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 June 30, 2006
|_| Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from _________ to ___________
Commission File Number: 000-50329
TRACEGUARD TECHNOLOGIES, INC.
(Exact Name of Small Business Issuer as Specified in Charter)
Nevada 98-0370398
(State or Other Jurisdiction of (I.R.S. Employer Identification
Incorporation or Organization) Number)
330 Madison Avenue, 9th Floor, New York, New York 10017
(Address of Principal Executive Offices)
(866) 401-5969
(Issuer's Telephone Number, Including Area Code)
(Former Address, if Changed Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes |X| No
|_|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the last practicable date: As of August 14, 2006 there were
24,186,695 shares of common stock issued and outstanding.
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
TRACEGUARD TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
(UNAUDITED)
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Page
CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS:
Balance Sheet 3
Statements of Operations 4
Statements of Cash Flows 5
Statements of Changes in shareholders' equity (Capital deficiency) 6
Notes to Financial Statements 7-10
2
TRACEGUARD TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
(UNAUDITED)
CONDENSED INTERIM CONSOLIDATED BALANCE SHEET
IN US DOLLAR
June 30, December 31,
2006 2005
------------ ------------
(Unuadited) (Audited)
------------ ------------
Assets
Current Assets
Cash and cash equivalents 1,654,296 895,693
Other receivables 213,552 24,080
------------ ------------
Total current assets 1,867,848 919,773
------------ ------------
Long Term Prepaid Expenses 16,696 --
------------ ------------
Restricted deposit 16,288 15,355
------------ ------------
Property and equipment, net 421,720 61,261
------------ ------------
License rights 100,000 100,000
------------ ------------
Total Assets 2,422,552 1,096,389
============ ============
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable- trade and other 334,717 154,053
Other current liabilities 238,435 32,154
------------ ------------
Total current liabilities 573,152 186,207
Commitments and contingencies
Total liabilities 573,152 186,207
------------ ------------
Shareholders' Equity
Share capital - common shares par value $0.001; 24,187 22,543
Authorized - June 30, 2006 and December 31, 2005 - 150,000,000
Issued and outstanding* - June 30, 2006 and December 31, 2005 -
24,186,695 and 22,542,859 shares, respectively
Additional paid-in capital 1,226,853 485,539
Receipt on account of shares to be allotted 1,655,799 686,900
Warrants 1,104,019 162,805
------------ ------------
Deficit accumulated during the development stage (2,161,458) (447,605)
------------ ------------
Total shareholders equity 1,849,400 910,182
------------ ------------
Total liabilities and shareholders equity 2,422,552 1,096,389
============ ============
* After giving a retroactive effect to a six-to-one stock split in the form
of stock dividend of fully paid dividend shares of $0.001 par value at a
rate of five shares for every one share of $0.001 par value on September
12, 2005.
The accompanying notes are an integral part of these
condensed financial statements.
3
TRACEGUARD TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
(UNAUDITED)
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
IN US DOLLAR
Cumulative from
Three Months Ended June 30 Six Months Ended June 30 March 20,2002(*)
------------------------- ------------------------- to June 30
2006 2005 2006 2005 2006
---------- ---------- ---------- ---------- ----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
---------- ---------- ---------- ---------- ----------
Research and development
expenses 574,809 -- 737,437 -- 767,977
Marketing general and
administrative expenses 441,874 6,527 985,810 13,814 1,401,448
---------- ---------- ---------- ---------- ----------
Operating loss (1,016,683) (6,527) (1,723,247) (13,814) (2,169,425)
Financing expenses (6,687) -- (13,184) -- (15,662)
Financing income 14,214 -- 22,578 -- 23,629
---------- ---------- ---------- ---------- ----------
Loss for the period (1,009,156) (6,527) (1,713,853) (13,814) (2,161,458)
========== ========== ========== ========== ==========
Loss per share ("EPS") --
basic and diluted (0.04) (0.00)** (0.08) (0.00)** (0.13)
========== ========== ========== ========== ==========
Weighted average number of
shares used in computation
of EPS basic and diluted 22,773,213 16,440,000** 22,675,578 16,440,000** 17,112,392
========== ========== ========== ========== ==========
(*) Date of inception.
(**) After giving a retroactive effect to a six-to-one stock split in the form
of stock dividend of fully paid dividend shares of $0.001 par value at a
rate of five shares for every one share of $0.001 par value on September
12, 2005.
The accompanying notes are an integral part of these
condensed financial statements.
4
TRACEGUARD TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
(UNAUDITED)
CONDENSED INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS
IN US DOLLARS
Cumulative from
Six Months Ended June 30 March 20, 2002(*)
------------------------ to June 30,
2006 2005 2006
---------- ---------- ----------
(Unaudited) (Unaudited) (Unaudited)
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss for the period (1,713,853) (13,814) (2,161,458)
Adjustments to reconcile net loss for the period to net cash
used in operating activities:
Income and expenses not involving cash flow:
Depreciation 14,641 -- 15,083
Compensation expenses to service provider 52,200 -- 52,200
Imputed interest on notes payable to shareholders -- 868 2,254
Changes in operating assets and liabilities:
Decrease (increase) in other receivables (189,472) 729 (213,553)
Increase in long term prepaid expenses (16,696) -- (16,696)
Increase (decrease) in accounts payable and other current
liabilities 386,945 (460) 578,518
---------- ---------- ----------
Net cash used in operating activities (1,466,235) (12,677) (1,743,652)
---------- ---------- ----------
Cash Flows from Investing Activities
Restricted deposit (933) -- (16,288)
Advance on account of license rights -- -- (100,000)
Purchase of property and equipment
(375,100) -- (436,803)
---------- ---------- ----------
Net cash used in investing activities (376,033) -- (553,091)
---------- ---------- ----------
Cash Flows from Financing Activities
Issuance of share capital and warrants, net of issuance expenses 945,072 -- 1,578,269
Receipts on accounts of shares to be allotted 1,655,799 -- 2,342,699
Receipt on account of notes from shareholder 13,501 30,071
---------- ---------- ----------
Net cash provided by financing activities 2,600,871 13,501 3,951,039
---------- ---------- ----------
Increase in cash and cash equivalents 758,603 824 1,654,296
Cash and cash equivalents at the beginning of the period 895,693 1,721 --
---------- ---------- ----------
Cash and cash equivalents at the end of the period 1,654,296 2,545 1,654,296
========== ========== ==========
(*) Date of Inception.
The accompanying notes are an integral part of these
condensed financial statements.
5
CONDENSED INTERIM CONSOLIDATED STATEMENT OF CHANGES IN SHAREOLDERS' EQUITY
(Capital deficiency)
IN US DOLLARS
Receipts Deficit
on Account Accumulated
Common of Shares Additional During The
Number of Stock To be Paid In Development
Shares* Amount Allotted Capital Warrants Stage Total
---------- ---------- ---------- ---------- ---------- ---------- ----------
Issuance of common stock to founders
on inception 15,000,000 2,500 -- -- -- -- 2,500
Issuance of common stock 1,440,000 240 -- 47,760 -- -- 48,000
Net loss for the period -- -- -- -- -- (76,263) (76,263)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance March 31, 2004 (audited) 16,440,000 2,740 -- 47,760 -- (76,263) (25,763)
Net loss for the year -- -- -- -- -- (13,382) (13,382)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance March 31, 2005 (audited) 16,440,000 2,740 -- 47,760 -- (89,645) (39,145)
Issuance of common stock (net of
issuance expense) on August 24, 2005 5,360,004 893 -- 72,407 -- -- 73,300
Issuance of dividend shares on
September 12, 2005 18,167 -- (18,167) -- -- --
Issuance of common stock and warrants
(net of issuance expense) on
November 6, 2005 and December 5, 2005 642,855 643 -- 275,949 162,805 -- 439,397
Receipt on accounts of shares to be
allotted -- -- 686,900 -- -- -- 686,900
Issuance of shares to service providers
(net of issuance expense) on
August 24, 2005 100,000 100 -- 69,900 -- -- 70,000
Capital surplus on account of
shareholders waiver on notes payable 37,690 37,690
Net loss for the period -- -- -- -- -- (357,960) (357,960)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance December 31, 2005 (audited) 22,542,859 22,543 686,900 485,539 162,805 (447,605) 910,182
Issuance of warrants in January, 2006 -- -- -- -- 407,189 407,189
Issuance of common stock (net of
issuance expense) on June 2006 1,607,836 1,608 (686,900) 689,150 -- -- 3,858
Issuance of Warrants on May, 2006 534,025 534,025
Receipt on accounts of shares to be
allotted in May, 2006 -- -- 1,655,799 -- -- -- 1,655,799
Issuance of shares to service provider
in January, 2006 36,000 36 -- 52,164 -- -- 52,200
Net loss for the period -- -- -- -- -- (1,713,853) (1,713,853)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance June 30, 2006 (unaudited) 24,186,695 24,187 1,655,799 1,226,853 1,104,019 (2,161,458) 1,849,400
========== ========== ========== ========== ========== ========== ==========
(*) After giving a retroactive effect to a six-to-one stock split in the form
of stock dividend of fully paid dividend shares of $0.001 par value at a
rate of five shares for every one share of $0.001 par value on September
12, 2005.
The accompanying notes are an integral part of these consolidated
financial statements.
6
TRACEGUARD TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
(UNAUDITED)
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL
a. TraceGuard Technologies, Inc. (formerly: IBHAS Technologies Inc.)
("the Company") was incorporated in Nevada on March 20, 2002.
Initially the Company's plan was to develop and market an internet
based computer software program known as IBHAS software. The IBHAS
computer software program was intended to automate the process of
submission of Internet web page information in multiple languages to
major internet search engines. Changes in the market place forced
the Company to seek other technologies, specifically homeland
security applications. The Company is currently developing
innovative security technologies and solutions for explosives
detection, a growth segment of the US and global homeland security
market. The Company's systems are designed to improve the screening
and detection of explosives, narcotics, biological contaminants and
other hazardous materials.
b. On February 2, 2006, the Board of Directors of the Company approved
a change in the Company's fiscal year to December 31 from March 31.
c. On June 20, 2006, the Company announced that it has entered into a
non-binding letter of intent to acquire Laser Detect Systems Ltd., a
developer of long distance, remote sensing, laser based trace
detection solutions, from ITL Optronics. The consummation of the
acquisition is conditional upon the performance of a due diligence
review to the satisfactory of the parties, and will be subject to
the negotiation of a definitive agreement.
d. The interim statements as of June 30, 2006 and for the six and three
month periods then ended (hereafter - the interim statements) were
drawn up in condensed form, in accordance with generally accepted
accounting principles applicable to interim statements. The
accounting principles applied in preparation of the interim
statements are consistent with those applied in the annual financial
statements. Nevertheless, the interim statements do not include all
the information and explanations required for the annual financial
statements.
e. As reflected in the accompanying interim condensed consolidated
financial statements, the Company's operations for the six and three
month periods ended June 30, 2006, resulted in a net loss of
$1,713,853 and $1,009,156, respectively. Shareholders' equity as of
June 30, 2005 is $ 1,849,400. The Company's ability to continue
operating as a going concern is dependent on its ability to raise
sufficient additional working capital. Management plans in this
regard include, among other things raising additional cash primarily
through a financing.
f. The company entered into a 12-month joint development program with
Rapiscan Systems ("Rapiscan"), a subsidiary of OSI Systems in order
to develop TraceScan (using TraceGuard's Carry Safe product), an
advanced combined bulk/trace detection system for interdiction of
explosive devices and weapons Upon development, TraceScan will be
marketed exclusively by Rapiscan primarily to the U.S. Government
and also through its global direct sales and distributor network.
CarrySafe is designed for carry-on luggage and is currently at an
advanced stage of development.
NOTE 2 - LICENSE RIGHTS
On February 15, 2006, the company's fully owned Subsidiary,
TraceGuard Technologies Ltd. (the "Subsidiary") entered into a
License Agreement (the "Agreement") with TraceTrack Technology Ltd.
("TraceTrack"), an Israeli based company. Pursuant to the Agreement,
the Subsidiary, under certain terms and conditions as set forth
within the Agreement, acquired an exclusive, worldwide, perpetual
license to the patents and related know-how owned by TraceTrack,
which involves technology being developed to be used for the
collection of explosive traces. In consideration for the license
granted to the Subsidiary, TraceTrack will receive royalty payments
of 3% of net sales until the earlier of: five years from the first
commercial sale of a product, or at the time that the aggregate
total royalty payment equal $2,500,000. This is in addition to a
previous payment of $100,000 made as a down payment for the license
and is as license rights. As a result of the agreement, the Company
is considered the successor entity of TraceTrack.
7
TRACEGUARD TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
(UNAUDITED)
NOTE 3 - SHAREHOLDERS EQUITY
a. On January 19, 2006, the Company completed a private placement
offering of 1,607,836 units, each "unit" comprising one share of our
common stock, one warrant to purchase one share of common stock with
an exercise price of $1.5 and an exercise period of one year and one
warrant to purchase one share of common stock with an exercise price
of $2.5 and an exercise period of three years.. Units were issued
for an aggregate purchase price of $1,125,487. Warrants were valued
according to Black-Scholes valuation model at $407,189 using a risk
free interest rate of 4.3%, their contractual life, an annual
volatility of 100% and no expected dividend.
b. In January 2006, the Company entered into a service agreement upon
which the service provider shall provide the Company services in
consideration for 36,000 shares of the Company's common stock.
According to the service agreement in the event that the aggregate
fair value of the shares at the end of the term of the agreement
shall be at less than $25,000 the Company shall issue additional
shares to compensate for such difference in value. The market value
of these shares as of March 31, 2006 was $52,200.
c. On May 7, 2006, the Company completed a private placement offering
of 2,108,662 units, each "unit" comprising one share of our common
stock, one warrants to purchase one share of common stock with an
exercise price of $1.5 and an exercise period of one year and one
warrant to purchase one share of common stock with an exercise price
of $2.5 and an exercise period of three years. Units were issued for
an aggregate purchase price of $1,476,064. Warrants were valued
according to Black-Scholes valuation model at $534,025 using a risk
free interest rate of 4.8%, their contractual life, an annual
volatility of 100% and no expected dividend.
d. Effective January 1, 2006 the Company adopted SFAS No. 123 (Revised
2004) "Share-Based Payment" ("SFAS No. 123R") using the Modified
Prospective Approach. SFAS No. 123R revises SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123) and
requires the measurement and recognition of compensation of all
share-based payments including grants of employee stock options, to
be based on their estimated fair values at grant date, or the date
of later modification, over the requisite service period. Under SFAS
No. 123R, the Company required to select a valuation technique that
meets the criteria as stated in the standard. Allowable valuation
models includes a binomial model and the Black-Scholes model. At the
present time the Company uses the Black-Scholes model with the
following assumptions: expected volatility is based on historical
volatility of comparable companies; the expected term is based on
the contractual life of the warrant granted and the risk-free rate
is based on the U.S Treasury yield cure in effect at the time of
grant.
NOTE 4 - MATERIAL AGREEMENTS AND TRANSACTIONS WITH RELATED PARTIES
a. On February 15, 2006 the Subsidiary entered into a consulting
agreement( which was amended on July 6, 2006, see note 5b), with
M.S. Materials Ltd. ("M.S.") for a term of thirty six months. The
services to be provided to the Subsidiary by M.S. shall be provided
solely by Dr. Ornath, who will be engaged as the Chief Scientist of
the Subsidiary. In consideration for Dr. Ornath services the
Subsidiary will pay a monthly fee of $12,000 to M.S. In addition,
the Company will grant M.S. options to purchase shares of common
stock (par value $0.001) as follows:
1) Options to purchase of 1,200,000 shares at an exercise price
of at least $0.70 or based on terms to be resolved by the
Company's Board of Directors.
2) M.S. shall receive additional options for the purchase of
1,200,000 shares of common stock at an exercise price of $1.00
upon the receipt of an approval of the Israeli Security Agency
or the US Transportation Security Administration to a
Company's product.
8
TRACEGUARD TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
(UNAUDITED)
NOTE 4 - MATERIAL AGREEMENTS AND TRANSACTIONS WITH RELATED PARTIES - (Continued)
3) M.S. shall receive additional options for the purchase of
1,200,000 shares of common stock at an exercise price of $1.50
upon the receipt of purchase orders for equipment in an
aggregate amount of $1,000,000 during one calendar year or
entering into a strategic agreement.
As none of the conditions set forth within the consulting agreement
have yet to materialize, none of the above options were issued to
date.
b. On May 7, 2006, the Subsidiary entered into an agreement with Dr.
Ehud Ganani pursuant to which Dr. Ganani will serve as Chief
Executive Officer of TraceGuard Technologies Ltd., effective
February 1, 2006. Dr. Ganani shall receive a monthly salary of
$15,000 and an annual bonus of up to $60,000 upon achieving certain
objectives. Dr. Ganani will be granted stock options to purchase up
to 2,790,000 shares of the Company's common stock. Options are
exercisable at an exercise price of $0.70 per share. As none of the
conditions set forth within the agreement have yet to materialize,
none of the above options were issued to date. This agreement has
been amended on July 6, 2006 (see also note 5c).
NOTE 5- SUBSEQUENT EVENTS
a. On July 6, 2006, the Board of Directors of the Company adopted the
2006 Global Stock Incentive Compensation Plan (the "Plan"), pursuant
to which the Company will be able to issue restricted stock awards
and restricted stock units awards to its employees, consultants and
independent agents. The Company reserved a total of 2,300,000
authorized but unissued shares of Common Stock of the Company, par
value US$ 0.001 each, for the purposes of the Plan and the Company's
other stock compensation plans, when applicable, subject to
adjustments as set forth in the Plan.
b. On July 6, 2006, the Subsidiary amended the agreement entered into
on February 15, 2006 with M.S. Materials Ltd. pursuant to which the
Subsidiary engaged M.S. to render it advisory and consulting
services through its employee Dr. Fredy Ornath. The amendment, among
other things, changed the number of options to be granted to M.S.
from 1,200,000 to 1,080,000.
c. On July 6, 2006, the Subsidiary has amended the agreement with Dr.
Ehud Ganani, initially entered into on May 7, 2006. Pursuant to the
amendment Dr. Ganani will forego the grant of stock options to
purchase an aggregate of 990,000 shares of the Company's common
stock, which were to vest based on Dr. Ganani's continued engagement
with the Subsidiary, in exchange for the grant of 550,000 shares of
restricted common stock in accordance with the 2006 Global Stock
Incentive Compensation Plan adopted by the Company's Board of
Directors, which shall be subject to the same vesting schedule as
the foregone stock options.
d. On July 6, 2006, the Subsidiary entered into employment agreements
with its Officers, Gil Perlberg and David Ben-Yair effective June 1,
2006. Pursuant to the Agreement, Mr. Perlberg and Mr. Ben-Yair will
serve as Officers of the Subsidiary, for which they will be paid an
annual bonus, upon achieving certain objectives, and restricted
shares of common stock of the Company in accordance with the 2006
Global Stock Incentive Compensation Plan, adopted by the Company.
9
TRACEGUARD TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
(UNAUDITED)
NOTE 5- SUBSEQUENT EVENTS - (Continued)
e. On August 8, 2006 the Board of Directors approved the grant of an
option for the purchase of 359,000 shares of common stock of the
Company, par value $0.001 each, to M.S. Savyonim Ltd. ("M.S."), an
Israeli corporation that rendered to the Corporation management
services through Mr. Meir Zucker who served as the President and
Chief Executive Officer of the Corporation. Such options were
granted to M.S. following the termination of the engagement of M.S.
in February 2006 in connection with the services rendered by it to
the Corporation. In addition to such options, the Subsidiary paid to
M.S. an amount equal to approximately US$ 27,000 in connection with
the termination of M.S. engagement.
f. On August 8, 2006, the Board of Directors of the Company approved
the grant of 96,613 shares of common stock of the Company, par
valued $0.001 each, to several service providers, in consideration
for services provided.
10
Item 2. Management's Discussion and Analysis of Financial Conditions and Results
of Operation.
FORWARD-LOOKING STATEMENTS
This quarterly report contains forward-looking statements as that term is
defined in the Private Securities Litigation Reform Act of 1995. These
statements relate to future events or our future financial performance. In some
cases, you can identify forward-looking statements by terminology such as "may",
"should", "expects", "plans", "anticipates", "believes", "estimates",
"predicts", "potential" or "continue" or the negative of these terms or other
comparable terminology. These statements are only predictions and involve known
and unknown risks, uncertainties and other factors that may cause our or our
industry's actual results, levels of activity, performance or achievements to be
materially different from any future results, levels of activity, performance or
achievements expressed or implied by these forward-looking statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Except as required by applicable law,
including the securities laws of the United States, we do not intend to update
any of the forward-looking statements to conform these statements to actual
results. You should carefully consider such risks, uncertainties and other
information, disclosures and discussions, which contain cautionary statements
identifying important factors, that could cause actual results to differ
materially from those provided in the forward looking statements. You should
carefully review the risks factors and other cautionary statements contained in
our annual report on form 10-KSB and other public filings. We undertake no
obligation to publicly update or revise any forward looking statements, whether
as a result of new information, future events or otherwise.
Our financial statements are stated in United States Dollars (US$) and are
prepared in conformity with generally accepted accounting principles in the
United States of America for interim financial statements. The following
discussion should be read in conjunction with our financial statements and the
related notes that appear elsewhere in this quarterly report.
As used in this quarterly report, the terms "we", "us", "our company", "the
Company" and "TraceGuard Technologies" mean TraceGuard Technologies Inc., unless
otherwise indicated. All dollar amounts refer to US dollars unless otherwise
indicated.
THE FOLLOWING DISCUSSION AND ANALYSIS PROVIDES INFORMATION WHICH OUR MANAGEMENT
BELIEVES IS RELEVANT TO AN ASSESSMENT AND UNDERSTANDING OF OUR COMPANY'S RESULTS
OF OPERATIONS AND FINANCIAL CONDITION. THIS DISCUSSION SHOULD BE READ TOGETHER
WITH OUR FINANCIAL STATEMENTS AND THE NOTES TO FINANCIAL STATEMENTS WHICH ARE
INCLUDED IN THIS REPORT, AND WITH OUR COMPANY'S FORM 10-KSB.
General
Up until June 29, 2005 our business plan was to develop and market an Internet
computer software program that was designed to automate the process of
submission of Internet web page information in multiple languages to major
Internet search engines. Currently, our business plan strategy is now focusing
on developing technologies for homeland security applications. This new focus is
based on an exclusive technology licensing agreement with Tracetrack
Technologies Ltd., ("TraceTrack"), which was finalized in a licensing agreement
between our wholly owned subsidiary, TraceGuard Technologies Ltd. (the
"Subsidiary") and Tracetrack on February 15, 2006. Since inception, Tracetrack
has focused on developing technologies for homeland security applications. We
currently developing innovative security technologies and solutions for
explosives detection, a growth segment of the US and global homeland security
market. The Company's systems are designed to improve the screening and
detection of explosives, narcotics, biological contaminants and other hazardous
materials.
11
Cash Requirements
As of June 30, 2006, we had a working capital and shareholders' equity of $
1,294,696 and $1,849,400 respectively. To date we have raised approximately
$4,500,000 and plan to raise additional cash of approximately $500,000 by
September 30, 2006, primarily through a financing. We plan to raise additional
$8,000,000 over the next twelve months. This will allow us to continue with the
development of our products. There can be no assurance that additional financing
will be available to us when needed or, if available, that it can be obtained on
commercially reasonable terms.
Estimated expenses over the next 12 months (in thousands):
Development and Engineering 3,050
Marketing and business development 680
General and Administrative 1,270
-------
Total 5,000
Product Research and Development
We anticipate the completion of the development of our first products within the
next twelve months.
Lease agreements & investments
The Company and our wholly owned subsidiary, entered into agreements to lease
office space in Arlington VA, Manhattan NY and Petach-Tikva (Israel). Total
expected rental fees for the next 12 months are approximately $92,500.
As of June 30, 2006 the Company and its subsidiary have invested approximately
$247,000 in leasehold improvements and furniture for its new facilities.
In addition, as of June 30, 2006, a sum of approximately $190,000 has been
invested in equipment, computer hardware and computer software for the
Subsidiary's development group. Additional $300,000 are planned to be invested
in 2006 for this purpose.
Employees
As of August 14, 2006 there are 20 employees, other than its directors, being
employed by our Subsidiary. We expect to further recruit number of part time and
full time employees in the field of engineering, R&D, administrative and
business development over the next 12-month period.
12
ACCOUNTING POLICIES
The Securities and Exchange Commission ("SEC") defines "critical accounting
policies" as those that require application of management's most difficult,
subjective or complex judgments, often as a result of the need to make estimates
about the effect of matters that are inherently uncertain and may change in
subsequent periods.
Not all of the accounting policies require management to make difficult,
subjective or complex judgments or estimates. However, the following policies
could be deemed to be critical within the SEC definition. We have historically
incurred losses, and through June 30, 2006 have incurred losses of $2,161,458.
On February 2, 2006, the Board of Directors of the Company approved a change in
its fiscal year so it will end December 31, rather than end at March 31. As a
result, the Company reported on the Form 10-KSB, the results of its activities
for the transition period between April 1, 2005 and December 31, 2005.
Effective January 1, 2006 the Company adopted SFAS No. 123 (Revised 2004)
"Share-Based Payment" ("SFAS No. 123R") using the Modified Prospective Approach.
SFAS No. 123R revises SFAS No. 123, "Accounting for Stock-Based Compensation"
("SFAS No. 123) and requires the measurement and recognition of compensation of
all share-based payments including grants of employee stock options, to be based
on their estimated fair values at grant date, or the date of later modification,
over the requisite service period. Under SFAS No. 123R, the Company required to
select a valuation technique that meets the criteria as stated in the standard.
Allowable valuation models includes a binomial model and the Black-Scholes
model. At the present time the Company uses the Black-Scholes model.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial
statements as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. These
estimates and assumptions relate to recording net revenue, collectbility of
accounts receivable, and the realizability of other intangible assets, accruals,
income taxes, inventory realization and other factors. Management has exercised
reasonable judgment in deriving these estimates; however, actual results could
differ from these estimates. Consequently, change in conditions could affect our
estimates.
Fair Value of Financial Instruments
The Company considers all highly liquid interest-earning investments with a
maturity of three months or less at the date of purchase to be cash equivalents
The financial instruments of the Company consist mainly of non-derivative
current assets and current liabilities. In view of their nature, the fair value
of financial instruments included in working capital of the Company is usually
identical or close to their carrying value.
Recently Issued Accounting Standards
The Company does not expect that the adoption of recently issued accounting
pronouncements will have a significant impact on our results of operations,
financial position or cash flows.
13
Results of Operations
Six month ended June 30, 2006 and 2005
Our Company recorded losses of $1,713,853 and $13,814 for the six month periods
ended June 30, 2006 and 2005, respectively, and losses of $2,161,458 since March
20, 2002 (date of inception). The principal components of the losses were for
R&D and general and administrative expenses.
The Company's operating expenses for the six month periods ended June 30, 2006
and 2005, were $1,723,247 and $13,814, respectively. The principal components of
these expenses were for R&D and general and administrative expenses, mainly
consisting of payroll cost and consulting expenses.
Liquidity and Capital Resources
The Company has had no revenues since inception.
During the period of six months ended June 30, 2006, the Company had an average
burn rate of approximately $300,000 per month, mainly consisting of (in
thousands):
Wages and consulting services 160
Marketing General and Administrative 100
Investment in equipment 40
-------
Total 300
As reflected in the accompanying interim condensed consolidated financial
statements, the Company's operations for the six and three month periods ended
June 30, 2006, resulted in a net loss of $1,713,853 and $1,009,156,
respectively. Shareholders' equity as of June 30, 2005 is $ 1,849,400. The
Company's ability to continue operating as a going concern is dependent on its
ability to raise sufficient additional working capital. Management plans in this
regard include, among other things raising additional cash primarily through a
financing.
Based on the Company's expectations and financing plans described above, all of
the above are expected to provide more than sufficient liquidity for the
foreseeable future and the next 12 months in particular. The Company cannot be
certain that funding will be available on acceptable terms, or at all.
The Company has no long-term debt and does not regard long-term borrowing as a
good, prospective source of financing.
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Item 3. Controls and Procedures.
As required by Rule 13a-15 under the Exchange Act, as of the end of the period
covered by this report, being June 30, 2006, we have carried out an evaluation
of the effectiveness of the design and operation of our Company's disclosure
controls and procedures. This evaluation was carried out under the supervision
and with the participation of our management, including our principal executive
and principal financial officer. Based upon that evaluation, our principal
executive and principal financial officer concluded that our disclosure controls
and procedures are effective as of the end of the period covered by this report.
There have been no significant changes in our internal controls over financial
reporting that occurred during our most recent fiscal quarter that have
materially affected, or are reasonably likely to materially affect our internal
controls over financial reporting.
Disclosure controls and procedures are designed to ensure that information
required to be disclosed in our Company's reports filed or submitted under the
Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the Securities and Exchange Commission's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed in our
reports filed under the Exchange Act is accumulated and communicated to
management, including our president and chief executive officer as appropriate,
to allow timely decisions regarding required disclosure.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On August 8, 2006 the Company granted of an option for the purchase of 359,000
shares of its common stock, par value $0.001 each, to M.S. Savyonim Ltd.
("M.S."), an Israeli corporation that rendered to the Corporation management
services through Mr. Meir Zucker who served as the President and Chief Executive
Officer of the Corporation. Such options were granted to M.S. following the
termination of the engagement of M.S. in February 2006 in connection with the
services rendered by it to the Corporation. The aforementioned securities were
issued in reliance upon the exemption afforded by the provisions of Regulation
S, as promulgated by the Securities and Exchange Commission under the Securities
Act of 1933, as amended, and in reliance of the purchaser's representation that
it is not a U.S. person and is not acquiring the securities for the account or
benefit of any U.S. person. In addition, the securities bare a Regulation S
restrictive legend.
On August 8, 2006, the Company granted 42,937 shares of its common stock, par
valued $0.001 each, to several service providers, in consideration for services
provided. The aforementioned securities were issued in reliance upon the
exemption afforded by the provisions of Regulation S, as promulgated by the
Securities and Exchange Commission under the Securities Act of 1933, as amended,
and in reliance of the purchasers' representations that they are not a U.S.
person and are not acquiring the securities for the account or benefit of any
U.S. person. In addition, the securities bare a Regulation S restrictive
legend..
On August 8, 2006, the Company granted 53,676 shares of its common stock, par
valued $0.001 each, to several service providers, in consideration for services
provided. The aforementioned securities were issued in reliance upon the
exemption afforded by the provisions of Section 4(2) of the Securities Act of
1933, as amended, and Rule 506 promulgated thereunder, and in reliance of the
purchasers' representations as to their status as an accredited investor, and
that they were acquiring the shares for investment purposes and with a view to
any sale or distribution. In addition, the shares bare a 1933 Act restrictive
legend.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
The Company recently announced that it has entered into a 12-month joint
development program with Rapiscan Systems ("Rapiscan"), a subsidiary of OSI
Systems in order to develop TraceScan (using TraceGuard's Carry Safe product),
an advanced combined bulk/trace detection system for interdiction of explosive
devices and weapons Upon development, TraceScan will be marketed exclusively by
Rapiscan primarily to the U.S. Government and also through its global direct
sales and distributor network. CarrySafe is designed for carry-on luggage and is
currently at an advanced stage of development.
Tracescan is a product under development and there can be no assurance that the
development will be successfully completed, in which event the Company's venture
with Rapiscan will not be successful. In addition, the product to be developed
have not yet been sold to the intended government and other users and no
assurance can be given that the product will find a successful market. For other
risk factors related to Traceguard, see the Company's report on Form 10-KSB for
the fiscal year ended December 31, 2005.
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Item 6. Exhibits and Reports on Form 8-K.
Item Number Exhibit
31.1 Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
17
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.
TraceGuard Technologies, Inc.
By:
/s/ Dr. Ehud Ganani
- ----------------------------
Dr. Ehud Ganani, President, Chief Executive Officer
(Principal Executive Officer)
Date: August 14, 2006
/s/ David Ben-Yair
- ----------------------------
David Ben-Yair, Chief Financial Officer
(Principal Financial Officer)
Date: August 14, 2006
18