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 March 31, 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 May 18, 2006, SPO Medical Inc. had outstanding 17,529,433 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 March 31, 2006 (unaudited) and
December 31, 2005 1
Unaudited Consolidated Statements of Operations for three
months ended March 31, 2006 and 2005 2
Unaudited Consolidated Statements of Changes in Shareholders'
Deficiency 3
Unaudited Consolidated Statements of Cash Flows for the three
months ended March 31, 2006 and 2005 4
Notes to Consolidated Financial Statements 5
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
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 12
Item 5 - Other Information 12
Item 6 - Exhibits 12
SIGNATURES
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
MARCH 31, 2006
UNAUDITED
---------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 606
Trade receivables 318
Other accounts receivable and prepaid expenses 52
Inventories 552
-----------
$ 1,528
LONG-TERM INVESTMENTS
Deposits 11
Severance pay fund 136
-----------
147
PROPERTY AND EQUIPMENT, NET 75
-----------
TOTAL ASSETS $ 1,750
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Short-term loans $ 825
Short-term convertible loans 651
Trade payables 349
Employees and payroll accruals 177
Other payables and accrued expenses 472
-----------
2,474
LONG-TERM LIABILITIES
Long term loans 104
Accrued severance pay 261
-----------
365
STOCKHOLDERS' DEFICIENCY
Stock capital 175
Additional paid-in capital 5,458
Payments on account of shares 485
Accumulated deficit (7,207)
-----------
(1,089)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 1,750
===========
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
THREE MONTHS ENDED
MARCH 31,
----------------------------------
2006 2005
------------- -------------
UNAUDITED,
REVENUES $ 701 $ 373
Cost of revenues 352 154
------------- -------------
Gross profit 349 219
------------- -------------
Operating expenses
Research and development, net 170 97
Selling and marketing 141 112
General and administrative 220 106
Merger expenses - 37
------------- -------------
Total operating expenses 531 352
------------- -------------
OPERATING LOSS 182 133
Financial expenses, net 939 58
------------- -------------
LOSS FOR THE PERIOD $ 1,121 $191
============= =============
Basic and diluted loss per ordinary share $ (0.06) $ (0.06)
============= =============
Weighted average number of shares
outstanding used in computation of basic and
diluted loss per share 18,382,715 3,210,032
============= =============
The accompanying notes to these financial statements
are an integral part thereof.
2
SPO MEDICAL INC.
AND ITS SUBSIDIARY
CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS DEFICIENCY
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
ADDITIONAL PAYMENTS ON
SHARE PAID-IN DEFERRED ACCOUNT OF ACCUMULATED
CAPITAL CAPITAL COMPENSATION SHARES 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
consultants 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
Deferred stock-based compensation related
to options granted to consultant 746 746
Exercise of warrants by consultant 5 5
Amortization of deferred Stock-based
compensation related to options granted to
employees 40 40
Payments on account of shares 485 485
Net Loss (1,121) (1,121)
-------- ---------- ------------ -------- --------- ----------
BALANCE AS OF MARCH 31, 2006 $ 175 $ 5,458 $ - $ 485 $ (7,207) $ (1,089)
-------- ---------- ------------ -------- --------- ----------
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
THREE MONTHS ENDED
MARCH 31,
--------------------------------
2006 2005
----------- -----------
UNAUDITED,
CASH FLOWS FROM OPERATING ACTIVITIES
Loss for the period $ (1,121) $ (191)
Adjustments to reconcile loss to net cash used in operating
activities:
Depreciation 7 1
Stock-based compensation expenses 950 -
Decrease in accrued severance pay, net (4) (8)
Increase in accrued interest payable on loans 35 11
Changes in assets and liabilities:
Increase in trade receivables (119) (99)
Decrease (increase) in other receivables (10) 6
Increase in inventories (92) (16)
Increase (decrease) in accounts payable 124 (4)
Decrease in other payables and
accrued expenses (40) (25)
----------- -----------
Net cash used in operating activities (270) (325)
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in short-term investments (1) -
Purchase of property and equipment (34) (2)
----------- -----------
Net cash used in investing activities (35) (2)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of stock capital 5 -
Receipt of short-term loans 150 -
Receipt of long-term loans - 350
Repayment of short-term loans (222) -
Receipt of payments on account of shares 485 -
----------- -----------
Net cash provided by financing activities 418 350
Increase in cash and cash equivalents 113 23
Cash and cash equivalents at the beginning of the period 493 9
Cash and cash equivalents at the end of the period $ 606 $ 32
=========== ===========
NON CASH TRANSACTIONS
Conversion of short term loans $ - $ 259
=========== ===========
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 March 31, 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 months ended March 31, 2006, are not necessarily indicative of the
results that may be expected for the year ended December 31, 2006.
NOTE 2 -GOING CONCERN
As reflected in the accompanying financial statements, the Company's operations
for the three months ended March 31, 2006, resulted in a net loss of $1,121 and
the Company's balance sheet reflects a net stockholders' deficit of $1,090. 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 SFAS
No. 123(R). SFAS No. 123(R) requires employee share-based equity awards to be
accounted for under the fair value method, and eliminates the ability to account
for these instruments under the intrinsic value method prescribed by APB Opinion
No. 25 and allowed under the original provisions of SFAS No. 123. SFAS No.
123(R) requires the use of an option pricing model for estimating fair value,
which is then amortized to expense over the service periods. If we had adopted
SFAS 123(R) in prior periods, the impact of that standard would have
approximated the impact of SFAS 123 as described in the disclosure of pro forma
net income and income per share above. SFAS No. 123(R) allows for either
prospective recognition of compensation expense or retrospective recognition. In
the first quarter of 2006, we began to apply the prospective recognition method
and implemented the provisions of SFAS No. 123(R). In January 2005, the SEC
issued SAB No. 107, which provides supplemental implementation guidance for SFAS
No. 123(R). SFAS No. 123(R) became effective as of January 1, 2006.
5
NOTE 4:- NOTE
On February 1, 2005 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.
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). During the three months ended March 31, 2006,
the Company received $485 in gross proceeds from the agreed upon amount. The
remaining proceeds were received through May 2006. See Note 7 (Subsequent
Event).
NOTE 7: SUBSEQUENT EVENT
In April and May 2006, the Company received $50 in gross proceeds in respect of
the amounts due to it under the private placement referred to in Note 6
(Private Placement).
6
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.
7
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.
Stock-based compensation
In December 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 123(R). SFAS No. 123(R) requires employee share-based equity
awards to be accounted for under the fair value method, and eliminates the
ability to account for these instruments under the intrinsic value method
prescribed by APB Opinion No. 25 and allowed under the original provisions of
SFAS No. 123. SFAS No. 123(R) requires the use of an option pricing model for
estimating fair value, which is then amortized to expense over the service
periods. If we had adopted SFAS 123(R) in prior periods, the impact of that
standard would have approximated the impact of SFAS 123 as described in the
disclosure of pro forma net income and income per share above. SFAS No. 123(R)
allows for either prospective recognition of compensation expense or
retrospective recognition. In the first quarter of 2006, we began to apply the
prospective recognition method and implemented the provisions of SFAS No.
123(R). In January 2005, the SEC issued SAB No. 107, which provides supplemental
implementation guidance for SFAS No. 123(R). SFAS No. 123(R) will be effective
for us beginning in the first quarter of fiscal 2006
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 MONTHS ENDED MARCH 31, 2006 AND THE THREE MONTHS ENDED
MARCH 31, 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 months ended March 31, 2006 and 2005 were
$701,000 and $373,000, respectively. The increase in revenues during the 2006
period reflected increased sales of our products.
Under the 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.
8
COSTS OF REVENUES. Costs of revenues for the three months ended March
31, 2006 and 2005 were $352,000 and $154,000, 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. This increase in cost of revenues during the 2006 period 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 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 months ended March 31, 2006 and 2005 were $170,000 and
$97,000, respectively. The increase in research and development expenses during
the 2006 period as compared to the 2005 period is primarily 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 months ended March 31,
2006 and 2005 were $141,000 and $112,000, respectively. The increase in selling
and marketing expenses during the 2006 period is primarily attributable to non
cash expenses that we recoded 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 months ended March 31, 2006 and 2005 were $220,000 and
$106,000 respectively. The increase in general and administrative expenses
during the 2006 period 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,
increased accounting, legal and other professional expenses and non cash
expenses that we recorded as a result of the implementation of FAS123R.
FINANCIAL EXPENSES, NET. Financial expense net, for the three months
ended March 31, 2006 and 2005 were $939,000 and $58,000 respectively. The
increase in financial expenses, net, during the three months ended March 31,
2006 is primarily attributable to non-cash expenses that we recorded in respect
of deferred compensation benefits as well the interest accrued on the loans
advanced to the company since April 2005.
NET LOSS. For the three months ended March 31, 2006 and 2005 we had a
net loss of $1,121,000 and $191,000, respectively. The increase in net loss
during the three months ended March 31, 2006 is primarily attributable to the
non-cash expense that we recorded during the period and discussed above under
"Financial Expenses, Net".
9
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2006, we had cash and cash equivalents of approximately
$606,000, compared to $493,000 at December 31, 2005.
We generated negative cash flow from operating activities of
approximately $270,000 during the three months ended March 31, 2006 compared to
$325,000 for the three months ended March 31, 2005.
From inception, we have financed our operations primarily from the sale
of our securities. Our recent financings are discussed below.
In April 2005 we raised $1,544,000 from the private placement to
certain accredited of certain units of our securities, with each unit comprised
of (i) an 18 month 6% Promissory Note and (ii) three year warrants to purchase
up to such number of shares of our 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.
On February 1, 2006 the Company 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. 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.
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 for aggregate gross proceeds of $600,000. During the three months
ended March 31, 2006, we received $485,000 in gross proceeds in respect of this
private placement and, in April and May 2006, an additional $50,000 of the
remaining gross proceeds due were remitted to us.
In addition to the funds we raised, in December 2005, 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 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 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.
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 $535,000 in gross proceeds from the sale of
our debt securities to date 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.
10
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 March 31, 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 March 31, 2006, we issued unregistered
securities as follows:
(i) In February 2006, we issued to a service provider warrants,
exercisable over four-years from the date of issuance, to purchase up to 500,000
shares of our Common Stock at a per share exercise price of $0.01. The warrants
were vested on issuance. In February 2006, the warrants were exercised in full
upon payment of the aggregate exercise price of $5,000.
(ii) In connection with an advance of $150,000 made to us in February
2005, we issued to the lender a three year warrant to purchase up to 60,000
shares of Common Stock at a per share exercise price of $0.85.
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.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS.
10.1 Stock Purchase Agreement dated as of January 10, 2006 between SPO Medical
Inc. and the investor specified therein.
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: May 22, 2006 SPO MEDICAL INC.
/s/ MICHAEL BRAUNOLD
-------------------------------------
MICHAEL BRAUNOLD
PRESIDENT AND CHIEF EXECUTIVE OFFICER
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER
DATE: May 22, 2006
BY /s/ JEFF FEUER
-------------------------------------
JEFF FEUER,
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
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