UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 2006
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from _______________________ to ________________
Commission File Number 333-106160
M-WISE, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 11-3536906
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3 Sapir Street, Herzeliya Pituach, Israel 46852
-----------------------------------------------
(Address of principal executive offices)
+972-9-9611212
--------------
(Issuer's telephone number, including area code)
All Correspondence to:
Arthur S. Marcus, Esq.
Sanny J. Barkats, Esq.
Gersten Savage LLP
600 Lexington Avenue, 9th Floor
New York, New York 10022
(212) 752-9700
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No []
The number of shares outstanding of the issuer's common stock, as of May 15,
2006 was 128,902,659.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
M-WISE, INC.
TABLE OF CONTENTS
Page
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Balance Sheet as of March 31, 2006 2
Unaudited Statements of Operations for the Three Months
Ended March 31, 2006 and 2005 3
Unaudited Statements of Cash Flows for the Three Months
Ended March 31, 2006 and 2005 5
Notes to Unaudited Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 18
Item 3. Controls and Procedures 22
PART II
OTHER INFORMATION
Item 1 Legal Proceedings 23
Item 2 Changes in Securities and Small Business 23
Issuer Purchases of Equity Securities 23
Item 3 Defaults upon Senior Securities 23
Item 4 Submission of Matters to a Vote of Security Holders 23
Item 5 Other Information 23
Item 6 Exhibits and Reports on Form 8-K 23
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
m-Wise, Inc.
CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED MARCH 31, 2006 AND 2005
CONTENTS
Report of Independent Registered Public Accounting Firm 1
Consolidated Balance Sheets 2
Consolidated Statements of Operations 3
Consolidated Statements of Changes in Stockholders' Deficit 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6 - 19
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of m-Wise, Inc.
We have reviewed the accompanying consolidated balance sheets of
m-Wise, Inc. and subsidiaries (the "Company") as of March 31, 2006 and 2005, and
the related consolidated statements of deficit, operations, change in
stockholders' deficit and cash flows for the three months then ended. These
interim financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards of the Public
Company Accounting Oversight Board (United States). A review of interim
financial information consists primarily of applying analytical procedures and
making inquires of persons responsible for financial and accounting matters. It
is substantially less in scope than an audit conducted in accordance with
standards of the Public Company Accounting Oversight Board (United States), the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications
that should be made to the consolidated interim financial statements referred to
above for them to be 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 since inception which raises substantial doubt about its ability to
continue as a going concern. Management's plan in regard to these matters is
also described in Note 1. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
"SF PARTNERSHIP, LLP"
Toronto, Canada CHARTERED ACCOUNTANTS
May 10, 2006
-1-
m-Wise, Inc.
Consolidated Balance Sheet
March 31, 2006 and 2005
2006 2005
------------ ------------
ASSETS
Current
Cash $ 20,239 $ 28,618
Accounts receivable - trade (net of allowance for 330,452 233,771
doubtful accounts of $63,952, 2005, $25,177)
Prepaid and sundry assets 14,235 6,743
------------ ------------
364,926 269,132
Long-term Prepaid Expenses 17,658 15,980
Equipment (note 3) 155,887 209,755
Deferred Financing Fees 22,109 34,737
------------ ------------
$ 560,580 $ 529,604
============ ============
LIABILITIES
Current
Bank indebtedness $ -- $ 17,363
Trade accounts payable 77,019 144,563
Other payables and accrued liabilities 1,004,375 876,630
Billings in excess of costs on uncompleted contracts 163,800 55,786
Notes payable - current portion -- 85,300
Advances from shareholders (note 4) 450,484 --
------------ ------------
1,695,678 1,179,642
Accrued Severance Pay (note 5) 57,202 31,092
Notes Payable (note 6) -- 1,810,193
------------ ------------
1,752,880 3,020,927
------------ ------------
STOCKHOLDERS' DEFICIENCY
Capital Stock (note 7) 214,344 118,162
Paid in Capital 9,619,964 6,900,084
Accumulated Deficit (11,026,608) (9,509,569)
------------ ------------
(1,192,300) (2,491,323)
------------ ------------
$ 560,580 $ 529,604
============ ============
(The accompanied notes of the financial statements is an
integral part of these statements)
- 2 -
m-Wise, Inc.
Consolidated Statements of Operations
Quarters Ended March 31, 2006 and 2005
2006 2005
------------- -------------
Net Sales $ 253,783 $ 1,264,549
Cost of Sales 12,947 305,454
------------- -------------
Gross Profit 240,836 959,095
------------- -------------
Expenses
General and administrative 262,518 306,766
Research and development 135,377 152,447
Financial 230,058 14,652
------------- -------------
627,953 473,865
------------- -------------
(Loss) Earnings Before Income Taxes (387,117) 485,230
------------- -------------
Provision for income taxes - current -- 121,300
Income taxes recoverable from loss carryforward -- (121,300)
------------- -------------
-- --
------------- -------------
Net (Loss) Earnings $ (387,117) $ 485,230
============= =============
Basic and Fully Diluted (Loss) Earnings Per Share (note 7) $ (0.00) 0.01
============= =============
Basic Weighted Average Number of Shares 116,868,131 69,506,898
============= =============
(The accompanied notes of the financial statements is
an integral part of these statements)
- 3 -
m-Wise, Inc.
Consolidated Statements of Stockholders' Deficit
Quarters Ended March 31, 2006 and 2005
Common Shares
Additional
Number of Paid in Accumulated
Shares Amount Capital Deficit
------------ ------------ ------------ ------------
Balance, January 1, 2005 69,506,898 $ 118,162 $ 6,894,664 $ (9,994,799)
Options vested for employee services -- -- 5,420 --
Net earnings -- -- -- 485,230
------------ ------------ ------------ ------------
Balance, March 31, 2005 69,506,898 118,162 6,900,084 (9,509,569)
------------ ------------ ------------ ------------
Balance, January 1, 2006 113,514,158 192,974 7,399,394 (10,639,491)
Issuance of common stock for repayment of
the notes payable (note 6, 7) 12,400,448 21,081 1,723,829 --
Issuance of warrants for repayment of
notes payable (note 6, 7) -- -- 436,228 --
Exercise of stock options 169,871 289 (18) --
Options vested for employee services -- -- 60,531 --
Net loss -- -- -- (387,117)
------------ ------------ ------------ ------------
Balance, March 31, 2006 126,084,477 $ 214,344 $ 9,619,964 $(11,026,608)
------------ ------------ ------------ ------------
(The accompanied notes of the financial statements is
an integral part of these statements)
- 4 -
m-Wise, Inc.
Consolidated Statements of Cash Flows
Quarters Ended March 31, 2006 and 2005
2006 2005
Cash Flows from Operating Activities
Net (loss) earnings $ (387,117) $ 485,230
Adjustments required to reconcile net loss to net cash used in operating
activities:
Depreciation 26,764 29,094
Wages paid by stock options 271 --
Financing fee paid by issuance of common shares 222,104 --
Employees stock options vested 60,531 5,420
----------- -----------
Net Changes in Assets & Liabilities
Accounts receivable - trade (177,418) (74,029)
Other receivables -- (4,379)
Prepaid and sundry assets (3,336) 265
Billings in excess of costs on uncompleted contracts 150,000 (614,104)
Trade accounts payable (17,885) (3,990)
Other payables and accrued liabilities 7,810 69,753
Long-term prepaid expenses 4,639 (1,385)
Deferred financing fees 3,157 3,157
Accrued severance pay (1,269) 14,575
----------- -----------
(111,749) (90,393)
----------- -----------
Cash Flows from Investing Activities
Acquisition of equipment (16,736) (18,070)
----------- -----------
Cash Flows from Financing Activities
Proceeds from issuance of common stock and warrants for repayment of
notes payable 1,959,034 --
Repayment of notes payable (1,959,034) --
Advances from shareholders 159,219 --
Proceeds from issuance of Promissory Notes -- 11,600
Bank indebtedness - net (11,068) 627
----------- -----------
148,151 12,227
----------- -----------
Net Increase (Decrease) in Cash 19,666 (96,236)
Cash - beginning of period 573 124,854
----------- -----------
Cash - end of period $ 20,239 $ 28,618
=========== ===========
Interest and Income Taxes Paid
During the quarter, the company had no cash flows arising
from income taxes and had interest paid as follows:
Interest paid $ 1,002 $ 323
=========== ===========
(The accompanied notes of the financial statements is
an integral part of these statements)
- 5 -
m-Wise, Inc.
Notes to Financial Statements
March 31, 2006 and 2005
1. Description of Business and Going Concern
a) Description of Business
m-Wise Inc. (the "Company") is a Delaware corporation which develops
interactive messaging platforms for mobile phone-based commercial
applications, transactions and information services with internet
billing capabilities.
The Company's wholly-owned subsidiary, m-Wise Ltd., is located in
Israel and 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, has negative cash
flows from operations with negative working capital that raise
substantial doubt as to its ability to continue as a going concern.
For the quarter ended March 31, 2006, the Company experienced net
losses of $387,117 and a working capital deficit of $1,330,752
(2004-$910,510)
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 sustaining profitable
operations.
The Company is pursuing 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.
-6-
m-Wise, Inc.
Notes to Financial Statements
March 31, 2006 and 2005
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) 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.
b) Basis of Consolidation
The consolidated financial statements include the operations of
m-Wise Inc. and its subsidiaries. Intercompany's balances and
transactions have been eliminated.
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
4. The overdraft from the credit facility is non-interest bearing
and there are 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.
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
Leasehold improvements Straight-line over the term of the lease
-7-
m-Wise, Inc.
Notes to Financial Statements
March 31, 2006 and 2005
2. Summary of Significant Accounting Policies (cont'd)
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) Research and Development Costs
Research and development costs are expensed as incurred.
-8-
m-Wise, Inc.
Notes to Financial Statements
March 31, 2006 and 2005
2. Summary of Significant Accounting Policies (cont'd)
g) 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.
h) 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.
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.
i) 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, 2006 and 2005, 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.
-9-
m-Wise, Inc.
Notes to Financial Statements
March 31, 2006 and 2005
2. Summary of Significant Accounting Policies (cont'd)
j) Earnings per Common Share
The Company calculates net earnings per share based on SFAS No. 128,
"Earnings Per Share". Basic earnings per share is computed by
dividing net earnings attributable to the common stockholders by the
weighted average number of common shares outstanding. Fully diluted
earnings per share is computed similar to basic earnings per share
except that the denominator is increased to include the number of
additional common shares that would have been outstanding if the
potential common shares had been issued and if the additional common
shares were dilutive.
k) Impact of Recently Issued Accounting Standards
In December 2004, the FASB issued a revision to SFAS No. 123,
"Share-Based Payment" (Statement 123R). This Statement requires a
public entity to measure the cost of employee services received in
exchange for an award of equity instruments based on the grant-date
fair value of the award (with limited exceptions). That cost will be
recognized over the period during which the employee is required to
provide service in exchange for the award requisite service period
(usually the vesting period). No compensation cost is recognized for
equity instruments for which employees do not render the requisite
service. Employee share purchase plans will not result in
recognition of compensation cost if certain conditions are met;
those conditions are much the same as the related conditions in
Statement 123. This Statement is effective for public entities that
do not file as a small business issuers as of the beginning of the
first interim or annual reporting period that begins after June 15,
2005. This Statement applies to all awards granted after the
required effective date and to awards modified, repurchased, or
cancelled after that date. The cumulative effect of initially
applying this Statement, if any, is recognized as of the required
effective date and is not expected to have a material impact on the
Company's consolidated financial statements.
In May 2005, the FASB issued Statement No. 154, Accounting Changes
and Error Corrections - A Replacement of APB Opinion No. 20 and FASB
Statement No. 3 (Statement No. 154). Statement No. 154 changes the
requirements for the accounting for and reporting of a change in
accounting principle. Statement No. 154 requires retrospective
application of any change in accounting principle to prior periods'
financial statements. Statement No. 154 is effective for the first
fiscal period beginning after December 15, 2005. We do not expect
the implementation of Statement No. 154 to have a significant impact
on our consolidated financial statements.
-10-
m-Wise, Inc.
Notes to Financial Statements
March 31, 2006 and 2005
3. Equipment
Equipment is comprised as follows:
2006 2005
Accumulated Accumulated
Cost Depreciation Cost Depreciation
------ ------------ ------- ------------
Furniture and equipment 57,930 27,865 57,747 21,604
Computer equipment $ 386,929 $ 262,637 $ 531,490 $ 369,027
Leasehold improvements 18,810 17,280 37,684 26,535
-----------------------------------------------------------------
$ 463,669 $ 307,782 $ 626,921 $ 417,166
-----------------------------------------------------------------
Net carrying amount $ 155,887 $ 209,755
----------- ----------
4. Advances from Shareholders
The advances from the shareholders are non-interest bearing and have no
fixed terms of repayment.
According to an agreement dated January 2003, a shareholder granted a
credit facility of $300,000 to the Company in return for preferred class
"C" shares as described in note 7. At the quarter ended March 31, 2006,
the line of credit has an outstanding balance of $450,484.
5. 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, 2006 and 2005,
the amount of the liabilities accrued were $113,123 and $76,728
respectively. Severance pay expenses for the periods ended March 31, 2006
and 2005 were $590 and $15,124 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, 2006 and 2005 were $55,921 and $45,636 respectively. Income
earned from the deposit funds for 2006 and 2005 was immaterial.
-11-
m-Wise, Inc.
Notes to Financial Statements
March 31, 2006 and 2005
6. Notes Payable
2006 2005
Syntek Capital AG
- a significant shareholder until July 2002 $ - $ 900,000
DEP Technology Holdings Ltd.
- a significant shareholder until July 2002 - 900,000
Accrued interest - 45,236
----------------------------
- 1,845,236
Less: Current portion - 28,200
----------------------------
$ - $ 1,817,036
============================
On March 8, 2006, the above $900,000 note payable to Syntek Capital AG
("Syntek") was converted into 6,200,224 common shares of the Company
pursuant to an agreement dated December 22, 2005.
In addition, the Company will issue warrants to Syntek for the purchase of
up to 5,263,158 common shares of the Company at an exercise price of $0.19
per warrant. As at March 31, 2006, warrants have been issued but not
exercised.
On March 8, 2006, the Company entered into an identical agreement with DEP
Technology Holdings Ltd. ("DEP").
Under both agreements, the three founding shareholders will transfer
11.25% of their shareholdings to Syntek and DEP.. As at March 31, 2006,
only one of the founding shareholders transferred 11.25% of his
shareholdings or 2,209,259 common shares to each of Syntek and DEP.
After the above mentioned conversions and transfers are completed, each of
Syntek and DEP will own 9% of the total outstanding common stock of the
Company. If the warrants are exercised, their percentage ownership in the
Company will increase to 13%.
-12-
m-Wise, Inc.
Notes to Financial Statements
March 31, 2006 and 2005
7. 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
2006 2005
Issued and outstanding
126,084,477 Common shares (2005 - 69,506,898) $ 214,344 $ 118,162
=================================
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:
2006 2005
Israel International Israel International
Interest rate 8% 8% 5% 5%
Expected volatility 80% 80% 50% 50%
Expected life in years 5 7 6 8
-13-
m-Wise, Inc.
Notes to Financial Statements
March 31, 2006 and 2005
7. 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.
On December 22, 2005, the Company entered into an agreement with Syntek
Capital AG, as part of the agreement for conversion of the note payable
into common shares as mentioned in note 6, whereby the Company issued
warrants to purchase up to 5,263,158 common shares of the Company at an
exercise price of $0.19. The value assigned to the warrants was $ 218,114.
As of March 31, 2006, the warrants have not been converted into common
shares.
On February 2, 2006, the Company entered into an identical agreement with
DEP Technology Holdings Ltd. as mentioned in note 6. The value assigned to
the warrants was $ 218,114. As of March 31, 2006, the warrants have not
been converted into common shares.
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
to a shareholder for providing a non-interest bearing credit line facility
of $300,000. These shares were issues 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.
-14-
m-Wise, Inc.
Notes to Financial Statements
March 31, 2006 and 2005
7. Capital Stock (cont'd)
Capital Stock (cont'd):
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.
On July 29, 2005, the Company issued 5,000,000 common shares, at par
value, to its Chief Financial Officer as compensation for services
rendered from September 2002 to December 2005. It was agreed upon by the
parties that the fair value of such services was $500,000, all of which
has been charged to wage expense.
On March 8, 2006, the Company issued 12,400,448 common shares for
repayment of the $1,800,000 note payable to Syntek Capital AG ("Syntek")
and DEP as mentioned in note 6.
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, 2006, 3,672 options under the Israel 2001 share
option plan for common stock were not yet granted.
In the quarter ended March 31, 2006, a total of 169,871 common stock
options were exercised by the employees.
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. On January 5, 2006, the share option plan was amended to
authorize an additional 1,260,000 stock options and the exercise price per
share for the new options will be $0.12 for options granted after January
5, 2006. As of March 31, 2006, 38,256 options under the Israel 2003 share
option plan were not yet granted.
On January 12, 2006, 1,260,000 stock options under the Israel 2003 share
options plan were granted at an exercise price of $0.12.
-15-
m-Wise, Inc.
Notes to Financial Statements
March 31, 2006 and 2005
7. 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
Year ended December 31, 2004 25,480
Year ended December 31, 2005 13,733
Quarter ended March 31, 2006 60,531
----------------
$ 493,633
The following table summarizes the activity of common stock options during
2005 and 2004:
2006 2005
Israel International Israel International
- ------------------------------------------------------------------------------------------------------------------
Outstanding, beginning of period 3,745,192 1,026,797 18,455,850 25,361,094
Granted 1,260,000 - - -
Exercised (169,871) - - -
Forfeited (1,813) - - -
- ------------------------------------------------------------------------------------------------------------------
Outstanding, end of period 4,833,508 1,026,797 18,455,850 25,361,094
- ------------------------------------------------------------------------------------------------------------------
Weighted average fair value of common
stock options granted during the
period $ 0.1284 $ - $ - $ -
- ------------------------------------------------------------------------------------------------------------------
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 $ 0.1200 $ - $ - $ -
- ------------------------------------------------------------------------------------------------------------------
Weighted average exercise price of
common stock options, end of
period $ 0.0300 $ 0.0017 $ 0.0017 $ 0.0017
- ------------------------------------------------------------------------------------------------------------------
Weighted average remaining
contractual life of common stock
options 5 years 7 years 6 years 8 years
The stock options have not been included in the calculation of the diluted
earnings per share as their inclusion would be antidilution.
-16-
m-Wise, Inc.
Notes to Financial Statements
March 31, 2006 and 2005
8. 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.
The Company has deferred income tax assets as follows:
2006 2005
Deferred income tax assets
Non-capital losses carried forward $ 2,654,000 $ 2,226,000
Valuation allowance for deferred income tax assets (2,654,000) (2,226,000)
----------------------------------
$ - $ -
==================================
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.
As at March 31, 2006, the Company has approximately $10,616,000 in tax
losses in the United States parent company and insignificant tax losses in
its Israeli subsidiary. Losses in the United States, if not utilized will
expire in twenty years from the year of origin as follows:
December 31, 2020 $ 909,500
2021 2,398,000
2022 778,000
2023 5,005,000
2024 581,000
2025 560,500
2026 384,000
----------------
$ 10,616,000
-17-
m-Wise, Inc.
Notes to Financial Statements
March 31, 2006 and 2005
9. Related Party Transactions
During the period, the Company incurred directors consulting fees and
salaries in the amount of $55,000 (2005, $50,000). At the quarter-end,
$568,000 (2005 - $407,000) 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.
10. Major Customers
In the quarter ended March 31, 2006, the Company had three major customers
which accounted for 53%, 16% and 15% of the total revenue respectively.
84% of the Company's total sales in the March 31, 2006 quarter were in the
United States. In the quarter ended March 31, 2005, one major customer in
Asia accounted for 81% of the total revenue.
11. Commitments
a) The company is committed under an operating lease for its premises
expiring June 30, 2006. Minimum annual payments exclusive of taxes,
insurance, and maintenance costs) under the lease is $13,500. In addition,
the company is committed under operating vehicle lease as follows:
Twelve months ended March 31, 2007 $ 83,000
Twelve months ended March 31, 2008 43,000
Twelve months ended March 31, 2009 5,000
--------------
$ 131,000
--------------
b) On February 10, 2006, the Company entered into an equity financing
agreement with a Delaware limited partnership ("DLP"), to sell up to
20,000,000 of the Company's common shares (up to $10,000,000) over the
course of 36 months. The amount that the Company shall be entitled to
request from each of the purchase "Puts", shall be equal to either 1)
$300,000 or 2) 200% of the average daily volume ("ADV") multiplied by the
average of the 3 daily closing prices immediately preceding the Put date.
The ADV shall be computed using the 10 trading days prior to the Put Date.
The Purchase Price for the common stock identified in the Put Notice shall
be set at 93% of the lowest closing bid price of the common stock during
the Pricing Period. The Pricing Period is equal to the period beginning on
the Put Notice date and ending on and including the date that is 5 trading
days after such Put Date. There are put restrictions applied on days
between the Put Date and the Closing Date with respect to that Put. During
this time, the Company shall not be entitled to deliver another Put
Notice.
In connection with the equity financing agreement, the Company has issued
a preliminary prospectus whereby the DLP and a current significant
shareholder can sell up to 30,000,000 common shares at market value.
-18-
m-Wise, Inc.
Notes to Financial Statements
March 31, 2006 and 2005
12. Subsequent Events
On April 27, 2006, the Company entered into an agreement with its
consultant whereby the latter will receive 2,818,182 common shares at par
value of $0.0017 per share as partial payment for services to be rendered
in addition to a $35,000 cash fee. Total value of the consulting contract
is approximately $39,800. The issuance of the 2,818,182 common shares were
registered with the Securities and Exchange Commission on April 28, 2006.
-19-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
The following discussion should be read in conjunction with our consolidated
financial statements and related notes included elsewhere in this Report.
This filing contains forward-looking statements. The words "anticipate,"
"believe," "expect, "plan," "intend," "seek," "estimate," "project," "will,"
"could," "may," and similar expressions are intended to identify forward-looking
statements. These statements include, among others, information regarding future
operations, future capital expenditures, and future net cash flow. Such
statements reflect our management's current views with respect to future events
and financial performance and involve risks and uncertainties, including,
without limitation: (a) the timing of our sales could fluctuate and lead to
performance delays; (b) without additional equity or debt financing we cannot
carry out our business plan; (c) our stockholders have pre-emptive rights to
purchase securities of m-Wise, which could impair our ability to raise capital;
(d) we operate internationally and are subject to currency fluctuations, which
could cause us to incur losses even if our operations are profitable; (e) we are
dependent upon certain major customers, and the loss of one or more of such
customers could adversely affect our revenues and profitability; (f) 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; (g) 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; (h) the rate of inflation in
Israel may negatively impact our costs if it exceeds the rate of devaluation of
the NIS against the Dollar. Should one or more of these risks or uncertainties
occur, or should underlying assumptions prove to be incorrect, actual results
may vary materially and adversely from those anticipated, believed, estimated or
otherwise indicated. These forward-looking statements speak only as of the date
of this prospectus. Subject at all times to relevant federal and state
securities law disclosure requirements, we expressly disclaim any obligation or
undertaking to disseminate any update or revisions to any forward-looking
statement contained herein to reflect any change in our expectations with regard
thereto or any changes in events, conditions or circumstances on which any such
statement is based. Consequently, all of the forward-looking statements made in
this Report are qualified by these cautionary statements and there can be no
assurance of the actual results or developments.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2006 COMPARED WITH THE THREE MONTHS ENDED MARCH 31,
2005.
REVENUES
3
License fees and products. Revenues from license fees and products decreased 87%
to $135,000 for the three months ended March 31, 2006 from $1,026,850 for the
same period in 2005. The decrease primarily consisted of $1,026,850 revenues
derived in 2005 from our contract with First Advanced Multi-Media Entertainment.
Revenue share.
Revenues from revenue share increased 135% to $37,433 for the three months ended
March 31, 2006 from $15,901 for the same period in 2005. The increase primarily
consisted of revenues from current customers who were not our customers during
the first three months of 2005 and from customers that did not generate revenues
from selling services to end users previously.
Customer services and technical support. Revenues from customer services and
technical support decreased 63% to $81,350 for the three months ended March 31,
2006 from $221,798 for the same period in 2005. The decrease primarily consisted
of $100,106 revenues derived in 2005 from two customers who have ceased the
usage of our support services.
Cost of revenues.
Cost of revenues decreased 96% to $12,947 for the three months ended March 31,
2006 from $305,454 for the same period in 2005. This decrease was primarily due
to lower revenues from License fees and products and revenues from customer
services and technical support.
Operating expenses.
Research and development. Research and development expenses decreased 11% to
$135,377 for the three months ended March 31, 2006 from $152,447 for the same
period in 2005. This decrease was primarily due to a $7,624 decrease in payroll
and related expenses. Research and development expenses, stated as a percentage
of revenues, increased to 53% for the three months ended March 31, 2006 from 12%
for the same period in 2005.
General and administrative.
General and administrative expenses decreased 14% to $262,518 for the three
months ended March 31, 2006 from $306,766 for the same period in 2005. This
decrease was primarily due to a $40,168 decrease in rent expenses and a $37,883
decrease in marketing expenses, partially offset by a $62,080 increase in
payroll and related expenses. General and administrative expenses, stated as a
percentage of revenues, increased to 103% for the three months ended March 31,
2006 from 24% for the same period in 2005.
4
Financing expenses.
Financing expenses. Our financing expenses increased 1,470% to $230,058 for the
three months ended March 31, 2006 from $14,652 for the same period in 2005. The
increase primarily consisted of $222,104 financing fee paid by issuance of
common shares.
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 $20,239 as of
March 31, 2006 and $573 as of December 31, 2005. 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. 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. As of
March 31, 2006, $450,484 is outstanding under the credit 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 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, 2006 we used $111,749 of cash in operating
activities primarily due to our net loss of $387,117 and a $177,418 increase in
accounts receivables, partially offset by $222,104 financing fee paid by
issuance of common shares and $150,000 increase in deferred revenues. In the
same period in 2005 we used $90,393 of cash in operating activities primarily
due to a $614,104 decrease in deferred revenues, partially offset by our net
earnings of $485,230.
Investing and financing activities.
Property and equipment consist primarily of computers, software, and office
equipment. For the three months ended March 31, 2006, net cash used in investing
activities was $16,736 consisting of an investment in equipment. In the same
period in 2005 net cash used in investing activities was $18,070 consisting of
an investment in equipment. For the three months ended March 31, 2006, net cash
provided by financing activities was $148,151 primarily due to a $159,219
increase in advances from shareholder, partially offset by a $11,068 decrease in
bank indebtedness. In the same period in 2005, net cash provided by financing
activities was $12,227 due to a $11,600 increase in notes payables and a $627
increase in bank indebtedness.
5
DIVIDENDS
We have not paid any dividends on our common stock. We currently intend to
retain any earnings for use in our business, and therefore do not anticipate
paying cash dividends in the foreseeable future.
OFF BALANCE SHEET ARRANGEMENTS
None.
Item 3. Controls and Procedures
With the participation of management, our Chief Executive Officer and Chief
Financial Officer evaluated our disclosure controls and procedures within the 90
days preceding the filing date of this quarterly report. Based upon this
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are effective in ensuring that
material information required to be disclosed is included in the reports that we
file with the Securities and Exchange Commission.
There were no significant changes in our internal control over financial
reporting to the knowledge of our management, or in other factors that have
materially affected or are reasonably likely to materially affect these internal
controls over financial reporting subsequent to the evaluation date.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Small Business Issuer Purchases of Equity
Securities
In April 2006, we issued 2,818,182 common shares to a consultant following a
technology consulting agreement we have entered into with him.
Item 3. Default upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
6
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Amended and restated Certificate of Incorporation**
3.2 Bylaws**
4.1 Purchase and registration rights agreement and schedule of details**
10.1 Amended and Restated Employment Agreement with Mordechai Broudo**
10.2 Amendment to Amended and Restated Employment Agreement with Mordechai
Broudo**
10.3 Amended and Restated Employment Agreement with Shay Ben-Asulin**
10.4 Amendment to Amended and Restated Employment Agreement with Shay
Ben-Asulin**
10.5 Employment Agreement, Gabriel Kabazo**
10.6 Confidentiality rider to Gabriel Kabazo Employment Agreement**
10.7 Employment Agreement Asaf Lewin**
10.8 2003 International Share Option Plan**
10.9 Form of Option Agreement, 2003 International Share Option Plan**
10.10 2001 International Share Option Plan**
10.11 Form of Option Agreement, 2001 International Share Option Plan**
10.12 2003 Israel Stock Option Plan**
10.13 Form of Option Agreement, 2003 Israel Stock Option Plan**
10.14 2001 Israel Share Option Plan**
10.15 Form of Option Agreement, 2001 Israel Share Option Plan**
10.16 Investors' Rights Agreement dated January 11, 2001**
10.17 Stockholders Agreement**
10.18 Agreement for Supply of Software and Related Services dated October 14,
2002, by and between i Touch plc and m-Wise, Inc.**
10.19 Purchase agreement between m-Wise, Inc. and Comtrend Corporation dated
May 22, 2002**
10.20 Amended and Restated Consulting agreement between Hilltek Investments
Limited and m-Wise dated November 13, 2003**
10.21 Consulting agreement between Hilltek Investments Limited and m-Wise
dated June 24, 2003, subsequently amended see exhibit 10.20 above**
10.22 Amendment to Investors' Rights Agreement dated October 2, 2003**
10.23 Appendices to 2003 Israel Stock Option Plan**
10.24 Appendices to 2001 Israel Share Option Plan**
10.25 Credit Line Agreement between m-Wise, Inc. and Miretzky Holdings,
Limited dated January 25, 2004**
10.26 Termination and Release Agreement by and among the Company and Syntek
capital AG. (Incorporated by reference to Exhibit 10.1 of the current
report on Form 8-K filed on January 13, 2006
10.27 Termination and Release Agreement dated February 2, 2006 by and among
the Company and DEP Technology Holdings Ltd (Incorporated by reference
to Exhibit 10.1 of the current report on Form 8-K filed on February 7,
2006)
21. List of Subsidiaries** 31.1 Rule 13a-14(a)/15d-14(a) Certification.*
31.2 Rule 13a-14(a)/15d-14(a) Certification.*
32.1 Certification by the Chairman Relating to a Periodic Report Containing
Financial Statements. ***
32.2 Certification by the Chief Financial Officer Relating to a Periodic
Report Containing Financial Statements. ***
- -------------
* Filed herewith.
7
** Incorporated by reference from the registration statement filed with
the Securities and Exchange Commission Registration Statement on Form SB-2 (Reg.
No. 333-106160).
*** The Exhibit attached to this Form 10-QSB shall not be deemed "filed"
for purposes of Section 18 of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), or otherwise subject to liability under that section, nor
shall it be deemed incorporated by reference in any filing under the Securities
Act of 1933, as amended, or the Exchange Act, except as expressly set forth by
specific reference in such filing.
(b) Reports on Form 8-K
The Company filed a current report on Form 8-K on January 13, 2006 pursuant to
entering into a Termination and Release Agreement with Syntek capital Ag.The
Company issued Syntek an aggregate of 5,561,994 shares of its common stock and
warrants to purchase 5,263,158 shares shares of its Common stock at $.19 per
shares for a period of three years.
The Company filed a current report on Form 8-K on February 7, 2006
disclosing that the Company entered into a Termination and Release Agreement
with DEP Technology Holdings Ltd., The Company issued DEP an aggregate of
5,561,994 shares of its common stock and warrants to purchase 5,263,158 shares
of its Common stock at $.19 per shares for a period of three years.
8
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
M-WISE, INC.
(Registrant)
Date: May 15, 2006 /s/ Shay Ben-Asulin
-------------------
Name: Shay Ben-Asulin
Title: Chairman
9