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 333-106160
M-WISE, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 11-3536906
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3 Sapir Street, Herzeliya Pituach, Israel 46852
(Address of principal executive offices)
+972-9-9611212
(Issuer's telephone number, including area code)
All Correspondence to:
Arthur S. Marcus, Esq.
Sanny J. Barkats, Esq.
Gersten Savage LLP
600 Lexington Avenue, 9th Floor
New York, New York 10022
(212) 752-9700
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes |X| No |_|
The number of shares outstanding of the issuer's common stock, as of August 14,
2006 was 128,902,659.
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
m-WISE, INC.
TABLE OF CONTENTS
Page
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Balance Sheet as of June30, 2006 2
Unaudited Statements of Operations for the
Three Months Ended and Six Months Ended
June 30, 2006 and 2005 3
Unaudited Statements of Cash Flows for the Six Months
Ended June 30, 2006 and 2005 5
Notes to Unaudited Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 18
Item 3. Controls and Procedures 22
PART II
OTHER INFORMATION
Item 1 Legal Proceedings 23
Item 2 Changes in Securities and Small Business 23
Issuer Purchases of Equity Securities 23
Item 3 Defaults upon Senior Securities 23
Item 4 Submission of Matters to a Vote of Security Holders 23
Item 5 Other Information 23
Item 6 Exhibits and Reports on Form 8-K 23
-2-
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
M-WISE, INC.
CONSOLIDATED FINANCIAL STATEMENTS
PERIODS ENDED JUNE 30, 2006 AND 2005
CONTENTS
Report of Independent Registered Public Accounting Firm 1
Consolidated Balance Sheets 2
Consolidated Statements of Operations 3 - 4
Consolidated Statements of Changes in Stockholders' Deficit 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7 - 18
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of m-Wise, Inc.
We have reviewed the accompanying consolidated balance sheets of m-Wise,
Inc. and subsidiaries (the "Company") as of June 30, 2006 and 2005, and the
related consolidated statements of operations, stockholders' deficit and cash
flows for the six months then ended. These interim financial statements are the
responsibility of the Company's management.
We conducted our reviews in accordance with standards of the Public
Company Accounting Oversight Board (United States). A review of interim
financial information consists primarily of applying analytical procedures and
making inquires of persons responsible for financial and accounting matters. It
is substantially less in scope than an audit conducted in accordance with
standards of the Public Company Accounting Oversight Board (United States), the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the consolidated interim financial statements referred to
above for them to be in conformity with accounting principles generally accepted
in the United States of America.
"SF PARTNERSHIP, LLP"
Toronto, Canada CHARTERED ACCOUNTANTS
August 1, 2006
-1-
M-WISE, INC.
Balance Sheets
June 30, 2006 and 2005
2006 2005
------------ ------------
ASSETS
Current
Cash $ 68,536 $ 481
Accounts receivable - trade (net of allowance for
doubtful accounts of $63,952, 2005, $25,177) 527,175 133,345
Prepaid and sundry assets 272,555 15,980
------------ ------------
868,266 149,806
Long-term Prepaid Expenses 23,162 10,195
Equipment (note 3) 140,104 196,401
Deferred Financing Fees 18,952 31,580
------------ ------------
$ 1,050,484 $ 387,982
============ ============
LIABILITIES
Current
Bank indebtedness $ 750 $ 1,724
Trade accounts payable 102,460 84,208
Advances from shareholder (note 4) 433,349 75,192
Other payables and accrued liabilities 1,008,583 947,381
Billings in excess of costs on uncompleted contracts 150,763 --
Notes payable - current portion -- 149,200
------------ ------------
1,695,905 1,257,705
Accrued Severance Pay (note 5) 59,974 36,844
Notes Payable (note 6) -- 1,757,893
------------ ------------
1,755,879 3,052,442
------------ ------------
STOCKHOLDERS' DEFICIENCY
Capital Stock (note 7) 219,135 118,162
Paid in Capital 9,939,674 6,904,401
Accumulated Deficit (10,864,204) (9,687,023)
------------ ------------
(705,395) (2,664,460)
------------ ------------
$ 1,050,484 $ 387,982
============ ============
(The accompanying notes of the financial statements are an integral part of
these statements)
-2-
M-WISE, INC.
Consolidated Statements of Operations
Six Months Ended June 30, 2006 and 2005
2006 2005
------------- -------------
Sales $ 1,024,700 $ 1,623,782
Cost of Sales 111,740 357,373
------------- -------------
Gross Profit 912,960 1,266,409
------------- -------------
Expenses
General and administrative 613,406 584,584
Research and development 272,749 355,528
Financial 251,518 18,521
------------- -------------
1,137,673 958,633
------------- -------------
Net (Loss) Earnings $ (224,713) $ 307,776
============= =============
Basic and Fully Diluted (Loss) Earnings Per Share (note 7) $ 0.00 0.00
============= =============
Basic Weighted Average Number of Shares 122,498,248 69,506,898
============= =============
(The accompanying notes of the financial statements are an integral part of
these statements)
-3-
M-WISE, INC.
Consolidated Statements of Operations
Three Months Ended June 30, 2006 and 2005
2006 2005
------------ ------------
Sales $ 770,917 $ 359,233
Cost of Sales 98,793 51,919
------------ ------------
Gross Profit 672,124 307,314
------------ ------------
Expenses
General and administrative 350,888 277,817
Research and development 137,372 203,081
Financial 21,460 3,869
------------ ------------
509,720 484,767
------------ ------------
Net Earnings (Loss) $ 162,404 $ (177,453)
============ ============
Basic and Fully Diluted Earnings (Loss) Per Share (note 7) $ 0.00 0.00
============ ============
Basic Weighted Average Number of Shares 128,066,495 69,506,898
============ ============
(The accompanying notes of the financial statements are an integral part of
these statements)
-4-
m-Wise, Inc.
Consolidated Statements of Stockholders' Deficit
Six Months Ended June 30, 2006 and 2005
Common Shares
--------------------------- Additional
Number Paid in Accumulated
of Shares Amount Capital Deficit
------------ ------------ ------------ ------------
Balance, January 1, 2005 69,506,898 $ 118,162 $ 6,894,664 $ (9,994,799)
Options vested for employee services -- -- 9,737 --
Net earnings -- -- -- 307,776
------------ ------------ ------------ ------------
Balance, June 30, 2005 69,506,898 $ 118,162 $ 6,904,401 $ (9,687,023)
============ ============ ============ ============
Balance, January 1, 2006 113,514,158 $ 192,974 $ 7,399,394 $(10,639,491)
Issuance of common stock for
repayment of the notes
payable (notes 6 and 7) 12,400,448 21,081 1,723,829 --
Issuance of warrants for
repayment of notes payable
(notes 6 and 7) -- -- 436,228 --
Exercise of stock options
(note 7) - quarter ended
March 31, 2006 169,871 289 (18) --
Issuance of commons stock for
consulting fees (note 7) -
quarter ended June 30, 2006 2,818,182 4,791 305,209 --
Options vested for employee
services (note 7) -- -- 75,032 --
Net loss -- -- -- (224,713)
------------ ------------ ------------ ------------
Balance, June 30, 2006 128,902,659 $ 219,135 $ 9,939,674 $(10,864,204)
============ ============ ============ ============
(The accompanying notes of the financial statements are an integral part of
these statements)
-5-
M-WISE, INC.
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2006 and 2005
2006 2005
----------- -----------
Cash Flows from Operating Activities
Net (loss) earnings $ (224,713) $ 307,776
Adjustments required to reconcile net loss to net
cash used in operating activities:
Consulting fees paid by issuance of common shares 51,667 --
Depreciation 54,640 57,122
Wages and salaries paid by options 75,303 9,737
Financing fee paid by issuance of common shares 222,104 --
Net Changes in Assets & Liabilities
Accounts receivable - trade (374,141) 22,018
Prepaid and sundry assets (3,323) (8,972)
Deferred revenue 136,963 (669,890)
Trade accounts payable 7,556 (64,345)
Other payables and accrued liabilities 12,018 140,504
Long-term prepaid expenses (865) 4,400
Deferred financing fees 6,314 6,314
Accrued severance pay 1,503 20,327
----------- -----------
(34,974) (175,009)
----------- -----------
Cash Flows from Investing Activities
Acquisition of equipment (28,829) (32,744)
----------- -----------
Cash Flows from Financing Activities
Advances from shareholder 142,084 75,192
Proceeds from issuance of promissory notes -- 23,200
Proceeds from issuance of common stock and warrants
for repayment of notes payable 1,959,034 --
Repayment of notes payable (1,959,034) --
Bank indebtedness - net (10,318) (15,012)
----------- -----------
131,766 83,380
----------- -----------
Net Increase (Decrease) in Cash 67,963 (124,373)
Cash - beginning of period 573 124,854
----------- -----------
Cash - end of period $ 68,536 $ 481
=========== ===========
Interest and Income Taxes Paid
During the period, the company had cash flows arising
from income taxes and interests paid as follows:
Interest paid $ 1,463 $ 603
=========== ===========
Income taxes paid $ -- $ --
=========== ===========
(The accompanying notes of the financial statements are an integral part of
these statements)
-6-
M-WISE, INC.
Notes to Financial Statements
June 30, 2006 and 2005
1. Description of Business and Going Concern
a) Description of Business
m-Wise Inc. (the "Company") is a Delaware corporation which develops
interactive messaging platforms for mobile phone-based commercial
applications, transactions and information services with internet
billing capabilities.
The Company's wholly-owned subsidiary, m-Wise Ltd., is located in
Israel and was incorporated in 2000 under the laws of Israel.
b) Going Concern
The Company's financial statements are presented on a going concern
basis, which contemplates the realization of assets and satisfaction
of liabilities in the normal course of business. The Company has
experienced recurring losses since inception and has negative cash
flows from operations that raise substantial doubt as to its ability
to continue as a going concern. For the quarter ended June 30, 2006,
the Company experienced net losses of $224,713 and a working capital
deficit of $827,639 (2005 - $1,107,899).
The Company is in an industry where operational fluctuation is
usually higher than other ordinary industries. The accompanying
financial statements reflect management's current assessment of the
impact to date of the economic situation on the financial position
of the Company. Actual results may differ materially from
management's current assessment.
The Company's ability to continue as a going concern is also
contingent upon its ability to secure additional financing,
continuing sale of its products and sustaining profitable
operations.
The Company is pursuing additional financing but there can be no
assurance that the Company will be able to secure financing when
needed or obtain financing on terms satisfactory to the Company, if
at all.
The financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification
of assets or the amounts and classification of liabilities that may
result from the possible inability of the Company to continue as a
going concern.
-7-
M-WISE, INC.
Notes to Financial Statements
June 30, 2006 and 2005
2. Summary of Significant Accounting Policies
The accounting policies of the Company are in accordance with U.S.
generally accepted accounting principles, and their basis of application
is consistent with that of the previous period. Outlined below are those
policies considered particularly significant:
a) Reporting Currency
A majority of the Company's revenues are generated in U.S. dollars.
In addition, a substantial portion of the Company's costs are
incurred in U.S. dollars. Management has determined that the U.S.
dollar will be used as the Company's functional and reporting
currency.
b) Basis of Consolidation
The consolidated financial statements include the operations of
m-Wise Inc. and its wholly-owned subsidiary. Intercompany's balances
and transactions have been eliminated.
c) Deferred Financing Fees
Deferred financing fees relate to a non-interest bearing credit line
facility of $500,000 provided by a shareholder as disclosed in note
4. The overdraft from the credit facility is non-interest bearing
and there are no covenants with which the Company will need to
comply. The credit line facility has no expiration date and
management expects to retain the facility for a period of at least
five years. Accordingly, the fees are being amortized using the
straight line method over five years.
d) Equipment and Depreciation
Equipment stated at cost less accumulated depreciation. Depreciation
is based on the estimated useful lives of the assets and is provided
using the undernoted annual rates and methods:
Furniture and equipment 6-15% Straight line
Computer equipment 33% Straight line
Leasehold improvements Straight line over the term of the lease
-8-
M-WISE, INC.
Notes to Financial Statements
June 30, 2006 and 2005
2. Summary of Significant Accounting Policies (cont'd)
e) Revenue Recognition
The Company generates revenues from product sales, licensing,
customer services and technical support.
Revenues from products sales are recognized on a completed-contract
basis, in accordance with Staff Accounting Bulletin No. 101 "Revenue
Recognition in Financial Statements" ("SAB No. 101"), Statement of
Position 97-2 "Software Revenue Recognition" and Statement of
Position 81-1 "Accounting for Performance of Construction-Type and
Certain Production-Type Contracts". The Company has primarily
short-term contracts whereby revenues and costs in the aggregate for
all contracts is expected to result in a matching of gross profit
with period overhead or fixed costs similar to that achieved by use
of the percentage-of-completion method. Accordingly, financial
position and results of operations would not vary materially from
those resulting from the use of the percentage-of-completion method.
Revenue is recognized only after all three stages of deliverables
are complete; installation, approval of acceptance test results by
the customer and when the product is successfully put into real-life
application. Customers are billed, according to individual
agreements, a percentage of the total contract fee upon completion
of work in each stage; approximately 40% for installation, 40% upon
approval of acceptance tests by the customer and the balance of the
total contract price when the software is successfully put into
real-life application. The revenues, less its' associated costs, are
deferred and recognized on completion of the contract and customer
acceptance. Amounts received for work performed in each stage are
not refundable.
On-going service and technical support contracts are negotiated
separately at an additional fee. The technical support is separate
from the functionality of the products, which can function without
on-going support.
Technology license revenues are recognized in accordance with SAB
No. 101 at the time the technology and license is delivered to the
customer, collection is probable, the fee is fixed and determinable,
a persuasive evidence of an agreement exists, no significant
obligation remains under the sale or licensing agreement and no
significant customer acceptance requirements exist after delivery of
the technology.
Revenues relating to customer services and technical support are
recognized as the services are rendered ratably over the period of
the related contract.
The Company does not sell products with multiple deliverables. It is
management's opinion that EITF 00-21, "Revenue Arrangements With
Multiple Deliverables" is not applicable.
f) Research and Development Costs
Research and development costs are expensed as incurred.
-9-
M-WISE, INC.
Notes to Financial Statements
June 30, 2006 and 2005
2. Summary of Significant Accounting Policies (cont'd)
g) Use of Estimates
The preparation of financial statements, in conformity with U.S.
generally accepted accounting principles, requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
h) Concentration of Credit Risk
SFAS No. 105, "Disclosure of Information About Financial Instruments
with Off-Balance Sheet Risk and Financial Instruments with
Concentration of Credit Risk", requires disclosure of any
significant off-balance sheet risk and credit risk concentration.
The Company does not have significant off-balance sheet risk or
credit concentration. The Company maintains cash and cash
equivalents with major Israel financial institutions.
The Company's provides credit to its clients in the normal course of
its operations. Depending on their size, financial strength and
reputation, customers are given credit terms of up to 60 days. The
Company carries out, on a continuing basis, credit checks on its
clients and maintains provisions for contingent credit losses which,
once they materialize, are consistent with management's forecasts.
For other debts, the Company determines, on a continuing basis, the
probable losses and sets up a provision for losses based on the
estimated realizable value.
Concentration of credit risk arises when a group of clients having a
similar characteristic such that their ability to meet their
obligations is expected to be affected similarly by changes in
economic or other conditions. The Company does not have any
significant risk with respect to a single client.
i) Fair Value of Financial Instruments
The estimated fair value of financial instruments has been
determined by the Company using available market information and
valuation methodologies. Considerable judgment is required in
estimating fair value. Accordingly, the estimates may not be
indicative of the amounts the Company could realize in a current
market exchange. At June 30, 2006 and 2005, the carrying amounts of
cash equivalents, short-term bank deposits, trade receivables and
trade payables approximate their fair values due to the short-term
maturities of these instruments.
-10-
M-WISE, INC.
Notes to Financial Statements
June 30, 2006 and 2005
2. Summary of Significant Accounting Policies (cont'd)
j) Earnings per Common Share
The Company calculates net earnings per share based on SFAS No. 128,
"Earnings Per Share". Basic earnings per share is computed by
dividing net earnings attributable to the common stockholders by the
weighted average number of common shares outstanding. Fully diluted
earnings per share is computed similar to basic earnings per share
except that the denominator is increased to include the number of
additional common shares that would have been outstanding if the
potential common shares had been issued and if the additional common
shares were dilutive.
k) Impact of Recently Issued Accounting Standards
In December 2004, the FASB issued a revision to SFAS No. 123,
"Share-Based Payment" (Statement 123R). This Statement requires a
public entity to measure the cost of employee services received in
exchange for an award of equity instruments based on the grant-date
fair value of the award (with limited exceptions). That cost will be
recognized over the period during which the employee is required to
provide service in exchange for the award requisite service period
(usually the vesting period). No compensation cost is recognized for
equity instruments for which employees do not render the requisite
service. Employee share purchase plans will not result in
recognition of compensation cost if certain conditions are met;
those conditions are much the same as the related conditions in
Statement 123. This Statement is effective for public entities that
do not file as a small business issuers as of the beginning of the
first interim or annual reporting period that begins after June 15,
2005. This Statement applies to all awards granted after the
required effective date and to awards modified, repurchased, or
cancelled after that date. The cumulative effect of initially
applying this Statement, if any, is recognized as of the required
effective date and is not expected to have a material impact on the
Company's consolidated financial statements.
In May 2005, the FASB issued Statement No. 154, Accounting Changes
and Error Corrections - A Replacement of APB Opinion No. 20 and FASB
Statement No. 3 (Statement No. 154). Statement No. 154 changes the
requirements for the accounting for and reporting of a change in
accounting principle. Statement No. 154 requires retrospective
application of any change in accounting principle to prior periods'
financial statements. Statement No. 154 is effective for the first
fiscal period beginning after December 15, 2005. We do not expect
the implementation of Statement No. 154 to have a significant impact
on our consolidated financial statements.
-11-
M-WISE, INC.
Notes to Financial Statements
June 30, 2006 and 2005
3. Equipment
Equipment is comprised as follows:
2006 2005
Accumulated Accumulated
Cost Depreciation Cost Depreciation
-------- ------------ -------- ------------
Furniture and equipment 60,090 29,451 57,747 23,170
Computer equipment $396,856 $ 287,845 $546,164 $ 393,071
Leasehold improvements 18,810 18,356 37,684 28,953
-------- ------------ -------- ------------
$475,756 $ 335,652 $641,595 $ 445,194
-------- ------------ -------- ------------
Net carrying amount $ 140,104 $ 196,401
------------ ------------
4. Advances from Shareholder
The advances from the major shareholder are non-interest bearing and have
no fixed terms of repayment.
According to an agreement dated January 2003, the shareholder granted a
credit facility of $500,000 to the Company in return for preferred class C
shares as described in note 7. At the quarter ended June 30, 2006, the
line of credit has an outstanding balance of $433,349.
5. Accrued Severance Pay
The Company accounts for its potential severance liability of its Israel
subsidiary in accordance with EITF 88-1, "Determination of Vested Benefit
Obligation for a Defined Benefit Pension Plan". The Company's liability
for severance pay is calculated pursuant to applicable labour laws in
Israel on the most recent salary of the employees multiplied by the number
of years of employment as of the balance sheet date for all employees. The
Company's liability is fully accrued and reduced by monthly deposits with
severance pay funds and insurance policies. As at June 30, 2006 and 2005,
the amount of the liabilities accrued were $126,188 and $82,935
respectively. Severance pay expenses for the periods ended June 30, 2006
and 2005 were $12,812 and $21,542 respectively.
The deposit funds include profits accumulated up to the balance sheet date
from the Israeli company. The deposited funds may be withdrawn only upon
the fulfillment of the obligation pursuant to Israeli severance pay laws
or labour agreements. Cash surrender values of the deposit funds as at
June 30, 2006 and 2005 were $66,214 and $46,091 respectively. Income
earned from the deposit funds for 2006 and 2005 was immaterial.
-12-
M-WISE, INC.
Notes to Financial Statements
June 30, 2006 and 2005
6. Notes Payable
2006 2005
---------- ----------
Syntek Capital AG
- a significant shareholder until July 2002 $ -- $ 900,000
DEP Technology Holdings Ltd.
- a significant shareholder until July 2002 -- 900,000
Accrued interest -- 107,093
---------- ----------
-- 1,907,093
Less: Current portion -- 149,200
---------- ----------
$ -- $1,757,893
========== ==========
On March 8, 2006, the above $900,000 note payable to Syntek Capital AG
("Syntek") was converted into 6,200,224 common shares of the Company
pursuant to an agreement dated December 22, 2005.
In addition, the Company will issue warrants to Syntek for the purchase of
up to 5,263,158 common shares of the Company at an exercise price of $0.19
per warrant. As at June 30, 2006, warrants have been issued but not
exercised.
On March 8, 2006, the Company entered into an identical agreement with DEP
Technology Holdings Ltd. ("DEP").
Under both agreements, the three founding shareholders will transfer
11.25% of their shareholdings to Syntek and DEP. As at June 30, 2006, only
two of the founding shareholders transferred 11.25% of their shareholdings
or 3,534,815 common shares to each of Syntek and DEP.
After the above mentioned conversions and transfers are completed, each of
Syntek and DEP will own 9% of the total outstanding common stock of the
Company. If the warrants are exercised, their percentage ownership in the
Company will increase to 13%.
-13-
M-WISE, INC.
Notes to Financial Statements
June 30, 2006 and 2005
7. Capital Stock
Authorized
210,000,000 Common shares
170,000,000 Preferred shares
Series "A": convertible, voting, par value of $0.0017 per
share
Series "B": 10% non-cumulative dividend, redeemable,
convertible, voting, par value of $0.0017 per
share
Series "C": 10% non-cumulative dividend, convertible,
voting, par value of $0.0017 per share
2006 2005
Issued and outstanding
128,902,659 Common shares (2005 - 69,506,898) $219,135 $118,162
-------- --------
Stock warrants and options:
The Company accounted for its stock options and warrants in accordance
with SFAS 123 "Accounting for Stock - Based Compensation" and SFAS 148
"Accounting for Stock - Based compensation - Transition and Disclosure."
Value of options granted has been estimated by the Black Scholes option
pricing model. The following assumptions were used:
2006 2005
----------------------- -----------------------
Israel International Israel International
------ ------------- ------ -------------
Interest rate 8% 8% 5% 5%
Expected volatility 80% 80% 50% 50%
Expected life in years 5 7 6 8
Warrants:
On December 22, 2005, the Company entered into an agreement with Syntek
Capital AG, as part of the agreement for conversion of the note payable
into common shares as mentioned in note 6, whereby the Company issued
warrants to purchase up to 5,263,158 common shares of the Company at an
exercise price of $0.19. The value assigned to the warrants was $ 218,114.
As of June 30, 2006, the warrants have not been converted into common
shares.
On February 2, 2006, the Company entered into an identical agreement with
DEP Technology Holdings Ltd. as mentioned in note 6. The value assigned to
the warrants was $ 218,114. As of June 30, 2006, the warrants have not
been converted into common shares.
-14-
M-WISE, INC.
Notes to Financial Statements
June 30, 2006 and 2005
7. Capital Stock (cont'd)
Capital Stock:
On July 29, 2005, the Company issued 5,000,000 common shares, at par
value, to its Chief Financial Officer as compensation for services
rendered from September 2002 to December 2005. It was agreed upon by the
parties that the fair value of such services was $500,000, all of which
has been charged to wage expense.
On March 8, 2006, the Company issued 12,400,448 common shares for
repayment of the $1,800,000 note payable to Syntek Capital AG ("Syntek")
and DEP as mentioned in note 6.
On April 28, 2006, the Company issued 2,818,182 common shares to its
external consultant in exchange for consulting services. It was agreed
upon by the parties that the fair value of such services was $310,000. At
June 30, 2006, $51,667 has been charged to consulting expense and $258,333
has been deferred and will be amortized over the term of the contract.
Stock Options:
In February 2001 the Board of Directors of the Company adopted two option
plans to allow employees and consultants to purchase ordinary shares of
the Company.
Under the Israel 2001 share option plan management authorized stock
options for 2,403,672 common shares of the Company having a $0.0017
nominal par value each and an exercise price of $0.0017, and under the
International 2001 share option plan, stock options for 300,000 common
shares having a $0.0017 nominal par value each and an exercise price of
$0.0017. As of June 30, 2005, 3,672 options under the Israel 2001 share
option plan for common stock were not yet granted.
In the quarter ended March 31, 2006, a total of 169,871 common stock
options were exercised by the employees.
Under the Israel 2003 share option plan management authorized stock
options (on a post conversion, post split basis) for 16,094,106 preferred
Class "B" shares, which were converted to options for common shares of the
Company having a $0.0017 nominal par value each and an exercise price of
$0.0017, and under the International 2003 share option plan stock options
(on a post conversion, post split basis) for 25,061,094 preferred Class
"B" shares which were converted to options for common shares of the
Company having a $0.0017 nominal par value each and an exercise price of
$0.0017. On January 5, 2006, the share option plan was amended to
authorize an additional 1,260,000 stock options and the exercise price per
share for the new options will be $0.12 for options granted after January
5, 2006. As of June 30, 2006, 38,256 options under the Israel 2003 share
option plan were not yet granted.
On January 12, 2006, 1,260,000 stock options under the Israel 2003 share
options plan were granted at an exercise price of $0.12. On June 6, 2006,
the exercise price was amended to $0.05. The compensation cost has been
revalued as if the option plan has been cancelled and reissued in
accordance with SFAS 123, paragraph 187 Accounting for Stock Based
Payments (Modification of Awards).
-15-
M-WISE, INC.
Notes to Financial Statements
June 30, 2006 and 2005
7. Capital Stock (cont'd)
The options vest gradually over a period of 4 years from the date of grant
for Israel and 10 years (no less than 20% per year for five years for
options granted to employees) for the International plan. The term of each
option shall not be more than 8 years from the date of grant in Israel and
10 years from the date of grant in the International plan. The outstanding
options that have vested have been expensed in the statements of
operations as follows:
Year ended December 31, 2001 $ 9,000
Year ended December 31, 2002 --
Year ended December 31, 2003 384,889
Year ended December 31, 2004 25,480
Year ended December 31, 2005 13,733
Period ended June 30, 2005 75,032
--------
$508,134
--------
The following table summarizes the activity of common stock options during
2006 and 2005:
2006 2005
--------------------------- ---------------------------
Israel International Israel International
---------- -------------- ---------- --------------
Outstanding, beginning of period 3,745,192 1,026,797 18,455,850 25,361,094
Granted 1,260,000 -- -- --
Exercised (169,871) -- -- --
Preferred stock options
converted to common -- -- -- --
Forfeited (1,813) -- -- --
---------- -------------- ---------- --------------
Outstanding, end of period 4,833,508 1,026,797 18,455,850 25,361,094
========== ============== ========== ==============
Weighted average fair value of
common stock options granted
during the period $ 0.0494 $ -- $ -- $ --
========== ============== ========== ==============
Weighted average exercise price
of common stock options,
beginning of period $ 0.0017 $ 0.0017 $ 0.0017 $ 0.0017
========== ============== ========== ==============
Weighted average exercise price
of common stock options
granted in the period $ 0.0500 $ -- $ -- $ --
========== ============== ========== ==============
Weighted average exercise price
of common stock options, end
of period $ 0.0143 $ 0.0017 $ 0.0017 $ 0.0017
========== ============== ========== ==============
Weighted average remaining
contractual life of common
stock options 5 years 7 years 6 years 8 years
========== ============== ========== ==============
-16-
M-WISE, INC.
Notes to Financial Statements
June 30, 2006 and 2005
8. Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". This Standard prescribes the use of the
liability method whereby deferred tax asset and liability account balances
are determined based on differences between financial reporting and tax
bases of assets and liabilities and are measured using the enacted tax
rates. The effects of future changes in tax laws or rates are not
anticipated.
Under SFAS No. 109 income taxes are recognized for the following: a)
amount of tax payable for the current year, and b) deferred tax
liabilities and assets for future tax consequences of events that have
been recognized differently in the financial statements than for tax
purposes. Management determined that accounting values of its assets and
liabilities recorded are not materially different from their tax values
and therefore no deferred tax assets/liabilities have been setup to
account for the temporary differences.
The Company has deferred income tax assets as follows:
2006 2005
----------- -----------
Deferred income tax assets
Non-capital losses carried forward $ 2,602,000 $ 2,310,000
Valuation allowance for deferred income tax assets (2,602,000) (2,310,000)
----------- -----------
$ -- $ --
=========== ===========
The Company provided a valuation allowance equal to the deferred income
tax assets because it is not presently more likely than not that they will
be realized.
As at June 30, 2006, the Company has approximately $10,408,000 of tax
losses carried forward in the parent company and no tax losses carried
forward in the Israeli subsidiary. Losses in the United States, if not
utilized will expire in twenty years from the year of origin as follows:
December 31, 2020 $ 909,500
2021 2,398,000
2022 778,000
2023 5,005,000
2024 581,000
2025 560,500
2026 176,000
-----------
$10,408,000
-----------
-17-
M-WISE, INC.
Notes to Financial Statements
June 30, 2006 and 2005
9. Related Party Transactions
During the period, the Company incurred directors consulting fees and
salaries in the amount of $110,000 (2005, $110,000). At June 30, 2006 and
2005, $566,000 and $462,000 respectively, was unpaid and included in other
payables and accrued expenses.
These transactions were in the normal course of business and recorded at
an exchange value established and agreed upon by the above mentioned
parties.
10. Major Customers
In the six months ended June 30, 2006, the Company had four major
customers which accounted for 39%, 18%, 18% and 13% of the total revenue.
71% of the Company's total sales in the June 30, 2006 quarter were in the
United States. In the six months ended June 30, 2005, the Company had one
major customer in Asia which primarily accounted for 63% of the total
revenue.
11. Commitments
a) The company is committed under an operating lease for its premises
expiring June 30, 2008. Minimum annual payment exclusive of taxes,
insurance, and maintenance costs) under the lease is $54,000. In
addition, the company is committed under operating vehicle lease as
follows:
Twelve months ended June 30, 2007 $ 90,000
Twelve months ended June 30, 2008 58,000
Twelve months ended June 30, 2009 32,000
Twelve months ended June 30, 2010 2,000
--------
$182,000
--------
b) On February 10, 2006, the Company entered into an equity financing
agreement with a Delaware limited partnership ("DLP"), to sell up to
20,000,000 of the Company's common shares (up to $10,000,000) over
the course of 36 months. The amount that the Company shall be
entitled to request from each of the purchase "Puts", shall be equal
to either 1) $300,000 or 2) 200% of the average daily volume ("ADV")
multiplied by the average of the 3 daily closing prices immediately
preceding the Put date. The ADV shall be computed using the 10
trading days prior to the Put Date. The Purchase Price for the
common stock identified in the Put Notice shall be set at 93% of the
lowest closing bid price of the common stock during the Pricing
Period. The Pricing Period is equal to the period beginning on the
Put Notice date and ending on and including the date that is 5
trading days after such Put Date. There are put restrictions applied
on days between the Put Date and the Closing Date with respect to
that Put. During this time, the Company shall not be entitled to
deliver another Put Notice.
In connection with the equity financing agreement, the Company has
issued a preliminary prospectus whereby the DLP and a current
significant shareholder can sell up to 30,000,000 common shares at
market value.
-18-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
The following discussion should be read in conjunction with our consolidated
financial statements and related notes included elsewhere in this Report.
This filing contains forward-looking statements. The words "anticipate,"
"believe," "expect, "plan," "intend," "seek," "estimate," "project," "will,"
"could," "may," and similar expressions are intended to identify forward-looking
statements. These statements include, among others, information regarding future
operations, future capital expenditures, and future net cash flow. Such
statements reflect our management's current views with respect to future events
and financial performance and involve risks and uncertainties, including,
without limitation: (a) the timing of our sales could fluctuate and lead to
performance delays; (b) without additional equity or debt financing we cannot
carry out our business plan; (c) our stockholders have pre-emptive rights to
purchase securities of m-Wise, which could impair our ability to raise capital;
(d) we operate internationally and are subject to currency fluctuations, which
could cause us to incur losses even if our operations are profitable; (e) we are
dependent upon certain major customers, and the loss of one or more of such
customers could adversely affect our revenues and profitability; (f) our
research and development facilities are located in Israel and we have important
facilities and resources located in Israel which could be negatively affected
due to military or political tensions; (g) certain of our officers and employees
are required to serve in the Israel defense forces and this could force them to
be absent from our business for extended periods; (h) the rate of inflation in
Israel may negatively impact our costs if it exceeds the rate of devaluation of
the NIS against the Dollar. Should one or more of these risks or uncertainties
occur, or should underlying assumptions prove to be incorrect, actual results
may vary materially and adversely from those anticipated, believed, estimated or
otherwise indicated. These forward-looking statements speak only as of the date
of this prospectus. Subject at all times to relevant federal and state
securities law disclosure requirements, we expressly disclaim any obligation or
undertaking to disseminate any update or revisions to any forward-looking
statement contained herein to reflect any change in our expectations with regard
thereto or any changes in events, conditions or circumstances on which any such
statement is based. Consequently, all of the forward-looking statements made in
this Report are qualified by these cautionary statements and there can be no
assurance of the actual results or developments.
-3-
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2006 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 2005.
REVENUES
License fees and products. Revenues from license fees and products decreased 46%
to $622,650 for the six months ended June 30, 2006 from $1,142,938 for the same
period in 2005. The decrease primarily consisted of $1,026,850 revenues which
was derived from a one time licensing fee recognized in 2005 from our contract
with First Advanced Multi-Media Entertainment.
Revenue share. Revenues from revenue share increased 147% to $160,072 for the
six months ended June 30, 2006 from $64,689 for the same period in 2005. The
increase primarily consisted of revenues from current customers who were not our
customers during the first six months of 2005 and from customers that did not
generate revenues from selling services to end users previously.
Customer services and technical support. Revenues from customer services and
technical support decreased 42% to $241,978 for the six months ended June 30,
2006 from $416,155 for the same period in 2005. The decrease primarily consisted
of $231,381 revenues derived in 2005 from two customers who have ceased the
usage of our support services.
Cost of revenues.
Cost of revenues decreased 69% to $111,740 for the six months ended June 30,
2006 from $357,373 for the same period in 2005. This decrease was primarily due
to lower revenues from License fees and products and revenues from customer
services and technical support.
Operating expenses.
Research and development. Research and development expenses decreased 23% to
$272,749 for the six months ended June 30, 2006 from $355,528 for the same
period in 2005. This decrease was primarily due to a $70,159 decrease in payroll
and related expenses. Research and development expenses, stated as a percentage
of revenues, increased to 27% for the six months ended June 30, 2006 from 22%
for the same period in 2005.
General and administrative.
General and administrative expenses increased 5% to $613,406 for the six months
ended June 30, 2006 from $584,584 for the same period in 2005. This increase was
primarily due to a $88,837 increase in payroll and related expenses and a
$32,521 increase in consulting expenses, partially offset by a $75,753 decrease
in marketing expenses and a $36,012 decrease in rent expenses. General and
administrative expenses, stated as a percentage of revenues, increased to 60%
for the six months ended June 30, 2006 from 36% for the same period in 2005.
-4-
Financing expenses.
Financing expenses. Our financing expenses increased 1,258% to $251,518 for the
six months ended June 30, 2006 from $18,521 for the same period in 2005. The
increase primarily consisted of $222,104 financing fee paid by issuance of
common shares.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity since our inception have been private sales
of equity securities, stockholder loans, borrowings from banks and to a lesser
extent, cash from operations. We had cash and cash equivalents of $68,536 as of
June 30, 2006 and $573 as of December 31, 2005. Our initial capital came from an
aggregate investment of $1.3 million from Cap Ventures Ltd. To date, we have
raised an aggregate of $5,300,000 from placements of our equity securities
(including the investment by Cap Ventures and a $4,000,000 investment by Syntek
Capital AG and DEP Technology Holdings Ltd.). We have also borrowed an aggregate
of $1,800,000 from Syntek Capital AG and DEP Technology Holdings Ltd. and as of
the date of this prospectus we have no funds available to us under bank lines of
credit. We have a credit line agreement with Miretzky Holdings Limited. As of
June 30, 2006, $433,349 is outstanding under the credit line. The credit line is
for $500,000. The credit line has no termination date and does not provide for
interest payments.
Other than the credit line agreement with Miretzky, we do not have any
commitments from any of our affiliates or current stockholders, to provide
additional sources of capital to us. We do have an equity line for $10.0 million
with Dutchess Private Equity Fund although we have not yet made any draws on
such line. We will need approximately $1.0 million for the next twelve months
for our operating costs which mainly include salaries, office rent and network
connectivity, which total approximately $60,000 per month, and for working
capital. We intend to finance this amount from our ongoing sales and through the
sale of either our debt or equity securities or a combination thereof, to
affiliates, current stockholders and/or new investors. Currently we do not
believe that our future capital requirements for equipment and facilities will
be material.
Operating activities.
For the six months ended June 30, 2006 we used $34,974 of cash in operating
activities primarily due to our net loss of $224,713 and a $374,141 increase in
accounts receivables, partially offset by $222,104 financing fee paid by
issuance of common shares and a $136,963 increase in deferred revenues. In the
same period in 2005 we used $175,009 of cash in operating activities primarily
due to a $669,890 decrease in deferred revenues, partially offset by our net
earnings of $307,776 and a $140,504 increase in other payables and accrued
liabilities.
Investing and financing activities.
Property and equipment consist primarily of computers, software, and office
equipment. For the six months ended June 30, 2006, net cash used in investing
activities was $28,829 consisting of an investment in equipment. In the same
period in 2005 net cash used in investing activities was $32,744 consisting of
an investment in equipment. For the six months ended June 30, 2006, net cash
provided by financing activities was $131,766 primarily due to a $142,084
increase in advances from shareholder, partially offset by a $10,318 decrease in
bank indebtedness. In the same period in 2005, net cash provided by financing
activities was $83,380 due to a $75,192 increase in advances from shareholder
and a $23,200 increase in notes payables, partially offset by a $15,012 decrease
in bank indebtedness.
-5-
DIVIDENDS
We have not paid any dividends on our common stock. We currently intend to
retain any earnings for use in our business, and therefore do not anticipate
paying cash dividends in the foreseeable future.
OFF BALANCE SHEET ARRANGEMENTS
None.
Item 3. Controls and Procedures
With the participation of management, our Chief Executive Officer and Chief
Financial Officer evaluated our disclosure controls and procedures within the 90
days preceding the filing date of this quarterly report. Based upon this
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are effective in ensuring that
material information required to be disclosed is included in the reports that we
file with the Securities and Exchange Commission.
There were no significant changes in our internal control over financial
reporting to the knowledge of our management, or in other factors that have
materially affected or are reasonably likely to materially affect these internal
controls over financial reporting subsequent to the evaluation date.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Small Business Issuer Purchases of Equity
Securities
In April 2006, we issued 2,818,182 common shares to a consultant pursuant to a
technology consulting agreement we entered into with him.
Item 3. Default upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
-6-
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Amended and restated Certificate of Incorporation**
3.2 Bylaws**
4.1 Purchase and registration rights agreement and schedule of details**
10.1 Amended and Restated Employment Agreement with Mordechai Broudo**
10.2 Amendment to Amended and Restated Employment Agreement with Mordechai
Broudo**
10.3 Amended and Restated Employment Agreement with Shay Ben-Asulin**
10.4 Amendment to Amended and Restated Employment Agreement with Shay
Ben-Asulin**
10.5 Employment Agreement, Gabriel Kabazo**
10.6 Confidentiality rider to Gabriel Kabazo Employment Agreement**
10.7 Employment Agreement Asaf Lewin**
10.8 2003 International Share Option Plan**
10.9 Form of Option Agreement, 2003 International Share Option Plan**
10.10 2001 International Share Option Plan**
10.11 Form of Option Agreement, 2001 International Share Option Plan**
10.12 2003 Israel Stock Option Plan**
10.13 Form of Option Agreement, 2003 Israel Stock Option Plan**
10.14 2001 Israel Share Option Plan**
10.15 Form of Option Agreement, 2001 Israel Share Option Plan** 10.16 Investors'
Rights Agreement dated January 11, 2001**
10.17 Stockholders Agreement**
10.18 Agreement for Supply of Software and Related Services dated October 14,
2002, by and between i Touch plc and m-Wise, Inc.*
10.19 Purchase agreement between m-Wise, Inc. and Comtrend Corporation dated May
22, 2002**
10.20 Amended and Restated Consulting agreement between Hilltek Investments
Limited and m-Wise dated November 13, 2003**
10.21 Consulting agreement between Hilltek Investments Limited and m-Wise dated
June 24, 2003, subsequently amended see exhibit 10.20 above**
10.22 Amendment to Investors' Rights Agreement dated October 2, 2003**
10.23 Appendices to 2003 Israel Stock Option Plan**
10.24 Appendices to 2001 Israel Share Option Plan**
10.25 Credit Line Agreement between m-Wise, Inc. and Miretzky Holdings, Limited
dated January 25, 2004**
10.26 Termination and Release Agreement by and among the Company and Syntek
capital AG. (Incorporated by reference to Exhibit 10.1 of the current
report on Form 8-K filed on January 13, 2006)
10.27 Termination and Release Agreement dated February 2, 2006 by and among the
Company and DEP Technology Holdings Ltd (Incorporated by reference to
Exhibit 10.1 of the current report on Form 8-K filed on February 7, 2006)
21. List of Subsidiaries** 31.1 Rule 13a-14(a)/15d-14(a) Certification.*
-7-
31.2 Rule 13a-14(a)/15d-14(a) Certification.*
32.1 Certification by the Chairman Relating to a Periodic Report Containing
Financial Statements. ***
32.2 Certification by the Chief Financial Officer Relating to a Periodic Report
Containing Financial Statements. ***
- -------------
* Filed herewith.
** Incorporated by reference from the registration statement filed with the
Securities and Exchange Commission Registration Statement on Form SB-2 (Reg. No.
333-106160).
*** The Exhibit attached to this Form 10-QSB shall not be deemed "filed" for
purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), or otherwise subject to liability under that section, nor shall
it be deemed incorporated by reference in any filing under the Securities Act of
1933, as amended, or the Exchange Act, except as expressly set forth by specific
reference in such filing.
(b) Reports on Form 8-K
The Company filed a current report on Form 8-K on January 13, 2006 pursuant to
entering into a Termination and Release Agreement with Syntek capital Ag.The
Company issued Syntek an aggregate of 5,561,994 shares of its common stock and
warrants to purchase 5,263,158 shares shares of its Common stock at $.19 per
shares for a period of three years.
The Company filed a current report on Form 8-K on February 7, 2006
disclosing that the Company entered into a Termination and Release Agreement
with DEP Technology Holdings Ltd., The Company issued DEP an aggregate of
5,561,994 shares of its common stock and warrants to purchase 5,263,158 shares
of its Common stock at $.19 per shares for a period of three years.
-8-
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
m-WISE, INC.
(Registrant)
Date: August 14, 2006 /s/ Shay Ben-Asulin
------------------------
Name: Shay Ben-Asulin
Title: Chairman
-9-