M-WISE, INC.
6,000,000 SHARES OF COMMON STOCK
The 6,000,000 shares of our common stock are being offered by the selling
stockholders. The expenses of the offering, estimated at $80,000, will be paid
by us and Hilltek Investments Limited, the selling stockholder herein. We will
not receive any proceeds from the sale of shares by the selling stockholder. The
offering by the selling stockholder will last for a period of twelve months from
the date of this prospectus. There is currently no trading market for our common
stock.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES, OR PASSED ON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
PLEASE SEE "RISK FACTORS" BEGINNING ON PAGE 5 TO READ ABOUT FACTORS YOU
SHOULD CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK.
Initial Offering Price Sales Commissions Total to selling
stockholders
Per share $0.16 (1) $0.16
Total $ 960,000 (1) $ 960,000
(1) We will not receive any proceeds from this offering. No person
has agreed to underwrite or take down any of the securities.
For sales on any trading market, sales commissions will be
limited to those paid in similar market transactions. For
private sale transactions, no sales commission can be paid.
There is no minimum amount of securities which may be sold.
The shares offered by the selling security holder will be sold
at $0.16 per share until our shares of common stock are quoted
on the OTC Bulletin Board and thereafter at prevailing market
prices or privately negotiated prices.
The date of this prospectus is July 20, 2004.
-1-
[GRAPHIC OMITTED][GRAPHIC OMITTED]0
ILLUSTRATION: SCHEMATIC ARCHITECTURE OF M-WISE CORE TECHNOLOGY " THE MOMA
GATEWAY PLATFORM
-2-
PROSPECTUS SUMMARY
The following summary highlights some of the information in this
prospectus. It may not contain all of the information that is important to you.
To understand this offering fully, you should read the entire prospectus
carefully, including the risk factors and our financial statements and the notes
accompanying the financial statements appearing elsewhere in this prospectus.
All references to share amounts herein reflect a six-for-one forward split of
our common stock on November 20, 2003 and the conversion of all shares of
preferred stock into common stock on November 19, 2003.
THE COMPANY
We develop, manufacture and support an application gateway marketed under
the brand MOMA Gateway. MOMA provides middleware technology that mediates and
integrates between various key enterprise applications such as billing,
reporting, provisioning, third-party management, development, content, customer
relationship management and application platforms for cellular operators and
other wireless application service providers. Our clients include prominent
global wireless application service providers and wireless operators.
Our technology allows our clients to enable consumers to utilize and
purchase data and multimedia value added services, such as applications for
handset personalization (ring tones and images, for example), news,
entertainment and chat via cellular phones and other wireless devices. We
primarily operate through original equipment manufacturers (OEMs) and regional
sales representatives to sell our products. Our revenues are primarily derived
from license fees and we spend a significant portion of our revenues on
continuing research and development. Our cumulative losses as of March 31, 2004
were $9,700,867. The segment of the technology industry in which we operate has
been characterized by volatility and financial instability.
SUMMARY CONSOLIDATED FINANCIAL DATA
The following summary consolidated financial data and other data are qualified
by reference to, and should be read in conjunction with, our financial
statements and their related notes appearing elsewhere in this prospectus and
"Management's Discussion and Analysis." The selected statement of operations
data shown below for the fiscal years ended December 31, 2003 and 2002 and the
balance sheet data as of December 31, 2003 are derived from our audited
financial statements and the selected statement of operations data shown below
for the three months ended March 31, 2004 and 2003 and the balance sheet data as
of March 31, 2004 are derived from our unaudited interim financial statements
included elsewhere in this prospectus.
Statement of Operations Data:
YEAR ENDED THREE MONTHS ENDED
December 31, March 31,
2003 2002 2004 2003
(restated)
Sales $ 361,721 $ 1,051,975 $ 123,969 $ 155,695
Cost of Sales $ 126,633 $ 89,719 $ 8,267 $ 28,650
Gross Profit $ 235,088 $ 962,256 $ 115,702 $ 127,045
General and Administrative Expenses $ 1,277,979 $ 1,129,059 $ 278,915 $ 482,538
Research and Development Expenses $ 282,845 $ 1,243,219 $ 54,989 $ 161,468
Gain (Loss) from discontinued operations $ 524,917 $ (893,421) -- $ (71,802)
Net Loss $ 1,139,237 $ 2,726,828 $ 219,103 $ 692,077
As of
December 31, March 31,
2003 2004
(restated)
Balance Sheet Data:
Current Assets $ 110,421 $207,416
Total Liabilities $2,919,034 $3,221,847
Stockholders' Equity (Deficiency) $(2,494,418) $(2,705,252)
THE OFFERING
The offering is being made by the selling stockholders.
Securities Offered:..................... 6,000,000 shares of common stock.
Initial Offering Price.................. $0.16 per share.
Offering Period:........................ Until 12 months from the date of this prospectus.
Risk Factors................................ The securities offered hereby involve a high degree of
risk and immediate substantial dilution and should not
be purchased by investors who cannot afford the loss
of their entire investment. See "Risk Factors".
Common stock Outstanding(1) Before Offering: 69,506,898 shares
Common stock Outstanding(1) After Offering: 69,506,898 shares
(1) Does not include up to 7,362,858 shares of common stock issuable upon the
exercise of outstanding warrants and 43,858,872 shares of common stock
reserved under employee option plans pursuant to which additional shares
may be issued. All above mentioned calculations were made on a fully
diluted basis, whereby the exercise of all warrants and options reserved
for grant under our employee stock option plans were calculated as if all
such warrants and options were exercised.
Our corporate offices are located at 3 Sapir Street, Herzeliya Pituach,
Israel 46852, and our telephone number is +972-9- 9611212. Information
contained on our web pages at "www.m-wise.com" does not constitute part of
this prospectus.
-3-
RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. IN ADDITION TO
OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, YOU SHOULD CAREFULLY CONSIDER
THE FOLLOWING RISK FACTORS AND OTHER INFORMATION IN THIS PROSPECTUS BEFORE
INVESTING IN OUR COMMON STOCK.
WE HAVE HAD OPERATING LOSSES AND LIMITED REVENUES TO DATE AND DO NOT EXPECT TO
BE PROFITABLE IN THE FORESEEABLE FUTURE.
We have incurred net losses for each of the years ended December 31,
2003 and 2002 in the amounts of $1,139,237 and $2,726,828, respectively, and for
the three months ended March 31, 2004 and 2003 in the amounts of $219,103 and
$692,077 , respectively. We expect to continue to incur losses for at least the
foreseeable future. Through March 31, 2004, we had an accumulated deficit in the
amount of $9,700,867. We also have had limited revenues. Revenues for the years
ended December 31, 2003 and 2002 were $361,721 and $1,051,975, respectively, and
for the three months ended March 31, 2004 and 2003 were $123,969 and $155,695,
respectively. There can be no assurance that we will achieve or sustain
profitability in the foreseeable future.
WITHOUT ADDITIONAL EQUITY OR DEBT FINANCING WE CANNOT CARRY OUT OUR
BUSINESS PLAN.
Our current business plan involves substantial costs, primarily those
costs associated with the restructuring of our subsidiaries and supporting the
sales efforts of our channel partners. While cash generated by our operations
will cover most of such costs, any current anticipated revenues will be
insufficient to cover all of such costs. If we are unable to secure additional
equity or debt financing our results of operations will be adversely affected.
THE TIMING OF OUR SALES COULD FLUCTUATE AND LEAD TO PERFORMANCE DELAYS.
The timing of our sales have fluctuated in the past and, we believe,
are likely to continue to fluctuate from period to period depending on a number
of factors, including but not limited to the timing and receipt of significant
orders, the timing of milestone payments within the license schedules, the
timing of completion of contracts, increased competition, or changes in the
demand for our products and services. Timing of sales could cause a lack of cash
and delay our completion of contracts, and we could face cancellation of
contracts for that reason, which could have a materially adverse impact on our
operations.
OUR STOCKHOLDERS HAVE PRE-EMPTIVE RIGHTS TO PURCHASE SECURITIES OF M-WISE, WHICH
COULD IMPAIR OUR ABILITY TO RAISE CAPITAL.
Except for certain exempt issuances set forth in the Investors'
Rights Agreement, certain of our stockholders have certain pre-emptive rights to
purchase their pro-rata portion of any of our securities which we may, from time
to time, propose to sell and issue. Unless these rights are waived by certain of
our stockholders, the delay occasioned by the procedures inherent in the
pre-emptive right could make it difficult or impossible for us to secure outside
equity financing.
WE OPERATE INTERNATIONALLY AND ARE SUBJECT TO CURRENCY FLUCTUATIONS, WHICH COULD
CAUSE US TO INCUR LOSSES EVEN IF OUR OPERATIONS ARE PROFITABLE.
We currently operate directly and through original equipment
manufacturers (OEMs) and regional sales representatives in the European Union,
United Kingdom, Singapore and Taiwan. Our research and development operations
are conducted in Israel and we expect to operate in additional markets, each
with its own currency. Contracts can be denominated in one of several
currencies. A change in currency rates could cause us losses as we perform under
the contract or as we are paid. We do not engage in currency trading operations
to minimize this risk, but we might if warranted in the future. Also, our
revenues earned abroad may be subject to taxation by more than one jurisdiction,
and this could have the effect of reducing our earnings.
-4-
WE ARE DEPENDENT UPON CERTAIN MAJOR CUSTOMERS, AND THE LOSS OF ONE OR MORE OF
SUCH CUSTOMERS COULD ADVERSELY AFFECT OUR REVENUES AND PROFITABILITY.
During the year ended December 31, 2003, approximately 78% of our
sales were from sales to one customer. During the year ended December 31, 2002,
approximately 73% of our sales were from sales to three customers, and 36% of
sales were to one customer. During the three months period ended March 31, 2004,
approximately 53% of our sales were from sales to two customers and 33% of sales
were to one customer. The agreement with a customer typically includes a down
payment over a period in which our system is installed, and subsequent payments
which are a function of actual use by the end-users of the system. At the
current stages of our business, the loss of any one of our major customers would
seriously affect our revenues and profit.
OUR AUDITORS HAVE RENDERED A GOING CONCERN EMPHASIS OPINION ON OUR
FINANCIAL STATEMENTS.
Our auditors have expressed concern as to our ability to continue as
a going concern. If our business is ultimately unsuccessful, the assets on our
balance sheet could be worth significantly less than their carrying value and
the amount available for distribution to stockholders on liquidation would
likely be insignificant.
PENNY STOCK RULES COULD MAKE IT HARD TO RESELL YOUR SHARES.
Our common stock does not meet the listing requirements for any
trading market other than the OTC Bulletin Board. The OTC Bulletin Board may not
approve our listing. Consequently, the liquidity of our securities could be
impaired, not only in the number of securities which could be bought and sold,
but also through delays in the timing of transactions, reduction in securities
analysts' and the news media's coverage of us, and lower prices for our
securities than might otherwise be attained.
In addition, the "penny stock" rules limit trading of securities not
traded on NASDAQ or a recognized stock exchange, or securities which do not
trade at a price of $5.00 or higher, in that brokers making trades in those
securities must make a special suitability determination for purchasers of the
security, and obtain the purchaser's consent prior to sale. The application of
these rules may make it difficult for purchasers in this offering to resell
their shares.
U.S. INVESTORS MAY HAVE TROUBLE IN ATTEMPTING TO ENFORCE LIABILITIES BASED UPON
U.S. FEDERAL SECURITIES LAWS AGAINST US AND OUR SUBSIDIARIES AND OUR NON-U.S.
RESIDENT DIRECTORS.
Our research and development operations are conducted through our
subsidiary, m-Wise Ltd., which is incorporated and located in Israel, and our
marketing and sales operations are conducted either directly by us or through
original equipment manufacturers (OEMs) and regional sales representatives. All
of our tangible assets are located outside the United States. In addition, all
of our directors are non-US citizens. As a result, it may be difficult or
impossible for United States investors to serve process within the United States
upon management or to enforce a judgment upon management for civil liabilities
in United States courts.
-5-
RISKS RELATED TO OUR LOCATION IN ISRAEL
OUR RESEARCH AND DEVELOPMENT FACILITIES ARE LOCATED IN ISRAEL AND WE HAVE
IMPORTANT FACILITIES AND RESOURCES LOCATED IN ISRAEL WHICH COULD BE NEGATIVELY
AFFECTED DUE TO MILITARY OR POLITICAL TENSIONS.
Our Israeli subsidiary, m-Wise Ltd., is incorporated under the laws
of the State of Israel and our research and development facilities as well as
significant executive officers are located in Israel. Although a substantial
portion of our sales are currently being made to customers outside of Israel,
political, economic and military conditions in Israel could nevertheless
directly affect our operations. Since the establishment of the State of Israel
in 1948, a number of armed conflicts have taken place between Israel and its
Arab neighbors and a state of hostility, varying in degree and intensity, has
led to security and economic problems for Israel. We could be adversely affected
by any major hostilities involving Israel, the interruption or curtailment of
trade between Israel and its trading partners, a significant increase in
inflation, or a significant downturn in the economic or financial condition of
Israel. Despite the progress towards peace between Israel and its Arab
neighbors, the future of these peace efforts is uncertain. Several Arab
countries still restrict business with Israeli companies which may limit our
ability to make sales in those countries. We could be adversely affected by
restrictive laws or policies directed towards Israel or Israeli businesses.
CERTAIN OF OUR OFFICERS AND EMPLOYEES ARE REQUIRED TO SERVE IN THE ISRAEL
DEFENSE FORCES AND THIS COULD FORCE THEM TO BE ABSENT FROM OUR BUSINESS FOR
EXTENDED PERIODS.
Several of our male employees located in Israel are currently
obligated to perform annual reserve duty in the Israel Defense Forces and are
subject to being called for active military duty at any time. The loss or
extended absence of any of our officers and key personnel due to these
requirements could harm our business.
THE RATE OF INFLATION IN ISRAEL MAY NEGATIVELY IMPACT OUR COSTS IF IT EXCEEDS
THE RATE OF DEVALUATION OF THE NIS AGAINST THE DOLLAR.
Substantially all of our revenues are denominated in dollars or are
dollar-linked, but we incur a portion of our expenses, principally salaries and
related personnel expenses in Israel, in New Israeli Shekels (NIS). In 2003,
33%, and in the three months ended March 31, 2004, 53% of our costs were
incurred in NIS. As a result, we are exposed to the risk that the rate of
inflation in Israel will exceed the rate of devaluation of the NIS in relation
to the US Dollar or that the timing of this devaluation will lag behind
inflation in Israel. In that event, the dollar cost of our operations in Israel
will increase and our dollar-measured results of operations will be adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
-6-
USE OF PROCEEDS
We will not receive any proceeds from the sale of the securities
being registered herein.
DIVIDEND POLICY
We have not paid any dividends on our common stock. We are prohibited
from paying dividends under certain promissory notes in the aggregate principal
amount of $1.8 million held by Syntek Capital AG and DEP Technology Holdings
Ltd. We currently intend to retain any earnings for use in our business, and
therefore do not anticipate paying cash dividends in the foreseeable future.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is currently no market for our securities, including our common
stock being offered herein, and there has never been a market for our common
stock. As of July 8, 2004, there were 11 record holders of stock of our common
stock.
There are currently outstanding warrants for the purchase of 7,362,858
shares of common stock and 43,858,872 shares of common stock reserved under
employee stock option plans pursuant to which additional shares may be issued.As
of July 8, 2004, 69,506,898 shares of common stock are issued and outstanding,
including the 6,000,000 shares of common stock which have been registered for
resale in this prospectus. There are 63,506,898 shares of common stock or common
stock equivalents which can be resold in the public market in reliance upon the
safe harbor provisions of Rule 144.
We are a party to an Investors' Rights Agreement dated January 11,
2001, with certain of our stockholders. Under this agreement, we agreed to
provide certain holders of our stock with demand registration rights, applicable
six months after the effective date of this registration statement (12 months in
the case of a registration statement on Form S-3); to file our reports in
accordance with Section 13 of the Securities Exchange Act of 1934 and otherwise
ensure that our financial information is "publicly available" for purposes of
Rule 144; provide the investors thereunder with copies of our financial
statements on a periodic basis; provide access to our books and records; and
obtain key man life insurance in the amount of $1,000,000 on each of Messrs.
Broudo and Ben-Asulin (which has not been complied with); and provide certain of
our stockholders with a right of first refusal to purchase newly issued m-Wise
securities, subject to certain exempt issuances. The holders were also granted
certain registration rights which are inapplicable to this registration
statement. Certain rights under the Investors' Rights Agreement terminate
immediately prior to a firm commitment underwriting under the Securities Act or
a public offering effected on the London, Paris or Frankfurt Stock Exchanges,
provided such firm commitment underwriting is for no less than $20,000,000 net
of underwriting discounts and commissions and such underwriting reflects m-Wise
a pre-money valuation of no less than $60,000,000.
-7-
EQUITY COMPENSATION PLAN INFORMATION
- ---------------------------- -------------------------- -------------------------- --------------------------
Plan category Number of Securities to Weighted-average Number of securities
be issued upon exercise exercise price of remaining available for
of outstanding options, outstanding options, future issuance under
warrants and rights warrants and rights equity compensation
plans (excluding
securities reflected in
column (a))
- ---------------------------- -------------------------- -------------------------- --------------------------
Equity compensation plans 51,179,802 $ 0.0066 41,928
approved by security
holders
- ---------------------------- -------------------------- -------------------------- --------------------------
Equity compensation plans 0 $ - 0
not approved by security
holders
- ---------------------------- -------------------------- -------------------------- --------------------------
-8-
MANAGEMENT'S DISCUSSION AND ANALYSIS
OVERVIEW
We were incorporated in February 2000 and commenced operations
immediately thereafter. We initially primarily provided pan-European wireless
application service provider operations by hosted MOMA Gateway services to
customers in the United Kingdom, Spain, France and Italy. We established data
centers in Spain, Italy and France that were connected to our main data center
in the United Kingdom. We had connectivity and billing arrangements with
cellular operators that enabled us to provide our hosted services. Altogether we
were enabling delivery and billing of value added data services to over 100
million wireless users by our clients, such as content and media providers,
advertising agencies and entertainment companies.
We gained strong credibility and experience as a wireless application
service provider during calendar 2000 and 2001, while we continued to build and
develop our wireless middleware product. The wireless application service
providers' operations provided us the ability to commercially test our product
across multiple geographic and vertical markets, to test our Gateway's
management of multiple applications and services across various operators and
partners, and to test our time-to-market and cost efficiencies in developing
value added services using different protocols for the transmission of data and
methods of user service interactions (e.g. SMS, IVR and J2ME). SMS, which stands
for Short Messaging Service, is built into all GSM cellular phones and enables
subscribers to send and receive text messages of up to 160 characters. IVR,
which stands for Interactive Voice Response, is utilized, among others, for
billing certain value added services using premium-rate fixed-line phone
systems. J2ME, which utilizes Java programming technology built into certain
cellular phones, enables applications to be written once for a wide range of
devices, to be downloaded dynamically, and to leverage each device's native
capabilities. However, we lacked sufficient financial and management resources
to dominate the pan-European wireless application service providers market and
achieve profitability. During the year ended December 31, 2001 we had no
revenues and a net loss of $4,442,913. By December 31, 2001 we had invested
$569,389 in equipment and had capital and lease costs of $84,414.
Due to the high costs and low revenues in the European wireless
application service provider (ASP) market, in 2002 our management decided to
transition our focus away from pan-European wireless application service
providers, toward installing and licensing our middleware technology at cellular
operators and wireless application service providers worldwide, and to operate
through original equipment manufacturers (OEMs) and regional sales
representatives to sell our products. Therefore, our management decided to
liquidate, or allow the liquidation of the UK subsidiary, m-Wise Ltd, and its
three subsidiaries in Italy, France and Spain, by creditors and local legal
authorities. Our UK subsidiary was dissolved pursuant to Section 652A of the
Companies Act of 1985 on November 11, 2003. We are in the process of contacting
the registrar in each of the countries of the subsidiaries of the UK subsidiary,
to notify them that each subsidiary has ceased doing business and to request the
dissolution of each subsidiary. As of November 11, 2003 we invested $3.2 million
in the UK subsidiary and its subsidiaries. The operations of those subsidiaries
were accounted for as discontinued operations in the financial statements.
Our shift away from hosted wireless application services using our
gateway enabled us to focus more on the core middleware benefits of our
technology in fiscal 2002. This shift toward installed gateways also coincided
with growing interest, as documented by wireless industry analysts, among
cellular operators and service providers for wireless middleware's capability to
support strategic service delivery.
In fiscal 2002 we channeled our research and development efforts to
enhance and update our middleware technology to interface with advanced and
emerging wireless technologies such as MMS (Multimedia Messaging Service -
delivery of highly enhanced images and audio files) and J2ME. We also upgraded
our middleware platform to incorporate modules for application deployment and
management, for centralized management of multiple value added services and
multiple third-party content and media providers, and for managing increased
data traffic and real-time billing and reporting requirements.
-9-
In fiscal 2002 we restructured our sales efforts toward establishing
distribution channels via original equipment manufacturers (OEMs) and
partnerships with major IT vendors and system integrators. During this period,
we took important steps to move from a direct sales strategy to using channel
partners and original equipment manufacturers to distribute our products. We are
therefore building partnerships with large original equipment manufacturers and
system integrators that already have large sales teams, existing relationships
with cellular operators, the visibility and brand value to interest potential
new clients and the requisite financial backing to support the long sales cycle
and finance our customers where necessary.
In fiscal 2003 we had to direct our research and development resources in an
effort to respond to specific business opportunities that were introduced to us
by our distributors and original equipment manufacturers and to be able to meet
our customers enhanced requirements in elements such as increased transactions
volume support and new J2ME possibilities. We also had to make significant cuts
in our expenses to offset the effects of the delay in finalizing agreements with
several prospective clients. We believe that we have managed to do so without
affecting the quality of our products and the level of customer service we
provide. We believe that our current product offering is very attractive to the
market both in terms of quality and price tag.
Revenues
We experienced rapid revenue growth between the years ended December
31, 2000 and December 31, 2002. Our revenues grew from $26,216 in the year ended
December 31, 2000 to $1,051,975 in the year ended December 31, 2002, however, we
experienced a sharp decline in our revenues during the year ended December 31,
2003 to $361,721, a decrease of 66% which management believes resulted from a
generally soft telecommunications sector and demonstrates the dynamic nature of
our business. A significant portion of the decline in revenues related to the
decline in business from Comtrend (from $403,870 in 2002 to $11,480 in 2003).
The 2002 Comtrend revenues were from the sale of the license, while in 2003
Comtrend revenues was limited to support fees. Our growing dependency on third
parties' marketing capability and our significantly reduced sales resources
prevented us from achieving enough sales in that fiscal year. Management
believes that our efforts to refocus our resources towards building
relationships with OEMS may yield additional contracts, which, if obtained, may
reverse our declining revenue trend. Although we are in negotiations for several
new contracts there can be no assurance that such contracts will be secured or
that they will generate significant revenue. We derive revenues from product
sales, licensing, revenue share, customer services and technical support.
When we license our MOMA Gateway solutions to our customers we generate
revenues by receiving a license payment, ongoing support fees which are
typically 15% of the annual license payment, and professional service fees which
are generated from our customers request for additional training, IT
administration and tailoring of our products for their specific needs. When we
license our products to our customers we install our product at a location
specified by our client. We also derive revenue through our hosted services,
whereby we enable customers to remotely use features of our MOMA Gateway (such
as a mobile content sales and delivery service for ring tones and color images),
which is installed and hosted at our location, and receive a set-up fee for
launching the services for them, as well as a portion of our customer's revenues
generated through our platform. When we provide hosted services we maintain the
MOMA Gateway at our location on behalf of our customer.
Customers and customer concentration. Historically we have derived
the majority of our revenues from a small number of customers and, although our
customer base is expanding, we expect to continue to do so in the future. In the
three months ended March 31, 2004, approximately 33% of our sales were derived
from sales to one non-affiliated customer (iTouch PLC). In the year ended
December 31, 2003, approximately 78% of our sales were derived from sales to
this customer.
Geographical breakdown. We sell our products primarily to customers
in Europe and the Far East. For the three months ended March 31, 2004, we
derived 85% of our revenues from sales in Europe and 15% of our revenues from
sales in the Far East. Of these revenues 72% were derived from sales by the
company and 28% of our revenues were derived from sales by our subsidiary. For
the year ended December 31, 2003, we derived 97% of our revenues from sales in
Europe and 3% of our revenues from sales in the Far East. Of these revenues, 97%
were derived from sales by the company and 3% of our revenues were derived from
sales by our subsidiary. For the year ended December 31, 2002, we derived 75% of
our revenues from sales in Europe and 25% of our revenues from sales in the Far
East. Of these revenues, 63% were derived from sales by the company and 37% of
our revenues were derived from sales by our subsidiaries. Sales in the Far East
declined, as we did not succeed in acquiring new customers in that region. We
did not lose any customer in the region, and continued to generate revenues,
though marginal, from customers we acquired in previous years.
-10-
Cost of revenues
Customer services and technical support cost of revenues consist of the salary
and related costs for our technical staff that provide those services and
support and related overhead expenses.
Operating expense
Research and development. Our research and development expenses consist
primarily of salaries and related expenses of our research and development
staff, as well as subcontracting expenses. All research and development costs
are expensed as incurred except equipment purchases that are depreciated over
the estimated useful lives of the assets.
General and administrative. Our general and administrative expenses consist
primarily of salaries and related expenses of our executive, financial,
administrative and sales and marketing staff. These expenses also include costs
of professional advisors such as legal and accounting experts, depreciation
expenses as well as expenses related to advertising, professional expenses and
participation in exhibitions and tradeshows.
Financing income and expenses
Financing income consists primarily of interest earned on our cash
equivalents balances and other financial investments and foreign exchange gains.
Financing expenses consist primarily of interest payable on bank loans and
foreign exchange losses.
Critical Accounting Policies. We prepare our consolidated financial
statements in conformity with accounting principles generally accepted in the
U.S. As such, we are required to make certain estimates, judgments and
assumptions that we believe are reasonable based upon the information available.
These estimates and assumptions affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
the periods presented. To fully understand and evaluate our reported financial
results, we believe it is important to understand our revenue recognition
policy.
Revenue recognition. Revenues from products sales are recognized on a
completed-contract basis, in accordance with Staff Accounting Bulletin No. 101
"Revenue Recognition in Financial Statements" ("SAB No. 101"), Statement of
Position 97-2 "Software Revenue Recognition" and Statement of Position 81-1
"Accounting for Performance of Construction-Type and Certain Production-Type
Contracts". The Company has primarily short-term contracts whereby revenues and
costs in the aggregate for all contracts is expected to result in a matching of
gross profit with period overhead or fixed costs similar to that achieved by use
of the percentage-of-completion method. Accordingly, financial position and
results of operations would not vary materially from those resulting from the
use of the percentage-of- completion method. Revenue is recognized only after
all the three stages of deliverables are complete; installation, approval of
acceptance tests results by the customer and when the product is successfully
put into real-life application. Customers are billed, according to individual
agreements, a percentage of the total contract fee upon completion of work in
each stage; approximately 40% for installation, 40% upon approval of acceptance
tests by the customer and the balance of the total contract price when the
software is successfully put into real-life application. The revenues, less its
associated costs, are deferred and recognized on completion of the contract and
customer acceptance. Amounts received for work performed in each stage are not
refundable.
On-going service and technical support contracts are negotiated
separately at an additional fee. The technical support is separate from the
functionality of the products, which can function without on-going support.
Technology license revenues are recognized in accordance with SAB
No. 101 at the time the technology and license is delivered to the customer,
collection is probable, the fee is fixed and determinable, a persuasive evidence
of an agreement exists, no significant obligation remains under the sale or
licensing agreement and no significant customer acceptance requirements exist
after delivery of the technology.
Revenue share is recognized as earned based on a certain percentage
of our clients' revenues from selling services to end users. Usage is determined
by receiving confirmation from the clients.
Revenues relating to customer services and technical support are
recognized as the services are rendered ratably over the period of the related
contract.
-11-
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO THREE MONTHS ENDED MARCH 31, 2003
REVENUES
License fees and products. Revenues from license fees and products decreased 73%
to $24,708 for the three months ended March 31, 2004 from $90,000 for the same
period in 2003, primarily due to our growing dependency on third parties'
marketing capability and our significantly reduced sales resources which
prevented us from achieving enough sales in this period.
Revenue share. Revenues from revenue share increased 363% to $1,460 for the
three months ended March 31, 2004 from $315 for the same period in 2003.
Customer services and technical support. Revenues from customer services and
technical support increased 50% to $97,801 for the three months ended March 31,
2004 from $65,380 for the same period in 2003. The increase primarily consisted
of revenues from ongoing customers who were not our customers during the first
three months of 2003.
Cost of revenues
Customer services and technical support. Cost of customer services and technical
support decreased 71% to $8,267 for the three months ended March 31, 2004 from
$28,650 for the same period in 2003. This decrease was primarily due to a
$20,383 decrease in payroll and related expenses.
Operating expenses
Research and development. Research and development expenses decreased 66% to
$54,989 for the three months ended March 31, 2004 from $161,468 for the same
period in 2003. This decrease was primarily due to a $42,387 decrease in payroll
and related expenses due to a reduction in the number of employees involved in
research and development from 7 on March 31, 2003 to 5 on March 31, 2004. Since
our products are now substantially developed, we reduced the number of our
employees engaged in research and development. We do not currently intend to
continue to reduce our research and development activities. We believe that we
have assembled a small core of highly skilled and efficient technical personnel
sufficient to conduct our current and future research and development
activities; and a $52,170 government grant received during the three months
ended March 31, 2004. Research and development expenses, stated as a percentage
of revenues, decreased to 44% for the three months ended March 31, 2004 from
104% for the same period in 2003.
General and administrative. General and administrative expenses decreased 42% to
$278,915 for the three months ended March 31, 2004 from $ 482,538 for the same
period in 2003. This decrease was primarily due to a $256,141 decrease in
payroll and related expenses mainly due to options granted for employee services
in the three months ended March 31, 2003. General and administrative expenses,
stated as a percentage of revenues, decreased to 225% for the three months ended
March 31, 2004 from 310% for the same period in 2003.
Financing income and expenses
Financing income. Our Financing income increased 33,327% to $7,354 for the three
months ended March 31, 2004 from $22 for the same period in 2003.
Financing expenses. Our financing expenses increased 147% to $8,255 for the
three months ended March 31, 2004 from $3,336 for the same period in 2003.
-12-
YEAR ENDED DECEMBER 31, 2003 COMPARED TO
YEAR ENDED DECEMBER 31, 2002
Revenues
License fees and Products. Revenues from license fees and products
decreased 83% to $147,450 for the year ended December 31, 2003 from $883,520 for
the same period in 2002, primarily due to our corporate restructuring process
and the change in the sales strategy involving a transition from direct sales to
indirect sales (mainly local sales representatives and original equipment
manufacturers agreements).
Revenue share. Revenues from revenue share increased 194% to $22,800 for the
year ended December 31, 2003 from $7,760 for the same period in 2002.
Customer services and technical support. Revenues from customer services
and technical support increased 19% to $191,471 for the year ended December 31,
2003 from $160,695 for the same period in 2002. The increase primarily consisted
of revenues from ongoing customers who were not our customers during 2002.
Cost of revenues
Customer services and technical support. Cost of customer services and technical
support increased 41% to $126,633 for the year ended December 31, 2003 from
$89,719 for the same period in 2002.
Operating expenses
Research and development. Research and development expenses decreased 77%
to $282,845 for the year ended December 31, 2003 from $1,243,219 for the same
period in 2002. This decrease was primarily due to a reduction in the number of
employees involved in research and development from 13 on December 31, 2002 to 5
on December 31, 2003. Since our products are now substantially developed, we
reduced the number of our employees engaged in research and development. We do
not currently intend to continue to reduce our research and development
activities. We believe that we have assembled a small core of highly skilled and
efficient technical personnel sufficient to conduct our current and future
research and development activities. This decrease was also partially due to a
$111,806 grant received from a joint Israeli Singapore government program.
Research and development expenses, stated as a percentage of revenues, decreased
to 78% for the year ended December 31, 2003, from 118% for the same period in
2002.
General and administrative. General and administrative expenses
increased 13% to $1,277,979 for the year ended December 31, 2003 from $1,129,059
for the same period in 2002. The increase in general and administrative expenses
was primarily due to a $132,477 increase in consulting expenses and a $289,697
increase in professional services expenses, partially offset by a $150,847
decrease in marketing expenses, a $42,673 decrease in rent expenses and a
$18,864 decrease in travel expenses. General and administrative expenses as a
percentage of revenues increased to 353% for the year ended December 31, 2003
from 107% for the same period in 2002. Our marketing expenses significantly
decreased during the year ended December 31, 2003 as compared to the same period
in 2002 as a result of the restructuring of our sales channels. Additionally,
during 2003 we received a grant from the Fund of Overseas Marketing
Encouragement at the Israeli Ministry of Industry and Trade in the amount of
$43,027. Sales of our products are now primarily made through regional sales
representatives, channel partners, distributors and original equipment
manufacturers (OEMs), each of which conduct their own marketing efforts for our
products. We expect this decrease in required marketing expenses to increase our
future cash flow.
-13-
Financing income and expenses
Financing income. Our financing income increased to $138 for the year ended
December 31, 2003 as compared to $0 for the same period in 2002.
Financing expenses. Our financing expenses increased 193% to $68,556 for
the year ended December 31, 2003 from $23,385 for the same period in 2002.
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
Revenues
License fees and Products. Revenues from license fees and products increased
to $883,520 for the year ended December 31, 2002 as compared to $0 for the same
period in 2001. This increase is primarily due to the fact that the revenues
derived from our discontinued operations from our UK Subsidiary and its
subsidiaries of $510,802 for the year ended December 31, 2001 are not included
herein.
Revenue share. Revenues from revenue share increased to $7,760 for the year
ended December 31, 2002 as compared to $0 for the same period in 2001. This
increase is primarily due to the fact that the revenues derived from our
discontinued operations from our UK Subsidiary and its subsidiaries of $5,252
for the year ended December 31, 2001 are not included herein.
Customer services and technical support. Revenues from customer service and
technical support increased to $160,695 for the year ended December 31, 2002 as
compared to $0 for the same period in 2001. This increase is primarily due to
the fact that the revenues derived from our discontinued operations from our UK
Subsidiary and its subsidiaries of $69,840 for the year ended December 31, 2001
are not included herein.
Cost of revenues
Customer services and technical support. Cost of customer services and technical
support increased to $89,719 for the year ended December 31, 2002 as compared to
$0 for the same period in 2001. This increase is primarily due to the fact that
the cost of revenues from our discontinued operations from our UK Subsidiary and
its subsidiaries of $38,782 for the year ended December 31, 2001 are not
included herein.
Operating expenses
Research and development. Research and development expenses increased 6% to
$1,243,219 for the year ended December 31, 2002 from $1,178,259 for the same
period in 2001. This increase was primarily due to an increase of $358,780 in
communications expenses and a $42,357 increase in travel expenses partially off
set by a $316,575 decrease in salaries expenses. Research and development
expenses, stated as a percentage of revenues, were 118% for the year ended
December 31, 2002.
General and administrative. General and administrative expenses decreased 19%
to $1,129,059 for the year ended December 31, 2002 from $1,388,424 for the same
period in 2001. This decrease was primarily due to a decrease of $256,363 in
consulting expenses and a $146,160 decrease in professional services expenses
partially offset by an increase of $82,132 other expenses. General and
administrative expenses as a percentage of revenues were 107% for the year ended
December 31, 2002.
-14-
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity since our inception have been private sales
of equity securities, stockholder loans, borrowings from banks and to a lesser
extent, cash from operations. We had cash and cash equivalents of $ 77,231 as of
March 31, 2004 and $32,538 as of December 31, 2003. Our initial capital came
from an aggregate investment of $1.3 million from Cap Ventures Ltd. To date, we
have raised an aggregate of $5,300,000 from placements of our equity securities
(including the investment by Cap Ventures and a $4,000,000 investment by Syntek
Capital AG and DEP Technology Holdings Ltd.). We have also borrowed an aggregate
of $1,800,000 from Syntek Capital AG and DEP Technology Holdings Ltd. (See
"Certain Transactions") and as of the date of this prospectus we have no funds
available to us under bank lines of credit. We have a credit line agreement with
Miretzky Holdings Limited. There is no amount currently outstanding under the
line. The credit line is for $300,000 The credit line has no termination date
and does not provide for interest payments.
Other than the said credit line agreement with Miretzky we do not have any
commitments from any of our affiliates or current stockholders, or any other
non-affiliated parties, to provide additional sources of capital to us. We will
need approximately $1.0 million for the next twelve months for our operating
costs which mainly include salaries, office rent and network connectivity, which
total approximately $60,000 per month, and for working capital. We intend to
finance this amount from our ongoing sales and through the sale of either our
debt or equity securities or a combination thereof, to affiliates, current
stockholders and/or new investors. Currently we do not believe that our future
capital requirements for equipment and facilities will be material.
Operating activities. For the three months ended March 31, 2004 we
generated $67,023 of cash in operating activities primarily due to a $353,994
increase in deferred revenues, partially offset by our net loss of $219,103. In
the same period in 2003, we used $162,921 of cash in operating activities
primarily due to our net loss of $692,077, partially offset by a compensation
expense of $345,250 related to the issuance of options for employee services, a
$100,000 increase in redemption premium on shares of Series B preferred stock
and $78,815 increase in trade accounts payable. For the year ended December 31,
2003 we used $52,229 of cash in operating activities primarily due to our net
loss of $1,139,237 and an amount of $311,005 net assets from discontinued
operations written-off, partially offset by a $440,356 increase in other
payables and accrued liabilities, an amount of $384,889 Options vested for
employee services and a $360,000 increase in redemption premium on shares of
Series B preferred stock. For the year ended December 31, 2002, we used
$1,423,304 of cash in operating activities primarily due to our net loss of
$2,726,828, partially offset by a $502,950 increase in trade accounts payable, a
$400,000 increase in redemption premium on shares of Series B preferred stock
and $218,121 depreciation expenses.
Investing and financing activities.
Property and equipment consist primarily of computers, software, and office
equipment.
For the three months ended March 31, 2004, net cash used in investing
activities was $23,799 consisting of an investment in equipment. In the same
period in 2003 net cash used in investing activities was $41,524 consisting of
an investment in equipment. For the year ended December 31, 2003, net cash used
in investing activities was $164,860 consisting of an investment in equipment.
For the year ended December 31, 2002, net cash used in investing activities was
$271,677 consisting of an investment in equipment.
The value of our equipment decreased from $442,787 at March 31, 2003 to
$250,703 at March 31, 2004 as a result of the discontinuation of our European
subsidiaries which held such equipment. We disposed of our European
subsidiaries.
For the three months ended March 31, 2004, net cash provided by financing
activities was $1,469 due to a $5,677 increase in notes payables, partially
offset by a $4,208 decrease in bank indebtedness. In the same period in 2003,
net cash provided by financing activities was $15,757 due to a $15,757 increase
in bank indebtedness. For the year ended December 31, 2003, net cash provided by
financing activities was $45,700 due to a $31,571 increase in notes payables and
a $14,129 increase in bank indebtedness. For the year ended December 31, 2002,
net cash provided by financing activities was $1,502,994 due to the receipt of
$1,807,988 in shareholders' loans, partially offset by $300,000 in shareholders'
loan repayment.
Market Risk
We do not currently use financial instruments for trading purposes and do
not currently hold any derivative financial instruments that could expose us to
significant market risk.
-15-
Corporate Tax Rate
Our net operating loss carry-forwards in the United States for tax purposes
amount to approximately $9.3 million as of March 31, 2004.
Impact of Inflation and Currency Fluctuation
Substantially all of our revenues are denominated in dollars or are
dollar-linked, but we incur a portion of our expenses, principally salaries and
related personnel expenses in Israel, in New Israeli Shekels (NIS). In 2003,
33%, and in the three months ended March 31, 2004, 53% of our costs were
incurred in NIS. As a result, we are exposed to the risk that the rate of
inflation in Israel will exceed the rate of devaluation of the NIS in relation
to the US Dollar or that the timing of this devaluation will lag behind
inflation in Israel. In that event, the dollar cost of our operations in Israel
will increase and our dollar-measured results of operations will be adversely
affected.
Our auditors have included an explanatory paragraph in their report on our
financial statements, relating to the uncertainty of our business as a going
concern, due to our limited operating history, our lack of historical
profitability, and limited funds. Management believes that it will be able to
raise the required funds for operations from bank financings, or from one or
more future offerings, and to be able to achieve our business plan. Risks
inherent in the business as discussed under the caption "Risk Factors" may
affect the outcome of Management's plans.
-16-
BUSINESS
BACKGROUND
We were incorporated in Delaware in February 2000 under the name of
Wireless Auctions, Inc. We develop, manufacture, market and support a software
and hardware-based wireless application gateway marketed under the brand MOMA
Gateway. A gateway, in the wireless industry, is an entry point for services and
content from different types of media (such as the Internet, magazines,
television) into the mobile networks, and through them to their customers-
mobile phone users. The MOMA Gateway enables cellular operators and wireless
application service providers to provide data and multimedia value-added
services and content to their customers such as: person to person telephone
calls, text messaging, ring tones, sports news and alerts, pictures and TV
voting for contest shows, over wireless networks. Our gateway is an end-to-end
application and middleware platform that includes monitoring, billing,
reporting, content management, customer care, application development, generic
application engines, third-party provisioning and centralized third-party
management tools. These services are called value-added services in the wireless
industry. Our platforms have been utilized since March 2000 in over 300
applications across more than 20 European and Asian networks for over 50 various
internationally known content and media providers. These include applications
such as games, information services, alerts, advertising and promotions, which
were developed and delivered on a hosted basis for content and media providers,
through our wholly-owned UK subsidiary and its Italian, French and Spanish
subsidiaries. In the second half of 2002, we ceased operating and owning
hardware infrastructure in order to concentrate on licenses and installed sales
of our technology, and the operations of our UK subsidiary and its European
subsidiaries were discontinued. Shay Ben-Asulin and Mordechai Broudo were the
directors of our wholly-owned UK subsidiary. Our UK subsidiary had three
wholly-owned subsidiaries: (i) m-Wise s.a.r.l. (France), which previously
provided sales and customer support in France, the sole officer and director is
Mordechai Broudo, our Chief Executive Officer; (ii) m-Wise S.r.l. (Italy), which
previously provided sales and customer support in Italy, the sole officer and
director is Shay Ben-Asulin, our Chairman and Secretary; and (iii) m-Wise Spain,
S.L, which previously provided sales and customer support in Spain, the sole
officer and director is Mordechai Broudo. Our Israeli subsidiary is legally
active in its jurisdiction of incorporation, however, our UK subsidiary was
dissolved pursuant to Section 652A of the Companies Act of 1985 on November 11,
2003. We are in the process of contacting the registrar in each of the countries
of the subsidiaries of the UK subsidiary, to notify them that each subsidiary
has ceased doing business and to request the dissolution of each subsidiary. The
liquidation of our UK subsidiary and its subsidiaries is not likely to affect
our revenues in Europe as our European clients contract directly with us, or via
a channel partner.
We operate mainly through m-Wise Ltd., our wholly-owned subsidiary in
Israel. The officers of our Israeli subsidiary are Mordechai Broudo, Chief
Executive Officer, Shay Ben-Asulin, Chairman, Asaf Lewin, Chief Technology
Officer, and Gabriel Kabazo, Chief Financial Officer, and the directors are Shay
Ben-Asulin and Mordechai Broudo. We currently sell our MOMA Gateway directly,
through potential channel partners and through representative offices in Taiwan
and Singapore. We are currently pursuing two projects with LM Ericsson Israel
Ltd., of which there can be no assurance that such projects will secure
agreements with customers in the near future, if at all.
We do not currently intend to seek to enter into a business
combination with another business entity within at least twelve months following
the date of this prospectus.
-17-
INDUSTRY BACKGROUND
GROWING MARKET FOR VALUE-ADDED SERVICES.
The wireless communications market primarily consists of cellular
telephone networks, but also includes pagers, personal digital assistants, and
private mobile networks such as those used by utility companies and delivery
services. Value added services constitute significant additional revenue sources
for wireless networks, and have become essential components of cellular services
in only a few years. This has been documented by industry analysts and
journalists, as well as by the financial reports from various cellular operators
that describe data services as a growing percentage of the carriers' revenues.
Originally utilized solely for telephone communications, the wireless
phone networks have added data and multimedia content for the benefit of their
subscribers, such as:
X SMS - short messaging service - enables subscribers to send and
receive short (160 character) text messages and graphics images;
X EMS - enhanced message service - enables subscribers to send and
receive high quality images and graphics;
X MMS - multimedia messaging service - enables the delivery of further
enhanced images and audio files;
X WAP - web application protocol - enables subscribers to access the
internet and send and receive email;
X Interactive media, such as quizzes and online gaming, enabled, inter
alia, by Java (J2ME) technology;
X Subscriber information, such as stock quotes or sports news;
X "Push" technology, enabling content providers to broadcast
advertisements to subscribers; and
X Entertainment media, including radio stations, music and magazines.
Our technology is referred to as middleware as it integrates the
wireless telecommunications providers with mainstream information technology
industries. Providers developing middleware technology supply a means of
integrating the wireless telecommunications providers, mainstream IT, and
content and media provider industries to deliver value added services to
wireless subscribers. The introduction of the wireless value added services
industry has put an onus on cellular operators and service providers to use
their internal operational infrastructure as an externally-facing, strategic
service delivery platform. Wireless middleware technology seeks to form a
crucial part of this platform, thus facilitating the cellular operators and
service providers' efforts to connect to content partners and then deliver
compelling services to their wireless subscriber base, regardless of the device
used by the subscribers.
GROWING IMPORTANCE OF MIDDLEWARE
Our MOMA Gateway provides a centralized approach to middleware. We
view the role of our middleware as central to the service offering by reducing
the complexity in the supply chain. Wireless operators and wireless application
service providers currently negotiate with a large number of industry players to
deliver content, including access providers, payment providers, content
aggregators and applications developers. We emphasize our business value as
reducing service development costs for wireless operators and wireless
application service providers by providing a single horizontal platform on which
to build and deliver value added services, and on which to manage value added
services content and billing relationships. We believe that the single
middleware solution reduces the time spent negotiating with third parties to
implement and run new services and then manage those agreements.
We believe that middleware will play a central role in the wireless
operator and wireless application service providers' service delivery offering.
The core middleware will be installed on the operator and wireless application
service provider's network to fulfill the functions of service development and
management, with smaller versions of the gateway installed at the operator or
wireless application service providers' subsidiaries in additional geographic
markets to share central sources of information. This approach lowers the costs
for the operator by centralizing the processes that are currently built
individually by content provider, geographic market and other criteria.
-18-
THE M-WISE STRATEGY
We believe that we were early to recognize the role of middleware in
an increasingly complex platform strategy, and that we positioned ourselves to
successfully prove the capacity of our application gateway to act as middleware
for wireless value added services regardless of different standards, device
types and billing infrastructures. One of the ways in which we are promoting our
middleware technology is by addressing wireless operators and wireless
application service providers requirements for a centralized platform on which
to build and manage value added services content and applications from a number
of different providers. In a similar approach, we are targeting wireless
application service providers in order to provide them with a centralized
platform on which to develop and deliver their own service offering.
PRODUCTS
We develop, manufacture, market and support a software and
hardware-based wireless application gateway marketed under the brand MOMA
Gateway (MOMA is a middleware, i.e. a bundle of hardware and software parts that
together provide all the functionalities described herein). The hardware
consists of off the shelf products, which include an array of servers, network
switches, high availability power supply and digital storage devices, that our
customers purchase per our specifications or that we may purchase on their
behalf, typically for no additional consideration other than the cost of such
hardware components. The main software that runs these hardware components
consists of the MOMA proprietary software code which we have developed. In
addition, we use standard off the shelf software for which we purchase licenses
for our use or on behalf of our customers and freeware (such as Linux, JSP,
Microsoft SQL, Checkpoint's firewall solutions, Tomcat).
Our MOMA Gateway middleware provides operators and service providers of
wireless data systems an end-to end range of functionalities necessary to
develop, manage and launch wireless value added services and transactions. These
functionalities include, among others, the ability to:
X Minimize the capital, commercial, training and technical requirements
by providing a common platform for the operator or wireless
application service provider's IT, marketing, customer care and
billing departments to manage current and next-generation wireless
value added services;
X Minimize costs by providing a common platform for all third-party
content and service providers to connect and bill through the
operator or wireless application service provider's wireless network;
X Increase value added services revenues by accelerating the time to
market for third-parties, and by increasing the number of content
providers, media companies and other enterprises able to enter the
wireless value added services market;
X Eliminate the common problem of un-billed premium value added
services for pre-paid wireless subscribers by integrating in
real-time with the operators legacy pre-paid billing system to ensure
that an adequate pre-paid account balance exists prior to delivering
the value added services to the subscriber;
X Centralize and itemize the operator or wireless application service
provider's reporting and billing for all value added services by
third party, delivery channel (e.g. SMS, MMS or other) or billing
mechanism (e.g. premium messaging, IVR, pre-paid data-card or other);
and
X Mitigate many typical problems, such as real-time billing, anti-spam
policies, itemized value added services billing and adequate customer
support, through the delivery of a live window and centralized
controls for all value added services, billing modules and
third-party providers.
One example of how our middleware or MOMA Gateway works is as
follows:
(i) a consumer watching television sees an advertisement inviting the
consumer to purchase and download a new ring tone for their
cellular phone, by sending a SMS via their cellular phone;
(ii)our customer, the mobile operator, will then send back to the
consumer a SMS, redirecting them to a download site on the
Internet, where the consumer may retrieve the requested ring
tone.
-19-
To enable this type of service a middleware, such as our MOMA Gateway
is required:
(a) our middleware receives the consumer's SMS from the network, in
this case the request to download a certain ring tone;
(b) our middleware then composes the response SMS to the consumer;
(c) the middleware hosts the download site for the new ring tone and
enables the mobile operator to monitor the response to the
advertisement offering the new ring tone in real time;
(d) our middleware enables the mobile operator to issue a variety of
reports regarding its services, including revenue breakdown,
billing and settlement;
(e) our middleware enables our client to modify the content of their
services, i.e. edit language of messages, add new content items
for sale; and
(f) our middleware interfaces with the mobile operator's network and
can flexibly determine the billing and pricing arrangement
between the consumer and mobile operator.
The functions described above are performed by the MOMA Gateway
proprietary code that we have developed, which requires standard operating
systems and hardware (mainly servers) to operate.
We provide our customers with various services, such as standard-level
product support and maintenance, product upgrades (typically at an annual fee of
15% of initial license price), and remote management and service monitoring,
that are priced separately. The MOMA Gateway software is designed to enable its
users to customize and manage certain aspects of the product, such as the "look
and feel" of the user interface, the language of the user interface, and the
connection of the MOMA Gateway to external services. Further customization, when
required, is also priced in addition to the license fee.
Our MOMA Gateway, embodied in hardware and software technology, provides
operators of mobile data systems the capability to offer the above services and
other interactive content. Our technology facilitates necessary billing and
customer service functions and interfaces with commercially available media
content.
CUSTOMERS
Our current wireless data customers include prominent global wireless
application service providers and wireless operators. For 2002, 36% of our
revenues were derived from our contract with one customer and 73% with three
customers. For the year ended December 31, 2002, iTouch Plc represented 36% of
our sales, Comtrend Corporation represented 25% of our sales and Vodafone
Omnitel represented 12% of our sales. For the year ended December 31, 2003,
iTouch Plc represented 78% of our sales. For the three months ended March 31,
2004 iTouch Plc represented 33% of our sales.
None of our customers are affiliated with us, our subsidiaries, or any of
our officers, directors or principal shareholders.
PARTNERS
We primarily operate through original equipment manufacturers (OEMs) and
regional sales representatives to distribute and sell our products on a project
by project basis. For example, we recently made a joint approach with a major
vendor to one of the mobile operators in Thailand as a response to an RFP
(request for purchase) issued by the said operator for a knowledge management
system, which is one of the core and proprietary components of our MOMA gateway.
The response and the commercial proposal were submitted by the major vendor,
which in this case would have been the prime contractor, responsible for
delivery, installation and system integration, and we would have been the
sub-contactor who licenses the product. For any approach of this type, whether
joined with an original equipment manufacturer (OEMs) or a vendor, we execute a
"teaming" agreement for the specific project, where we quote the "transfer
price" (the actual price in which we license our product to such sales channel),
and the sales channel then submits the proposal to the potential customer (a
mobile operator), along with its price quotes for the installation and
integration and our quote for the license fee. In some cases, the vendor or OEM,
or the sales channel, may add a sales margin/mark-up to our transfer price
-20-
before they present it to the potential customer. We also intend to establish
prime contractor relationships with major vendors, of which there can be no
assurance. Under these contracts, a wireless carrier requests a major vendor to
be the front-end supplier of our middleware/MOMA Gateway on our behalf, in
return for a certain mark-up, typically of 20-30%, and other services like
hardware provision, system integration and installation. The wireless carrier,
through our prime contractor, will use our products to provide its customers
services such as: news alerts, picture messages, game downloads and cellular
handset personalization. We cannot assure you that any prime contractor
relationships will be formed with any OEM or vendor.
RESEARCH AND DEVELOPMENT
We devote significant resources to research and development. In January
2003 we were jointly awarded with Hewlett Packard an SIIRD Grant
(Singapore-Israel Research and Development Foundation government grant of
$186,343 USD) to upgrade the MOMA Gateway to support MMS and J2ME (Java
technology for wireless applications) for wireless carriers in the Far East.
This grant was funded during the year ended December 31, 2003 and the three
months ended March 31, 2004 and is reflected in our financial statements. We
expect to continue significant research and development activities to integrate
new technologies into our gateway. During the years ended December 31, 2002 and
2003 we expended $1,243,219 and $282,845, respectively, on research and
development activities. During the quarter ended March 31, 2004, we expended
$54,989 on research and development activities.
Our Israeli subsidiary, m-Wise Ltd., was granted an "Approved Enterprise"
status from the Israeli Ministry of Industry and Trade, for the expansion of its
facilities in the city of Herzeliya in Israel. The Approved Enterprise status
grants the subsidiary certain tax benefits and requires it to fulfill certain
conditions and criteria, such as notify the Ministry with respect to, for
example, the progress of and any change in its performance or its corporate
structure and operations. Also, the subsidiary is required to obtain approval
from the Ministry for certain transactions, including changes in its corporate
equity holding of more than 49% of its ownership, whether by private placement
or a public offering on a stock exchange.
INTELLECTUAL PROPERTY
Our intellectual property rights are important to our business. We protect
our intellectual property rights with a combination of copyright, the use of
contractual provisions with our customers and partners embodied in our license
and partnership agreements, and procedures to maintain the confidentiality of
trade secrets. Most of our intellectual property is embodied in software. The
functionality of all software can eventually be reverse engineered, given enough
time and resources. We rely on common law for protection of our trademarks "MOMA
Gateway" and "m-Wise".
COMPETITION
We encounter competition from numerous competitors, including hundreds of
smaller companies addressing niche content markets. Our larger competitors
include Cash-U Mobile Technologies Ltd. in SMS and MMS, Mobilitech, Inc. in J2ME
and centralized technology platforms (middleware), Akumitti Ltd. in digital
content platforms, Openwave Systems Inc. in application platforms, and LogicaCMG
and Materna GmbH Information & Communications in the middleware arena. We
believe our competitive strengths are our superior technology, which was greatly
enhanced since its release, and our technical experience in integrating our
middleware with various third-party technologies already existing within the
cellular operator or wireless application service providers network (e.g. SMSCs,
MMSCs and legacy billing systems). We also believe our competitive strengths are
further enhanced by our strong presence in the market through our sales to large
local and global wireless service providers in each of the relevant vertical
markets, partnering with industry-leading global and regional OEM/channel
partners as well as local sales representatives, flexibility, and commercial
experience in the industry.
-21-
EMPLOYEES
Along with our subsidiaries we employ an aggregate of 10 employees,
including our officers. Two employees (Messrs. Broudo and Ben-Asulin) are
employed by m-Wise and 8 employees are employed by m-Wise Israel, two of whom
also provide their services to us (Messrs. Kabazo and Lewin). All employment
agreements with officers and directors are described under the caption
"Executive Compensation". We believe our employee relations to be excellent.
None of our employees is represented by a labor union, and all are employed on a
full-time basis.
Since we have determined to pursue an aggressive objective, which will
require us to maintain competitive advantages in a range of areas, we intend to
maintain a small core of highly skilled technical experts in key areas. This
team will be responsible for maintaining the leadership of the technology
platform, designing the future technology upgrades and products, and utilizing
outsourced development firms on an as-needed basis to implement the necessary
codes and assist in dealing with peaks derived from sales and projects.
We anticipate that managing potential growth during 2004-2005 while
maintaining a small core team will require us to hire additional personnel, as
required by growing sales volumes In the event that the level of our business
increases we may have to hire additional personnel. We would expect that such
personnel would include a few additional personnel for technical support,
account management and sales support for the distribution channels.
Israeli law and certain provisions of the nationwide collective bargaining
agreements between the Histadrut (General Federation of Labor in Israel) and the
Coordinating Bureau of Economic Organizations (the Israeli federation of
employers' organizations) apply to our Israeli employees. These provisions
principally concern the maximum length of the work day and the work week,
minimum wages, paid annual vacation, contributions to a pension fund, insurance
for work-related accidents, procedures for dismissing employees, determination
of severance pay and other conditions of employment. We provide our employees
with benefits and working conditions above the required minimum. Furthermore,
pursuant to such provisions, the wages of most of our employees are subject to
cost of living adjustments, based on changes in the Israeli CPI (Consumer Price
Index). The amounts and frequency of such adjustments are modified from time to
time. Israeli law generally requires the payment of severance pay upon the
retirement or death of an employee or upon termination of employment by the
employer or, in certain circumstances, by the employee. We typically fund our
ongoing severance obligations for our Israeli employees by making monthly
payments for managers' insurance policies and severance funds.
Israeli law provides that employment arrangements with employees who are
not in senior managerial positions or positions who require a special degree of
personal trust, or whose working conditions and circumstances do not facilitate
employer supervision of their hours of work, must provide for compensation which
differentiates between compensation paid to employees for a work week (as
defined under Israeli law) or for maximum daily work hours and compensation for
overtime work. The maximum number of hours of overtime is limited by law.
Certain of our employment compensation arrangements are fixed and do not
differentiate between compensation for regular hours and overtime work.
Therefore, we may face potential claims from these employees asserting that the
fixed salaries do not compensate for overtime work, however, we do not believe
that these claims would have a material adverse effect on us.
FACILITIES
Our offices are located at 3 Sapir Street, Herzeliya Pituach, Israel 46852,
in leased office space of approximately 300m2, which we believe is adequate for
our current and future operating activities. Our monthly rent is $2,700.
ISRAELI TAX CONSIDERATION
Pursuant to the Law for the Encouragement of Capital Investments (1959), the
Government of the State of Israel, through the Investment Center, has granted an
"Approved Enterprise" status to our Israeli subsidiary's facility in Herzelyia.
Consequently, we are eligible for certain tax benefits for the first several
years in which we generate taxable income. We have not, however, begun to
generate taxable income for purposes of this law and we do not expect to utilize
these tax benefits for the near future. The benefits available to an approved
enterprise are dependent upon the fulfillment of certain conditions and
criteria. If we fail to comply with these conditions and criteria, the tax
benefits that we receive could be partially or fully cancelled and we could be
forced to refund the amount of the benefits we received, adjusted for inflation
and interest. We currently believe that we will be entitled to receive these
benefits, although there can be no assurances that we will be able to do so at
this time. From time to time, the Government of Israel has discussed reducing or
limiting the benefits. We cannot assess whether these benefits will be continued
in the future at their current levels or at all.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
-22-
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The members of our Board of Directors serve until the next annual meeting
of stockholders, or until their successors have been elected. The officers serve
at the pleasure of the Board of Directors. The following are our directors and
executive officers. All officers dedicate their full business time to our
operations.
NAME AGE POSITION
Mordechai Broudo 45 Chief Executive Officer and Director
Shay Ben-Asulin 36 Chairman of the Board and Secretary
Gabriel Kabazo 31 Chief Financial Officer
Asaf Lewin 39 Chief Technology Officer
MR. MORDECHAI BROUDO is one of our co-founders and has been a director
since our inception. Mr. Broudo has been acting as our Chief Executive Officer
since June 2001. Before founding m-Wise, Mr. Broudo was the Chief Technology
Officer of Need2Buy.com, Inc., now known as River One Inc., which was funded by
Mitsubishi and several leading venture capital firms, from November 1999 to
March 2000. River One provides management software and services for
manufacturers to control processes between customers and suppliers. From January
1997 to April 1998, Mr. Broudo served as the Managing Director of the New York
office of Mercado DTL, a provider of advanced intelligent data management
systems. Mr. Broudo received a Bachelors Degree in Computer Science from Queens
College, New York, in 1991.
MR. SHAY BEN-ASULIN is one of our co-founders and has been a director since
our inception. Mr. Ben-Asulin has been acting as our Secretary and Chairman of
the Board of Directors since June 2001, focusing mainly on our European
operations, corporate strategy and funding and product planning. Before founding
m-Wise, Mr. Ben-Asulin served as the Business Development and Wireless Content
Manager, from April 1999 to March 2000, of PassCall Advanced Technologies Ltd.,
an Israeli start-up company based in New York, focused on web-based content and
applications to wireless phones. In this position, Mr. Ben-Asulin acquired
extensive knowledge and expertise of the wireless communications market, and
developed sales and business development channels with US cellular operators,
system integrators and media companies. From January 1998 to September 1999, Mr.
Ben-Asulin served as the Chief Executive Officer of Mishin Investments Ltd., a
privately-owned company that promoted multinational projects and investments in
the Middle East region through business alliances in Israel and countries such
as Jordan, Oman, Qatar and Egypt.
MR. GABRIEL KABAZO, CPA, has served as our Chief Financial Officer since
October 2002. From August 2000 to September 2002, Mr. Kabazo was the Controller
of On Track Innovations Ltd., a high-tech manufacturing company in the business
of contactless smart cards traded on the NASDAQ, with several subsidiaries
worldwide (North America, South Africa, Asia and Europe) and over 200 employees,
where he supervised the finance and accounting activities of the various
subsidiaries, the ongoing management of the accounting department, preparation
of budget plans, financial reports and reports to the SEC. Mr. Kabazo has led
several initiatives to enhance efficiency and reduce company spending as
required from market conditions and played a principal role in the preparation
of On Track Innovations Ltd.'s public offering, working closely with company
management, external attorneys and underwriters. From December 1997 to July
2000, Mr. Kabazo worked as a CPA, Senior Level, at Luboshitz Kasierer, one of
Israels leading CPA firms. Mr. Kabazo received a Bachelors Degree in Accounting
and Economics from the Faculty of Management of Tel-Aviv University in 1997 and
is a Certified Public Accountant registered in Israel since 1999.
MR. ASAF LEWIN has served as our Chief Technology Officer since June 2001.
From March 2000 to September 2000, Mr. Lewin was a co-founder and managing
director at eCaddo Ltd., an Israeli start-up company in the field of
scheduling/pricing solutions for online directories. From 1995 to March 2000,
Mr. Lewin oversaw the development of several extensive visual reconnaissance
systems at Elron Software (a wholly owned subsidiary of Elron Electronic
-23-
Industries and a recognized global leader in the development of innovative
technology products and services for advanced networking and Internet
infrastructures), in the capacity of division manager. Prior to his engagement
by Elron Software in 1995, Mr. Lewin was engaged by the development team at the
Israeli Air Force Avionics Software Center, where he participated in numerous
research and development projects in a variety of languages and development
environments. He was honored with an award of excellence from the Israeli Air
Force Commander for a certain project. Mr. Lewin received a Bachelors Degree
(cum laude) in Aeronautical Engineering from the Israeli Technion (the Israel
Institute of Technology) in 1988.
AUDIT COMMITTEE
We do not have an audit committee. Because of our small size and the risk
attendant to a small public company, we are currently unable to attract an audit
committee financial expert to our Board of Directors.
EXECUTIVE COMPENSATION
The following table sets forth the cash and all other compensation paid to
our executive officers and directors during each of the last three fiscal years,
including compensation from our subsidiaries. The remuneration described in the
table includes our cost of any benefits which may be furnished to the named
executive officers, including premiums for health insurance and other benefits
provided to such individual that are extended in connection with the conduct of
our business. This table does not include certain options to purchase common
stock granted to corporations controlled by Messrs. Broudo and Ben-Asulin
(10,432,560 and 10,876,080 shares, respectively) since such options were granted
in order to provide for anti-dilution protection, and not in connection with
such individuals' employment.
-24-
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------------------------ ----------------------------------------
NAME AND OTHER ANNUAL AWARDS PAYOUTS ALL
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION --------------- ---------
Restricted Securities LTIP Compensation
Stock Underlying Payouts(S)
Awards(S) Options SARs(#)
- ----------------------------------------------------------------------------------------------------------------------
Shay Ben-Asulin 2003 $ 109,992 0 0 0 10,876,080 0 0
2002 $ 109,992 0 0 0 0 0 0
Chairman of the Board 2001 $ 126,498 0 0 0 0 0 0
and Secretary
Gabriel Kabazo (1) 2003 $ 49,608 0 0 0 552,114 0 0
2002 $ 12,658 0 0 0 0 0 0
CFO 2001 0 0 0 0 0 0 0
Mordechai Broudo 2003 $ 109,992 0 0 0 10,432,560 0 0
2002 $ 109,992 0 0 0 0 0 0
CEO 2001 $ 126,498 0 0 0 0 0 0
(1) Gabriel Kabazo's employment commenced in October 2002. The amounts shown for
Messrs. Ben-Asulin and Broudo include for each $54,996 accrued but not paid in
2002 and $109,992 in 2003.
-25-
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning stock options granted to
each of the named officers in the Summary Compensation Table for the fiscal year
ending December 31, 2003:
- ----------------------- ------------- ----------------- ------------ ------------- ---------------------------------
PERCENTAGE OF
TOTAL OF
NUMBER OF OPTIONS
SHARES GRANTED TO POTENTIAL REALIZABLE VALUE AT
UNDERLYING EMPLOYEES EXERCISE ASSUMED ANNUAL RATES OF
OPTIONS DURING PRICE PER EXPIRATION STOCK PRICE APPRECIATION FOR
NAME GRANTED FISCAL YEAR SHARE DATE OPTION TERM
- ----------------------- ------------- ----------------- ------------ ------------- ---------------------------------
5% 10%
- ----------------------- ------------- ----------------- ------------ ------------- --------------- -----------------
January
Shay Ben-Asulin(2) 10,876,080 25.0% $ 0.0017 2013 (1) (1)
- ----------------------- ------------- ----------------- ------------ ------------- --------------- -----------------
Mordechai Broudo(3) 10,432,560 23.9% January (1) (1)
$ 0.0017 2013
- ----------------------- ------------- ----------------- ------------ ------------- --------------- -----------------
Gabriel Kabazo 552,114 1.3% September (1) (1)
$ 0.0017 2011
- ----------------------- ------------- ----------------- ------------ ------------- --------------- -----------------
<FN>
(1) There is no current market for our common stock, therefore the
assumed realizable value cannot be calculated.
(2) All of such options were issued to Putchkon.com, LLC, of which
Mr. Shay Ben-Asulin is the beneficial owner.
(3) All of such options were issued to Proton Marketing Associates,
LLC, of which Mr. Mordechai Broudo is the beneficial owner.
</FN>
FISCAL YEAR-END OPTION VALUES
The following table sets forth certain information concerning the number of
shares covered by both exercisable and unexercisable stock options as of
December 31, 2003. Since there is no market for our common stock, we cannot
provide meaningful information with respect to the "Value of In-the-Money
Options at fiscal year end".
- -------------------------- ------------------------------------------------ -------------------------------------
NUMBER OF SHARES SUBJECT TO UNEXERCISED OPTIONS VALUE OF IN-THE-MONEY OPTIONS AT
AT FISCAL YEAR-END FISCAL YEAR END
- -------------------------- ------------------------------------------------ -------------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------- ----------------------- ------------------------ ------------------- -----------------
Shay Ben-Asulin 10,876,080 0 (1) (1)
- -------------------------- ----------------------- ------------------------ ------------------- -----------------
Mordechai Broudo 10,432,560 0 (1) (1)
- -------------------------- ----------------------- ------------------------ ------------------- -----------------
Gabriel Kabazo 276,057 276,057 (1) (1)
- -------------------------- ----------------------- ------------------------ ------------------- -----------------
<FN>
(1) There is no current market for our common stock, therefore the assumed
realizable value cannot be calculated.
</FN>
EMPLOYMENT AGREEMENTS
Mordechai Broudo has an employment agreement dated January 8, 2001, as
amended, pursuant to which he provides us with his services as Chief Executive
Officer, for an initial period of three years, renewed automatically unless
previously terminated. The agreement may be terminated, without cause, upon 90
days notice or by payment of three months salary, or may be immediately
terminated by us, without cause, provided that Mr. Broudo receives six months
severance pay. Mr. Broudo's current salary is $9,166 per month, plus 24 days
paid annual vacation.
-26-
Shay Ben-Asulin has an employment agreement dated January 8, 2001, as
amended, pursuant to which he provides us with his services as Chairman of the
Board of Directors and Secretary for an initial period of three years, renewed
automatically unless previously terminated. The agreement may be terminated,
without cause, upon 90 days notice or by payment of three months salary, or may
be immediately terminated by us, without cause, provided that Mr. Ben-Asulin
receives six months severance pay. Mr. Ben-Asulin's salary is $9,166 per month,
plus 24 days paid annual vacation.
Asaf Lewin has an employment agreement with the Israeli Subsidiary
dated June 1, 2001, as amended, and serves as our Chief Technology Officer and
the Chief Technology Officer of our Israeli subsidiary. Pursuant to his
employment agreement, he receives NIS 33,000 per month. He also receives a
manager's insurance policy, which will be transferred to him upon severance
unless his employment is terminated for cause (or under circumstances in which
Israeli law denies the right for severance payment). He also receives a
vocational studies fund from us in the amount of 7.5% of his monthly salary. His
employment agreement may be terminated upon 3 months notice without cause, or
immediately for cause. He has received an option to purchase 5,336,820 shares of
our common stock, subject to certain vesting schedules and certain other
restrictions.
Gabriel Kabazo has an employment agreement with the Israeli Subsidiary
dated October 1, 2002, as amended, and serves as our Chief Financial Officer and
the Chief Financial Officer of our Israeli subsidiary. Pursuant to his
employment agreement, he receives NIS 15,000 per month. He also receives a
manager's insurance policy, which will be transferred to him upon severance
unless his employment is terminated for cause (or under circumstances in which
Israeli law denies the right for severance payment). He also receives a
vocational studies fund from us in the amount of 7.5% of his monthly salary. His
employment agreement may be terminated upon one month's notice without cause, or
immediately for cause. He has received an option to purchase 552,114 shares of
our common stock, subject to certain vesting schedules and certain other
restrictions.
CONSULTING AGREEMENT
On June 24, 2003, as amended and restated on November 13, 2003, we
entered into an agreement with Hilltek Investments Limited ("Hilltek") for the
provision of general business consulting services, as well as assisting us in
coordinating the efforts of our attorneys and accountants, in connection with
our intention to become publicly traded on the Nasd's OTC Bulletin Board.
Management believes that the services which Hilltek is providing to m-Wise
allows management to focus its time and attention on m-Wise's business without
the time, effort and expense associated with becoming a fully reporting issuer
with the SEC and having its securities listed on the OTC Bulletin Board.
In consideration for all services to be provided by Hilltek, Hilltek
has received 6,000,000 fully paid and non-restricted (except by applicable law
or as set forth in the agreement between us and Hilltek) shares of our common
stock. Except for accounting and auditing expenses, by an SEC approved
accountant, which shall be borne solely by us, all the costs associated with the
aforementioned transactions shall be borne solely by Hilltek and we will not be
required to pay any other amounts to Hilltek or any third parties.
Hilltek's corporate counsel, Mr. Eric A. Weinbaum, has provided the
consulting services to m-Wise on behalf of Hilltek. Mr. Weinbaum is being paid a
cash fee for his services by Hilltek. Mr. Weinbaum has extensive experience with
corporate transactions, including public and private offerings of corporate
securities, and has been a corporate attorney in Israel since 2000. Mr. Weinbaum
has represented corporate issuers listed on both the Nasdaq Stock Market and the
OTC Bulletin Board. Through Mr. Weinbaum's representation of such issuers he has
established contacts with corporate attorneys in the U.S. as well as public
accounting firms that are part of the SEC Peer Review program. Mr. Weinbaum has
also come into contact with many market makers of OTC Bulletin Board securities.
-27-
STOCK OPTION PLANS
We adopted an Israel Stock Option Plan (2003) (the "2003 Israeli Plan")
and an International Share Option Plan (2003) (the "2003 International Plan") on
January 16, 2003, by resolution of our Board of Directors and stockholders, and
an Israel Share Option Plan (2001) and an International Share Option Plan (2001)
by resolution of our Board of Directors and stockholders. The Plans enable us to
offer an incentive based compensation system to our employees, directors and
consultants and employees, directors and consultants of our subsidiaries and/or
affiliated companies.
No options were granted in 2002.
During the year ended December 31, 2003, options to purchase our shares of
common stock were issued to the following officers, directors and affiliates of
m-Wise (and its subsidiaries), as well as to certain employees, former employees
and service provider of m-Wise (and its subsidiaries), in the amounts listed
next to their names pursuant to the Israel Share Option Plan (2001), Israel
Stock Option Plan (2003) and the International Share Option Plan (2003):
Israel Share Option Plan (2001):
Gabriel Kabazo - 150,000 options.
Additionally, an aggregate of 2,250,000 options were issued pursuant to the
Israel Share Option Plan (2001) to other employees and former employees.
All options under the Israel Share Option Plan (2001) are exercisable into
shares of common stock on a one-for-one basis.
Israel Stock Option Plan (2003):
Inter-Content Development for the Internet
Ltd. -7,457,010 options.
Gabriel Kabazo - 402,114 options
Asaf Lewin - 5,336,820 options
Additionally, an aggregate of 2,859,906 options were issued pursuant to
the Israel Stock Option Plan (2003) to other employees.
All options under the Israel Stock Option Plan (2003) are exercisable
into shares of common stock on a one-for-one basis.
International Share Option Plan (2003):
Proton Marketing Associates, LLC - 10,432,560 options - beneficial owner is
Mordechai Broudo, our CEO.
Putchkon.com, LLC - 10,876,080 options - beneficial owner is Shay Ben-Asulin,
our Chairman.
Additionally, an aggregate of 3,752,454 options were issued pursuant to the
International Share Option Plan(2003) to former employees.
All options under the International Share Option Plan (2003) are exercisable
into shares of common stock on a one-for-one basis.
No options were granted in 2004.
-28-
INTERNATIONAL SHARE OPTION PLAN (2001)
The International Share Option Plan (2001) is administered by the
Board of Directors, or a committee appointed by the Board comprised of one or
more of our directors (the "Administrator"). The Plan provides for the grant of
Incentive Stock Options, Nonstatutory Stock Options or other options, as
determined by the Administrator at the time of grant, to our employees,
directors and consultants and of our subsidiaries. There are 300,000 shares of
common stock authorized under the Plan. We may increase the number of shares
authorized for issuance under the International Plan or may make other
modifications to the Plan without stockholder approval, unless required under
applicable law, however, no amendment may adversely change the existing rights
of any option holder. As of the date of this prospectus there were 300,000
options issued under the International Share Option Plan (2001).
Any options which have been granted but not exercised may again be
used for awards under the Plan. Nonstatutory stock options may be granted to
service providers (employees, directors or consultants of m-Wise and its
subsidiaries). Incentive stock options may only be granted to our directors,
officers and employees employed by us or by our subsidiaries. However,
notwithstanding such designation, to the extent that the aggregate fair market
value of the shares with respect to which incentive stock options are
exercisable for the first time by the optionee during any calendar year exceeds
$100,000, such options shall be treated as nonstatutory stock options. Except
for certain circumstances, incentive stock options may not be granted at an
exercise price less than 100% of the fair market value of the stock as of the
date of grant (110% as to any 10% stockholder at the time of grant);
non-qualified stock options may not be granted at a price less than 85% of fair
market value of the stock as of the date of grant (110% as to any 10%
stockholder at time of grant).
Stock options may be exercised during a period of time fixed by the
Administrator except that no stock option may be exercised more than ten (10)
years (in the case of an incentive stock option, five (5) years if the optionee
holds more than 10% of our voting power, or such shorter term as may be provided
in the option agreement) after the date of grant, provided that upon our
liquidation the vesting of the option may accelerate. If the optionee ceases to
be a service provider as a result of death or disability, then the vested
portion of the option may be exercised within such period of time as set forth
in the option agreement (of at least six (6) months or for 12 (twelve) months if
the option agreement does not specify such date, but in no event later than the
expiration term of such option as set forth in the option agreement). Except in
the case of options granted to officers, directors and consultants, options may
become exercisable at a rate of no less than 20% per year over five (5) years
from the date of grant. In the discretion of the Administrator, payment of the
purchase price for the shares of stock acquired through the exercise of a stock
option may be made in cash, check, or by delivery of promissory notes or
consideration received by us by cashless exercise, or any combination of the
foregoing methods of payment. Any option granted under the Plan is exercisable
according to the terms of the Plan and of the option agreement and at such times
and under such conditions as determined by the Administrator and set forth in
the option agreement. Unless otherwise determined, shares issued upon exercise
of an option are issued to the Optionee or in the name of the Optionee to a
trustee, to be held either by the Optionee or the trustee on behalf of the
Optionee, unless otherwise determined, until the initial underwritten public
offering of our shares pursuant to an effective registration statement,
prospectus or similar document in the United States or such other jurisdiction
as is determined by the Board of Directors. In the event of a merger by us with
or into another corporation, or the sale of substantially all of our assets, and
the successor corporation refuses to assume or substitute the outstanding
options, then the option shall fully vest shall be fully exercisable for a
period of fifteen (15) days from the date of the notice thereof to the optionee,
and the option shall terminate upon the expiration of such period.
-29-
ISRAEL SHARE OPTION PLAN (2001)
The Israel Share Option Plan (2001) is administered by the Board of
Directors, or a committee appointed by the Board. Our employees, directors,
service providers and consultants and those of our subsidiaries and affiliates
become participants in the Plan upon receiving option grants. There are
2,403,672 shares of common stock authorized under the Plan. We may increase the
number of shares authorized for issuance under the Plan and extend the
termination date of the Plan with the recommendation of the Board of Directors
and the approval of the general meeting of our stockholders. The Plan is
designed to conform to Section 102 of the Israeli Income Tax Ordinance and the
rules promulgated thereunder, however, the Board of Directors, may, at its
discretion, decide whether an option shall be granted pursuant to Section 102 or
otherwise, to a trustee, Optionee or otherwise. Where a conflict arises between
any section of the Plan, the option agreement and the provisions of the law and
the rules, the latter shall apply and the Board of Directors in its sole
discretion determines the necessary changes to be made to the Plan and its
determination regarding this matter shall be final and binding. As of the date
of this prospectus there were 2,400,000 options issued under the Israel Share
Option Plan (2001).
Options may be granted at a value as determined by the Board of
Directors. Unless otherwise determined by the Board of Directors, shares issued
upon exercise of options shall be issued and held by either the Optionee or a
trustee until the completion of an initial underwritten public offering of our
shares in the United States, or another jurisdiction decided by the Board of
Directors, pursuant to an effective registration statement or similar document,
but in the case of grants pursuant to Section 102, not less then the period
required or approved pursuant to Israeli law, regulations or rules promulgated
thereunder. A grantee who desires to exercise an option granted directly to him
(and not through the trustee) shall so notify us in writing in such form as
shall be prescribed by the Board of Directors from time to time. The Plan
terminates and no option shall be granted after the ten (10) year anniversary of
the Plan.
Unless otherwise directed by the Board of Directors, options vest,
subject to certain conditions, at the rate of 1/4 at the end of the first year
and 1/16 every 3 months thereafter. The term of the options shall not be more
than 8 years, provided that, and unless in each case the applicable option
agreement provides otherwise, upon our liquidation 1/2 of the outstanding
options held by or on behalf of a grantee shall be accelerated and become
immediately vested and exercisable and upon the occurrence of certain
"significant events" all outstanding options held by or on behalf on a grantee
shall be accelerated and become immediately fully vested and exercisable. Upon
dismissal of the employee for Cause, all options held by or on behalf of the
grantee immediately expire. If the grantee's employment is terminated as a
result of death, disability or retirement after age 60 with the approval of the
Board of Directors, then the vested portion of the option may be exercised for a
period of 12 (twelve) months.
In the event that a grantee is exempt from vesting periods the Board
of Directors is entitled to determine that where the grantee does not comply
with the conditions determined by the Board of Directors or ceases to be an
employee, the trustee, us or a company related to us thereof have the right to
repurchase the shares from the grantee for nominal or any other consideration
paid by the grantee, subject to applicable law. Any options which have been
granted but not exercised may again be used for awards under the Plan. If our
shares should be registered for trading on any stock exchange, then the options
and/or shares allotted in accordance with the Plan may be made conditional to
any requirement or instruction of the stock exchange authorities or of any other
relevant authority acting pursuant to applicable law as shall exist from time to
time.
INTERNATIONAL SHARE OPTION PLAN (2003)
The International Share Option Plan (2003) is administered by the
Board of Directors, or a committee appointed by the Board comprised of one or
more of our directors (the "Administrator"). The Plan provides for the grant of
Incentive Stock Options, Nonstatutory Stock Options or other options, as
determined by the Administrator at the time of grant, to our employees,
directors and consultants and of our subsidiaries. There are 25,061,094 shares
of common stock authorized under the Plan. We may increase the number of shares
authorized for issuance under the International Plan or may make other
modifications to the Plan without stockholder approval, unless required under
applicable law, however, no amendment may adversely change the existing rights
of any option holder. As of the date of this prospectus there were 25,061,094
options issued under the International Share Option Plan (2003).
-30-
Any options which have been granted but not exercised may again be
used for awards under the Plan. Nonstatutory stock options may be granted to
service providers (employees, directors or consultants of m-Wise and its
subsidiaries). Incentive stock options may only be granted to employees,
including officers and directors, employed by us and by our subsidiaries.
However, notwithstanding such designation, to the extent that the aggregate fair
market value of the shares with respect to which incentive stock options are
exercisable for the first time by the optionee during any calendar year exceeds
$100,000, such options shall be treated as nonstatutory stock options. Except
for certain circumstances, incentive stock options may not be granted at an
exercise price less than 100% of the fair market value of the stock as of the
date of grant (110% as to any 10% stockholder at the time of grant);
non-qualified stock options may not be granted at a price less than 85% of fair
market value of the stock as of the date of grant (110% as to any 10%
stockholder at time of grant).
Stock options may be exercised during a period of time fixed by the
Administrator except that no stock option may be exercised more than ten (10)
years (in the case of an incentive stock option, five (5) years if the optionee
holds more than 10% of our voting power, or such shorter terms as may be
provided in the option agreement) after the date of grant, provided that upon
our liquidation the vesting of the option may accelerate. If the optionee ceases
to be a service provider as a result of death or disability, then the vested
portion of the option may be exercised within such period of time as set forth
in the option agreement (of at least six (6) months) or for 12 (twelve) months
if the option agreement does not specify such date, but in no event later than
the expiration term of such option as set forth in the option agreement). Except
in the case of options granted to officers, directors and consultants, options
may become exercisable at a rate of no less than 20% per year over five (5)
years from the date of grant. In the discretion of the Administrator, payment of
the purchase price for the shares of stock acquired through the exercise of a
stock option may be made in cash, check, or by delivery of promissory notes or
consideration received by us by cashless exercise, or any combination of the
foregoing methods of payment. Any option granted under the Plan is exercisable
according to the terms of the Plan and of the option agreement and at such times
and under such conditions as determined by the Administrator and set forth in
the option agreement. Unless otherwise determined, shares issued upon exercise
of an option are issued to the Optionee or in the name of the Optionee to a
trustee, to be held either by the Optionee or by the trustee on behalf of the
optionee, unless otherwise determined, until the initial underwritten public
offering of our shares pursuant to an effective registration statement,
prospectus or similar document in the United States or such other jurisdiction
as is determined by the Board of Directors. In the event of a merger by us with
or into another corporation, or the sale of substantially all of our assets, and
the successor corporation refuses to assume or substitute the outstanding
options, then the option shall fully vest shall be fully exercisable for a
period of fifteen (15) days from the date of the notice thereof to the optionee,
and the option shall terminate upon the expiration of such period.
ISRAEL STOCK OPTION PLAN (2003)
The Israel Stock Option Plan (2003) is administered by the Board of
Directors, or a committee appointed by the Board. Our employees, directors,
service providers and consultants and those of our subsidiaries and affiliates
become participants in the Plan upon receiving option grants. There are
16,094,106 shares of common stock authorized under the Plan. We may increase the
number of shares authorized for issuance under the Plan and extend the
termination date of the Plan with the recommendation of the Board of Directors
and the approval of the general meeting of our stockholders. The Plan is
designed to conform to Section 102 of the Israeli Income Tax Ordinance and the
rules promulgated thereunder, however, the Board of Directors, may, at its
discretion, decide whether an option shall be granted pursuant to Section 102 or
otherwise, to a trustee, Optionee or otherwise. Where a conflict arises between
any section of the Plan, the option agreement and the provisions of the law and
the rules, the latter shall apply and the Board of Directors in its sole
discretion determines the necessary changes to be made to the Plan and its
determination regarding this matter shall be final and binding. As of the date
of this prospectus there were 16,055,850 options issued under the Israel Stock
Option Plan (2003).
-31-
Options may be granted at a value as determined by the Board of
Directors. Unless otherwise determined by the Board of Directors, shares issued
upon exercise of options shall be issued and held either by the Optionee or by a
trustee until the completion of an initial underwritten public offering of our
shares in the United States, or another jurisdiction decided by the Board of
Directors, pursuant to an effective registration statement or similar document,
but in the case of grants pursuant to Section 102, not less then the period
required or approved pursuant to Israeli law, regulations or rules promulgated
thereunder. A grantee who desires to exercise an option granted directly to him
(and not through the trustee) shall so notify us in writing in such form as
shall be prescribed by the Board of Directors from time to time. The Plan
terminates and no option shall be granted after the ten (10) year anniversary of
the Plan.
Unless otherwise directed by the Board of Directors, options vest at
the rate of 1/4 at the end of the first year and 1/16 every 3 months thereafter.
The term of the options shall not be more than 8 years, provided that, and
unless in each case the applicable option agreement provides otherwise, upon our
liquidation 1/2 of the outstanding options held by or on behalf of a grantee
shall be accelerated and become immediately vested and exercisable and upon the
occurrence of certain "significant events" all outstanding options held by or on
behalf of a grantee shall be accelerated and become immediately fully vested and
exercisable. Upon dismissal of the employee for Cause, all options held by or on
behalf of the grantee immediately expire. If the grantee's employment is
terminated as a result of death, disability or retirement after age 60 with the
approval of the Board of Directors, then the vested portion of the option may be
exercised for a period of 12 (twelve) months.
In the event that a grantee is exempt from vesting periods the Board
of Directors is entitled to determine that where the grantee does not comply
with the conditions determined by the Board of Directors or ceases to be an
employee, the trustee, us or one of our related companies have the right to
repurchase the shares from the grantee for nominal or any other consideration
paid by the grantee, subject to applicable law. Any options which have been
granted but not exercised may again be used for awards under the Plan. If our
shares should be registered for trading on any stock exchange, then the options
and/or shares allotted in accordance with the Plan may be made conditional to
any requirement or instruction of the stock exchange authorities or of any other
relevant authority acting pursuant to applicable law as shall exist from time to
time.
In 2003, the Board of Directors resolved to grant certain of our
service providers and service providers of our subsidiaries an aggregate of
2,401,668 options to purchase shares of common stock under the Israel 2003 Plan,
subject to a certain vesting schedule. If a Liquidation Event occurs prior to
July 1, 2005, then the vesting of these options shall cease forthwith and such
grantees shall have no right to receive or exercise any options not vested prior
to such date. All such unvested options will be granted, fully vested, to
Putchkon.com, LLC (38.46%), Proton Marketing Associates, LLC (38.46%) and
Inter-Content Development for the Internet Ltd. (23.08%). A "Liquidation Event"
shall mean each of the following events: (i) any of Putchkon.com, LLC, Proton
Marketing Associates, LLC or Inter-Content Development for the Internet Ltd.
sells, transfers, pledges or otherwise disposes of any of their securities of
m-Wise; (ii) if the aforementioned stockholders, or an affiliate thereof,
receive stock or dividends following the consummation of a merger or acquisition
transaction; or (iii) the initial public offering of our securities.
-32-
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information, as of the date
hereof, with respect to the beneficial ownership of the common stock by each
beneficial owner of more than 5% of the outstanding shares thereof, by each
director, each nominee to become a director and each executive named in the
Summary Compensation Table and by all executive officers, directors and nominees
to become directors of m-Wise. As of the date hereof we had 69,506,898 shares of
our common stock outstanding. Pursuant to the rules and regulations of the
Securities and Exchange Commission, shares of common stock that an individual or
group has a right to acquire within 60 days pursuant to the exercise of options
or warrants are deemed to be outstanding for the purposes of computing the
percentage ownership of such individual or group, but are not deemed to be
outstanding for the purposes of computing the percentage ownership of any other
person shown in the table.
PERCENTAGE PERCENTAGE
NAME AND ADDRESS COMMON STOCK BEFORE OFFERING AFTER OFFERING
Shay Ben-Asulin(1) 19,637,862 24.4% 24.4%
Mordechai Broudo(2) 19,637,862 24.6 24.6
Miretzky Holdings Ltd. (3) 37,891,548 54.5 54.5
Gabriel Kabazo (4) 414,086 * *
Asaf Lewin(5) 2,668,410 3.7 3.7
Inter-Content development
Inter-content Development
for the Internet Ltd. (6) 11,782,716 15.3 15.3
Hilltek Investments Limited (7) 6,000,000 8.6 0.0
All officers and directors as a
group (4 persons) (1)(2)(4)(5) 42,358,220 45.1% 45.1%
<FN>
*LESS THAN ONE PERCENT
(1) Shay Ben-Asulin is the beneficial owner of Putchkon.com, LLC, which owns all
these shares and options. The address of Putchkon.com, LLC is c/o Doron Cohen -
David Cohen, Law Offices, 14 Abba Hillel Silver Rd. Ramat-Gan, Israel 52506.
Includes 10,876,080 options to purchase common stock granted to PUTCHKON.COM.
Does not include certain additional options to purchase common stock which
Putchkon.com is entitled to receive upon the occurrence of a Liquidation Event
(see "Stock Option Plans").
(2) Mordechai Broudo is the beneficial owner of Proton Marketing Associates,
LLC, which owns all these shares and options. The address of Proton Marketing
Associates, LLC is c/o Doron Cohen - David Cohen, Law Offices, 14 Abba Hillel
Silver Rd. Ramat-Gan, Israel 52506. Includes 10,432,560 options to purchase
common stock granted to Proton Marketing. Does not include certain additional
options to purchase common stock which Proton is entitled to receive upon the
occurrence of a Liquidation Event (see "Stock Option Plans").
(3) The beneficial owner of Miretzky Holdings Ltd. is Mark Quirk. The address
for Miretzky Holdings, Ltd. is Clinch's House, Lord Street, Douglas, Isle of
Man, IM99 1RZ (PO Box 227).
(4) Includes an aggregate of 414,086 options to purchase common stock granted to
Gabriel Kabazo, subject to certain limitations (see "Stock Option Plans"). The
address of Gabriel Kabazo is c/o m-Wise.
(5) Includes an aggregate of 2,668,410 options to purchase shares of common
stock, granted to Asaf Lewin, subject to certain restrictions and limitations
(see "Stock Option Plans"). The address of Asaf Lewin is c/o m-Wise.
-33-
(6) The address of Inter-Content Development for the Internet Ltd. is 18 Yohanan
Ha'Sandlar St., Tel Aviv, Israel 63822. The beneficial owner of Inter-Content
Development for the Internet is Mr. Jacob Marinka. Includes 7,457,010 options to
purchase common stock . Does not include certain additional options to purchase
common stock which Inter-Content Development for the Internet Ltd. is entitled
to receive upon the occurrence of a Liquidation Event (see "Stock Option
Plans").
(7) The address of Hilltek Investments Limited is P.O. Box 3161, Road Tow,
Tortola, British Virgin Islands. Channa Ross is the control person, sole
director and sole shareholder of Hilltek Investments Limited. Based on
representations made to m-Wise by Mrs. Channa Ross, Channa Ross has sole voting
and investment power of the 6,000,000 shares of m-Wise common stock held by
Hilltek, and there are no contracts, arrangements, understandings, or
relationships or otherwise, with respect to the voting power or investment power
of the 6,000,000 shares held by Hilltek.
</FN>
STOCKHOLDERS' AGREEMENT
Cap Ventures Ltd., Miretzky Holdings Ltd., Proton Marketing
Associates, LLC, Putchkon.com, LLC, and certain other stockholders holding an
aggregate of 63,506,898 shares of common stock have entered into a stockholders'
agreement dated January 11, 2001, agreeing to restrictions on transfer. Under an
Investors' Rights Agreement dated January 11, 2001, we agreed to provide certain
stockholders with demand registration rights, applicable six months after the
effective date of this registration statement (12 months in the case of a
registration statement on Form S-3); to file our reports in accordance with
Section 13 of the Securities Exchange Act of 1934 and otherwise ensure that its
financial information is "publicly available" for purposes of Rule 144; provide
the investors thereunder with copies of our financial statements on a periodic
basis; provide access to our books and records; obtain key man life insurance in
the amount of $1,000,000 on each of Messrs. Broudo and Ben-Asulin (which has not
been complied with); and provide certain of our stockholders with a right of
first refusal to purchase newly issued m-Wise securities, subject to certain
exempt issuances. The holders were also granted certain registration rights
which are inapplicable to this registration statement. Certain rights under the
Investors' Rights Agreement terminate immediately prior to a firm commitment
underwriting under the Securities Act, or a public offering effected on the
London, Paris or Frankfurt Stock Exchanges, provided such firm commitment
underwriting is for no less than $20,000,000 net of underwriting discounts and
commissions and such underwriting reflects m-Wise a pre-money valuation of no
less than $60,000,000.
SELLING STOCKHOLDERS
The shares of our common stock being offered by the selling
stockholders will be offered initially at $0.16 per share, until the common
stock is admitted for trading, at which point the shares will likely be offered
at market prices, as reflected on the National Association of Securities Dealers
OTC Bulletin Board, or on the NASDAQ Small Cap Market if the common stock is
then traded on NASDAQ. Selling stockholders may also sell their shares in
private transactions at negotiated prices. It is anticipated that registered
broker-dealers will be allowed the commissions which are usual and customary in
open market transactions. There are no other arrangements or understandings with
respect to the distribution of the common stock. The relationship, if any,
between us and any selling stockholder is set forth below. None of the selling
stockholders are broker-dealers or affiliates of broker-dealers. All of the
shares of common stock being offered in this prospectus were issued and
outstanding as of the date of this prospectus.
SHARES BENEFICIALLY PERCENTAGE
OWNED TOTAL SHAREs
NAME AND ADDRESS AND BEING OFFERED AFTER OFFERING
Hilltek Investments Limited(1) 6,000,000 0.0%
-34-
(1) On June 24, 2003, m-Wise and Hilltek entered into a general business
consulting agreement, which was subsequently amended on November 13, 2003. No
person affiliated or associated with Hilltek has held any position or office
with m-Wise, or any of its predecessors or affiliates, within the past three
years. Channa Ross is the control person and sole director of Hilltek
Investments Limited.
PLAN OF DISTRIBUTION
We have applied to have our shares of common stock registered on the OTC
Bulletin Board. We anticipate that once the shares are trading on the OTC
Bulletin Board or any other market the selling stockholders will sell their
shares directly into any such market. Selling Stockholders will initially offer
their shares at $0.16 per share until such time as the common stock is quoted on
the OTC Bulletin Board, at which time, prices the selling stockholders will
receive will be determined by prevailing market prices on the OTC Bulletin Board
or Selling stockholders may also sell in private transactions at negotiated
prices. We cannot predict the price at which shares may be sold or whether the
common stock will ever trade on any market. The shares may be sold by the
selling stockholders, as the case may be, from time to time, in one or more
transactions. We do not intend to enter into any arrangements with any
securities dealers concerning solicitation of offers to purchase the shares.
Commissions and discounts paid in connection with the sale of the shares by the
selling stockholders will be determined through negotiations between them and
the broker-dealers through or to which the securities are to be sold and may
vary, depending on the broker-dealers fee schedule, the size of the transaction
and other factors. The separate costs of the selling stockholders will be borne
by them. The selling stockholders will, and any broker-dealer or agent that
participates with the selling stockholders in the sale of the shares by them
may, be deemed an "underwriter" within the meaning of the Securities Act, and
any commissions or discounts received by them and any profits on the resale of
shares purchased by them may be deemed to be underwriting commissions under the
Securities Act. The expenses of this offering are estimated to be approximately
$80,000, which, other than fees paid to SF Partnership LLP our independent
auditors, will be paid by Hilltek.
The selling stockholders will bear the selling expenses in connection with sales
made by them. We will use our best efforts to update the registration statement
and maintain its effectiveness for a period of one year from its initial
effective date.
-35-
CERTAIN TRANSACTIONS
RESEARCH AND DEVELOPMENT SERVICES AGREEMENTS, LICENSE AGREEMENTS AND LOAN
AGREEMENT. We have entered into a License Agreement with each of our United
Kingdom, France, Spain, Italy and Israeli subsidiaries, and into Research and
Development Services Agreements with the Israeli subsidiary, m-Wise Ltd. The
License Agreements provide for the grant of a non-exclusive, irrevocable and
non-transferable license to each of the said subsidiaries to use, sublicense,
sell, market and distribute our technology and platform, for no consideration.
As part of our corporate and sales channel's reorganization process, these
agreements were terminated by us as of April 1, 2003. The Research and
Development Services Agreements with our Israeli subsidiary provide for the
performance of research and development services of the components to be
included in our technology and platform, by our Israeli subsidiary. During 2000,
in consideration for the services, we paid our Israeli subsidiary service fees
in an amount equal to the sum of all costs of the subsidiary, plus a fee equal
to 5% of such costs (a "cost plus" basis), or $473,883. As of 2001, we paid our
Israeli subsidiary service fees on a "cost" basis, however the parties may
change the consideration from time to time, and when we become profitable, the
consideration shall be on a "cost plus" basis, or another structure agreed by
the parties. The Research and Development Services and License agreements
provide for the sole ownership by us of our technology, platform, derivative
invention and intellectual property. The amounts paid in during the years ended
December 31, 2001, 2002 and 2003 to our Israeli subsidiary were $1,522,000 ,
$1,760,000 and $665,000, respectively.
The Loan Agreement with the United Kingdom subsidiary and its
subsidiaries provides for the extension by us of a loan in the amount of
$3,200,000 to the United Kingdom subsidiary, which was made by us between April
2000 and January 2003. The outstanding loan amount, together with simple
interest at a rate per annum of 4% shall be due and payable on the earlier of:
(i) August 31, 2006, or (ii) upon the occurrence of (A) any of the following
"exit events": (i) a consolidation, merger or reorganization of the subsidiary
with or into, or the sale of all or substantially all of the subsidiary's
assets, or substantially all of the subsidiary's issued and outstanding share
capital to any other company, or any other person, other than a wholly-owned
subsidiary of the subsidiary, or (ii) any transaction or series of related
transactions in which more than fifty percent (50%) of the outstanding share
capital of the subsidiary following such transaction or series of related
transactions is held by a shareholder or group of shareholders that held less
than fifty percent (50%) of the outstanding share capital of the subsidiary
prior to such transaction or series of transactions; or (B) (i) the insolvency
of the subsidiary; (ii) the commission of any act of bankruptcy by the
subsidiary; (iii) the execution by the subsidiary of a general assignment for
the benefit of creditors; (iv) the filing by or against the subsidiary of any
petition in bankruptcy or any petition for relief under the provisions of any
law for the relief of debtors, and the continuation of such petition without
dismissal for a period of ninety (90) days or more; (v) the appointment of a
receiver or trustee to take possession of a material portion of the property or
assets of the subsidiary and the continuation of such appointment without
dismissal for a period of ninety (90) days or more; or (vi) the subsidiary
ceases to conduct business in the normal course for a period of ninety (90) days
or more. The loans extended by the UK subsidiary to its subsidiaries were to be
repaid on the same terms and in the same manner as provided for with respects to
the loan extended us.
The loan in the amount of $3,200,000 to our UK subsidiary was used
by our subsidiary primarily for: the establishment of its subsidiaries, salaries
of employees, network costs, office rent and for working capital and general
corporate purposes of the subsidiaries.
Due to the high costs and low revenues in the European application
service provider (ASP) market, in 2002 our management decided to transition our
focus away from pan-European wireless application service providers, and toward
installing and licensing our middleware technology at cellular operators and
wireless application service providers worldwide, and to operate through
original equipment manufacturers (OEMs) and regional sales representatives to
sell our products. Therefore, our management decided to liquidate, or allow the
liquidation of the UK subsidiary, m-Wise Ltd., and its three subsidiaries in
Italy, France and Spain, by creditors and local legal authorities. Our UK
subsidiary was dissolved pursuant to Section 652A of the Companies Act of 1985
on November 11, 2003. We are in the process of contacting the registrar in each
of the countries of the subsidiaries of the UK Subsidiary, to notify them that
each Subsidiary has ceased doing business and to request the dissolution of each
subsidiary.
-36-
We do not expect to be repaid the loan amount. The operations of
those subsidiaries were accounted for as discontinued operations in the
financial statements. The subsidiaries have no ability to pay creditors or to
continue as a going concern.
PROMISSORY NOTE dated July 10, 2002 (canceling and replacing certain Promissory
Notes dated March 13, 2002) with each of Syntek Capital AG and DEP Technology
Holdings Ltd. During 2002, Syntek Capital and DEP, then the sole holders of
shares of our Series B preferred stock (which has subsequently been converted
into shares of our common stock) and represented on our Board of Directors,
extended to us a loan in the aggregate amount of $1,800,000. Pursuant to the
Promissory Notes, we are required to repay the loan amount, together with
accrued interest from the date of the Promissory Notes and until the date of
repayment, during the period of January 1, 2003 through December 31, 2007. The
interest rate is determined according to the per annum LIBOR rate offered by
Citibank North America as of the date of the Promissory Notes, and thereafter
such LIBOR rate offered on each anniversary of the date of the Promissory Notes,
to apply for the following 12 month period. The repayment of the loan amount,
together with the accrued interest thereon, is to be made exclusively from our
annual revenues generated during the repayment period, as recorded in our
audited annual financial statements in such way that each of the Syntek Capital
and DEP Technology Holdings shall be entitled to receive 2.5% of the revenues on
account of the repayment of the loan amount until the earlier to occur of: (i)
each of Syntek Capital and DEP Technology Holdings has been repaid the entire
loan amounts; or (ii) any event in which the loan amount becomes due and
payable, as described below. Actual payments are on a quarterly basis, within 45
days following the last day of the quarter, based upon the quarterly financial
reports. The entire unpaid portion of the loan amount shall be automatically and
immediately due and payable upon the earlier to occur of (i) December 31, 2007;
(ii) the closing of an exit transaction; or (iii) an event of default. An "exit
transaction" includes, INTER ALIA: (a) the acquisition of m-Wise by means of
merger, acquisition or other form of corporate reorganization in which our
stockholders prior to such transaction hold less than 50% of the share capital
of the surviving entity, (b) sale of all or substantially all of our assets or
any other transaction resulting in our assets being converted into securities of
any other entity, (c) the acquisition of all or substantially all of our issued
shares, (d) the sale or exclusive license of our intellectual property other
than in the ordinary course of business; or (e) a public offering of our
securities. An "event of default" includes, INTER ALIA: (a) our breach of any of
our material obligations under the Promissory Notes (including any default on
any payment due under the Promissory Notes) which has not been remedied within
20 days of written notice by Syntek Capital and DEP Technology Holdings (b) the
suspension of the transaction of our usual business or our insolvency, (c) the
commencement by us of any voluntary proceedings under any bankruptcy
reorganization, arrangement, insolvency, readjustment of debt, receivership,
dissolution or liquidation law or statute of a jurisdiction, or if we shall be
adjudicated insolvent or bankrupt by a decree of a court of competent
jurisdiction; if we shall petition or apply for, acquiesce in, or consent to,
the appointment of any receiver or trustee of us or for all or any part of our
property or if we apply for an arrangement with our creditors or participants;
or if we shall make an assignment of our intellectual property for the benefit
of our creditors (other than in the ordinary course of business), or if we shall
admit in writing our inability to pay our debts as they mature or if any of our
intellectual property is purchased by or assigned to any one of our founders
(and/or affiliates thereof) under liquidation proceedings without the prior
written consent of Syntek Capital and DEP Technology Holdings, (d) or if there
shall be commenced against us any proceedings related to us under any
bankruptcy, reorganization, arrangement, insolvency, readjustment of debt,
receivership, dissolution or liquidation law or statute of any jurisdiction, and
any such proceedings shall remain undismissed for a period of thirty (30) days,
or if by any act we indicate our consent to, approval of or acquiescence in, any
such proceeding; or if a receiver or trustee shall be appointed for us or for
all or a substantial part of our property, and any such receivership or
trusteeship shall remain undischarged for a period of thirty (30) days; or (e)
if there shall have been a material deterioration of our business, financial
condition or operations. Under the Promissory Notes, we undertook that until the
repayment of the loan amount: (i) we shall not create or suffer to create a
pledge, charge or other encumbrance over any or all of our assets except for
such pledge, charge or encumbrance in favor of a bank under the terms of a loan
or line of credit granted by a bank to us, provided that we gave prior notice to
Syntek Capital and DEP Technology Holdings with respect such pledge, charge or
encumbrance at least ten (10) days prior to its creation; (ii) we shall not
engage or permit any of our subsidiaries to engage in any business other than
the business engaged in by us at the date of the Promissory Notes and any
business substantially similar or related thereto (or incidental thereto); (iii)
we shall not declare or pay a dividend or make any distribution or payment on
account of our shares, except for the purpose of purchasing common stock of
-37-
m-Wise held by Ogen LLC as applicable under a certain undertaking of the
principals of Ogen LLC towards m-Wise; (iv) we shall deliver to Syntek Capital
and DEP Technology Holdings audited financial statements within 90 days of the
end of our fiscal year, accompanied by the report of a firm of independent
certified public accountants of recognized standing and unaudited quarterly
financial statements signed by our Chief Financial Officer within 30 (thirty)
days of the end of each quarter and we shall also deliver to Syntek Capital and
DEP Technology Holdings any information which we make generally available to our
stockholders or which Syntek Capital and DEP Technology Holdings may otherwise
reasonably require. As of March 31, 2004, we have to pay $28,200 of the loan
amount, based on 5.0% of our revenues subsequent to January 1, 2003. As of the
date hereof, we have not paid any amount due to the lenders. Neither Syntek nor
DEP Technology is represented on our current Board of Directors and neither is
affiliated with any of our officers, directors or principal stockholders. As of
the date of this prospectus, the outstanding balance of the loan was $1,845,236.
AGREEMENT, SECURITY AGREEMENT, ESCROW AGREEMENT AND UNDERTAKING. In
July 2002, Proton Marketing Associates, LLC, Putchkon.com, LLC (each a founding
stockholder of m-Wise and represented on our Board of Directors) and
Inter-Content Development for the Internet Ltd. (the "Buying stockholders")
purchased all of our Series B preferred stock (all of which has been converted
into shares of our common stock) then held by DEP Technology Holdings Ltd. and
Syntek Capital AG, thus becoming the sole holders of our Series B preferred
stock (all of which has been converted into shares of our common stock), except
for options granted to purchase Series B preferred stock (prior to the
conversion thereof to shares of our common stock). In consideration for the
stock purchased, each of the Buying stockholders is required to pay each of DEP
Technology Holdings and Syntek Capital, upon the consummation of any
"liquidation event" (as described below), an amount equal to 50% (to be reduced
by 5 percentage points at the end of each 6 months commencing as of July 1,
2002, provided that from and after June 30, 2005, such percentage shall equal
20%) of any gross distribution to or any gross proceeds received by the Buying
stockholders by reason of their ownership of, or rights in, any of our shares or
options to purchase our shares, whether such shares are held by the Buying
stockholders directly, indirectly, or by an affiliate (the "Founders
securities"). The consideration will be paid upon the consummation of a
liquidation event which is defined as the: (i) sale, transfer, conveyance,
pledge or other disposal by the Buying stockholders or any affiliate thereof of
any of their Founders securities; (ii) any event in which the Buying
stockholders or any affiliate thereof receive stock (in kind or cash dividends)
from us or any surviving corporation following the consummation of a merger and
acquisition transaction (any transaction in which we shall merge into or
consolidate with any other corporation in which we are not the surviving
entity); or (iii) the initial public offering of our securities. In the event of
an initial public offering of our securities, the consideration shall be paid in
Founders securities and shall equal 50% (as adjusted) of the securities held by
the Buying stockholders prior to the public offering. Until payment of the
consideration as aforesaid, the purchased Series B preferred stock (all of which
has been converted into shares of our common stock) and any securities as shall
be issued and/or granted to either of the Buying stockholders during the terms
of the Agreement (the "Secured collateral"), are subject to a certain first
priority interest granted in favor of each of DEP Technology Holdings and Syntek
Capital (and subject to adjustment as aforesaid) pursuant to a Security
Agreement signed between the parties, and are placed in escrow pursuant to a
certain Escrow Agreement until the occurrence of a liquidation event, such as
the sale, transfer, conveyance, pledge or other disposal by the Buying
stockholders of any of their securities in m-Wise or the consummation of an
initial public offering of our securities. Under the Security Agreement, the
Buying stockholders undertook, INTER ALIA, not to encumber or pledge or to
suffer any such encumbrance, pledge, attachment or other third party rights on
any of the Secured collateral. In an event of default in any transfer of the
consideration pursuant to the Agreement, DEP Technology Holdings and Syntek
Capitals shall have all rights of a secured creditor subject to the terms of the
Agreement and may immediately take ownership of any part of the Secured
collateral and sell, assign or transfer any part of the Secured collateral.
Under a Letter of Consent, Approval and Undertaking, each beneficial owner of
Proton Marketing Associates, Putchkon.com and Inter-Content Development for the
Internet undertook towards DEP Technology Holdings and Syntek Capital, INTER
ALIA, not to transfer any securities and that such transfer shall be null and
void unless approved in writing by DEP Technology Holdings and Syntek Capital.
-38-
In January 2003, we issued Miretzky Holdings Limited 37,891,548 shares of
our Series C Preferred Stock, which were subsequently converted into 37,891,548
shares of our common stock, in consideration for the provision of a credit line
in the amount of $300,000.
In 2002 and 2003, we accrued $54,996 and $109,992, respectively, for each of
Shay Ben-Asulin and Mordechai Bruodo as salary for their management of our
activities. Each of Messrs. Ben-Asulin and Broudo are full time employees of
ours. Since we did not have funds available to pay such amounts we have accrued
it.
OGEN LLC and Chinese Whispers LLC are considered to be "promoters" of
m-Wise, as well as our officers and directors. All transactions between us and
our "promoters" required to be included in this "Certain Transactions" section
have been disclosed.
-39-
DESCRIPTION OF SECURITIES
COMMON STOCK
Our Certificate of Incorporation authorizes the issuance of 210,000,000
shares of common stock, $.0017 par value per share, of which 69,506,898 shares
were issued and outstanding as of the date of this prospectus. Holders of shares
of common stock are entitled to one vote for each share on all matters to be
voted on by the stockholders. Holders of shares of common stock have no
cumulative voting rights. Holders of shares of common stock are entitled to
share ratably in dividends, if any, as may be declared, from time to time by the
Board of Directors in its discretion, from funds legally available therefore and
subject to any preferential rights conferred to the holders of preferred stock,
if any. In the event of a liquidation, dissolution or winding up of m-Wise, the
holders of shares of common stock shall be entitled to receive all of the assets
of m-Wise available for distribution to the holders of common stock ratably in
proportion to the number of shares of common stock held by them. There are no
conversion rights, redemption or sinking fund provisions with respect to the
common stock. On November 20, 2003, we effected a six-for-one forward split of
our common stock.
Meetings of stockholders may be called by the Board of Directors.
Holders of a majority of the shares outstanding and entitled to vote at the
meeting must be present, in person or by proxy, for a quorum to be present to
enable the conduct of business at the meeting.
PREFERRED STOCK
Our Certificate of Incorporation authorizes the issuance of 170,000,000
shares of blank check preferred stock, $.0017 par value. We previously had
325,000 shares of Series A preferred stock, 3,000,000 shares of Series B
preferred stock and 20,000,000 shares of Series C preferred stock authorized,
all of which have been cancelled. There are currently no shares of our preferred
stock outstanding.
Our Board of Directors has authority, without action by the
stockholders, to issue all or any portion of the authorized but unissued shares
of preferred stock in one or more series and to determine the voting rights,
preferences as to dividends and liquidation, conversion rights, and other rights
of such series. We consider it desirable to have preferred stock available to us
to provide increased flexibility in structuring possible future acquisitions and
financings, and in meeting corporate needs which may arise. If opportunities
arise that would make desirable the issuance of preferred stock through either a
public offering or private placements, the provisions for preferred stock in our
Certificate of Incorporation would avoid the possible delay and expense of a
stockholders' meeting, except as may be required by law or regulatory
authorities. Issuance of the preferred stock could result, however, in a series
of securities outstanding that will have certain preferences with respect to
dividends and liquidation over the common stock, which would result in dilution
of the income per share and net book value of the common stock. Issuance of
additional common stock pursuant to any conversion right that may be attached to
the terms of any series of preferred stock may also result in dilution of the
net income per share and the net book value of the common stock. The specific
terms of any series of preferred stock will depend primarily on market
conditions, terms of a proposed acquisition or financing, and other factors
existing at the time of issuance. Therefore, it is not possible at this time to
determine in what respect a particular series of preferred stock will be
superior to our common stock or any other series of preferred stock which we may
issue. The Board of Directors may issue preferred stock in future financings,
but has no current plans to do so at this time.
The issuance of preferred stock could have the effect of making it more
difficult for a third party to acquire a majority of our outstanding voting
stock.
RIGHTS OF FIRST REFUSAL
We granted certain of our stockholders certain rights of first refusal to
purchase shares offered by us pursuant to an Investors' Rights Agreement dated
January 11, 2001. The right of first refusal does not extend to securities
issuable upon conversion of existing preferred stock, upon the exercise of
existing options, upon the acquisition of another company provided we control
51% or more of such acquired entity, in a firm commitment underwritten public
offering of more than $7.5 million and in certain other circumstances.
We intend to furnish holders of our common stock annual reports
containing audited financial statements and to make public quarterly reports
containing unaudited financial information.
TRANSFER AGENT
The transfer agent for our common stock is Computershare Trust Company
inc., 350 Indiana Street, Golden, Colorado 80401, and its telephone number is
(303) 262-0600.
INTEREST OF NAMED EXPERTS AND COUNSEL
The legality of the common stock offered by this prospectus and certain
legal matters in connection with the offering will be passed upon for us by
Gersten, Savage, Kaplowitz, Wolf & Marcus, LLP, New York, New York.
EXPERTS
Our audited financial statements included in this Prospectus as of
December 31, 2003 and 2002 have been audited by SF Partnership LLP, independent
certified public accountants, to the extent and for the periods set forth in
their report thereon, and are included in reliance upon such report given upon
the authority of such firm as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed a registration statement under the Securities Act with
respect to the securities offered hereby with the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549. This prospectus, which is a part of the
registration statement, does not contain all of the information contained in the
registration statement and the exhibits and schedules thereto, certain items of
which are omitted in accordance with the rules and regulations of the
Commission. For further information with respect to us and our securities
offered, reference is made to the registration statement, including all exhibits
and schedules thereto, which may be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, at prescribed rates during regular business hours.
Statements contained in this prospectus as to the contents of any contract or
other document are not necessarily complete, and in each instance reference is
made to the copy of such contract or document filed as an exhibit to the
registration statement, each such statement being qualified in its entirety by
such reference. We will provide, without charge upon oral or written request of
any person, a copy of any information incorporated by reference herein. This
request should be directed to m-Wise at 3 Sapir Street, Herzeliya Pituach,
Israel 46852, telephone +972-9- 9611212.
We are required to file reports and other information with the
Commission. All of such reports and other information may be inspected and
copied at the Commission's public reference facilities described above. The
public may obtain information on the operation of the public reference room in
Washington , D.C. by calling the Commission at 1-800-SEC-0330. The Commission
maintains a web site that contains reports, proxy and information statements and
other information regarding issuers that file electronically with the
Commission. The address of such site is http://www.sec.gov. In addition, we
intend to make available to our shareholders annual reports, including audited
financial statements and such other reports as we may determine.
-40-
INDEMNIFICATION
We have adopted provisions in our certificate of incorporation and
bylaws that limit the liability of our directors and provide for indemnification
of our directors and officers to the full extent permitted under the Delaware
General Corporation Law ("DGCL"). Under our certificate of incorporation, and as
permitted under the Delaware General Business Act, directors are not liable to
us or our stockholders for monetary damages arising from a breach of their
fiduciary duty of care as directors. Such provisions do not, however, relieve
liability for breach of a director's duty of loyalty to us or our stockholders,
liability for acts or omissions not in good faith or involving intentional
misconduct or knowing violations of law, liability for transactions in which the
director derived as improper personal benefit or liability for the payment of a
dividend in violation of Delaware law. Further, the provisions do not relieve a
director's liability for violation of, or otherwise relieve us or our directors
from the necessity of complying with federal or state securities laws or affect
the availability of equitable remedies such as injunctive relief or recission.
At present, there is no pending litigation or proceeding involving any
of our directors, officers, employees or agents where indemnification will be
required or permitted. We are not aware of any threatened litigation or
proceeding that may result in a claim for indemnification by any director or
officer.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to our directors, officers and
controlling persons pursuant to the foregoing provisions, or otherwise, we have
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by m-Wise of expenses incurred or paid by a director,
officer or controlling person of m-Wise in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, we will, unless in the
opinion of our counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
-41-
M-WISE, INC.
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
CONTENTS
Independent Auditors' Report F-1
Consolidated Balance Sheet F-2
Consolidated Statement of Operations F-3
Consolidated Statement of Changes in Stockholders' Equity F-4
Consolidated Schedule of Expenses F-5
Consolidated Statement of Cash Flows F-6
Notes to Consolidated Financial Statements F-7-23
Consolidated Financial Statements for Quarters Ended
March 31, 2004 and 2003 F-24-42
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
M-WISE, INC.
We have audited the accompanying consolidated balance sheets of m-Wise,
Inc. and subsidiaries (the "Company") as of December 31, 2003 and 2002, and the
related consolidated statements of operations, change in stockholders' equity
and cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of December 31, 2003 and 2002, and the results of its operation, changes in
its accumulated deficit and its cash flows for the years ended, in conformity
with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the consolidated financial statements, the Company has suffered recurring
losses from inception and has negative cash flows from operations which raises
substantial doubt about its ability to continue as a going concern. Management's
plan in regard to these matters are also described in Note 1. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
As discussed in note 16 to the consolidated financial statements, the
Company changed its method of accounting for long-term contracts, and corrected
accounting errors relating to the capitalization of offering costs and the tax
effect on the gain from discontinued operations. Our original audit report dated
March 29, 2004 has been withdrawn and the consolidated financial statements have
been revised.
"SF PARTNERSHIP, LLP"
CHARTERED ACCOUNTANTS
TORONTO, CANADA
March 29, 2004 and May 12, 2004
F-1
M-WISE, INC.
Balance Sheets
December 31, 2003 and 2002
2003 2002
(Restated Note 16)
ASSETS
CURRENT
Cash and cash equivalents $ 32,538 $ 215,575
Accounts receivable - trade 49,965 127,868
Other receivables (note 3) 15,676 104,454
Prepaid and sundry assets 12,242 15,969
--------------------------
110,421 463,866
LONG-TERM PREPAID EXPENSES 7,299 17,018
EQUIPMENT (note 4) 256,374 499,974
DEFERRED FINANCING FEES 50,522 --
--------------------------
$ 424,616 $ 980,858
==========================
LIABILITIES
CURRENT
Bank indebtedness $ 19,968 $ 5,839
Trade accounts payable 198,218 1,110,267
Other payables and accrued expenses (note 5) 784,830 446,182
Deferred revenue 55,786 --
Notes payable - current portion (note 7) 22,000 --
--------------------------
1,080,802 1,562,288
ACCRUED SEVERANCE PAY (note 6) 20,673 21,577
NOTES PAYABLE (note 7) 1,817,559 1,807,988
REDEEMABLE PREFERRED SHARES (note 8) -- 4,800,304
--------------------------
2,919,034 8,192,157
--------------------------
STOCKHOLDERS' EQUITY
CAPITAL STOCK (note 9) $ 118,162 $ 11,627
PAID IN CAPITAL 6,869,184 1,297,374
ACCUMULATED OTHER COMPREHENSIVE LOSS -- (177,773)
ACCUMULATED DEFICIT (9,481,764) (8,342,527)
--------------------------
(2,494,418) (7,211,299)
--------------------------
$ 424,616 $ 980,858
==========================
F-2
M-WISE, INC.
Consolidated Statement of Operations
Years Ended December 31, 2003 and 2002
2003 2002
(Restated Note 16)
SALES $ 361,721 $ 1,051,975
COST OF SALES 126,633 89,719
----------------------------
GROSS PROFIT 235,088 962,256
----------------------------
EXPENSES
General and administrative (page 5) 1,277,979 1,129,059
Research and development (page 5) 282,845 1,243,219
Financial 68,418 23,385
Redemption premium on Class B preferred shares (note 8) 360,000 400,000
----------------------------
1,989,242 2,795,663
----------------------------
LOSS BEFORE DISCONTINUED OPERATIONS (1,754,154) (1,833,407)
Gain (loss) from discontinued operations,
net of taxes (note 15) 524,917 (893,421)
----------------------------
LOSS BEFORE INCOME TAXES (1,229,237) (2,726,828)
Recovery of taxes on application of prior years' losses 90,000 --
----------------------------
NET LOSS $ (1,139,237) $ (2,726,828)
============================
BASIC LOSS PER SHARE BEFORE DISCONTINUED OPERATIONS $ (0.09) $ (0.35)
============================
BASIC LOSS PER SHARE $ (0.06) (0.52)
============================
FULLY DILUTED LOSS PER SHARE BEFORE DISCONTINUED
OPERATIONS (note 9) $ (0.09) (0.35)
============================
FULLY DILUTED LOSS PER SHARE (note 9) $ (0.06) (0.52)
============================
BASIC WEIGHTED AVERAGE NUMBER OF SHARES 20,468,173 5,260,428
============================
F-3
M-WISE, INC.
Consolidated Statement of Stockholders' Equity
Period from January 1, 2002 to December 31, 2003
COMMON SHARES PREFERRED ACCUMULATED
SHARES OTHER ADDITIONAL
NUMBER OF NUMBER OF COMPREHENSIVE PAID IN ACCUMULATED
SHARES $ SHARES $ LOSS CAPITAL DEFICIT
-----------------------------------------------------------------------------------------------------
Balance, January 1,
2002 5,260,428 $ 8,943 268,382 $ 2,684 $ (14,665) $ 1,297,374 $(5,615,699)
Net Loss -- -- -- -- -- -- (2,726,828)
Options granted for
employee services -- -- -- -- -- -- --
Financial statement
translation -- -- -- -- (163,108) -- --
----------------------------------------------------------------------------------------------------
Balance, December 31,
2002 5,260,428 $ 8,943 268,382 $ 2,684 $ (177,773) $ 1,297,374 $(8,342,527)
====================================================================================================
Balance, January 1,
2003 5,260,428 $ 8,943 268,382 $ 2,684 $ (177,773) $ 1,297,374 $(8,342,527)
Shares issued for
offering costs 25,786,896 42,978 -- -- -- 207,022 --
Shares issued for
offering costs
forfeited (19,786,896) (32,778) -- -- -- (157,222) --
7,025,778 warrants
issued for deferral
of debt for legal
services rendered -- -- -- -- -- 10,000 --
Class "C" shares
issued for
obtaining line of
credit -- -- 6,315,258 63,153 -- -- --
Option vested for
employee services -- -- -- -- -- 384,889 --
Preferred shares
converted into
common shares 58,246,470 99,019 (6,583,640) (65,837) -- 5,127,121 --
Net Loss -- -- -- -- -- -- (1,139,237)
Financial statement
translation -- -- -- -- 177,773 -- --
----------------------------------------------------------------------------------------------------
Balance, December 31,
2003
(Restated Note 16) 69,506,898 $ 118,162 -- $ -- $ -- $ 6,869,184 $(9,481,764)
====================================================================================================
F-4
M-WISE, INC.
Consolidated Schedule of Expenses
Years Ended December 31, 2003 and 2002
2003 2002
(Restated Note 16)
GENERAL AND ADMINISTRATIVE
Consulting $ 472,911 $ 340,434
Payroll and related expenses 226,587 228,990
Marketing (note 10) 28,698 179,545
Other expenses 53,977 110,463
Communications 72,423 90,412
Rent 23,319 65,992
Professional services 354,561 64,864
Travel 23,160 42,024
Depreciation 7,150 6,335
Bad debts 15,193 --
------------------------------
$ 1,277,979 $ 1,129,059
==============================
RESEARCH AND DEVELOPMENT
Payroll and related expenses $ 143,832 $ 508,408
Materials and components 24,622 368,080
Travel 38,249 175,231
Vehicle maintenance 54,629 86,661
Depreciation 85,672 85,129
Shipment and freight 3,650 19,710
Subcontractors 43,997 --
Government grant (note 10) (111,806) --
------------------------------
$ 282,845 $ 1,243,219
==============================
F-5
M-WISE, INC.
Consolidated Statement of Cash Flows
Years Ended December 31, 2003 and 2002
2003 2002
(restated, note 16)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,139,237) $(2,726,828)
Adjustments required to reconcile net loss to
net cash used in operating activities:
Depreciation 92,822 218,121
Increase in redemption premium on
Class B preferred shares 360,000 400,000
Net assets from discontinued operations
written-off (311,005) --
Common shares issued for offering costs 60,000 --
Warrants issued for deferral of debt for
legal services rendered 10,000 --
Wages and salaries paid by options 384,889 --
Accounts receivable - trade 35,427 94,668
Other receivables 19,214 (37,724)
Prepaid and sundry assets (6,014) 107,235
Trade accounts payable (12,760) 502,950
Other payables and accrued liabilities 440,356 16,074
Deferred revenue 55,786 --
Long-term prepaid expenses 9,719 1,603
Deferred financing fees (50,522) --
Accrued severance pay (904) 597
--------------------------
(52,229) (1,423,304)
--------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of equipment (164,860) (271,677)
--------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in notes payable 31,571 1,807,988
Repayment of notes payable -- (300,000)
Bank indebtedness - gross 14,129 (4,994)
--------------------------
45,700 1,502,994
--------------------------
FOREIGN EXCHANGE (LOSS) GAIN ON
CASH AND CASH EQUIVALENTS (11,648) 2,297
--------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (183,037) (189,690)
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 215,575 405,265
--------------------------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 32,538 $ 215,575
==========================
F-6
M-WISE, INC.
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
1. DESCRIPTION OF BUSINESS AND GOING CONCERN
a) Description of Business
m-Wise Inc. (the "Company") is a U.S. corporation which develops
interactive messaging platforms for mobile phone-based commercial
applications, transactions and information services with internet
billing capabilities.
The Company has a wholly-owned subsidiary in Israel, which was
incorporated in 2000 under the laws of Israel.
b) Going Concern
The Company's financial statements are presented on a going concern
basis, which contemplates the realization of assets and satisfaction
of liabilities in the normal course of business. The Company has
experienced recurring losses since inception and has negative cash
flows from operations that raise substantial doubt as to its ability
to continue as a going concern. For the years ended December 31, 2003
and 2002, the Company experienced net losses of $1,139,237 and
$2,726,828 respectively.
The Company is in an industry where operational fluctuation is usually
higher than other ordinary industries. The accompanying financial
statements reflect management's current assessment of the impact to
date of the economic situation on the financial position of the
Company. Actual results may differ materially from management's
current assessment.
The Company's ability to continue as a going concern is also
contingent upon its ability to secure additional financing, continuing
sale of its products and attaining profitable operations.
Management is pursuing various sources of equity financing. Although
the Company plans to pursue additional financing, there can be no
assurance that the Company will be able to secure financing when
needed or obtain such on terms satisfactory to the Company, if at all.
The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may
result from the possible inability of the Company to continue as a
going concern.
F-7
M-WISE, INC.
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies of the Company are in accordance with U.S.
generally accepted accounting principles, and their basis of
application is consistent with that of the previous year. Outlined
below are those policies considered particularly significant:
a) Reporting Currency
A majority of the Company's revenues are generated in U.S. dollars. In
addition, a substantial portion of the Company's costs are incurred in
U.S. dollars. Management has determined that the U.S. dollar will be
used as the Company's functional and reporting currency.
Accordingly, financial statements of subsidiaries maintained in
currencies other than the reporting currency are being translated into
U.S. dollars in accordance with Statement of Financial Accounting
Standard No. 52 (SFAS 52), "Foreign Currency Translation". All
translation gains and losses are directly reflected separately in
stockholders' equity as Accumulated Other Comprehensive Income or
Loss.
Foreign currency transactions of subsidiaries have been translated to
their functional currencies at the rate prevailing at the time of the
transaction. Realized foreign exchange gains and losses have been
charged to income in the year.
During the year, the subsidiaries whose reporting currency was other
than US dollars were disposed (see note 15) and as such, the
accumulated other comprehensive loss was adjusted to nil.
b) Cash and Cash Equivalents
Cash equivalents include cash and highly liquid investments with
initial maturities of three months or less.
c) Deferred Financing Fees
Deferred financing fees relate to a non-interest bearing credit line
facility of $300,000 provided by a shareholder as disclosed in note 9.
The overdraft from the credit facility will be non-interest bearing
and there will be no covenants with which the Company will need to
comply. The credit line facility has no expiration date and
management expects to retain the facility for a period of at least
five years.
Accordingly, the fees are being amortized using the straight-line
method over five years.
F-8
M-WISE, INC.
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
d) Equipment and Depreciation
Equipment are stated at cost less accumulated depreciation.
Depreciation is based on the estimated useful lives of the assets and
is provided using the undernoted annual rates and methods:
Furniture and equipment 6-15% Straight-line
Computer equipment 33% Straight-line
e) Revenue Recognition
The Company generates revenues from product sales, licensing, customer
services and technical support.
Revenues from products sales are recognized on a completed-contract
basis, in accordance with Staff Accounting Bulletin No. 101 "Revenue
Recognition in Financial Statements" ("SAB No. 101"), Statement of
Position 97-2 "Software Revenue Recognition" and Statement of Position
81-1 "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts". The Company has primarily short-term
contracts whereby revenues and costs in the aggregate for all
contracts is expected to result in a matching of gross profit with
period overhead or fixed costs similar to that achieved by use of the
percentage-of-completion method. Accordingly, financial position and
results of operations would not vary materially from those resulting
from the use of the percentage-of-completion method. Revenue is
recognized only after all three stages of deliverables are complete;
installation, approval of acceptance test results by the customer and
when the product is successfully put into real-life application.
Customers are billed, according to individual agreements, a percentage
of the total contract fee upon completion of work in each stage;
approximately 40% for installation, 40% upon approval of acceptance
tests by the customer and the balance of the total contract price when
the software is successfully put into real-life application. The
revenues, less its' associated costs, are deferred and recognized on
completion of the contract and customer acceptance. Amounts received
for work performed in each stage are not refundable.
On-going service and technical support contracts are negotiated
separately at an additional fee. The technical support is separate
from the functionality of the products, which can function without
on-going support.
Technology license revenues are recognized in accordance with SAB No.
101 at the time the technology and license is delivered to the
customer, collection is probable, the fee is fixed and determinable, a
persuasive evidence of an agreement exists, no significant obligation
remains under the sale or licensing agreement and no significant
customer acceptance requirements exist after delivery of the
technology.
Revenues relating to customer services and technical support are
recognized as the services are rendered ratably over the period of the
related contract.
The Company does not sell products with multiple deliverables. It is
management's opinion that EITF 00-21, "Revenue Arrangements With
Multiple Deliverables" is not applicable.
F-9
M-WISE, INC.
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
f) Research and Development Costs
Research and development costs are expensed as incurred.
g) Government Grants
Government grants are recognized as income over the periods necessary
to match them with the related costs that they are intended to
compensate.
h) Use of Estimates
The preparation of financial statements, in conformity with U.S.
generally accepted accounting principles, requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
i) Concentration of Credit Risk
SFAS No. 105, "Disclosure of Information About Financial Instruments
with Off-Balance Sheet Risk and Financial Instruments with
Concentration of Credit Risk", requires disclosure of any significant
off-balance sheet risk and credit risk concentration. The Company does
not have significant off-balance sheet risk or credit concentration.
The Company maintains cash and cash equivalents with major Israel
financial institutions.
The Company's provides credit to its clients in the normal course of
its operations. Depending on their size, financial strength and
reputation, customers are given credit terms of up to 60 days. The
Company carries out, on a continuing basis, credit checks on its
clients and maintains provisions for contingent credit losses which,
once they materialize, are consistent with management's forecasts.
For other debts, the Company determines, on a continuing basis, the
probable losses and sets up a provision for losses based on the
estimated realizable value. For the years ended 2003 and 2002, all
uncollectible amounts have been written off and there was no further
provision for doubtful accounts.
Concentration of credit risk arises when a group of clients having a
similar characteristic such that their ability to meet their
obligations is expected to be affected similarly by changes in
economic or other conditions. The Company does not have any
significant risk with respect to a single client.
F-10
M-WISE, INC.
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
j) Fair Value of Financial Instruments
The estimated fair value of financial instruments has been determined
by the Company using available market information and valuation
methodologies. Considerable judgment is required in estimating fair
value. Accordingly, the estimates may not be indicative of the amounts
the Company could realize in a current market exchange. At December
31, 2002 and 2003, the carrying amounts of cash equivalents,
short-term bank deposits, trade receivables and trade payables
approximate their fair values due to the short-term maturities of
these instruments.
k) Impact of Recently Issued Accounting Standards
The FASB recently issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," that is applicable to financial
statements issued for fiscal years beginning after December 15, 2001.
The FASB's new rules on asset impairment supercede FASB Statement 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," and portions of APB Opinion 30, "Reporting
the Results of Operations." SFAS No. 144 provides a single accounting
model for long-lived assets to be disposed of and significantly
changes the criteria that must be met to classify an asset as
"held-for-sale." Classification as "held-for-sale" is an important
distinction since such assets are not depreciated and are stated at
the lower of fair value and carrying amount. SFAS No. 144 also
requires expected future operating losses from discontinued operations
to be displayed in the period(s) in which the losses are incurred,
rather than as of the measurement date as currently required. The
provisions of SFAS No. 144 were implemented for the year ending
December 31, 2002 and did not have a material effect on the Company's
financial position or operating results.
3. OTHER RECEIVABLES
2003 2002
Value added taxes receivable $ 15,676 $100,857
Accrued income -- 573
Other -- 3,024
--------------------------
$ 15,676 $104,454
==========================
F-11
M-WISE, INC.
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
4. EQUIPMENT
Equipment is comprised as follows:
2003 2002
ACCUMULATED Accumulated
COST DEPRECIATION Cost Depreciation
-------------------------------------------
Furniture and equipment $ 71,431 $ 29,455 $ 70,176 $ 22,510
Computer equipment 454,603 240,205 830,961 378,653
--------------------------------------------
$526,034 $269,660 $901,137 $401,163
--------------------------------------------
Net carrying amount $256,374 $499,974
======== --------
5. OTHER PAYABLES AND ACCRUED EXPENSES
2003 2002
Employee payroll accruals $435,345 $193,491
Accrued payroll taxes 66,654 78,939
Accrued expenses 267,831 168,603
Others 15,000 5,149
--------------------------
$784,830 $446,182
==========================
F-12
M-WISE, INC.
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
6. ACCRUED SEVERANCE PAY
The Company accounts for its potential severance liability of its Israel
subsidiary in accordance with EITF 88-1, "Determination of Vested Benefit
Obligation for a Defined Benefit Pension Plan". The Company's liability
for severance pay is calculated pursuant to applicable labour laws in
Israel on the most recent salary of the employees multiplied by the number
of years of employment as of the balance sheet date for all employees. The
Company's liability is fully accrued and reduced by monthly deposits with
severance pay funds and insurance policies. As at December 31, 2002 and
2003, the amount of the liabilities accrued were $49,842 and $60,170
respectively. Severance pay expenses for the years ended December 31, 2002
and 2003 were $2,013 and $5,284 respectively.
The deposit funds include profits accumulated up to the balance sheet date
from the Israeli company. The deposited funds may be withdrawn only upon
the fulfillment of the obligation pursuant to Israeli severance pay laws
or labour agreements. Cash surrender values of the deposit funds as at
December 31, 2002 and 2003 were $28,265 and $39,497 respectively. Income
earned from the deposit funds for 2002 and 2003 was immaterial.
7. NOTES PAYABLE
2003 2002
Syntek Capital AG - a significant
shareholder until July 2002 $ 900,000 $ 900,000
DEP Technology Holdings Ltd. -
a significant shareholder
until July 2002 900,000 900,000
Accrued interest 39,559 7,988
---------------------------
1,839,559 1,807,988
Less: Current portion 22,000 --
---------------------------
$1,817,559 $1,807,988
===========================
The promissory notes are unsecured, bear interest at the per annum LIBOR
rate offered by Citibank North America and are repayable on December 31,
2007. Commencing January 1, 2004, the annual principal repayments are
calculated as a total of 5% of annual prior year's revenues.
Under the loan agreements, the Company is not allowed to declare dividends
except for the purpose of redemption of common stock owned by Ogen LLC,
one of the stockholders of the Company.
The Company may not create a pledge, charge or other encumbrance over any
or all of its assets for financing without the lenders' consent and must
provide notice to the lender at least 10 days prior to any such action.
F-13
M-WISE, INC.
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
8. REDEEMABLE PREFERRED SHARES
The Company has issued Series "B" preferred shares, redeemable at the
option of the holder at a price equal to $8.17 per share plus 10% per
annum from the date of purchase through the redemption date.
The Company recorded the transaction in accordance with EITF D-98,
"Classification and Measurement of Redeemable securities". As such, the
preference shares have been presented outside of permanent equity at its
redemption value. The premium on redemption is being charged to the
statement of operations as incurred.
On November 19, 2003, the Company, in accordance with the holders, agreed
to convert 489,456 Series "B" preferred shares into 3,124,105 common
shares at a ratio of 1 to 6.3828125. Following the conversion, the common
shares were split on a 1 to 6 basis to 18,744,630 common shares as
described in note 9.
9. CAPITAL STOCK
Authorized
210,000,000 Common shares
170,000,000 Preferred shares
Series "A": convertible, voting, par value of
$0.0017 per share
Series "B": 10% non-cumulative dividend, redeemable,
convertible, voting, par value of
$0.0017 per share
Series "C": 10% non-cumulative dividend,
convertible, voting, par
value of $0.0017 per share
2003 2002
Issued
69,506,898 Common shares (2002 - 5,260,428) $ 118,162 $8,943
nil Series "A" Preferred shares
(2002 - 268,382) -- 2,684
-------------------
$ 118,162 $11,627
===================
On November 19, 2003, the Company, in accordance with the holders, agreed
to convert all the 268,382 Class "A" and 489,456 Class "B" and 6,315,258
Class "C" preferred shares into common shares. Following the conversion,
the Company granted a 1 to 6 forward stock split of its common shares. The
conversion has been recorded prospectively in the consolidated financial
statements, while the forward stock split has been recorded retroactively.
F-14
M-WISE, INC.
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
9. CAPITAL STOCK (cont'd)
Stock warrants and options:
The Company accounted for its stock options and warrants in accordance
with SFAS 123 "Accounting for Stock - Based Compensation" and SFAS 148
"Accounting for Stock - Based compensation - Transition and Disclosure."
Value of options granted has been estimated by the Black Scholes option
pricing model. The assumptions are evaluated annually and revised as
necessary to reflect market conditions and additional experience. The
following assumptions were used:
2003 2002
ISRAEL INTERNATIONAL ISRAEL INTERNATIONAL
Interest rate 5% 5% 5% 5%
Expected volatility 50% 50% 50% 50%
Expected life in years 8 10 8 10
Warrants:
In April 2000, 56,180 warrants, equivalent to 337,080 after the 1 to 6
forward stock split, were issued to one of the shareholders with his
preferred Class "A" shares for a total investment of $750,000. Warrants
will expire in the event of an initial public offering of the Company's
securities. Warrants have an exercise price for preferred Class "A" shares
of the Company at $4.45 per share, equivalent to $0.74 after the 1 to 6
forward stock split. No value has been assigned to the warrants and the
total investment net of par value of preferred Class "A" shares has been
presented as additional paid in capital. The warrants for preferred Class
"A" shares were converted into warrants for common shares on a 1 to 1
basis during the year.
In January 2003, the Company issued 180,441 warrants for the Class "B"
preferred shares of the Company for deferral of debt for legal services
rendered, which was valued at $10,000. The Warrants will expire in 2010.
The warrants for preferred Class "B" shares have been converted into
warrants for common shares during the year at a ratio of 1 to 6.3828125.
After the conversion, the warrants were further split at the ratio of 1 to
6 in accordance with the forward stock split of the common shares. After
the conversion and the forward split, there were 7,025,778 warrants
outstanding each convertible to 1 common share at par value.
F-15
M-WISE, INC.
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
9. CAPITAL STOCK (cont'd)
Capital Stock:
In January 2003, the Company issued 4,297,816 common shares, equivalent to
25,786,896 after the 1 to 6 forward stock split, for $250,000 of offering
costs with regard to the registration of its securities with the
Securities Exchange Commission. In November 2003 it was agreed upon by the
parties that the fair value of the offering costs was only $60,000 and
therefore 19,786,896 of the post-split shares were forfeited. The offering
costs have been charged to professional services expense in the year.
In January 2003, the Company issued 6,315,258 Class "C" preferred shares
at par value to a shareholder for providing a non-interest bearing credit
line facility of $300,000. These shares were issued at par value, which
approximates the fair market value of the financing fees relating to the
credit line facility. At December 31, 2003 the line of credit has not been
utilized. The 6,315,258 Class "C" preferred shares were subsequently
converted into 37,891,548 common shares post forward stock split.
Stock Options:
In February 2001 the Board of Directors of the Company adopted two option
plans to allow employees and consultants to purchase ordinary shares of
the Company.
Under the Israel 2001 share option plan management authorized stock
options for 2,403,672 common shares of the Company having a $0.0017
nominal par value each and an exercise price of $0.0017, and under the
International 2001 share option plan, stock options for 300,000 common
shares having a $0.0017 nominal par value each and an exercise price of
$0.0017. As of December 31, 2003, 3,672 options under the Israel 2001
share option plan for common stock were not yet granted.
Under the Israel 2003 share option plan management authorized stock
options (on a post conversion, post split basis) for 16,094,106 preferred
Class "B" shares, which were converted to options for common shares of the
Company having a $0.0017 nominal par value each and an exercise price of
$0.0017, and under the International 2003 share option plan stock options
(on a post conversion, post split basis) for 25,061,094 preferred Class
"B" shares which were converted to options for common shares of the
Company having a $0.0017 nominal par value each and an exercise price of
$0.0017. As of December 31, 2003, 38,256 options under the Israel 2003
share option plan were not yet granted.
F-16
M-WISE, INC.
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
9. CAPITAL STOCK (cont'd)
The options vest gradually over a period of 4 years from the date of grant
for Israel and 10 years (no less than 20% per year for five years for
options granted to employees) for the International plan. The term of each
option shall not be more than 8 years from the date of grant in Israel and
10 years from the date of grant in the International plan. The outstanding
options that have vested have been expensed in the statements of
operations as follows:
Year ended December 31, 2001 $ 9,000
Year ended December 31, 2002 --
Year ended December 31, 2003 384,889
----------
$ 393,889
----------
The following table summarizes the activity of common stock options during
2003 and 2002:
2003 2002
ISRAEL INTERNATIONAL ISRAEL INTERNATIONAL
--------------------------------------------------------
Outstanding, beginning of year 600,000 300,000 600,000 300,000
Granted 1,800,000 -- -- --
Exercised -- -- -- --
Preferred stock options
converted to common 16,055,850 25,061,094 -- --
Cancelled -- -- -- --
-----------------------------------------------------
Outstanding, end of year 18,455,850 25,361,094 600,000 300,000
=====================================================
Weighted average fair value of
options granted during the year $ 30,355 $ 42,604 $ -- $ --
=====================================================
Weighted average exercise
price of common stock options,
beginning of year $ 0.0017 $ 0.0017 $ 0.0017 $ 0.0017
=====================================================
Weighted average exercise
price of common stock options
granted in the year $ 0.0017 $ 0.0017 $ -- $ --
=====================================================
Weighted average exercise
price of common stock options,
end of year $ 0.0017 $ 0.0017 $ 0.0017 $ 0.0017
=====================================================
Weighted average remaining
contractual life of common
stock options 8 years 10 years 7 years 9 years
=====================================================
F-17
M-WISE, INC.
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
9. CAPITAL STOCK (cont'd)
The following table summarizes the activity of preferred stock options
during 2003 and 2002:
2003 2002
ISRAEL INTERNATIONAL ISRAEL INTERNATIONAL
Outstanding, beginning of period -- -- -- --
Granted 16,055,850 25,061,094 -- --
Exercised -- -- -- --
Preferred stock options
converted to common (16,055,850) (25,061,094) -- --
Cancelled -- -- -- --
-----------------------------------------------------
Outstanding, end of period -- -- -- --
=====================================================
Weighted average fair value of
preferred stock options granted
during the period $ 27,360 $ 42,604 $ -- $ --
=====================================================
Weighted average exercise price
of preferred stock options,
beginning of period $ -- $ -- $ -- $ --
=====================================================
Weighted average exercise price
of preferred stock options
granted in the period $ 0.0017 $ 0.0017 $ -- $ --
=====================================================
Weighted average exercise price
of preferred stock options, end
of period $ -- $ -- $ -- $ --
=====================================================
All outstanding preferred stock options have been cancelled and replaced
with common stock options during the year at the ratio of 1 to 6.3828125.
The stock options and the preferred shares have not been included in the
calculation of the diluted earnings per share as their inclusion would be
antidilutive.
F-18
M-WISE, INC.
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
10. GOVERNMENT GRANTS
During the year ended December 31, 2003, the Israeli subsidiary received
approximately $112,000 from a joint Israeli-Singapore government grant
program. The amount is being recorded as a reduction of the research and
development expense incurred in the year. The total amount approved for
the grant was $186,330, which the Company is recording on a cash basis.
The Israeli subsidiary is required to repay the government agency
royalties in the amount of 2.5% of gross sales from the products and
services being developed relating to the grant, limited to the amount of
the grant. If the product is not marketable, the grant will not be repaid.
As at December 31, 2003 the products have been developed but no sales have
been made. As such, no amount has been paid as royalties.
The Israeli subsidiary received a second grant from the Israeli government
during 2003 of approximately $43,000. To receive the grant, the Company
was required to incur various marketing and exporting expenses. The amount
of the grant has been recorded as a reduction in marketing expenses for
the year.
11. INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". This Standard prescribes the use of the
liability method whereby deferred tax asset and liability account balances
are determined based on differences between financial reporting and tax
bases of assets and liabilities and are measured using the enacted tax
rates. The effects of future changes in tax laws or rates are not
anticipated.
Under SFAS No. 109 income taxes are recognized for the following: a)
amount of tax payable for the current year, and b) deferred tax
liabilities and assets for future tax consequences of events that have
been recognized differently in the financial statements than for tax
purposes. Management determined that accounting values of its assets and
liabilities recorded are not materially different from their tax values
and therefore no deferred tax assets/liabilities have been setup to
account for the temporary differences.
F-19
M-WISE, INC.
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
11. INCOME TAXES (cont'd)
The Israeli subsidiary maintains an investment program in hardware and
software in the amount of $75,000 and has been granted the status of
"Approved Enterprise" under the Law for the Encouragement of Capital
Investments, 1959 in Israel. This status entitles the Company to an
exemption from tax on income derived there from for a period of 10 years
starting in the year in which the Company first generates taxable income,
but not later than 14 years from the date of approval which was received
on December 2002 or 12 years from commencement of operations. The
tax-exempt profits that will be earned by the Company's "Approved
Enterprises" can be distributed to shareholders, without imposing tax
liability on the Company only upon its complete liquidation. If these
retained tax-exempt profits are distributed in a manner other than in the
complete liquidation of the Company they would be taxed at the corporate
tax rate applicable to such profits as if the Company had not elected the
alternative system of benefits (depending on the level of foreign
investment in the Company) currently between 10% to 25% for an "Approved
Enterprise". Under SFAS 109, a deferred tax liability normally would be
recorded relating to taxes that would be owed on the distribution of
profits even if management does not intend currently to declare dividends.
As at December 31, 2003 the Israel subsidiary has not reported any taxable
income and there was an accumulated deficit of approximately $250,000.
There was no deferred tax liability to be recorded in the year.
The Company has deferred income tax assets as follows:
2003 2002
Deferred income tax assets
Non-capital losses carried forward $ 2,312,500 1,105,000
Valuation allowance for deferred
income tax assets (2,312,500) (1,105,000)
-------------------------
$ -- --
=========================
The Company provided a valuation allowance equal to the deferred income
tax assets because it is not presently more likely than not that they will
be realized.
The Company has accumulated tax losses in all of its subsidiaries. It is
not likely that the Company will be able to generate income to utilize the
tax loss. Therefore, no deferred tax assets have been set up to record the
tax benefits.
As at December 31, 2003, the Company has approximately $9,100,000 and
$250,000 tax losses carried forward in its United States and Israeli
subsidiaries. Losses in the United States subsidiary, if not utilized,
will expire in twenty years from the year of origin, December 31, 2020 to
December 31, 2023. For the Israel subsidiary, the losses can be carried
forward indefinitely to reduce income taxes on future taxable income.
F-20
M-WISE, INC.
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
12. RELATED PARTY TRANSACTIONS
During the year the Company incurred directors consulting fees and
salaries in the amount of $240,000 (2002, $240,000). At the year-end, the
amount was unpaid and included in other payables and accrued expenses.
These transactions were in the normal course of business and recorded at
an exchange value established and agreed upon by the above mentioned
parties.
13. MAJOR CUSTOMERS
In 2002, the Company had three major customers which primarily accounted
for 73% of the total revenue, of which 65% were in Europe and 35% were in
Asia. In 2003, sales to two major customers accounted for 83% of the total
revenue, all of which was in Europe.
14. SEGMENTED INFORMATION
Israel USA Discontinued Total
Operations
Gross revenue - 2003 $ 10,767 $ 436,790 $ -- $ 447,557
2002 28,928 1,023,047 -- 1,051,975
Net income (loss) - 2003 (692,726) (945,642) 614,917 (1,023,451)
2002 (1,915,313) 81,906 (893,421) (2,726,828)
Total assets - 2003 317,210 107,406 -- 424,616
2002 311,613 220,178 449,067 980,858
In 2003, the Company derived 97% (2002, 75%) of its revenues from sales to
Europe and 3% (2002, 25%) from sales to the Far East.
F-21
M-WISE, INC.
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
15. DISCONTINUED OPERATIONS
The Company accounted for the discontinued operations in accordance with
SFAS No. 144 "Accounting for the impairment or disposal of long-lived
assets" and SFAS No. 146 "Accounting for costs associated with exit or
disposal activities". All assets within the discontinued operations have
been written-down to fair value, and any gain or loss from the disposal of
these assets has been recorded at the time of disposal.
Due to the high costs and low revenues in the European application service
provider (ASP) market, on November 11, 2003 the Company's management
registered the liquidation of the English subsidiary, m-Wise Ltd., and its
three subsidiaries in Italy, France and Spain, by creditors and local
legal authorities. At the time of liquidation the total liabilities of the
subsidiaries exceeded their net assets by $614,917. Due to the liquidation
of the subsidiaries, the liabilities (trade payables) were only repaid to
the extent of the assumption of assets by the creditors, resulting in a
gain on disposal of discontinued operations of $524,917 (net of $90,000 of
taxes). The gain on disposal was offset against the tax loss carryforwards
of approximately $300,000 which were not initially recognized for
accounting purposes (as described in note 11).
The discontinued operations are comprised of the following:
U.K. France Italy Spain Total
Gross revenue - 2003 $ -- $ -- $ -- $ -- $ --
2002 291,018 25,203 250,916 -- 567,137
Net income (loss) - 2003 586,407 547,556 (617,403) 98,357 614,917
2002 (517,842) (352,495) 84,261 (107,345) (893,421)
Total assets - 2003 -- -- -- -- --
2002 109,643 74,292 220,237 44,895 449,067
F-22
M-WISE, INC.
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
15. DISCONTINUED OPERATIONS (cont'd)
U.K. France Italy Spain
Cash - 2003 -- -- -- --
2002 7,301 138 1,053 3,156
Accounts receivable - 2003 -- -- -- --
2002 6,411 52,714 40,004 9,314
Prepaid and sundry assets - 2003 -- -- -- --
2002 7,412 3,324 2,603 --
Computer equipment (net) - 2003 -- -- -- --
2002 88,054 18,117 176,578 32,425
Other equipment (net) - 2003 -- -- -- --
2002 465 -- -- --
Trade accounts payable - 2003 -- -- -- --
2002 501,754 249,396 71,729 76,410
Accrued expenses - 2003 -- -- -- --
2002 -- 66,966 34,741 --
16. RESTATEMENT OF FINANCIAL INFORMATION
a) Correction of Accounting Errors
The consolidated financial statements have been revised to reflect the
correction of an error whereby offering costs that were charged to
paid-in-capital have been expensed in the 2003 year. The effect of this
revision is an increase in the net loss for 2003 of $60,000.
The consolidated financial statements have been revised to reflect the
gain from discontinued operation net of taxes and separately disclose
the recovery of taxes on application of prior years' losses. There is
no effect from this revision on the net loss for 2003.
b) Change in Accounting Policy
The Company has accounted for revenue and costs for long-term contracts
by the completed contract method in 2003, whereas in all prior years
revenue and costs were determined by the percentage of completion
method. Financial statements of prior years have been restated to apply
the new method retroactively. The effect of the accounting change is an
increase in the net loss for 2003 of $55,786. As there were no long-term
contracts outstanding at the end of 2002, the accounting change has no
effect on the prior year balances.
F-23
m-Wise, Inc.
CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED MARCH 31, 2004 AND 2003
CONTENTS
Consolidated Balance Sheet 1
Consolidated Statement of Deficit 2
Consolidated Statement of Operations 2
Consolidated Statement of Changes in Stockholders' Equity 3
Schedule of Expenses 4
Consolidated Statement of Cash Flows 5
Notes to Consolidated Financial Statements 6-19
m-Wise, Inc.
Balance Sheet
March 31, 2004 and 2003
2004 2003
ASSETS
Current
Cash and cash equivalents $ 77,231 $ 20,078
Accounts receivable - trade (net of allowance for
doubtful accounts of $15,193, 2003, nil) 94,118 167,209
Other receivables 12,354 108,605
Prepaid and sundry assets 23,713 84,858
--------------------------
207,416 380,750
Long-term Prepaid Expenses 11,111 6,064
Equipment 250,703 442,787
Deferred Financing Fees 47,365 --
--------------------------
$ 516,595 $ 829,601
==========================
LIABILITIES
Current
Bank indebtedness
$ 15,760 $ 21,596
Trade accounts payable 191,219 1,014,896
Other payables and accrued liabilities 737,959 435,781
Deferred revenue 409,780 --
Notes payable - current portion 28,200 --
--------------------------
1,382,918 1,472,273
Accrued Severance Pay (note 3) 21,893 15,214
Notes Payable 1,817,036 1,807,988
Redeemable Preferred Shares (note 4) -- 4,900,304
--------------------------
3,221,847 8,195,779
--------------------------
STOCKHOLDERS' DEFICIENCY
Capital Stock (note 5)
$ 118,162 $ 84,980
Paid in Capital 6,877,453 1,702,424
Accumulated Other Comprehensive Loss -- (118,978)
Accumulated Deficit (9,700,867) (9,034,604)
--------------------------
(2,705,252) (7,366,178)
--------------------------
$ 516,595 $ 829,601
==========================
APPROVED ON BEHALF OF THE BOARD
"SHAY BEN ASULIN" "MORDECHAI BROUDO"
- ------------------------------- ------------------
Director Director
F-24
m-Wise, Inc.
Consolidated Statement of Operations
Quarters Ended March 31, 2004 and 2003
2004 2003
Sales $ 123,969 $ 155,695
Cost of Sales 8,267 28,650
------------------------------
Gross Profit 115,702 127,045
------------------------------
Expenses
General and administrative (page 4) 278,915 482,538
Research and development (page 4) 54,989 161,468
Financial 901 3,314
Redemption premium on Class B
preferred shares (note 4) -- 100,000
------------------------------
334,805 747,320
------------------------------
Loss Before Discontinued Operations (219,103) (620,275)
Loss on discontinued operations -- 71,802
------------------------------
Net Loss $ (219,103) $ (692,077)
==============================
Basic Loss Per Share
Before Discontinued Operations $ (0.003) (0.067)
==============================
Basic Loss Per Share $ (0.003) (0.075)
==============================
Fully Diluted Loss Per Share
Before Discontinued Operations $ (0.003) (0.067)
==============================
Fully Diluted Loss Per Share (note 5) $ (0.003) (0.075)
==============================
Basic Weighted Average Number of Shares 69,506,898 9,265,761
==============================
F-25
m-Wise, Inc.
Consolidated Statement of Stockholders' Equity
Quarters Ended March 31, 2004 and 2003
Common Shares Preferred Shares Accumulated
Other Additional
Number of Number of Comprehensive Paid in Accumulated
Shares $ Shares $ Loss Capital Deficit
- -----------------------------------------------------------------------------------------------------------------------------
Balance,
January 1, 2003 5,260,428 8,943 268,382 2,684 (177,773) $ 1,297,374 $(8,342,527)
Shares issued for
offering costs 25,786,896 42,978 -- -- -- 207,022 --
Shares issued for
offering costs
forfeited (19,786,896) (32,778) -- -- -- (157,222) --
7,025,778 warrants
issued for deferral
of debt for legal
services rendered -- -- -- -- -- 10,000 --
Class "C" shares
issued for
obtaining line
of credit -- -- 6,315,258 63,153 -- -- --
Options vested for
employee services- -- -- -- -- 345,250 --
Financial statement
translation -- -- -- -- 58,795 -- --
Net loss -- -- -- -- -- -- (692,077)
---------------------------------------------------------------------------------------------------
Balance,
March 31, 2003 11,260,428 19,143 6,583,640 65,837 (118,978) $ 1,702,424 $(9,034,604)
===================================================================================================
Balance,
January 1, 2004 69,506,898 118,162 -- -- -- $ 6,869,184 $(9,481,764)
Options vested for
employee services -- -- -- -- -- 8,269 --
Net Loss -- -- -- -- -- -- (219,103)
---------------------------------------------------------------------------------------------------
Balance,
March 31, 2004 69,506,898 118,162 -- -- -- $ 6,877,453 $(9,700,867)
===================================================================================================
F-26
m-Wise, Inc.
Schedule of Expenses
Quarters Ended March 31, 2004 and 2003
2004 2003
General and Administrative
Consulting $ 121,352 $ 168,446
Professional services 44,642 27,661
Other expenses 31,152 12,125
Communications 22,941 16,937
Marketing 19,636 (19,661)
Travel 17,549 --
Payroll and related expenses 13,086 269,227
Rent 5,248 6,014
Depreciation 3,309 1,789
-------------------------
$ 278,915 $ 482,538
========================
Research and Development
Payroll and related expenses $ 44,387 $ 86,774
Depreciation 26,162 24,153
Travel 19,051 26,406
Vehicle maintenance 15,945 21,414
Subcontractors 892 --
Materials and components 701 2,721
Shipment and freight 21 --
Government grant (note 6) (52,170) --
------------------------
$ 54,989 $ 161,468
========================
F-27
m-Wise, Inc.
Consolidated Statement of Cash Flows
Quarters Ended March 31, 2004 and 2003
2004 2003
Cash Flows from Operating Activities
Net loss $(219,103) $(692,077)
Adjustments required to reconcile net
loss to net cash used in operating
activities:
Depreciation 29,471 64,350
Increase in redemption premium on
Class B preferred shares -- 100,000
Common shares issued for offering costs -- 60,000
Warrants issued for deferral of debt
for legal services rendered -- 10,000
Wages and salaries paid by options 8,269 345,250
Accounts receivable - trade (44,153) (51,285)
Other receivables 3,322 8,914
Prepaid and sundry assets (11,471) (7,417)
Deferred revenue 353,994 --
Trade accounts payable (7,000) 78,815
Other payables and accrued liabilities (46,871) (20,909)
Long-term prepaid expenses (3,812) 10,954
Deferred financing fees 3,157 (63,153)
Accrued severance pay 1,220 (6,363)
----------------------
67,023 (162,921)
----------------------
Cash Flows from Investing Activities
Acquisition of equipment (23,799) (41,524)
----------------------
Cash Flows from Financing Activities
Increase in notes payable 5,677 --
Bank indebtedness - gross (4,208) 15,757
----------------------
1,469 15,757
----------------------
Foreign Exchange Loss on Cash and Cash Equivalents -- (6,809)
----------------------
Net Increase (Decrease) in Cash and Cash Equivalents 44,693 (195,497)
Cash and Cash Equivalents - beginning of period 32,538 215,575
----------------------
Cash and Cash Equivalents - end of period $ 77,231 $ 20,078
======================
F-28
m-Wise, Inc.
Notes to Financial Statements
March 31, 2004 and 2003
1. Description of Business and Going Concern
a) Description of Business
m-Wise Inc. (the "Company") is a U.S. corporation which develops
interactive messaging platforms for mobile phone-based commerc.ial
applications, transactions and information services with internet
billing capabilities.
The Company has a wholly-owned subsidiary in Israel, which was
incorporated in 2000 under the laws of Israel.
b) Going Concern
The Company's financial statements are presented on a going concern
basis, which contemplates the realization of assets and satisfaction
of liabilities in the normal course of business. The Company has
experienced recurring losses since inception and has negative cash
flows from operations that raise substantial doubt as to its ability
to continue as a going concern. For the periods ended March 31, 2004
and 2003, the Company experienced net losses of $219,103 and
$692,077 respectively.
The Company is in an industry where operational fluctuation is
usually higher than other ordinary industries. The accompanying
financial statements reflect management's current assessment of the
impact to date of the economic situation on the financial position
of the Company. Actual results may differ materially from
management's current assessment.
The Company's ability to continue as a going concern is also
contingent upon its ability to secure additional financing,
continuing sale of its products and attaining profitable operations.
Management is pursuing various sources of equity financing. Although
the Company plans to pursue additional financing, there can be no
assurance that the Company will be able to secure financing when
needed or obtain such on terms satisfactory to the Company, if at
all.
The financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification
of assets or the amounts and classification of liabilities that may
result from the possible inability of the Company to continue as a
going concern.
F-29
m-Wise, Inc.
Notes to Financial Statements
March 31, 2004 and 2003
2. Summary of Significant Accounting Policies
The accounting policies of the Company are in accordance with U.S.
generally accepted accounting principles, and their basis of application
is consistent with that of the previous period. Outlined below are those
policies considered particularly significant:
a) Basis of Presentation
These unaudited interim financial statements reflect all adjustments
that are, in the opinion of management, necessary to a fair
statement of the results for the interim periods presented.
b) Reporting Currency
A majority of the Company's revenues are generated in U.S. dollars.
In addition, a substantial portion of the Company's costs are
incurred in U.S. dollars. Management has determined that the U.S.
dollar will be used as the Company's functional and reporting
currency.
Accordingly, financial statements of subsidiaries maintained in
currencies other than the reporting currency are being translated
into U.S. dollars in accordance with Statement of Financial
Accounting Standard No. 52 (SFAS 52), "Foreign Currency
Translation". All translation gains and losses are directly
reflected separately in stockholders' equity as Accumulated Other
Comprehensive Income or Loss.
Foreign currency transactions of subsidiaries have been translated
to their functional currencies at the rate prevailing at the time of
the transaction. Realized foreign exchange gains and losses have
been charged to income in the year.
During the 2003 fiscal year, the subsidiaries whose reporting
currency was other than US dollars were disposed and as such, the
accumulated other comprehensive loss was adjusted to nil.
c) Cash and Cash Equivalents
Cash equivalents include cash and highly liquid investments with
initial maturities of three months or less.
d) Deferred Financing Fees
Deferred financing fees relate to a non-interest bearing credit line
facility of $300,000 provided by a shareholder as disclosed in note
5. The fees being are amortized using the straight-line method over
five years.
F-30
m-Wise, Inc.
Notes to Financial Statements
March 31, 2004 and 2003
2. Summary of Significant Accounting Policies (cont'd)
e) Equipment and Depreciation
Equipment are stated at cost less accumulated depreciation.
Depreciation is based on the estimated useful lives of the assets
and is provided using the undernoted annual rates and methods:
Furniture and equipment 6-15% Straight-line
Computer equipment 33% Straight-line
f) Revenue Recognition
The Company generates revenues from product sales, licensing,
customer services and technical support.
Revenues from products sales are recognized in accordance with Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial
Statements" ("SAB No. 101") and Statement of Position 97-2 "Software
Revenue Recognition" and Statement of Position 81-1 "Accounting for
Performance of Construction--Tyep and Certain Production--Type
Contracts." The Company has primarily short-term contracts whereby
revenues and costs in the aggregate for all contracts is expected to
result in a matching of gross profit with period overhead or fixed
costs similar to that achieved by use of the percentage of
completion method. Revenue is recognized only after all three
stages of deliverables are complete; installation, approval of
acceptance test results by the customer and when the product is
successfully put into real-life application. Customers are billed,
according to individual agreements, a percentage of the total
contract fee upon completion of work in each stage; approximately
40% for installation, 40% upon approval of acceptance tests by the
customer and the balance of the total contract price when the
software is successfully put into real-life application. The
revenues, less its' associated costs, are deferred and recognized on
completion of the contract and customer acceptance. Amounts received
for work performed in each stage are not refundable.
On-going service and technical support contracts are negotiated
separately at an additional fee. The technical support is separate
from the functionality of the products, which can function without
on-going support.
Technology license revenues are recognized in accordance with SAB
No. 101 at the time the technology and license is delivered to the
customer, collection is probable, the fee is fixed and determinable,
a persuasive evidence of an agreement exists, no significant
obligation remains under the sale or licensing agreement and no
significant customer acceptance requirements exist after delivery of
the technology.
Revenues relating to customer services and technical support are
recognized as the services are rendered ratably over the period of
the related contract.
The Company does not sell products with multiple deliverables. It is
management's opinion that EITF 00-21, "Revenue Arrangements With
Multiple Deliverables" is not applicable.
F-31
m-Wise, Inc.
Notes to Financial Statements
March 31, 2004 and 2003
2. Summary of Significant Accounting Policies (cont'd)
g) Research and Development Costs
Research and development costs are expensed as incurred.
h) Government Grants
Government grants are recognized as income over the periods
necessary to match them with the related costs that they are
intended to compensate.
i) Use of Estimates
The preparation of financial statements, in conformity with U.S.
generally accepted accounting principles, requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
j) Concentration of Credit Risk
SFAS No. 105, "Disclosure of Information About Financial Instruments
with Off-Balance Sheet Risk and Financial Instruments with
Concentration of Credit Risk", requires disclosure of any
significant off-balance sheet risk and credit risk concentration.
The Company does not have significant off-balance sheet risk or
credit concentration. The Company maintains cash and cash
equivalents with major Israel financial institutions.
The Company's provides credit to its clients in the normal course of
its operations. Depending on their size, financial strength and
reputation, customers are given credit terms of up to 60 days. The
Company carries out, on a continuing basis, credit checks on its
clients and maintains provisions for contingent credit losses which,
once they materialize, are consistent with management's forecasts.
For other debts, the Company determines, on a continuing basis, the
probable losses and sets up a provision for losses based on the
estimated realizable value. For the periods ended March 31, 2004 and
2003, all uncollectible amounts have been written off and there was
no further provision for doubtful accounts.
Concentration of credit risk arises when a group of clients having a
similar characteristic such that their ability to meet their
obligations is expected to be affected similarly by changes in
economic or other conditions. The Company does not have any
significant risk with respect to a single client.
F-32
m-Wise, Inc.
Notes to Financial Statements
March 31, 2004 and 2003
2. Summary of Significant Accounting Policies (cont'd)
k) Fair Value of Financial Instruments
The estimated fair value of financial instruments has been
determined by the Company using available market information and
valuation methodologies. Considerable judgment is required in
estimating fair value. Accordingly, the estimates may not be
indicative of the amounts the Company could realize in a current
market exchange. At March 31, 2003 and 2004, the carrying amounts of
cash equivalents, short-term bank deposits, trade receivables and
trade payables approximate their fair values due to the short-term
maturities of these instruments.
l) Impact of Recently Issued Accounting Standards
The FASB recently issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," that is applicable to
financial statements issued for fiscal years beginning after
December 15, 2001. The FASB's new rules on asset impairment
supercede FASB Statement 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and
portions of APB Opinion 30, "Reporting the Results of Operations."
SFAS No. 144 provides a single accounting model for long-lived
assets to be disposed of and significantly changes the criteria that
must be met to classify an asset as "held-for-sale." Classification
as "held-for-sale" is an important distinction since such assets are
not depreciated and are stated at the lower of fair value and
carrying amount. SFAS No. 144 also requires expected future
operating losses from discontinued operations to be displayed in the
period(s) in which the losses are incurred, rather than as of the
measurement date as currently required. The provisions of SFAS No.
144 were implemented for the year ending December 31, 2002 and did
not have a material effect on the Company's financial position or
operating results.
F-33
m-Wise, Inc.
Notes to Financial Statements
March 31, 2004 and 2003
3. Accrued Severance Pay
The Company accounts for its potential severance liability of its Israel
subsidiary in accordance with EITF 88-1, "Determination of Vested Benefit
Obligation for a Defined Benefit Pension Plan". The Company's liability
for severance pay is calculated pursuant to applicable labour laws in
Israel on the most recent salary of the employees multiplied by the number
of years of employment as of the balance sheet date for all employees. The
Company's liability is fully accrued and reduced by monthly deposits with
severance pay funds and insurance policies. As at March 31, 2003 and 2004,
the amount of the liabilities accrued were $45,417 and $61,988
respectively. Severance pay expenses for the periods ended March 31, 2003
and 2004 were $544 and $1,890 respectively.
The deposit funds include profits accumulated up to the balance sheet date
from the Israeli company. The deposited funds may be withdrawn only upon
the fulfillment of the obligation pursuant to Israeli severance pay laws
or labour agreements. Cash surrender values of the deposit funds as at
March 31, 2003 and 2004 were $30,203 and $40,095 respectively. Income
earned from the deposit funds for 2003 and 2004 was immaterial.
4. Redeemable Preferred Shares
The Company has issued Series "B" preferred shares, redeemable at the
option of the holder at a price equal to $8.17 per share plus 10% per
annum from the date of purchase through the redemption date.
The Company recorded the transaction in accordance with EITF D-98,
"Classification and Measurement of Redeemable securities". As such, the
preference shares have been presented outside of permanent equity at its
redemption value. The premium on redemption is being charged to the
statement of operations as incurred.
On November 19, 2003, the Company, in accordance with the holders, agreed
to convert 489,456 Series "B" preferred shares into 3,124,105 common
shares at a ratio of 1 to 6.3828125. Following the conversion, the common
shares were split on a 1 to 6 basis to 18,744,630 common shares as
described in note 5.
F-34
m-Wise, Inc.
Notes to Financial Statements
March 31, 2004 and 2003
5. Capital Stock
Authorized
210,000,000 Common shares
170,000,000 Preferred shares
Series "A": convertible, voting, par value of
$0.0017 per share
Series "B": 10% non-cumulative dividend, redeemable,
convertible, voting, par value of
$0.0017 per share
Series "C": 10% non-cumulative dividend, convertible,
voting, par value of $0.0017 per
share
2004 2003
Issued
69,506,898 Common shares (2003 - 11,260.428) $ 118,162 $ 19,143
nil Series "A" Preferred shares (2003 - 268,382) -- 2,684
nil Series "C" Preferred shares (2003 - 6,315,258) -- 63,153
----------------------
$ 118,162 $ 84,980
======================
On November 19, 2003, the Company, in accordance with the holders, agreed
to convert all the 268,382 Class "A" and 489,456 Class "B" and 6,315,258
Class "C" preferred shares into common shares. Following the conversion,
the Company granted a 1 to 6 forward stock split of its common shares. The
conversion has been recorded prospectively in the consolidated financial
statements, while the forward stock split has been recorded retroactively.
Stock warrants and options:
The Company accounted for its stock options and warrants in accordance
with SFAS 123 "Accounting for Stock - Based Compensation" and SFAS 148
"Accounting for Stock - Based compensation - Transition and Disclosure."
Value of options granted has been estimated by the Black Scholes option
pricing model. The assumptions are evaluated annually and revised as
necessary to reflect market conditions and additional experience. The
following assumptions were used:
2004 2003
Israel International Israel International
Interest rate 5% 5% 5% 5%
Expected volatility 50% 50% 50% 50%
Expected life in years 8 10 8 10
F-35
m-Wise, Inc.
Notes to Financial Statements
March 31, 2004 and 2003
5. Capital Stock (cont'd)
Warrants:
In April 2000, 56,180 warrants, equivalent to 337,080 after the 1 to 6
forward stock split, were issued to one of the shareholders with his
preferred Class "A" shares for a total investment of $750,000. Warrants
will expire in the event of an initial public offering of the Company's
securities. Warrants have an exercise price for preferred Class "A" shares
of the Company at $4.45 per share, equivalent to $0.74 after the 1 to 6
forward stock split. No value has been assigned to the warrants and the
total investment net of par value of preferred Class "A" shares has been
presented as additional paid in capital. The warrants for preferred Class
"A" shares were converted into warrants for common shares on a 1 to 1
basis during the year.
In January 2003, the Company issued 180,441 warrants for the Class "B"
preferred shares of the Company for deferral of debt for legal services
rendered, which was valued at $10,000. The Warrants will expire in 2010.
The warrants for preferred Class "B" shares have been converted into
warrants for common shares during the year at a ratio of 1 to 6.3828125.
After the conversion, the warrants were further split at the ratio of 1 to
6 in accordance with the forward stock split of the common shares. After
the conversion and the forward split, there were 7,025,778 warrants
outstanding each convertible to 1 common share at par value.
Capital Stock:
In January 2003, the Company issued 4,297,816 common shares, equivalent to
25,786,896 after the 1 to 6 forward stock split, for $250,000 of offering
costs with regard to the registration of its securities with the
Securities Exchange Commission. In November 2003 it was agreed upon by the
parties that the fair value of the offering costs was only $60,000 and
therefore 19,786,896 of the post-split shares were forfeited. The offering
costs have been charged to professional services expense in the year.
In January 2003, the Company issued 6,315,258 Class "C" preferred shares
at par value to a shareholder for providing a non-interest bearing credit
line facility of $300,000. At March 31, 2004 the line of credit has not
been utilized. The 6,315,258 Class "C" preferred shares were subsequently
converted into 37,891,548 common shares post forward stock split.
F-36
m-Wise, Inc.
Notes to Financial Statements
March 31, 2004 and 2003
5. Capital Stock (cont'd)
Stock Options:
In February 2001 the Board of Directors of the Company adopted two option
plans to allow employees and consultants to purchase ordinary shares of
the Company.
Under the Israel 2001 share option plan management authorized stock
options for 2,403,672 common shares of the Company having a $0.0017
nominal par value each and an exercise price of $0.0017, and under the
International 2001 share option plan, stock options for 300,000 common
shares having a $0.0017 nominal par value each and an exercise price of
$0.0017. As of March 31, 2004, 3,672 options under the Israel 2001 share
option plan for common stock were not yet granted.
Under the Israel 2003 share option plan management authorized stock
options (on a post conversion, post split basis) for 16,094,106 preferred
Class "B" shares, which were converted to options for common shares of the
Company having a $0.0017 nominal par value each and an exercise price of
$0.0017, and under the International 2003 share option plan stock options
(on a post conversion, post split basis) for 25,061,094 preferred Class
"B" shares which were converted to options for common shares of the
Company having a $0.0017 nominal par value each and an exercise price of
$0.0017. As of March 31, 2004, 38,256 options under the Israel 2003 share
option plan were not yet granted.
The options vest gradually over a period of 4 years from the date of grant
for Israel and 10 years (no less than 20% per year for five years for
options granted to employees) for the International plan. The term of each
option shall not be more than 8 years from the date of grant in Israel and
10 years from the date of grant in the International plan. The outstanding
options that have vested have been expensed in the statements of
operations as follows:
Year ended December 31, 2001 $ 9,000
Year ended December 31, 2002 -
Year ended December 31, 2003 384,889
Quarter ended March 31, 2004 8,269
------------
$ 402,158
------------
F-37
m-Wise, Inc.
Notes to Financial Statements
March 31, 2004 and 2003
5. Capital Stock (cont'd)
The following table summarizes the activity of common stock options during
2004 and 2003:
2004 2003
Israel International Israel International
Outstanding, beginning of period 18,455,850 25,361,094 600,000 300,000
Granted -- -- 1,800,000 --
Exercised -- -- -- --
Cancelled -- -- -- --
----------------------------------------------------
Outstanding, end of period 18,455,850 25,361,094 2,400,000 300,000
====================================================
Weighted average fair value
of common stock options
granted during the period $ -- $ -- $ 18,000 $ --
====================================================
Weighted average exercise
price of common stock
options, beginning of period $ 0.0017 $ 0.0017 $ 0.0017 $ 0.0017
====================================================
Weighted average exercise
price of common stock
options granted in the period $ -- $ -- $ 0.0017 $ --
====================================================
Weighted average exercise
price of common stock
options, end of period $ 0.0017 $ 0.0017 $ 0.0017 $ 0.0017
====================================================
Weighted average remaining
contractual life of
common stock options 7 years 9 years 8 years 10 years
====================================================
F-38
m-Wise, Inc.
Notes to Financial Statements
March 31, 2004 and 2003
5. Capital Stock (cont'd)
The following table summarizes the activity of preferred stock options
during 2004 and 2003:
2004 2003
Israel International Israel International
Outstanding, beginning of period -- -- -- --
Granted -- -- 16,055,850 25,061,094
Exercised -- -- -- --
Preferred stock options
converted to common -- -- -- --
Cancelled -- -- -- --
----------------------------------------------------
Outstanding, end of period -- -- 16,055,850 25,061,094
====================================================
Weighted average fair value of
preferred stock options
granted during the period $ -- $ -- $ 27,360 $ 42,604
====================================================
Weighted average exercise price
of preferred stock options,
beginning of period $ -- $ -- $ -- $ --
====================================================
Weighted average exercise
price of preferred stock
options granted in the period $ -- $ -- $ 0.0017 $ 0.0017
====================================================
Weighted average exercise
price of preferred stock
options, end of period $ -- $ -- $ 0.0017 $ 0.0017
====================================================
Weighted average remaining
contractual life of
preferred stock options 8 years 10 years
====================================================
All outstanding preferred stock options have been cancelled and replaced
with common stock options during the 2003 fiscal year at the ratio of 1 to
6.3828125.
The stock options and the preferred shares have not been included in the
calculation of the diluted earnings per share as their inclusion would be
antidilutive.
F-39
m-Wise, Inc.
Notes to Financial Statements
March 31, 2004 and 2003
6. Government Grants
During the quarter ended March 31, 2004 the Israeli subsidiary received
approximately $52,000 from a joint Israeli-Singapore government grant
program. The amount is being recorded as a reduction of the research and
development expense incurred in the period. The total amount approved for
the grant was $186,330, which the Company is recording on a cash basis.
The Israeli subsidiary is required to repay the government agency
royalties in the amount of 2.5% of gross sales from the products and
services being developed relating to the grant, limited to the amount of
the grant. If the product is not marketable, the grant will not be repaid.
As at March 31, 2004 the products have been developed but no sales have
been made. As such, no amount has been paid as royalties.
7. Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". This Standard prescribes the use of the
liability method whereby deferred tax asset and liability account balances
are determined based on differences between financial reporting and tax
bases of assets and liabilities and are measured using the enacted tax
rates. The effects of future changes in tax laws or rates are not
anticipated.
Under SFAS No. 109 income taxes are recognized for the following: a)
amount of tax payable for the current year, and b) deferred tax
liabilities and assets for future tax consequences of events that have
been recognized differently in the financial statements than for tax
purposes. Management determined that accounting values of its assets and
liabilities recorded are not materially different from their tax values
and therefore no deferred tax assets/liabilities have been setup to
account for the temporary differences.
F-40
m-Wise, Inc.
Notes to Financial Statements
March 31, 2004 and 2003
7. Income Taxes (cont'd)
The Israeli subsidiary maintains an investment program in hardware and
software in the amount of $75,000 and has been granted the status of
"Approved Enterprise" under the Law for the Encouragement of Capital
Investments, 1959 in Israel. This status entitles the Company to an
exemption from tax on income derived there from for a period of 10 years
starting in the year in which the Company first generates taxable income,
but not later than 14 years from the date of approval which was received
on December 2002 or 12 years from commencement of operations. The
tax-exempt profits that will be earned by the Company's "Approved
Enterprises" can be distributed to shareholders, without imposing tax
liability on the Company only upon its complete liquidation. If these
retained tax-exempt profits are distributed in a manner other than in the
complete liquidation of the Company they would be taxed at the corporate
tax rate applicable to such profits as if the Company had not elected the
alternative system of benefits (depending on the level of foreign
investment in the Company) currently between 10% to 25% for an "Approved
Enterprise". Under SFAS 109, a deferred tax liability normally would be
recorded relating to taxes that would be owed on the distribution of
profits even if management does not intend currently to declare dividends.
As at March 31, 2004 the Israel subsidiary has not reported any taxable
income and there was an accumulated deficit of approximately $240,000.
There was no deferred tax liability to be recorded in the period.
The Company has deferred income tax assets as follows:
2004 2003
Deferred income tax assets
Non-capital losses carried forward $ 2,387,500 1,280,000
Valuation allowance for deferred
income tax assets (2,387,500) (1,280,000)
----------------------------
$ -- --
============================
The Company provided a valuation allowance equal to the deferred income
tax assets because it is not presently more likely than not that they will
be realized.
The Company has accumulated tax losses in all of its subsidiaries. It is
not likely that the Company will be able to generate income to utilize the
tax loss. Therefore, no deferred tax assets have been set up to record the
tax benefits.
As at March 31, 2004, the Company has approximately $9,330,000 and
$240,000 tax losses carried forward in its United States and Israeli
subsidiaries. Losses in the United States subsidiary, if not utilized,
will expire in twenty years from the year of origin, December 31, 2020 to
December 31, 2023. For the Israel subsidiary, the losses can be carried
forward indefinitely to reduce income taxes on future taxable income.
F-41
m-Wise, Inc.
Notes to Financial Statements
March 31, 2004 and 2003
8. Related Party Transactions
During the quarter the Company incurred directors consulting fees and
salaries in the amount of $60,000 (2003, $60,000). At quarter-end, the
amount was unpaid and included in other payables and accrued expenses.
These transactions were in the normal course of business and recorded at
an exchange value established and agreed upon by the above mentioned
parties.
F-42
No dealer, salesman or other person is authorized to give any information or to
make any representations not contained in this Prospectus in connection with the
offer made hereby, and, if given or made, such information or representations
must not be relied upon as having been authorized by us. This Prospectus does
not constitute an offer to sell or a solicitation to an offer to buy the
securities offered hereby to any person in any state or other jurisdiction in
which such offer or solicitation would be unlawful. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that the information contained herein is correct as of any time
subsequent to the date hereof.
TABLE OF CONTENTS
PAGE
Prospectus Summary.......................... 2
Risk Factors................................ 4
Additional Information...................... 5
Dividend Policy............................. 5
Market Price of common stock................ 6
Plan of Operation........................... 6
Business.................................... 7
Management.................................. 10
Principal stockholders...................... 14
Selling stockholders........................ 14
Plan of Distribution........................ 21
Certain Transactions........................ 21
Description of Securities................... 22
Interest of Named Experts and Counsel....... 23
Experts..................................... 23
Indemnification............................. 23
Financial Statements........................ F-1
- -----------------------------------------------------
Until ______, 2004 (90 days after the date of this prospectus) all dealers that
effect transactions in these securities, whether or not participating in this
offering, may be required to deliver a prospectus. This is in addition to the
dealers' obligation to deliver a prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
M-WISE, INC.
6,000,000 SHARES
PROSPECTUS
, 2004
-42-
M-WISE, INC.
PART II
Item 24. INDEMNIFICATION OF DIRECTORS AND
OFFICERS.
We have adopted provisions in its articles of incorporation and
bylaws that limit the liability of its directors and provide for indemnification
of its directors and officers to the full extent permitted under the Delaware
General Corporation Law. Under our articles of incorporation, and as permitted
under the Delaware General Corporation Law, directors are not liable to us or
its stockholders for monetary damages arising from a breach of their fiduciary
duty of care as directors. Such provisions do not, however, relieve liability
for breach of a director's duty of loyalty to us or its stockholders, liability
for acts or omissions not in good faith or involving intentional misconduct or
knowing violations of law, liability for transactions in which the director
derived as improper personal benefit or liability for the payment of a dividend
in violation of Delaware law. Further, the provisions do not relieve a
director's liability for violation of, or otherwise relieve us or our directors
from the necessity of complying with, federal or state securities laws or affect
the availability of equitable remedies such as injunctive relief or recission.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of us where indemnification will be
required or permitted. We are not aware of any threatened litigation or
proceeding that may result in a claim for indemnification by any director or
officer.
Item 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Filing fee under the Securities Act of 1933 $ 77.66
Printing and engraving(1) $ 17,000.00
Legal Fees $ 33,000.00
Blue Sky Fees $ 1,200.00
Auditors Fees(1) $ 20,000.00
NASD Filing Fees $ 500.00
Miscellaneous(1) $ 8,222.34
-----------
TOTAL(2) $ 80,000.00
(1) Estimates
(2) Hilltek Investments Limited, a selling stockholder herein, will pay or has
paid a portion of such expenses, currently estimated at $60,000, and the Company
will pay all other expenses.
Item 26. RECENT SALES OF UNREGISTERED
SECURITIES.
During the past three years we have sold unregistered securities as described
below. Unless otherwise indicated, there was no underwriter involved in any of
the above transactions and there were no underwriting discounts or commissions
paid in connection therewith, except as disclosed above. Unless otherwise
indicated, the issuances of these securities were considered to be exempt from
registration under Section 4(2) of the Securities Act of 1933, as amended, and
the regulations promulgated thereunder. The purchasers of the securities in such
transactions represented their intention to acquire the securities for
investment only and not with a view to or for the sale in connection with any
distribution thereof and appropriate legends were affixed to the certificates
for the securities issued in such transaction. The purchasers of the securities
had adequate access to information about us. Each of the persons/entities listed
-43-
below, other than Ogen LLC is an accredited investor as defined in Rule 501(a)
of the Securities Act of 1933, as amended. To the best of our knowledge Ogen LLC
is a "sophisticated investor" in that it has been represented to m-Wise that
immediately prior to its sales of common stock to Ogen LLC, Ogen LLC had such
knowledge and experience in financial and business matters that it was capable
of evaluating the merits and risks of its investment in m-Wise.
TYPE OF NUMBER OF TOTAL
PURCHASER DATE SECURITY SECURITIES PRICE
Proton Marketing
Associates, LLC 02/03/00 Common 1,995,840 $ 3,326.4(1)(6)
Putchkon.com, LLC 02/03/00 Common 1,552,320 $ 2,587.2(1)(6)
Chinese Whispers, LLC 02/03/00 Common 604,800 $ 1,008 (1)(6)
Ogen, LLC 02/03/00 Common 887,040 $ 1,478.4 (1)(6)
Doron Cohen 02/03/00 Common 64,170 $ 106.95(1)(6)
Irit Cohen 02/03/00 Common 64,170 $ 106.95(1)(6)
Yuval Horn 02/03/00 Common 92,088 $ 153.48(1)(6)
Cap Ventures Ltd. 04/12/00 Series A 1,012,032 $ 750,000(1)(2)(6)
Cap Ventures Ltd. 09/04/00 Series A 337,080 $ 250,000(1)(6)
Cap Ventures Ltd. 11/15/00 Series A 261,180 $ 300,000(1)(6)
e-Street
International, AG 01/09/01 Series B 1,468,368 $2,000,162(1)(6)
D.E.P. Technology
Holdings Ltd. 01/09/01 Series B 1,468,368 $2,000,162(1)(6)
Doron Cohen -
David Cohen,
Law Offices 01/16/03 Warrants; 1,082,646 (4)(6)
Series B
Miretzky Holdings
Limited 01/25/03 Series C 37,891,548 (3)(6)
Hilltek Investments
Limited 06/24/03 Common 6,000,000 (5)(6)
<FN>
(1) Purchaser paid cash for its securities.
(2) Plus a warrant to purchase 337,080 shares of common stock, at an exercise
price of $0.74 per share.
(3) In January 2003, m-Wise issued in consideration for the provision of a
credit line in an amount of $300,000, 37,891,548 shares of Series C
preferred stock to Miretzky Holdings Limited.
(4) On January 16, 2003, m-Wise issued Doron Cohen - David Cohen, Law Offices
1,082,646 warrants to purchase shares of Series B Preferred Stock in
exchange for their agreement to defer payment of their fees for legal
services rendered, the warrants were valued at $10,000. 20% of the shares
underlying the warrants are currently held by Doron Cohen - David Cohen,
Law Offices and the remaining 80% were transferred on January 23, 2003, to
the beneficial owners of the law firm or their immediate family members:
Mr. Doron Cohen, Ms. Irit Cohen and Mr. Yuval Horn.
(5) On June 24, 2003, m-Wise issued 6,000,000 shares of its common stock to
Hilltek Investments Limited in exchange for consulting services rendered to
us, valued at $60,000.
(6) All share amounts reflect a six-for-one forward split effected in November
2003 and do not reflect any conversion of preferred stock or exercise of
warrants or options in shares of common stock.
</FN>
-44-
Listed below is a list of options issued by us during the last three years
pursuant to each of our Option Plans, each of the options were issued to
employees of m-Wise:
Israel Share Option Plan (2001)
We have issued an aggregate of 2,400,000 options to purchase common Stock
pursuant to our Israel Share Option Plan (2001) to our employees and certain
former employees (including employees of our subsidiaries) for services rendered
to us.
Nir Frishman and Barak Galili (beneficial owners of Ogen, LLC ) 600,000 options
granted on January 16, 2003 Gabriel Kabazo 150,000 options granted on September
21, 2003 Nir Simionovich 360,000 options granted on September 21, 2003 Lior
Zolty 180,000 options granted on September 21, 2003 Miri Malkin 210,000 options
granted on September 21, 2003 Alona Shatchan 180,000 options granted on
September 21, 2003 Shay Kahlon 360,000 options granted on September 21, 2003
Igor Gladishev 180,000 options granted on September 21, 2003 Oded Arbel 180,000
options granted on September 21, 2003
International Share Option Plan (2001):
We have issued an aggregate of 300,000 options to purchase shares of our common
stock pursuant to our International Share Option Plan (2001) to an employee of
our subsidiary in exchange for services rendered to us.
James Crossley (beneficial owner of Chinese Whispers , LLC ) 300,000 options
granted on June 1, 2001
Israel Stock Option Plan (2003):
We have issued an aggregate of 16,055,850 options to purchase shares of our
common stock pursuant to our Israel Stock Option Plan (2003) to our employees
and certain former services providers (including employees and service providers
of our subsidiaries) for services rendered to us.
Inter-Content Development for the Internet Ltd. 7,457,010 options granted on
January 16, 2003 Gabriel Kabazo 402,114 options granted on September 21, 2003
Nir Simionovich 191,490 options granted on September 21, 2003 Zach Sivan
2,668,416 options granted on January 16, 2003 Asaf Lewin 5,336,820 options
granted on January 16, 2003
International Share Option Plan (2003):
We have issued an aggregate of 25,061,094 options to purchase shares of our
common stock pursuant to our International Share Option Plan (2003) to our
employees and certain former employees (including employees of our subsidiaries)
in exchange for services rendered to us.
Proton Marketing Associates, LLC 10,432,560 options granted on January 16, 2003
Putchkon. com, LLC 10,876,080 options granted on January 16, 2003 Rony Cohen
2,668,416 options granted on January 16, 2003 Leora Penchina 1,084,038 options
granted on January 16, 2003
(1) Each option was issued to an employee or consultant of m-Wise in
consideration for services rendered to m-Wise.
-45-
Item 27. EXHIBITS AND FINANCIAL SCHEDULES
3. Certificate of Incorporation and Bylaws
3.1. Amended and Restated Certificate of Incorporation(1)
3.2 Bylaws(1)
4. Instruments defining the rights of security holders
4.1 Purchase and registration rights agreement and schedule of details.(1)
5.1 Opinion of Gersten, Savage, Kaplowitz, Wolf & Marcus, LLP(2)
10. Material Contracts
10.1 Amended and Restated Employment Agreement with Mordechai Broudo(1)
10.2 Amendment to Amended and Restated Employment Agreement with Mordechai
Broudo(1)
10.3 Amended and Restated Employment Agreement with Shay Ben-Asulin(1)
10.4 Amendment to Amended and Restated Employment Agreement with Shay
Ben-Asulin(1)
10.5 Employment Agreement, Gabriel Kabazo(1)
10.6 Confidentiality rider to Gabriel Kabazo Employment Agreement(1)
10.7 Employment Agreement Asaf Lewin(1)
10.8 2003 International Share Option Plan (2)
10.9 Form of Option Agreement, 2003 International Share Option Plan(2)
10.10 2001 International Share Option Plan(2)
10.11 Form of Option Agreement, 2001 International Share Option Plan(2)
10.12 2003 Israel Stock Option Plan(2)
10.13 Form of Option Agreement, 2003 Israel Stock Option Plan(2)
10.14 2001 Israel Share Option Plan(2)
10.15 Form of Option Agreement, 2001 Israel Share Option Plan(2)
10.16 Investors' Rights Agreement dated January 11, 2001(1)
10.17 Stockholders Agreement(1)
10.18 Agreement for Supply of Software and Related Services dated October 14,
2002, by and between i Touch plc and m-Wise, Inc. (1)
10.19 Purchase agreement between m-Wise, Inc. and Comtrend Corporation dated
May 22, 2002(1)
10.20 Amended and Restated Consulting agreement between Hilltek Investments
Limited and m-Wise dated November 13, 2003(1)
10.21 Consulting agreement between Hilltek Investments Limited and m-Wise
dated June 24, 2003, subsequently amended see exhibit 10.20 above (1)
10.22 Amendment to Investors' Rights Agreement dated October 2, 2003(1)
10.23 Appendices to 2003 Israel Stock Option Plan (1)
10.24 Appendices to 2001 Israel Share Option Plan (1)
10.25 Credit Line Agreement between m-Wise, Inc. and Miretzky Holdings,
Limited dated January 25, 2004.(2)
21. List of Subsidiaries(1)
23. Consents of Experts and Counsel
23.1 Consent of SF Partnership LLP(2)
23.2 Consent of Gersten, Savage, Kaplowitz, Wolf & Marcus, LLP included in
Exhibit 5.1 hereto (1)
-46-
All other Exhibits called for by Rule 601 of Regulation S-B are not
applicable to this filing.
(b) Financial Statement Schedules
All schedules are omitted because they are not applicable or because
the required information is included in the financial statements or notes
thereto.
(1) Previously filed. (2) Filed herewith.
Item 28. UNDERTAKINGS.
(a) The undersigned small business issuer hereby undertakes:
(1) To file, during any period in which it offers or sells
securities, a post-effective amendment to this
registration statement to:
(I) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together represent a fundamental change in the information in
the registration statement. Notwithstanding the foregoing,, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) any deviation
from the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to RULE
424(B) (ss.230.424(b) of this chapter) if, in thE aggregate, the changes in
volume and price represent no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in the
effective registration statement; and
(iii) Include any material or changed information the plan
of distribution.
(2) For determining liability under the Securities Act, treat
each post-effective amendment as a new registration
statement of the securities offered, and the offering of
the securities as at that time to be the initial bona fide
offering thereof.
(3) File a post effective amendment to remove from
registration any of the securities that remain unsold at
the end of the offering.
(e) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the small business issuer in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the small business
issuer will, unless in the opinion of its counsel that matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
(f) The undersigned small business issuer hereby undertakes that it
will:
-47-
(1) For purposes of determining any liability under the
Securities Act that the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be a part of this
registration statement as of the time the Commission declared it effective.
(2) For the purpose of determining any liability under the
Securities Act, that each post-effective amendment that contains a form of
prospectus as a new registration statement for the securities offered in the
registration statement, and that offering of the securities at that time as the
initial bona fide offering of those securities.
-48-
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it meets all the requirements for filing on Form SB-2
and has duly caused this amendment to the registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of Tel
Aviv, on July 9, 2004.
M-WISE, INC.
By: /S/ SHAY BEN-ASULIN
--------------------
Shay Ben-Asulin
Chairman
In accordance with the requirements of the Securities Act of 1933, this
amendment to Registration Statement has been signed by the following persons in
the capacities indicated on July 9, 2004.
By: /S/ SHAY BEN-ASULIN Chairman
---------------------
Shay Ben-Asulin
By: /S/ GABRIEL KABAZO Chief Financial Officer
--------------------- and Principal Accounting Officer
Gabriel Kabazo
By: /S/ MORDECHAI BROUDO Chief Executive Officer
--------------------- and Director
Mordecai Broudo
-49-