U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2006
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________________ to __________________
Commission File Number: 33-22175
Safetek International, Inc.
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(Exact name of small business issuer as specified in its charter)
Delaware 75-2226896
- ------------------------------- -----------------------------------
(State or other jurisdiction or (I.R.S. Employer Identification No)
incorporation or organization)
23 Aminadav St. Tel Aviv, Israel 67898
- ---------------------------------------- --------
(Address of principal executive offices) (Zip Code)
972-3-561-3468
---------------------------
(Issuer's telephone number)
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 issuer 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 Registrant's Common Stock, $0.0001 par
value, as of the close of business on May 1, 2006 was 60,138,923.
SAFETEK INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
FORM 10-QSB
QUARTERLY PERIOD ENDED MARCH 31, 2006
- ------------------------------------------------------------------------------------------------
INDEX
Part I. FINANCIAL INFORMATION Page
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheet (Unaudited) at March 31, 2006. 3
Consolidated Statements of Operations (Unaudited) for the three months
ended March 31, 2006 and 2005 and for the Period from April 16, 2005
Through March 31, 2006 (Development stage). 4
Consolidated Statements of Cash Flows (Unaudited) for the three months
ended March 31, 2006 and 2005 and for the Period from April 16, 2005
Through March 31, 2006 (Development stage). 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis or Plan of Operation 15
Item 3. Controls and Procedures 18
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 19
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6: Exhibits 20
SIGNATURES
- -----------------------------------------------------------------------------------------------
SAFETEK INTERNATIONAL INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED BALANCE SHEET
March 31,
2006
(Unaudited)
ASSETS
Current Assets
Cash & Cash Equivalents $ 134,436
Other Receivable 25,665
Prepaid Expenses 11,006
Biological Materials Supply Inventory 100,000
-----------
Total Current Assets 271,107
Available for Sale Securities 5,417
Property and Equipment, Net 17,353
Other 4,683
Debt Financing Cost, Net of Amortization 52,717
-----------
TOTAL ASSETS $ 351,277
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts Payable $ 152,629
Accrued Expenses 120,552
Accrued Payroll and Related Expenses 58,107
Loans Payable 69,647
Convertible Debentures, Net of Discount of $201,248 28,061
Warrants, Net of Discount of $17,988 2,703
Derivative Liability - Convertible Debentures and 988,621
Warrants
Derivative Liability - Warrants, Current Portion 1,300,613
-----------
Total Current Liabilities 2,720,933
Other
Derivative Liability - Warrants 1,385,939
Redeemable Convertible Preferred Shares (4,648 shares, par value $
.0001, redeemable prior to February 21, 2002 at $50 per share)
50,000,000 shares authorized 232,400
-----------
TOTAL LIABILITIES 4,339,272
-----------
Stockholders' Deficit:
Common Stock, $.0001 Par Value Authorized
500,000,000 Shares, Issued and Outstanding
60,138,923 6,014
Additional Paid in Capital 6,080,396
Accumulated Deficit Through April 15, 2005* (4,250,580)
Deficit Accumulated During the Development Stage (3,795,043)
Deferred Compensation (2,028,782)
-----------
Total Stockholders' Deficit (3,987,995)
-----------
TOTAL LIABILITIES & STOCKHOLDERS' DEFICIT $ 351,277
===========
*Commencement of development stage
3
SAFETEK INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended
Cumulative for
the Period from
April 16, 2005*
March 31, March 31, Through March
2006 2005 31, 2006
------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited)
Operating Expenses (Income)
Payroll and Related Expenses $ 111,756 $ -- $ 256,356
Income from Cancellation of Indebtedness (212,432)
Gain from Securities (2,263) (11,264)
Office & General Expenses 28,717 3,810 100,000
Exchange Rate Loss 1,738 -- 13,300
Professional Fees 61,614 12,000 354,598
Amortization of
Convertible Debentures and
Warrant Discount 28,230 -- 38,047
Business Development Costs 93,423 -- 133,746
------------ ------------ ------------
Total Operating Expenses (323,215) (15,810) (672,351)
Loss from Operations (323,215) (15,810) (672,351)
Other Income (Expenses)
Interest Income 1,192 -- 2,808
Interest Expenses Convertible Debentures (4,932) (2,700) (7,233)
Derivative Liability Expenses (557,779) -- (3,118,267)
------------ ------------ ------------
Total Other Income (Expenses) (561,519) (2,700) (3,122,692)
------------ ------------ ------------
Net (Loss) $ (884,734) $ (18,510) $ (3,795,043)
============ ============ ============
Net (Loss) Per Share
Basic & Diluted Per
Common Shares $ (0.0147) $ -- $ (0.0676)
------------ ------------ ------------
Weighted Average Number of
Shares Outstanding -
Basic and Diluted 60,138,923 26,902,974 56,115,607
------------ ------------ ------------
* Commencement of development stage
4
SAFETEK INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended
Cumulative
for the
Period from
April 16,
March 31, March 31, 2005* Through
2006 2005 March 31, 2006
----------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss for the period $ (884,734) $ (18,510) $(3,795,043)
Adjustment to Reconcile Net Loss to Net Cash
Used in Operating Activities:
Depreciation 1,738 -- 2,966
Stock Issued for Services -- -- 179
Income from Cancellation of Indebtedness -- -- (212,432)
Non Cash Interest Expenses -- -- 5,001
Derivative Liability Expenses 557,779 -- 3,118,095
Amortization of Debentures and Warrants
Discount 28,230 -- 38,047
Other 75 -- (4,180)
Changes in Assets and Liabilities
Sale of Trading Securities 122,162 -- 4,256
Decrease in Prepaid Expenses 13,247 -- (11,006)
(Increase)in Other Receivable (9,572) -- (25,666)
Decrease in Other Current Assets 54,906 54,906
(Increase) in Supplies Inventory (100,000) (100,000)
Increase in Account Payable 62,710 6,000 99,051
(Decrease) in Accrued Expenses (10,515) 2,700 115,550
Increase in Accrued Payroll and Related
Expenses 7,845 -- 58,110
----------- ----------- -----------
Net Cash Used in Operating Activities (156,129) (9,810) (652,166)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Property and Equipment (3,842) -- (20,318)
Advance payment to Matrix -- -- (25,000)
Loan to Serapis -- -- (29,906)
Other Long Term Assets 59 -- (4,684)
Available-For-Sale Securities -- -- (5,490)
----------- ----------- -----------
Net Cash Used in Investing Activities (3,783) -- (85,398)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceed from Issuance of Shares
and Warrants, Net of Issuance -- 37,369 685,001
Expenses
Proceeds from Issuance of Debentures, Net of -- -- 190,000
Issuance Expenses
Payment on Debentures -- (15,827) --
Payments on Loan Payable -- (11,732) (3,001)
----------- ----------- -----------
Net Cash Provided by Financing Activities -- 9,810 872,000
----------- ----------- -----------
(DECREASE) INCREASE IN CASH AND CASH EQUVALENTS (159,912) -- 134,436
BALANCE OF CASH AND CASH EQVIVALENTS
AT THE BEGINNING OF PERIOD 294,348 -- --
----------- ----------- -----------
BALANCE OF CASH AND CASH EQVIVALENS
AT THE END OF PERIOD $ 134,436 $ -- $ 134,436
----------- ----------- -----------
*Commencement of development stage
5
SAFETEK INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006 (Unaudited)
NOTE 1: ORGANIZATION AND DESCRIPTION OF BUSINESS
Safetek International, Inc. (the "Company") was incorporated in April 1988
under the name Theoretics, Inc. The Company reorganized in May 2001 for
the purpose of providing embryonic companies with good concepts and
promising patented ideas. During the years 2002-2004 the Company did not
have any business activity.
As of April 15, 2005, Dr. Goldstein was appointed as the Company's
Chairman, Chief Executive Officer and Secretary, and since then the
Company has been focusing on screening new technologies and other business
opportunities in the life sciences and health care fields. On May 17,
2005, the Company established an Israeli wholly owned subsidiary under the
laws of the State of Israel, called "Oriens Life Sciences Ltd. (the
"Subsidiary") , to serve as a platform for the Company to screen the
Israeli life sciences and health care industry and identify, analyze, and
acquire or invest in technologies in this field.
In accordance with Financial Accounting Standards Board (FASB) No. 7, the
Company is considered a development stage company, beginning on April 16,
2005, the date it commenced with its new business activity.
During the fiscal year ended December 31, 2005, the Company signed 4 term
sheets to purchase technologies in the life science field. In due course,
on January 4, 2006, the Company closed on a transaction contemplated by
the Exclusive Patent and Know How License Option Agreement dated December
28, 2005 with Matrix Pharma Inc., a Delaware corporation ("Matrix").
Pursuant to the Agreement, the Company acquired from Matrix for a
consideration of $60,000 an option to purchase an exclusive, world-wide
license in all of Matrix's intellectual property rights in its Thrombin
inhibition compounds.
On March 30, 2006, the Company and Matrix signed an amendment, extending
the exercise date of the option to May 15, 2006. The amendment provides
that until April 15 the Company will pay Matrix $15,000 in consideration
for Matrix's agreement to extend the exercise date. Such amount will be
deducted from the repayment of costs that the Company shall pay if it
exercises the option. The Company is considering whether to exercise the
option, due to the amounts needed to finance such development and the
other business opportunities that the Company obtained.
On March 23, 2006, the Company entered into a term sheet with Resdevco
Ltd, a company incorporated under the laws of Israel ("Resdevco"). The
term sheet sets forth the principal terms of a proposed agreement between
the Company and Resdevco, pursuant to which Resdevco will grant the
Company an exclusive, worldwide license in Resdevco's Antioxidant
salicylate compounds. The Company is conducting a due diligence process
using the services of applicable expert, in order to evaluate the
probability and the potential uses of those compounds.
On April 25, 2006, the Company entered into a term sheet with Interactive
Health Pharmacy Services, Inc. ("IHPS"). The term sheet sets forth the
principal terms of a proposed agreement between the Company and IHPS,
pursuant to which the Company will acquire IHPS at the closing, after the
parties agree to a mutually acceptable definitive acquisition agreement.
In consideration therefore at the closing of the acquisition, the Company
will issue to IHPS shares of common stock in an amount equal to 50.01% of
the issued and outstanding shares of common stock. In addition, at the
closing of the acquisition the Company is obligated to have no less than
$1,500,000 in cash and working capital. Anticipated date for the execution
of a definitive agreement is June 25, 2006. IHPS is engaged in preparing
and distributing HIV and AIDS drugs in the New York area.
The Company currently invests its efforts in conducting its due diligence
on the companies with which it has signed term sheets.
As of March 31, 2006, the Company has an accumulated deficit of
$8,045,623. Our prospects must therefore be evaluated in light of the
problems, expenses, delays and complications associated with the financial
situation of the Company. The Company is in the process of raising funds
to finance its activities, including without limitation, the completion of
the above described prospective transactions, and other potential business
opportunities. The Company requires funds in order to execute the
transaction with IHPS, to finance its current activities and in order to
begin the development of the technologies it has the opportunity to
purchase if and when definitive agreements will be executed.
6
SAFETEK INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006 (Unaudited)
NOTE 2: GOING CONCERN
As of March 31, 2006, we have cash on hand of $134,436 which we received
for securities issuance. This amount is inadequate for us to effectuate
our planned activities during the next 12 months. Accordingly, we may be
unable to continue operations in the future as a going concern. Our plans
to deal with this uncertainty include raising additional capital or
entering into a strategic arrangement with a third party. There can be no
assurance that our plans can be realized. There can be no assurance that
we will be able to obtain additional financing if and when needed or that,
if available, financing will be on acceptable terms. Additional equity
financings may be dilutive to holders of our common stock and debt
financing, if available, and may involve significant payment obligations
and covenants that restrict how we operate our business.
Certain conditions raise substantial doubt about the Company's ability to
continue as a going concern beyond the next twelve (12) month period. As
of March 31, 2006, the Company had stockholders' deficit of $3,987,995 and
an accumulated deficit of $8,045,623. Our balance sheet as of March 31,
2006 reflects total liabilities of $4,339,272. The Company needs to obtain
additional financing to fund payment of its obligations and to provide
working capital for operations.
NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements of Safetek
International, Inc. and its subsidiary have been prepared in accordance
with accounting principles generally accepted in the United States of
America for interim financial information and with instructions for Form
10-QSB and Item 310 of Regulation S-B. Accordingly, they do not include
all the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. Results
of operations for the three months ended March 31, 2006 are not
necessarily indicative of the results that may be expected for the fiscal
year ended December 31, 2006. The accompanying consolidated financial
statements should be read in conjunction with the consolidated financial
statements in the Company's annual report on Form 10-KSB for the fiscal
year ended December 31, 2005 and notes thereto filed with the Securities
and Exchange Commission in April 2006.
USE OF ESTIMATES
The preparation of these financial statements requires our management to
make estimates, judgments and assumptions that affect the reported amounts
of assets, liabilities, revenues and expenses. We continually evaluate the
accounting policies and estimates we use to prepare the consolidated
financial statements. We base our estimates on historical experiences and
assumptions believed to be reasonable under current facts and
circumstances. Actual amounts and results could differ from these
estimates made by Management. We do not participate in, nor have we
created, any off-balance sheet special purpose entities or other
off-balance sheet financing. In addition, we have not and do not
anticipate entering into any derivative financial instruments for
speculative purposes or use derivative financial instruments primarily for
managing our exposure to changes in interest rates. Significant estimates
include the useful life of property and equipment and the fair value of
derivative liabilities.
RECLASSIFICATION
The Company has reclassified certain amounts and descriptions to enhance
financial statement presentation.
DEVELOPMENT STAGE COMPANY
In accordance with Financial Accounting Standards Board (FASB) No. 7, the
Company is considered a development stage company, beginning on April 16,
2005, the date it commenced with its new business activity.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of
the Company and its subsidiary. All material inter-company balances and
transactions have been eliminated in consolidation.
7
SAFETEK INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006 (Unaudited)
FUNCTIONAL CURRENCY
The currency of the primary economic environment in which the operations
of the Company and its subsidiary are conducted is the US dollar. A
significant part of the Company's capital expenditures and most of its
financing is in dollars. Most of the Company's expenses incurred in
dollars and all intercompany balances are denominated in dollars. In
addition, a substantial portion of the subsidiary's expenses are incurred
in dollars. Thus, the functional currency of the Company and its
subsidiary is the US dollar.
Transactions and balances originally denominated in dollars are presented
at their original amounts. Balances in foreign currencies are translated
into dollars using historical and current exchange rates for non-monetary
and monetary balances, respectively. For foreign transactions and other
items reflected in the statements of operations, the following exchange
rates are used: (1) for transactions - exchange rates at transaction dates
or average rates and (2) for other items (derived from non- monetary
balance sheet items such as depreciation) - historical exchange rates. The
resulting transaction gains or losses are carried to financial income or
expenses, as appropriate.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments, which include
short-term bank deposits (up to three months from date of deposit) that
are not restricted as to withdrawal or use, to be cash equivalents.
OTHER RECEIVABLE
Other receivable consist of refundable value added tax (VAT) payments that
the Company paid during the year.
INVESTMENTS IN SECURITIES
The Company and its subsidiary account for securities in accordance with
Statement of Financial Accounting Standard No. 115, "Accounting for
Certain Investments in Debt and Equity Securities"
Securities that are bought and held principally for the purpose of selling
them in the near term shall be classified as trading securities.
Investments not classified as trading securities shall be classified as
available-for-sale securities.
Unrealized holding gains and losses for trading securities shall be
included in earnings. Unrealized holding gains and losses for
available-for-sale securities shall be excluded from earnings and reported
in other comprehensive income until realized except in hedge transactions.
PREPAID EXPENSES
Prepaid expenses consist of insurance payments that are amortized over the
service and contract period.
BIOLOGICAL MATERIALS SUPPLY INVENTORY
Disposal biological materials are expensed as used and the remaining
balance is stated at cost.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated by the
straight-line method over the estimated useful lives of the assets (2-7
years).
OTHER LONG TERM ASSETS
Other long term assets include deposits on leased property that will be
applied toward the last three months of the three year leasing period.
8
SAFETEK INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006 (Unaudited)
DEBT FINANCING COSTS
Consist of costs that were incurred by issuance of the convertible
debentures on November 18, 2006. The balance is amortized on a straight
line basis over the three years debentures period.
DEBENTURES
The Company accounts for debentures that were issued in accordance with
APB 14, SFAS 133 and EITF 00-19. Per APB 14, when Warrants are detachable
from the debt instrument, and the warrants are used as security for the
debt instrument, the proceeds from the sale of the debt instrument and the
detachable warrants should be allocated between the warrants and the debt
instrument.
Paragraph 12 of Statement of Financial Accounting Standard No. 133
provides that in the case of contracts that do not in their entirety meet
the definition of a derivative instrument such as bonds, insurance
policies, and leases, any embedded derivative instruments shall be
separated from the host contract and accounted for as a derivative
instrument.
Paragraph 11(a) of Statement of Financial Accounting Standard No. 133
provides that contracts issued or held by a reporting entity that are both
(1) indexed to its own stock and (2) classified in stockholders' equity in
its statement of financial position, shall not be considered derivative
instruments for purposes of this statement.
EITF Issue No. 00-19, "Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company's Own Stock," provides
guidance in determining whether an embedded derivative which is indexed to
its own stock would be classified in stockholders' equity in accordance
with paragraph 11(a) of Statement of Financial Accounting Standard No. 133
or if it was freestanding. EITF Issue No. 00-19 excludes from its
classification requirements "conventional instruments".
Such instruments are defined in EITF 05-2 as: instruments that provide the
holder with an option to convert into a fixed number of shares (or
equivalent amount of cash at the discretion of the issuer) for which the
ability to exercise the option is based on the passage of time or a
contingent event should be considered "conventional" for purposes of
applying Issue 00-19. Instruments that contain "standard" antidilution
provisions would not preclude a conclusion that the instrument is
convertible into a fixed number of shares. Standard antidilution
provisions are those that result in adjustments to the conversion ratio in
the event of an equity restructuring transaction (as defined in the
glossary of Statement 123(R) 2 ) that are designed to maintain the value
of the conversion option.
WARRANTS
The Warrants that the Company issued are presented at their fair value and
classified as liabilities, according to paragraphs 20 and 24 of EITF 00-19
"Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock".
As a result of the terms of the debentures that the Company issued and
since theoretically the debentures can be converted into a number of
shares that will exceed the company's authorized shares if the Company's
market price falls below 0.000569. (As of March 23, 2006 as reported on
http://Bloomberg.com, the average bid and ask price was 0.25), all
convertible instruments of the Company including warrants (but excluding
employee stock options) are accounted as for derivative liabilities.
INCOME TAX
The Company and its subsidiary account for income taxes in accordance with
Statement of Financial Accounting Standard No. 109, "Accounting for Income
Taxes". This Statement requires the use of the liability method of
accounting for income taxes, whereby deferred tax asset and liability
account balances are determined based on the differences between financial
reporting and tax bases of assets and liabilities and are measured using
the enacted tax rates and laws that will be in effect when the differences
are expected to reverse. The Company and its subsidiary provide a
valuation allowance, if necessary, to reduce deferred tax assets to their
estimated realizable value.
9
SAFETEK INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006 (Unaudited)
BASIC AND DILUTED NET LOSS PER SHARE
Basic and diluted net losses per common share are presented in accordance
with FAS No. 128 "Earning per share" ("FAS 128"), for all periods
presented. Outstanding warrants have been excluded from the calculation of
the diluted loss per share because such securities have an anti-dilutive
effect for all periods presented. The total number of shares of common
stock outstanding excluded 22,581,863 warrants and options. In addition,
2,092,050, shares to be exercised into the Company's Common stock by
converting debentures that were issued and 627,615 shares upon a default
event (calculated according the market price as of March 31 2006).
STOCK BASED COMPENSATION
In December 2004, the Financial Accounting Standards Board ("FASB") issued
the revised Statement of Financial Accounting Standards ("FAS") No. 123,
"Share-Based Payment" (FAS 123R), which addresses the accounting for
share-based payment transactions in which the Company obtains employee
services in exchange for (a) equity instruments of the Company or (b)
liabilities that are based on the fair value of the Company's equity
instruments or that may be settled by the issuance of such equity
instruments. The Statement will be effective as of the beginning of the
first interim or annual reporting period that begins after December 15,
2005, for small business issuers.
The Company decided to adopt FAS 123R and to reflect the fair value of the
options granted to employees during the year 2005.
NOTE 4: BIOLOGICAL MATERIALS SUPPLY INVENTORY
On March 27, 2006 the Company exercised its right that was given to it in
a Letter Agreement dated December 1, 2005 to purchase certain biological
materials from Serapis Biotech Ltd ( "Serapis") for a purchase price of
$100,000 plus value added tax (VAT). The purchase price was paid by the
forgiveness of $29,906 debt owed to the Company, and the balance to be
paid in 12 equal monthly payments, with the first payment on the signing
date. With these biological materials, the Company intends to develop a
technology that will assist and accelerate the identification of new
generation of lead compounds stimulating the activity of muscarinic
receptors, for the development of new therapies for variety of diseases
such as Alzheimer's disease, glaucoma, and over active bladder.
NOTE 5: PROPERTY AND EQUIPMENT
Property and equipment consist of the following at March 31, 2006:
Useful Life
Computer Equipment & Hardware 3 $ 6,679
Office Furniture and Equipment 7 4,715
Leasehold Improvement 2 2,854
Website 2 4,431
Communication 6.7 1,640
--------
Total 20,319
Accumulated depreciation (2,966)
--------
Property and Equipment, Net $ 17,353
========
Depreciation expense totaled $1,738 in the three months ended
March 31, 2006.
NOTE 6: ACCOUNTS PAYABLE
Consist of $ 37,397 of old debt from the Company's business activity from
the years 2001- 2003 and $70,094 owed to Serapis for biological materials
that the Company purchased. The amount owed to Serapis is to be paid in 12
equal monthly payments, with the first payment on the signing date. On
April 4, 2006 the Company paid the first payment. The Company didn't pay
the second payment that was due on April 27, 2006.
10
SAFETEK INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006 (Unaudited)
NOTE 7: ACCRUED EXPENSES
Consist of $74,650 accrued auditing fee. The balance primarily consists
of accrued payments to advisories, legal fees and office and general
expenses to be paid.
NOTE 8: LOANS PAYABLE
The Company has a total of $69,647 of loan payable as of March 31, 2006
which is due on demand and is non-interest bearing.
NOTE 9: REDEEMABLE CONVERTIBLE PREFERRED STOCK
The redeemable convertible preferred stock were issued prior to 2001. The
shares may be converted to common shares at a rate of one-half common
share for each preferred stock and are redeemable on February 21, 2002 at
$50 per share. The shares are presented at their obligation amount of
$232,400 associated with the redemption feature.
NOTE 10: DEBENTURES AND EMBEDDED DERIVATIVE INSTRUMENTS (2005)
1. On November 18, 2005 the Company signed an agreement with 4 investors
(together, the "Investors") to issue an aggregate of $750,000 as
convertible debentures (the "Notes") due three years after issuance. The
issuance is to be made in three installments, the first, in the amount of
$250,000 was received upon signing the definitive investment agreements,
the second in the amount of $250,000 upon the filing of a registration
statement covering the shares underlying the Notes and the warrants
referred to below, and the third in the amount of $250,000 upon the
effectiveness of the registration statement.
The Notes bear interest at the rate of 8% per annum payable quarterly in
cash. Interest on delay payments shall be 15% annually. No interest shall
be due and payable for any month in which the Trading Price is greater
than $0.1875 for each Trading Day of the month.
The Notes can be immediately convertible into shares of the Company's
common stock. The conversion price will be equal to the lesser of: (i)
$0.15 and (ii) the average of the lowest 3 intra-day trading prices during
the 20 trading days immediately prior to the conversion date discounted by
50%.
In addition, the Company issued to the Investors 333,334 warrants with an
exercise price of $0.30. The Company will issue to the investors an
additional 333,333 warrants while receiving the second amount of $250,000
and 333,334 warrants while receiving the third amount of $250,000 upon the
effectiveness of the registration statement. All the Company assets
secured the debt.
According to the agreement, the Company was obligated to file, on or prior
to thirty days from November 18, 2005, a registration statement, to
register the shares of common stock underlying the Notes and warrants
issued to the Investors. The Company has been delayed in its obligation
and is currently in default. As a result, the Company will have to pay
penalties at a rate of 2% of the outstanding amount of debentures for each
month of delay. The penalties can be paid in cash or at the Company's
option, in shares of Common Stock priced at the Conversion Price (as
defined in the Notes) on such payment date. The Company announced the
Debentures holders of the delay in filing.
At a default event the Holders of a majority of the aggregate principal
amount of the outstanding Notes issued have the option to ask for
immediate due and payable and the Company shall pay to the Holders, an
amount equal to the greater of (i) 130% times the sum of the outstanding
principal amount, plus accrued and unpaid interest on the unpaid principal
amount, plus Default Interest, if any, and/or any other amounts owed to
the Holders under the Registration Rights Agreement or (ii) the highest
number of shares of Common Stock issuable upon conversion of or otherwise
pursuant to such Default Sum in accordance with the Trading Day
immediately preceding the Mandatory Prepayment Date as the "Conversion
Date" for purposes of determining the lowest applicable Conversion Price,
unless the Default Event arises as a result of a breach in respect of a
specific Conversion Date in which case such Conversion Date shall be the
Conversion Date), multiplied by (b) the highest Closing Price for the
Common Stock during the period beginning on the date of first occurrence
of the Event of Default and ending one day prior to the Mandatory
Prepayment Date. Because of the delay in filing the registration statement
the Company is also in a delay in declaration of effectiveness by the
Securities and Exchange Commission. The Company filed the registration
statement at the on May 9, 2006.
11
SAFETEK INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006 (Unaudited)
2. The Company applied the provisions of APB 14 and allocated the proceeds to
the detachable warrants and the convertible notes based on their
respective fair values. The Company further evaluated the convertible
notes to determine if they contain derivatives that warrant bifurcation.
The Company concluded that in accordance with EITF 05-2 the convertible
debentures do not meet the definition of conventional convertible debt
instruments for purposes of evaluating the existence of embedded
derivatives under EITF 00-19. The Company further concluded that as a
freestanding derivative, the embedded feature would not be classified as
equity under EITF 00-19, and as such, determined that the embedded feature
needs to be bifurcated from the host contract.
In addition, the Company determined that the liquidated damages clause
contained in the registration rights agreement needs to be bifurcated as
well. The clause requires the Company to pay 2% per month of the
outstanding principal amount of the debentures, in cash, to the debenture
holders in the event that a registration statement covering the shares
underlying the convertible debentures is not declared effective within 120
days of the date the debentures were issued. The probability that the
holders will announce a default event is remote due to the economic
motivation to receive registered shares.
The Company also determined that a contingent interest payment feature
exists and needs to be bifurcated from the host instrument. That feature
exempts the Company from having to pay the stated interest on the
debentures if the stock price reaches a price of $0.1875. In order to
evaluate the embedded derivatives, the Company estimated the fair market
values using the Binomial model and the Black - Scholes model. Since the
Company is in default and since the fair value of the embedded feature
exceeded the value of the debt, the Company presented the excess
derivative liability separate from the debentures.
Because there is a possibility that the Company will be required to issue
more shares then are authorized, the Company recorded the warrants as a
derivative liability.
The Company remeasured the embedded features in the debentures as of March
31, 2006 to reflect their updated fair value. The Company also updated the
allowance it made for possible penalties it should pay because of not
filing on time the registration statement as disclosed above, and
remeasured the derivative liability for the fair value of the detachable
warrants detachable.
The fair value of the derivative liability relating to the convertible
debentures at March 31, 2006 is $875,225. The Company charged $103,901 as
an adjustment to the fair value. The fair value of the detachable warrants
detachable is $73,800. The Company charged $14,153 as an adjustment to the
fair value. The updated allowance for the possible penalties is $39,597,
after the Company made additional charge of $10,000. The Derivative
Liability - convertible debentures and warrants detachable are presented
together in amount of $988,621.
The following assumptions were used for purposes of determining the fair
value of the features at March 31, 2006:
March 31, 2006
-------------------------
Exercise price The lower of $0.15 or 50%
of the market price
Expected dividend yield 0%
Expected volatility 285%
Risk free interest rate 5%
Expected life of warrant 3 years
The following weighted average assumptions were used for
determining the fair value of the freestanding warrants at March
31, 2006:
March 31, 2006
--------------
Exercise price $0.3
Expected dividend yield 0%
Expected volatility 285%
Risk free interest rate 5%
Expected life of warrant 5 years
12
SAFETEK INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006 (Unaudited)
The Company remeasured the class A and class B warrants that it issued
during 2005. As a result of the remeasurment, the Company recorded the
Class A warrants at March 31, 2006 at $1,300,613 and the class B at
$1,385,939. As a result, the Company charged a derivative liabilities
expense of $429,725.
NOTE 11: STOCKHOLDERS' EQUITY
A. Capital Stock
During the three months ended March 31, 2006, the Company did not issue
shares.
B. Warrants
A summary of the warrant activity for the three months ended March 2006 is
as follows (there were no warrants outstanding in 2004):
Weighted
Shares Average
Underlying Exercise
Warrants Price
---------- ----------
$
Outstanding at January 1, 2006 14,233,332 1.23
Granted -- --
Forfeited -- --
---------- ----------
Outstanding at March 31, 2006 14,233,332 1.23
========== ==========
Warrants exercisable at March 31, 2006 14,233,332 1.23
========== ==========
The following table summarizes information concerning warrants outstanding
at March 31, 2005:
Number Out Weighted Average
standing Exercise Price
$
6,950,000 1
6,950,000 1.5
333,332 0.3
----------
14,233,332 1.23
==========
As described in note 8 warrants as of November 18, 2005 and as of December
31, 2005, the Company presented the warrants as derivative liabilities
according to EITF 00-19.
The following assumptions were used in calculating the fair value at March
31, 2006:
o Dividend yield - 0%,
o Expected volatility - 285%,
o Risk free interest rate - 5%.
As a result of the remeasurment, the Company recorded the Class A warrants
at March 31, 2006 at $1,300,613 and the class B at $1,385,939. The Company
charged a derivative liabilities expense of $429,725.
C. Stock Options to Employees
The company follows fair value accounting and the related provisions of
SFAS No. 123R for all share based payment awards. The fair value of each
option or warrant granted is estimated on the date of grant using the
Black-Scholes option-pricing model. The following is a summary of all
stock options granted to employees. All options
13
SAFETEK INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006 (Unaudited)
grant have been recorded as deferred compensation in stockholders equity
due to the fact that they are not yet vested with an offsetting credit to
additional paid in capital:
Weighted
Shares Average
Underlying Exercise
Options Price
$
Outstanding at January 1, 2006 5,318,893 0.1
Granted 3,029,638 0.226
Forfeited - -
-----------------------
Outstanding at March 31, 2006 8,348,531 0.146
=======================
Options exercisable at March 31, 2006 -
=======================
On January 10, 2006 the board of directors resolved to grant an aggregate
of 370,192 stock options to its directors for future services exercisable
at a price per share equal to 90% of the last transaction price quoted for
such date by the NASDAQ system on the NASDAQ National Market as of the
stock Option Agreement date, according to the plan. These options vest
over the three year period commencing the first anniversary of the grant
date as follows:
Gilad Yoeli - Director - 185,096
Jean-Pierre Elisha Martinez - Director - 185,096
The options grant was valued pursuant to SFAS 123R at $63,387.
On March 31, 2006 the board of directors resolved to grant an aggregate of
2,659,449 stock options Amnon Presler, CEO for future services exercisable
at a price per share equal to 90% of the last transaction price quoted for
such date by the NASDAQ system on the NASDAQ National Market as of the
stock Option Agreement date, according to the plan. These options vest
over the three year period commencing December 1, 2006.
The options grant was valued pursuant to SFAS 123R at $581,283.
Weighted average assumptions used by management were as follows:
------------------------------- -------------------- --------------
January 10, 2006 March 29, 2006
------------------------------- -------------------- --------------
Dividend yield 0% 0%
------------------------------- -------------------- --------------
Expected volatility 303% 286%
------------------------------- -------------------- --------------
Risk free interest rate 5% 5%
------------------------------- -------------------- --------------
Expected life of option 7 years 7 years
------------------------------- -------------------- --------------
NOTE 12: BUSINESS DEVELOPMENT COSTS
Business development costs primarily consist of $60,000 payment to Matrix
as a consideration to an option to an Exclusive Patent and Know How
License to Thrombin Inhibitor compounds.
14
SAFETEK INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006 (Unaudited)
NOTE 13: SUBSEQUENT EVENTS
On April 25, 2006, the Company entered into a term sheet with Interactive
Health Pharmacy Services, Inc. ("IHPS"). The term sheet sets forth the
principal terms of a proposed agreement between the Company and IHPS,
pursuant to which the Company will acquire IHPS at the closing, after the
parties agree to a mutually acceptable definitive acquisition agreement.
In consideration therefore at the closing of the acquisition, the Company
will issue to IHPS shares of common stock in an amount equal to 50.01% of
the issued and outstanding shares of common stock. In addition, at the
closing of the acquisition the Company is obligated to have no less than
$1,500,000 in cash and working capital. Anticipate date for the execution
of a definitive agreement is June 25, 2006. IHPS is engaged in preparing
and distributing HIV and AIDS drugs in the New York area.
On May 9, 2006, the Company filed registration statement for the
convertible debentures that it issued on November 18, 2005. By filing the
registration statement the Company intends to receive another amount of
$250,000.
The Company is negotiating with Matrix to extend the period to exercise
the option it purchased on January 4, 2006, to an exclusive, world-wide
license in all of Matrix's intellectual property rights in its Thrombin
inhibition compounds. The last date to exercise the option is May 15,
2006.
15
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
FORWARD LOOKING STATEMENT
The following discussion should be read in conjunction with the financial
statements of Safetek International, Inc. (the "Company"), which are
included elsewhere in this Form 10-QSB. This Quarterly Report on Form
10-QSB contains forward-looking information. Forward-looking information
includes statements relating to the ability of the Company to consummate
the transactions contemplated by the term sheets it has executed, the
ability of the Company to raise capital, to develop the products and
technologies to which it may acquire and market and distribute such
products, future actions, future performance, costs and expenses, interest
rates, outcome of contingencies, financial condition, results of
operations, liquidity, business strategies, cost savings, objectives of
management, and other such matters of the Company. The Private Securities
Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking
information to encourage companies to provide prospective information
about themselves without fear of litigation so long as that information is
identified as forward-looking and is accompanied by meaningful cautionary
statements identifying important factors that could cause actual results
to differ materially from those projected in the information.
Forward-looking information may be included in this Quarterly Report on
Form 10-QSB or may be incorporated by reference from other documents filed
with the Securities and Exchange Commission (the "SEC") by the Company.
You can find many of these statements by looking for words including, for
example, "believes," "expects," "anticipates," "estimates" or similar
expressions in this Quarterly Report on Form 10-QSB or in documents
incorporated by reference in this Quarterly Report on Form 10-QSB. The
Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information or
future events.
The Company has based the forward-looking statements relating to the
Company's operations on management's current expectations, estimates, and
projections about the Company and the industry in which it operates. These
statements are not guarantees of future performance and involve risks,
uncertainties and assumptions that the Company cannot predict. In
particular, the Company has based many of these forward-looking statements
on assumptions about future events that may prove to be inaccurate.
Accordingly, the Company's actual results may differ materially from those
contemplated by these forward-looking statements. Any differences could
result from a variety of factors, including, but not limited to general
economic and business conditions, competition, and other factors.
PLAN OF OPERATION
As of April 15, 2005, Dr. Goldstein was appointed as the Company's
Chairman, Chief Executive Officer and Secretary, and since then the
Company has been focusing on screening new technologies in the life
sciences and health care fields and other business opportunities in the
life science field. On May 17, 2005, the Company established an Israeli
wholly owned subsidiary under the laws of the State of Israel, called
"Oriens Life Sciences Ltd. (the "Subsidiary") , to serve as a platform for
the Company to screen the Israeli life sciences and health care industry
and identify, analyze, and acquire or invest in technologies in this
field. On December 1, 2005 Mr. Amnon Presler was appointed as the Chief
Executive Officer and Dr. Goldstein was appointed as the Chief Medical
Officer on December 7, 2005. On March 12, 2006 Dr. Goldstein resigned from
serving as the Company's Chairman and Mr. Jean-Pierre Elisha Martinez was
appointed as the Company's Chairman.
In accordance with Financial Accounting Standards Board (FASB) No. 7, the
Company is considered a development stage company, beginning on April 16,
2005, the date it commenced with its new business activity.
During the fiscal year ended December 31, 2005, the Company signed 4 term
sheets to purchase technologies in the life science field. In due course,
on January 4, 2006, the Company closed on a transaction contemplated by
the Exclusive Patent and Know How License Option Agreement dated December
28, 2005 with Matrix Pharma Inc., a Delaware corporation ("Matrix").
Pursuant to the Agreement, the Company acquired from Matrix an option to
purchase an exclusive, world-wide license in all of Matrix's intellectual
property rights in its Thrombin inhibition compounds in consideration of
$60,000.
On March 30 2006, the Company and Matrix signed an amendment, extending
the exercise date of the option to May 15, 2006. The amendment provides
that until April 15, 2006 the Company will pay Matrix $15,000 in
consideration for Matrix's agreement to extend the exercise date. Such
amount will be deducted from the repayment of costs that the Company shall
pay if it exercises the option. The Company is negotiating with Matrix to
extend the period to exercise the option . On March 23, 2006, the Company
entered into a term sheet with Resdevco Ltd, a company incorporated under
the laws of Israel ("Resdevco"). The term sheet sets forth the principal
terms of a proposed agreement between the Company and Resdevco, pursuant
to which Resdevco will grant the Company an exclusive, worldwide license
in Resdevco's Antioxidant salicylate compounds. The Company is conducting
a due diligence process using the services of applicable expert, in order
to evaluate the probability and the potential uses of those compounds.
On March 27, 2006 the Company exercised its right that was given to it in
a Letter Agreement dated December 1, 2005 to purchase certain biological
materials from Serapis for a purchase price of $100,000 plus value added
tax (VAT). The purchase price was paid by the forgiveness of $29,906 debt
owed to the Company, and the balance to be paid by Serapis in 12 equal
monthly payments, with the first payment on the signing date. The Company
didn't pay the second payment that was due on April 27, 2006.
16
With these biological materials, the Company intends to develop a
technology that will assist and accelerate the identification of new
generation of lead compounds stimulating the activity of muscarinic
receptors, for the development of new therapies for variety of diseases
such as Alzheimer's disease, glaucoma, and over active bladder.
On April 25, 2006, the Company entered into a term sheet with Interactive
Health Pharmacy Services, Inc. ("IHPS"). The term sheet sets forth the
principal terms of a proposed agreement between the Company and IHPS,
pursuant to which the Company will acquire IHPS at the closing, after the
parties agree to a mutually acceptable definitive acquisition agreement.
In consideration therefore at the closing of the acquisition, the Company
will issue to IHPS shares of common stock in an amount equal to 50.01% of
the issued and outstanding shares of common stock. In addition, at the
closing of the acquisition the Company is obligated to have no less than
$1,500,000 in cash and working capital. Anticipate date for the definitive
agreement is June 25, 2006.
IHPS is a New York area specialty pharmacy provider (SPP) whose goal is to
increase HIV/AIDS patients' compliance with their prescribed treatments by
providing confidential, home-delivery of prescriptions drugs, Package by
dose, with therapy management and educational materials that help a
patient optimally control his or her condition. Services include
counseling by a highly trained pharmacist and patient specialist,
compliance monitoring, refill reminders, automated reorder capabilities,
and direct shipments to patients. The company was founded in 1995 by
Marvin Sirota. The Company intent to use IHPS as a platform of
distribution Israeli OTC drugs.
The Company currently invests its efforts in conducting its due diligence
on the companies with which it has signed term sheets.
As of March 31, 2006, the Company has an accumulated deficit of
$8,045,623. Our prospects must therefore be evaluated in light of the
problems, expenses, delays and complications associated with the financial
situation of the Company. The Company is in the process of raising funds
to finance its activities, including without limitation, the completion of
the above described prospective transactions, and other potential business
opportunities. The Company requires funds in order to execute the term
sheet with IHPS, to finance its current activities and in order to begin
the development of the technologies it has the opportunity to purchase, if
and when definitive agreements will be executed.
RESULTS OF OPERATIONS
Comparison of the Three Months March 31, 2006 to the Three Months Ended
March 31, 2005.
Revenues
For the three months ended March 31, 2006, there were no revenues.
Operating Expenses
The following table summarizes the Company's operating expenses for the
three months ended March 31, 2006 and 2005:
For the Three Months Ended
March 31, March 31,
2006 2005
--------- ---------
(Unaudited) (Unaudited)
Operating Expenses
Payroll and Related Expenses $ 111,756 $ --
Gain From Securities (2,263)
Office & General Expenses 28,717 3,810
Exchange Rate Loss 1,738
Professional Fees 61,614 12,000
Amortization 28,230
Business Development Costs 93,423 --
--------- ---------
Total Operating Expenses 323,215 15,810
Loss from Operations 323,215 15,810
17
For the three months ended March 31, 2006, our operating expenses were
$323,215 as compared to $15,810 for the three months ended March 31, 2005.
Our expenses increased mainly as a result of our efforts of screening
technologies and other business opportunities in the life sciences field
and as a result of the due diligence procedures and the efforts invested
in executing the signed term sheets and progressing to definitive
agreements.
The main expenses in the period consist of payroll and related expenses to
our management of $111,756.
Business development costs consisted primarily of payment of $60,000 to
Matrix, as a consideration to an option to an Exclusive Patent and Know
How License to Thrombin Inhibitor compounds. Professional fees expenses
consist primarily auditing and legal consulting regarding the Company's
transactions.
Other Income and Expenses
For the three months ended March 31, 2006, we recognized $2,263 income
from gain from securities and $1,192 from interest income.
The following table presents the Company's other expenses:
For the three
months ended
March 31, 2006
Interest expenses convertible debentures 1 4,932
Derivative Convertible Liability Expenses
-----------------------------------------
Derivative liability expenses (warrants) 2 429,725
Derivative liability expenses (convertible 3
debentures) 103,901
Derivative liability expenses (warrants debentures) 14,153
Penalties 4 10,000
---------
Total derivative liability expenses $ 557,779
=========
1. Interest expenses includes, $4,932 interest related to the
convertible debentures that the Company issued on November 18, 2005.
2. The Warrants that the Company issued presented at their fair value
and classified as liabilities, according to paragraphs 20 and 24 of
EITF 00-19 "Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Company's Own Stock,". The
derivative liability expenses reflect an adjustment to the fair
value as of March 31, 2006.
3. Adjustment of the debentures issued on November 18, 2005 to their
fair value as of March 31, 2006.
4. Adjustment the Company's penalties allowance. According to the
debentures terms, the Company was obligated to file a registration
statement on or prior to thirty days from November 18, 2005, to
register the shares of common stock underlying the notes and
warrants issued to the investors. The Company has been delayed in
its obligation and is currently in default.
Net Income (loss)
During the three months period ended March 31, 2006, we reported a net
loss of $884,734 compared to a net loss of $18,510 for the three months
ended March 31, 2005. The difference is primarily attributable our
operating expenses as a result of our activity during this period.
Liquidity and Capital Resources
Our cash and cash equivalents as March 31, 2006 were $134,436 compared to
none as of March 31, 2005. The increase in the cash and cash equivalents
is primarily a result of receiving $685,000 in consideration for Units
consisting of common stock and warrants subscribed, and $190,000 as a
result of debentures issuance during 2005.
18
Net cash used in operating activities decreased mainly as result of
increase in the Company's business activity and an increase in our
accounts payable and accrued expenses. The primary finance source to our
operating during the period was consideration from a securities sale.
We are in the process of attempting to raise funds in order to have the
capability of conducting our activity. The Company intends to finance its
operations by private placements, stocks and debt issuance and financial
arrangements. There are currently no plans or arrangements regarding any
of the foregoing.
We currently have no revenues. We currently have no commitments or
agreements with any third party to provide financial accommodations to us,
other than the commitment of NIR and the other investors to lend us an
additional $250,000 when the registration statement will be filed and an
additional $250,000 when said registration statement is declared
effective. However, such proceeds and any proceeds we may receive from
private placements and additional capital that the Company, will not be
sufficient to satisfy the Company's cash requirements for the next twelve
(12) months.
Going Concern
As of March 31, 2006, we have cash on hand of $134,436. This amount is
inadequate for us to effectuate our planned activities during the next 12
months. Accordingly, we may be unable to continue operations in the future
as a going concern. Our plans to deal with this uncertainty include
raising additional capital or entering into a strategic arrangement with a
third party. There can be no assurance that our plans can be realized.
There can be no assurance that we will be able to obtain additional
financing if and when needed or that, if available, financing will be on
acceptable terms. Additional equity financings may be dilutive to holders
of our common stock and debt financing, if available, and may involve
significant payment obligations and covenants that restrict how we operate
our business.
Certain conditions raise substantial doubt about the Company's ability to
continue as a going concern beyond the next twelve (12) month period. As
of March 31, 2006, the Company had stockholders' deficit of $3,987,995 and
an accumulated deficit of $8,045,623. Our balance sheet as of March 31,
2006 reflects total liabilities of $4,339,272. The Company needs to obtain
additional financing to fund payment of its obligations and to provide
working capital for operations.
Off Balance Sheet Arrangements
None
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our financial statements and accompanying notes have been prepared in
accordance with generally accepted accounting principles in the United
States of America. The preparation of these financial statements requires
our Management to make estimates, judgments and assumptions that affect
the reported amounts of assets, liabilities, revenues and expenses. We
continually evaluate the accounting policies and estimates we use to
prepare the consolidated financial statements. We base our estimates on
historical experiences and assumptions believed to be reasonable under
current facts and circumstances. Actual amounts and results could differ
from these estimates made by Management. We do not participate in, nor
have we created, any off-balance sheet special purpose entities or other
off-balance sheet financing. In addition, we have not and do not
anticipate entering into any derivative financial instruments for
speculative purposes or use derivative financial instruments primarily for
managing our exposure to changes in interest rates. Significant estimates
include the useful life of property and equipment and the fair value of
derivative liability.
ITEM 3 - CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as
of December 31, 2005, the Company's management carried out an evaluation
of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. This evaluation was carried out by the
Company's Chief Executive Officer, and the Company's Chief Financial
Officer. Based upon that evaluation, the Company's Chief Executive Officer
and Chief Financial Officer concluded that as of December 31, 2005, the
Company's disclosure controls and procedures were effective except as set
forth below, in the following paragraph, in timely alerting them to
material information required to be included in the Company's periodic SEC
reports.
The Company's independent auditors, in conjunction with their audit of the
Company's financial statements for the year ended December 31, 2005,
advised the Company and the Audit Committee that in the auditors' view,
the Company's disclosure controls and procedures were subject to a
material weakness resulting from inadequate segregation of duties related
to accounting controls caused by the limited number of personnel available
for accounting duties. Management plans to expand personnel to provide for
adequate segregation of duties when it is cost beneficial to the Company
and, in the interim, has implemented mitigating controls wherever possible
in consideration of the limited segregation of duties.
19
It should be noted that the design of any system of controls is based in
part upon certain assumptions about the likelihood of future events and
there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions, regardless how remote.
Disclosure controls and procedures are controls and other procedures that
are designed to ensure that information required to be disclosed in the
Company's reports filed or submitted under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in
the SEC's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that
information required to be disclosed in the Company's reports filed under
the Exchange Act is accumulated and communicated to management, including
the Company's Chief Executive Officer and Chief Financial Officer, to
allow timely decisions regarding required disclosure.
There were no changes in the Company's internal control over financial
reporting identified in connection with the evaluation required by
paragraph (d) of Rule 13a-15 under the Exchange Act with respect to the
three months ended March 31, 2006 that have materially affected, or are
reasonably likely to materially affect, the Company's internal control
over financial reporting.
Changes in Internal Controls over Financial Reporting
There have been no changes in the Company's internal control over
financial reporting during the last quarterly period covered by this
report that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial
reporting.
Part II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDING
We are not a party to any legal proceeding.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS Exhibits
31.1 Certification of Principal Executive Officer Pursuant to Section
302(a) of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial Officer Pursuant to Section
302(a) of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Principal Executive Officer Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Principal Financial Officer Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
20
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..
Signature Capacity Date
/s/ Amnon Presler Chief Executive Officer (principal
executive officer)
/s/ Tamar Tzaban-Nahomov Chief Financial Officer (principal
financial officer)
21