $ 193 $ 9,653 $ -- $(10,602) $ (756)
-------- -------- -------- -------- --------
The accompanying notes to these financial statements are an integral part
thereof.
5
SPO MEDICAL INC.
AND ITS SUBSIDIARY
CONDENSED INTERIM STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. dollars in thousands
Nine months ended Three months ended
------------------ ------------------
September 30, September 30,
2006 2005 2006 2005
------- ------- ------- -------
Unaudited Unaudited
------------------ ------------------
Cash Flows from Operating Activities
Loss for the period $(4,516) $(1,058) $(2,810) $ (286)
Adjustments to reconcile loss to net cash used in operating
activities:
Depreciation 17 5 5 2
Stock-based compensation expenses 952 82 50 --
Amortization of loan discounts, net 625 -- 148 --
Benefit resulting from changes to warrant terms 2,534 -- 2,534 --
Increase (decrease) in accrued severance pay, net (13) 93 (7) (4)
Increase in accrued interest payable on loans 114 55 45 20
Changes in assets and liabilities:
Decrease (increase) in trade receivables (335) (36) (83) 25
Decrease (increase) in other receivables (47) 10 (41) 20
Increase in inventories (202) (307) (160) (51)
Increase in accounts payable 93 83 1 33
Increase (decrease) in other payables and
accrued expenses 331 115 228 (14)
------- ------- ------- -------
Net cash used in operating activities (447) (958) (90) (255)
Cash Flows from Investing Activities
Decrease in short-term investments -- 33 -- --
Increase in long-term deposits (1) (5) -- (5)
Purchase of property and equipment (55) (29) (21) (7)
------- ------- ------- -------
Net cash used in investing activities (56) (1) (21) (12)
Cash Flows from Financing Activities
Issuance of ordinary shares, net 580 -- -- --
Exercise of warrant by consultant 5 -- -- --
Receipt of short-term loans 152 100 68 100
Receipt of long-term loans -- 1,536 -- 721
Repayment of short-term loans (301) (40) (40) (15)
Proceeds on grant of exercisable warrants 428 -- 362 --
------- ------- ------- -------
Net cash provided by financing activities 864 1,596 390 806
Increase in cash and cash equivalents 361 637 279 539
Cash and cash equivalents at the beginning of the period 493 8 575 106
------- ------- ------- -------
Cash and cash equivalents at the end of the period $ 854 $ 645 $ 854 $ 645
======= ======= ======= =======
Non cash transactions:
Conversion of convertible notes $ 569 $ -- $ 569 $ --
======= ======= ======= =======
The accompanying notes to these financial statements are an integral part
thereof.
6
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 September 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 nine months ended September 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 nine and three months ended September 30, 2006, resulted in a net loss
of $4,596 and $2,890 respectively, and the Company's balance sheet reflects a
net stockholders' deficit of $756. 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.
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 nine and three months ended
September 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."
7
The pro-forma information for the nine months and three months ended September
30, 2005 is as follows:
NINE MONTHS THREE MONTHS
ENDED ENDED
September 30, September 30,
------------ ------------
2005 2005
--------- ---------
UNAUDITED UNAUDITED
--------- ---------
Net loss, as reported $1,058 $286
Deduct: Total stock-based compensation
expense determined under fair value
method for all awards 31 31
------- -------
Pro forma net loss $1,089 $317
======= =======
Basic and diluted net loss per share, as
reported $ 0.06 $ 0.02
======= =======
Basic and diluted net loss per share, pro forma $ 0.06 $ 0.02
======= =======
8
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 September 30, 2006, the Company repaid $78
representing principal and accrued interest then due.
NOTE 5: CONVERSION OF OUTSTANDING DEBT
In January 2005, the Company issued to 10 investors its convertible promissory
notes (collectively the "Notes") in the aggregate principal amount of $300. The
Notes became payable on September 30, 2006 and bore interest at an annual rate
of 8%. By their terms, at the election of the holder the Notes are convertible
into the Company's Common Stock at a per share 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. All the holders of these convertible promissory
notes elected to convert the principal and the accrued interest. The conversion
resulted in the issuance to these investors of a total of 948,949 shares of the
Company's Common Stock.
NOTE 6: AMENDMENT TO APRIL 2005 PRIVATE PLACEMENT
In December 2005 the Company completed the private placement to certain
accredited investors that it commenced in April 2005 for the issuance of up to
$1,544 of units of its securities, with each unit comprised of (i) the Company's
18 month 6% promissory note (collectively, the "April 2005 Notes") and (ii)
three year warrants to purchase up to such number of shares of the Company's
Common Stock as are determined by the principal amount of the Note purchased by
such investor divided by $ 0.85 (collectively the "April 2005 Warrants"). In
September 2006, the Company offered to the holders of the April 2005 Notes to
revise certain of the terms of the original offering in order to facilitate an
extension to the scheduled maturity date of the Note, (hereinafter the
"Amendment"). The Amendment provides that (a) the maturity date of the April
2005 Notes is to be extended by one year from the original maturity date on the
original note, (b) the exercise period of the April 2005 Warrants is to be
extended from three to five years and the per share exercise price was adjusted
to $0.60 and (c) the interest rate on the amounts outstanding under the April
2005 Notes was increased to 8% per annum, effective July 12, 2006. The Amendment
also provides that if the Company subsequently issues shares of its Common Stock
at an effective per share exercise price less than that of the adjusted per
share exercise price of the April 2005 Warrants during the adjusted exercise
period, then the exercise price thereof is to be reduced to such lower exercise
price; provided, that, this protection will not apply to certain Company equity
or debt issuances (i) from approved stock option plans to employees, directors
and other service providers, (ii) upon exercise of options and warrants
outstanding as of September 27, 2006 and (iii) to Company consultants that an
unaffiliated third party would deem to be commercially reasonable and fair. In
addition, the Amendment also provides that, subject to certain qualifications,
the Company's obligation to file a registration statement under the Securities
Act of 1933, as amended, relating to the resale of the Company's Common Stock
underlying the April 2005 Warrants is extended to April 15, 2007.
The Amendment was effective as of September 30, 2006 and the accounting costs
related to the Amendment has been fully recognized in the current accounting
period. This has resulted in a one time non-cash finance expense in the amount
of $2,500.
NOTE 7: 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 8: JULY 2006 PRIVATE PLACEMENT
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 Company raised $550, which is the maximum amount
that can be raised under the offering. As at September 30, 2006 the Company had
recorded $430.
9
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 our common stock, par value $0.01 (the "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 principally from sales of our products. Revenues
from the sale of products 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 deemed to have occurred upon
shipment of products from distribution center of the Company.
We also generate revenues from the provision of research and
development services. Revenues generated from research and development services
are recognized when such services are performed.
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.
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.
10
RESULTS OF OPERATIONS
COMPARISON OF THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2006 AND THE NINE
AND THREE MONTHS ENDED SEPTEMBER 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 nine and three months ended September 30, 2006 were
$2,520,000 and $929,000 respectively. Revenues for the corresponding periods in
2005 were $1,224,000 and $482,000 respectively. The increase in revenues during
the 2006 periods primarily reflects 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.
Currently, two 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 such resellers could have a material adverse effect on our results of
operation.
COST OF REVENUES. Cost of revenues for the nine and three months ended
September 30, 2006 were $1,264,000 and $435,000, respectively. Cost of revenues
for the corresponding periods in 2005 were $528,000 and $193,000 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. The 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 relating to 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 nine and three months ended September 30, 2006 were $549,000 and $204,000,
respectively. Research and development expenses for the corresponding periods in
2005 were $399,000 and $140,000, respectively. The increase in research and
development expenses during the 2006 periods as compared to the 2005 periods is
also attributable to increased compensation and facility lease 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 and 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 nine and three months ended
September 30, 2006 were $463,000 and $161,000, respectively. Selling and
marketing expenses for the corresponding periods in 2005 were $377,000 and
$141,000, respectively. The increase in selling and marketing expenses during
the 2006 periods is also attributable to increased compensation expenses and non
cash expenses that we recorded as a result of the implementation of FAS 123R 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 and accounting services. General and administrative
expenses for the nine and thee months ended September 30, 2006 were $716,000 and
$197,000 respectively. General and administrative expenses for the corresponding
periods in 2005 were $545,000 and $211,000, respectively. The increase in
general and administrative expenses during the 2006 periods as compared to the
2005 period is primarily attributable to increased 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 FAS 123R.
FINANCIAL EXPENSES, NET. Financial expense net, for the nine and three
months ended September 30, 2006 were $4,044,000 and $2,742,000 respectively.
Financial expenses for the corresponding periods in 2005 were $182,000 and
$83,000, 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, of which $2,500,000 is
attributable to the amendment to the April 2005 Notes discussed further below.
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NET LOSS. For the nine and three months ended September 30, 2006 we had
a net loss of $4,516,000 and $2,810,000, respectively. Net loss for the
corresponding periods in 2005 were $1,058,000 and $286,000, respectively. The
increase in net loss during the 2006 periods is primarily attributable to the
non-cash expenses that we recorded in respect of stock based compensation
benefits during these periods, which are discussed above under "Financial
Expenses, Net".
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2006, we had cash and cash equivalents of
approximately $854,000, compared to $493,000 at December 31, 2005.
We generated negative cash flow from operating activities of
approximately $447,000 during the nine months ended September 30, 2006 compared
to $958,000 for the corresponding period in 2005.
In December 2005 we completed the private placement to certain
accredited investors that we commenced in April 2005 for the issuance of up to
$1,544,000 of units of our securities, with each unit comprised of (i) our 18
month 6% promissory note (collectively, the "April 2005 Notes") and (ii) three
year warrants to purchase up to such number of shares of our Common Stock as are
determined by the principal amount of the Note purchased by such investor
divided by $ 0.85 (collectively the "April 2005 Warrants"). In September 2006,
we offered to the holders of the April 2005 Notes to revise certain of the terms
of the original offering in order to facilitate an extension to the scheduled
maturity date of the Note, (hereinafter the "Amendment"). The Amendment provides
that (a) the maturity date of the April 2005 Notes is to be extended by one year
from the original maturity date on the original note, (b) the exercise period of
the April 2005 Warrants is to be extended from three to five years and the per
share exercise price was adjusted to $0.60 and (c) the interest rate on the
amounts outstanding under the April 2005 Notes was increased to 8% per annum,
effective July 12, 2006. The Amendment also provides that if we subsequently
issue shares of our Common Stock at an effective per share exercise price less
than that of the adjusted per share exercise price of the April 2005 Warrants
during the adjusted exercise period, then the exercise price thereof is to be
reduced to such lower exercise price; provided, that, this protection will not
apply to certain of our equity or debt issuances (i) from approved stock option
plans to employees, directors and other service providers, (ii) upon exercise of
options and warrants outstanding as of September 27, 2006 and (iii) to our
consultants that an unaffiliated third party would deem to be commercially
reasonable and fair. In addition, the Amendment also provides that, subject to
certain qualifications, our obligation to file a registration statement under
the Securities Act of 1933, as amended, relating to the resale of our Common
Stock underlying the April 2005 Warrants is extended to April 15, 2007.
The Amendment became effective as of September 30, 2006. The Amendment
resulted in a one time non-cash finance expense in the amount of $2,500,000
being recognized in the current period. As of November 13, 2006, holders of
Notes in the principal amount $489,000 have signed the Amendment and the holder
of a note in the principal amount of $50,000 which is scheduled to mature on
November 30, 2006, has requested repayment of principle and accrued interest.
The Company is currently in contact with the remaining note holders of the April
2005 Notes with respect to obtaining their formal execution of the Amendment.
From inception, we have financed our operations primarily from the sale
of our securities. Our recent financings in 2006 are discussed below.
On February 1, 2006 we borrowed the principal amount of $150,000. 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. We
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
September 30, 2006, we repaid $78,000, 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 $600,000. The
private placement was completed in June 2006.
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 $25,000 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 $550,000. As of the date of the filing of this quarterly
report on Form 10-QSB, we have raised $550,000 in gross proceeds from this
offering.
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Additionally, 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 $300,000. The Notes became payable
on September 30, 2006; interest accrued at a per annum rate of 8%. 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. In September 2006, the
outstanding principal and accrued interest were converted into 948,949 shares of
our Common Stock.
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 $1,300,000 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.
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 September 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 three months ended September 30, 2006, we issued
unregistered securities as follows:
(i) In September 2006, we issued 948,949 shares of our Common Stock
upon the conversion of $342,000 in principal and accrued interest of notes that
the Company issued.
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.
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ITEM 6. EXHIBITS.
4.1 Form of Promissory Note issued in connection with the
Subscription Agreement referred to in Item 10.1
4.2 Form of Warrant issued in connection with the Agreement referred
to in Item 10.1
10.1 Form of Subscription Agreement between the Company and certain
Buyers
10.2 Form of First Amendment to Subscription Agreement between the
Company and parties thereto.
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: November 14, 2006 SPO MEDICAL INC.
/s/ MICHAEL BRAUNOLD
-------------------------------------------
MICHAEL BRAUNOLD
PRESIDENT AND CHIEF EXECUTIVE OFFICER
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER
DATE: November 14, 2006 BY /s/ JEFF FEUER
-------------------------------------------
JEFF FEUER,
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
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