U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2006
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________________ to _________________
COMMISSION FILE NUMBER: 33-22175
SAFETEK INTERNATIONAL, INC.
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(Exact name of small business issuer as specified in its charter)
DELAWARE 75-2226896
--------------------------------- -----------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No)
or incorporation or organization)
23 AMINADAV ST. TEL AVIV, ISRAEL 67898
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
972-3-561-3468
---------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. YES |X| NO |_|
The number of shares outstanding of the Registrant's Common Stock, $0.0001 par
value, as of the close of business on August 9, 2006 was 64,138,923
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
SAFETEK INTERNATIONAL, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
FORM 10-QSB
QUARTERLY PERIOD ENDED JUNE 30, 2006
INDEX
Part I. FINANCIAL INFORMATION Page
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheet (Unaudited) at June 30, 2006. 3
Consolidated Statements of Operations (Unaudited) for the six
and the three months ended June 30, 2006 and 2005 and for the
Period from April 16, 2005 Through June 30, 2006 (Development stage). 4
Consolidated Statements of Cash Flows (Unaudited) for the six
months ended June 30, 2006 and 2005 and for the Period from
April 16, 2005 Through June 30, 2006 (Development stage). 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis or Plan of Operation 15
Item 3. Controls and Procedures 19
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 19
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6: Exhibits 20
SIGNATURES
2
SAFETEK INTERNATIONAL INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
JUNE 30,
2006
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash & Cash Equivalents $ 119,912
Other Receivable 35,183
Prepaid Expenses 51,140
Biological Materials Supply Inventory 105,068
-----------
TOTAL CURRENT ASSETS 311,303
AVAILABLE FOR SALE SECURITIES 5,691
PROPERTY AND EQUIPMENT, NET 15,659
DEBT FINANCING COST, NET OF AMORTIZATION 78,923
OTHER 4,921
-----------
TOTAL ASSETS $ 416,497
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts Payable $ 227,530
Accrued Expenses 96,351
Accrued Payroll and Related Expenses 82,985
Loans Payable 69,647
Convertible Debentures, Net of Discount of $405,175 74,133
Warrants, Net of Discount of $32,638 5,155
Derivative Liability - Convertible Debentures and
Warrants 1,249,832
Derivative Liability - Warrants, Current Portion 241,781
-----------
TOTAL CURRENT LIABILITIES 2,047,414
OTHER
Derivative Liability - Warrants 315,429
Redeemable Convertible Preferred Shares
(4,648 shares, par value $ .0001, redeemable
prior to February 21, 2002 at $50 per share)
50,000,000 shares authorized 232,400
-----------
TOTAL LIABILITIES 2,595,243
-----------
STOCKHOLDERS' DEFICIT:
Common Stock, $.0001 Par Value Authorized
500,000,000 Shares, Issued and Outstanding
60,138,923 6,014
Additional Paid in Capital 4,051,614
Accumulated Deficit Through April 15, 2005* (4,250,580)
Deficit Accumulated During the Development Stage (1,985,794)
-----------
TOTAL STOCKHOLDERS' DEFICIT (2,178,746)
-----------
TOTAL LIABILITIES & STOCKHOLDERS' DEFICIT $ 416,497
===========
*COMMENCEMENT OF DEVELOPMENT STAGE
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
3
SAFETEK INTERNATIONAL, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED THREE MONTHS ENDED
CUMULATIVE
FOR THE
PERIOD FROM
APRIL 16,
2005*
JUNE 30, JUNE 30, JUNE 30, JUNE 30, THROUGH
2006 2005** 2006 2005** JUNE 30, 2006
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(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
OPERATING EXPENSES
Payroll and Related Expenses $ 236,187 15,303 $ 124,431 15,303 $ 380,786
Office & General Expenses 70,310 17,725 41,593 13,636 141,593
Professional Fees 107,253 58,904 45,639 47,083 400,237
Business Development Costs 130,493 -- 37,070 -- 170,817
------------ ------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 544,243 91,932 248,733 76,021 1,093,433
LOSS FROM OPERATIONS 544,243 91,932 248,733 76,022 1,093,433
OTHER INCOME (EXPENSES)
Income from Cancellation of Indebtedness -- 181,311 -- 181,311 212,432
Gain from Sale of Securities 2,263 -- -- -- 11,265
Interest Income 1,404 55 212 55 3,020
Exchange Rate Loss 115 -- 1,853 -- (11,447)
Interest Expenses Convertible Debentures (12,329) -- (7,397) -- (14,630)
Amortization of Convertible Debentures and
Warrant Discount (65,945) -- (37,715) -- (75,762)
Derivative Liability Income (Expenses) 1,543,250 -- 2,101,029 -- (1,017,238)
------------ ------------ ------------ ------------ ------------
TOTAL OTHER INCOME (EXPENSES) 1,468,758 181,366 2,057,982 181,366 (892,360)
------------ ------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 924,515 89,434 $ 1,809,249 105,345 $ (1,985,793)
============================= ============================= ============
NET INCOME(LOSS) PER SHARE
Basic Per Common Share $ 0.015 0.002 $ 0.030 0.003 $ (0.035)
Diluted Per Common Share (0.007) -- (0.003) -- --
WEIGHTED AVERAGE NUMBER OF
Shares Outstanding Basic 60,138,923 42,252,705 60,138,923 51,996,370 56,945,815
Shares Outstanding Diluted 79,699,006 -- 76,920,696 -- --
*COMMENCEMENT OF DEVELOPMENT STAGE
** RESTATED
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
4
SAFETEK INTERNATIONAL, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED
CUMULATIVE
FOR THE
PERIOD FROM
APRIL 16,
JUNE 30, JUNE 30, 2005* THROUGH
2006 2005** JUNE 30, 2006
----------- ----------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) for the period $ 924,515 $ 89,434 $(1,985,793)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH
CASH USED IN OPERATING ACTIVITIES:
Depreciation 3,431 -- 4,659
Stock Issued for Services -- 179 179
Income from Cancellation of Indebtedness -- (181,311) (212,432)
Non Cash Interest Expenses -- -- 5,001
Derivative Liability Expenses (1,543,250) -- 1,017,066
Amortization of Debentures and Warrants Discount 65,945 -- 75,762
Other (436) -- (4,693)
CHANGES IN ASSETS AND LIABILITIES
Sale of Trading Securities 122,162 -- 4,257
(Increase) in Prepaid Expenses (26,885) (51,204) (51,139)
(Increase)in Other Receivable (19,088) -- (35,182)
Decrease in Other Current Assets 54,906 54,906
(Increase) in Supplies Inventory (105,068) (105,068)
Increase in Accounts Payable 137,609 117,292 173,951
(Decrease) Increase in Accrued Expenses (34,718) 91,349
Increase in Accrued Payroll and Related Expenses 32,724 -- 82,987
----------- ----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (388,153) (25,610) (884,190)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Property and Equipment (3,842) -- (20,318)
Advance payment to Matrix -- -- (25,000)
Loan to Serapis -- -- (29,906)
Other Long Term Assets 59 -- (4,684)
Available-For-Sale Securities -- -- (5,490)
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (3,783) (85,398)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceed from Issuance of Shares
and Warrants, Net of Issuance Expenses -- 162,369 685,001
Proceeds from Issuance of Debentures, Net of
Issuance costs 217,500 -- 407,500
Payment on Debentures -- (15,827) --
Payments on Loan Payable -- (14,732) (3,001)
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 217,500 131,810 1,089,500
----------- ----------- -----------
(DECREASE) INCREASE IN CASH AND CASH EQUVALENTS (174,436) 106,200 119,912
BALANCE OF CASH AND CASH EQVIVALENTS
AT THE BEGINNING OF PERIOD 294,348 -- --
----------- ----------- -----------
BALANCE OF CASH AND CASH EQVIVALENTS
AT THE END OF PERIOD $ 119,912 $ 106,200 $ 119,912
=========== =========== ===========
CASH PAID DURING THE PERIOD FOR:
INTEREST $ 12,135 $ 4,902 $ 12,135
=========== =========== ===========
TAXES $ -- $ -- $ --
=========== =========== ===========
*COMMENCEMENT OF DEVELOPMENT STAGE
** RESTATED
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
5
SAFETEK INTERNATIONAL, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
NOTE 1: ORGANIZATION AND DESCRIPTION OF BUSINESS
Safetek International, Inc. (the "Company") was incorporated in April 1988
under the name Theoretics, Inc. The Company reorganized in May 2001 for
the purpose of providing embryonic companies with good concepts and
promising patented ideas. During the years 2002-2004 the Company did not
have any business activity.
As of April 15, 2005, Dr. Goldstein was appointed as the Company's
Chairman, Chief Executive Officer and Secretary, and since then the
Company has been focusing on screening new technologies and other business
opportunities in the life sciences and health care fields. On May 17,
2005, the Company established an Israeli wholly owned subsidiary under the
laws of the State of Israel, called "Oriens Life Sciences Ltd. (the
"Subsidiary") , to serve as a platform for the Company to screen the
Israeli life sciences and health care industry and identify, analyze, and
acquire or invest in technologies in this field.
During the fiscal year ended December 31, 2005, the Company signed 4 term
sheets to purchase technologies in the life science field. On January 4,
2006, the Company closed on a transaction contemplated by the Exclusive
Patent and Know How License Option Agreement dated December 28, 2005 with
Matrix Pharma Inc., a Delaware corporation ("Matrix") to purchase an
exclusive, world-wide license in all of Matrix's intellectual property
rights in its Thrombin inhibition compounds. On March 30, 2006, the
Company and Matrix signed an amendment, extending the exercise date of the
option to May 15, 2006.
On March 27, 2006 the Company exercised its right that was given to it in
a Letter Agreement dated December 1, 2005 to purchase certain biological
materials from Serapis Biotech Ltd ( "Serapis") for a purchase price of
$100,000 plus value added tax (VAT). The purchase price was paid by the
forgiveness of $29,906 debt owed to the Company, and the balance to be
paid in 12 equal monthly payments, with the first payment on the signing
date. Other than this purchase of equipment, after conducting its due
diligence and reconsidering its business focus, the company decided not to
proceed with any of the transactions contemplated by any of the 4 term
sheets signed during 2005. The Company has also decided not to exercise
the option agreement with Matrix.
On March 23, 2006, the Company entered into a term sheet with Resdevco
Ltd, a company incorporated under the laws of Israel ("Resdevco"). For an
exclusive, worldwide license in Resdevco's Antioxidant salicylate
compounds. After conducting a due diligence process, the company found
that the probability and the potential uses of those compounds are not as
expected and subsequently decided not to proceed with the transaction
contemplated by the term sheet.
On April 25, 2006, the Company entered into a term sheet with Interactive
Health Pharmacy Services, Inc. ("IHPS"). The term sheet sets forth the
principal terms of a proposed agreement between the Company and IHPS,
pursuant to which the Company will acquire IHPS at the closing, after the
parties agree to a mutually acceptable definitive acquisition agreement.
In consideration therefore at the closing of the acquisition, the Company
will issue to IHPS shares of common stock in an amount equal to 50.01% of
the issued and outstanding shares of common stock. In addition, at the
closing of the acquisition the Company is obligated to have no less than
$1,500,000 in cash and working capital. IHPS is engaged in preparing and
distributing HIV and AIDS drugs in the New York area.
The Company is currently investing its efforts in negotiating a definitive
agreement with IHPS and raising the necessary capital to consummate the
transaction.
As described in detail in note 10, the Company, issued debentures to fund
its ongoing operations. On May 16, 2006 the Company issued $250,000 of
such notes after it filed a registration statement under the Securities
Act of 1933 to register the shares underlying such notes. On July 10,
2006, the Company filed a prospectus under Rule 424(b) (3) of the
Securities Act of 1933 and issued an additional $250,000 of such notes.
On June 21, 2006, the Company received a separate notice of resignation
from each of the following directors: Dr. Shay Goldstein, Jean-Pierre
Elisha Martinez, and Gilad Yoeli (collectively, the "Resigning
Directors"). Dr. Goldstein also resigned as the Chief Medical Officer of
the Company. Pursuant to such notices of resignation, the Resigning
Directors resigned from their positions with the Company and its
wholly-owned subsidiary, Oriens Life Sciences (Israel) Ltd., effective as
of June 21, 2006.
6
SAFETEK INTERNATIONAL, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006 (UNAUDITED)
On June 21, 2006, the Board appointed Amnon Presler, the Chief Executive
Officer of the Company, as a director of the Company.
As of June 30, 2006, the Company has an accumulated deficit of $6,236,374.
Our prospects must therefore be evaluated in light of the problems,
expenses, delays and complications associated with the financial situation
of the Company. The Company is in the process of raising funds to finance
its activities, including without limitation, the completion of the above
described prospective transaction with IHPS. The Company requires funds in
order to execute the transaction with IHPS and to finance its current
activities.
NOTE 2: GOING CONCERN
As of June 30, 2006, we have cash on hand of $119,912 which we received
from the issuance of the Notes described below. This amount is inadequate
for us to effectuate our planned activities during the next 12 months.
Accordingly, we may be unable to continue operations in the future as a
going concern. Our plans to deal with this uncertainty include raising
additional capital or entering into a strategic arrangement with a third
party. There can be no assurance that our plans can be realized. There can
be no assurance that we will be able to obtain additional financing if and
when needed or that, if available, financing will be on acceptable terms.
Additional equity financings may be dilutive to holders of our common
stock and debt financing, if available, and may involve significant
payment obligations and covenants that restrict how we operate our
business.
The consolidated financial statements have been prepared assuming that the
Company will continue as a going concern. The Company's auditors on their
Report of independent registered public accounting firm for the financial
statement for the year ended December 31, 2005, raised substantial doubt
about the Company's ability to continue as a going concern.
Certain conditions raise substantial doubt about the Company's ability to
continue as a going concern beyond the next twelve (12) month period. As
of June 30, 2006, the Company had stockholders' deficit of $2,178,746 and
an accumulated deficit of $6,236,374. Our balance sheet as of June 30,
2006 reflects total liabilities of $2,595,243. The Company needs to obtain
additional financing to fund payment of its obligations and to provide
working capital for operations.
NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements of Safetek
International, Inc. and its subsidiary have been prepared in accordance
with accounting principles generally accepted in the United States of
America for interim financial information and with instructions for Form
10-QSB and Item 310 of Regulation S-B. Accordingly, they do not include
all the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. Results
of operations for the six months ended June 30, 2006 are not necessarily
indicative of the results that may be expected for the fiscal year ended
December 31, 2006. The accompanying consolidated financial statements
should be read in conjunction with the consolidated financial statements
in the Company's annual report on Form 10-KSB for the fiscal year ended
December 31, 2005 and notes thereto filed with the Securities and Exchange
Commission in April 2006.
USE OF ESTIMATES
The preparation of these financial statements requires our management to
make estimates, judgments and assumptions that affect the reported amounts
of assets, liabilities, revenues and expenses. We continually evaluate the
accounting policies and estimates we use to prepare the consolidated
financial statements. We base our estimates on historical experiences and
assumptions believed to be reasonable under current facts and
circumstances. Actual amounts and results could differ from these
estimates made by management. We do not participate in, nor have we
created, any off-balance sheet special purpose entities or other
off-balance sheet financing. In addition, we have not and do not
anticipate entering into any derivative financial instruments for
speculative purposes or use derivative financial instruments primarily for
managing our exposure to changes in interest rates. Significant estimates
include the useful life of property and equipment and the fair value of
derivative liabilities.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's cash and cash equivalents, accounts
payable and accrued expenses and loans payable approximate their estimated
fair values due to the short-term maturities of those financial
instruments. The carrying amount of the derivative liability is based on
its fair value. The carrying amount of the convertible notes approximate
the estimated fair value for these financial instruments as management
believes that such convertible notes constitute substantially all of the
Company's debt and the interest payable on the convertible notes
approximates the Company's incremental borrowing rate.
7
SAFETEK INTERNATIONAL, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
DEVELOPMENT STAGE COMPANY
In accordance with Financial Accounting Standards Board (FASB) No. 7, the
Company is considered a development stage company, beginning on April 16,
2005, the date it commenced with its new business activity.
RECLASSIFICATION
The Company has reclassified certain amounts and descriptions to enhance
financial statement presentation.
ADJUSTMENTS/RESTATEMENT
As part of the quarterly report for the nine months ended September 30,
2005, the financial statements for the six and the three months ended June
30, 2005, were adjusted to reflect the proper accounting treatment
regarding subordinated convertible redeemable debentures that were issued
in the years 2001 and 2002. To reclassify amount of $104,300 that was
recorded as income from cancellation of indebtedness during the six months
ended June 30 2005 and $91,700 for the three months ended June 30, 2005,
to additional paid in capital, to reflect the conversions of the
debentures into shares and to present $16,993 interest waived by the
debentures holders.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 2006, the FASB issued FAS 155, accounting for certain Hybrid
Financial Instruments, an amendment of FASB statements No.133 and 140.
This statement permits fair value measurement for any hybrid financial
instrument that contains an embedded derivative that otherwise would
require bifurcation. This statement is effective for all financial
instruments acquired or issued after the beginning of an entity's first
fiscal year that begins after September 15, 2006. Earlier adoption is
permitted as of the beginning of an entity's fiscal year, provided that no
interim period financial statements have been issued for the financial
year. In the Company's opinion, implementation of this standard is not
expected to have a material effect on its financial statements in future
periods.
In March 2006 the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Reporting No. 156 ("FAS 156"). This Statement
amends FASB Statement No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, with respect to the
accounting for separately recognized servicing assets and servicing
liabilities, and is effective for financial periods beginning after
September 15, 2006. Since the Company does not currently engage in
transfers of financial fixed assets , the company does not anticipate that
the adoption of this statement will have a material impact on its
financial statements.
In July 2006, the FASB issued FASB Interpretation (FIN) No. 48 Accounting
for Uncertainty in Income Taxes an interpretation of FASB Statement 109.
FIN 48 prescribes a comprehensive model for recognizing, measuring,
presenting and disclosing in the financial statements tax positions taken
or expected to be taken on a tax return, including a decision whether to
file or not to file in a particular jurisdiction. FIN 48 is effective for
fiscal years beginning after December 15, 2006. If there are changes in
net assets as a result of application of FIN 48 these will be accounted
for as an adjustment to retained earnings. In the Company's opinion,
implementation of this standard is not expected to have a material effect
on its financial statements in future periods.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of
the Company and its wholly owned subsidiary. All material inter-company
balances and transactions have been eliminated in consolidation.
FUNCTIONAL CURRENCY
The currency of the primary economic environment in which the operations
of the Company and its subsidiary are conducted is the US dollar. A
significant part of the Company's capital expenditures and most of its
financing is in U.S. dollars. Most of the Company's expenses incurred are
in U.S. dollars and all intercompany balances are denominated in U.S.
dollars. In addition, a substantial portion of the subsidiary's expenses
are incurred in U.S.dollars. Thus, the functional currency of the Company
and its subsidiary is the US dollar.
8
SAFETEK INTERNATIONAL, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
Transactions and balances originally denominated in dollars are presented
at their original amounts. Balances in foreign currencies are translated
into dollars using historical and current exchange rates for non-monetary
and monetary balances, respectively. For foreign transactions and other
items reflected in the statements of operations, the following exchange
rates are used: (1) for transactions - exchange rates at transaction dates
or average rates and (2) for other items (derived from non- monetary
balance sheet items such as depreciation) - historical exchange rates. The
resulting transaction gains or losses are carried to financial income or
expenses, as appropriate.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments, which include
short-term bank deposits (up to three months from date of deposit) that
are not restricted as to withdrawal or use, to be cash equivalents.
OTHER RECEIVABLE
Other receivable consist of refundable value added tax (VAT) payments that
the Company paid during the year.
INVESTMENTS IN SECURITIES
The Company and its subsidiary account for securities in accordance with
Statement of Financial Accounting Standard No. 115, "Accounting for
Certain Investments in Debt and Equity Securities"
Securities that are bought and held principally for the purpose of selling
them in the near term shall be classified as trading securities.
Investments not classified as trading securities shall be classified as
available-for-sale securities.
Unrealized holding gains and losses for trading securities shall be
included in earnings. Unrealized holding gains and losses for
available-for-sale securities shall be excluded from earnings and reported
in other comprehensive income until realized except in hedge transactions.
PREPAID EXPENSES
Prepaid expenses consist of insurance payments that are amortized over the
service and contract period.
BIOLOGICAL MATERIALS SUPPLY INVENTORY
Disposal biological materials are expensed as used and the remaining
balance is stated at cost.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated by the
straight-line method over the estimated useful lives of the assets (2-7
years).
OTHER LONG TERM ASSETS
Other long term assets include deposits on leased property that will be
applied toward the last three months of the three year leasing period.
DEBT FINANCING COSTS
Consist of costs that were incurred upon issuance of the convertible
debentures on November 18, 2005, and May 17, 2006, the balance is
amortized on a straight line basis over the three years debentures period.
DEBENTURES
The Company accounts for debentures that were issued in accordance with
APB 14, SFAS 133 and EITF 00-19. Per APB 14, when warrants are detachable
from the debt instrument, and the warrants are used as security for the
debt instrument, the proceeds from the sale of the debt instrument and the
detachable warrants should be allocated between the warrants and the debt
instrument.
9
SAFETEK INTERNATIONAL, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
Paragraph 12 of Statement of Financial Accounting Standard No. 133
provides that in the case of contracts that do not in their entirety meet
the definition of a derivative instrument such as bonds, insurance
policies, and leases, any embedded derivative instruments shall be
separated from the host contract and accounted for as a derivative
instrument.
Paragraph 11(a) of Statement of Financial Accounting Standard No. 133
provides that contracts issued or held by a reporting entity that are both
(1) indexed to its own stock and (2) classified in stockholders' equity in
its statement of financial position, shall not be considered derivative
instruments for purposes of this statement.
EITF Issue No. 00-19, "Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company's Own Stock," provides
guidance in determining whether an embedded derivative which is indexed to
its own stock would be classified in stockholders' equity in accordance
with paragraph 11(a) of Statement of Financial Accounting Standard No. 133
or if it was freestanding. EITF Issue No. 00-19 excludes from its
classification requirements "conventional instruments".
Such instruments are defined in EITF 05-2 as: instruments that provide the
holder with an option to convert into a fixed number of shares (or
equivalent amount of cash at the discretion of the issuer) for which the
ability to exercise the option is based on the passage of time or a
contingent event should be considered "conventional" for purposes of
applying Issue 00-19. Instruments that contain "standard" antidilution
provisions would not preclude a conclusion that the instrument is
convertible into a fixed number of shares. Standard antidilution
provisions are those that result in adjustments to the conversion ratio in
the event of an equity restructuring transaction (as defined in the
glossary of Statement 123(R) (2) that are designed to maintain the value
of the conversion option.
WARRANTS
The warrants that the Company issued are presented at their fair value and
classified as liabilities, according to paragraphs 20 and 24 of EITF 00-19
"Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock".
As a result of the terms of the debentures that the Company issued and
since theoretically the debentures can be converted into a number of
shares that will exceed the company's authorized shares if the Company's
market price falls below 0.000569, (as of August 10, 2006 as reported on
http://quates.nasdaq.com, the average bid and ask price was 0.01325), all
convertible instruments of the Company including warrants (but excluding
employee stock options) are accounted for as derivative liabilities.
INCOME TAX
The Company and its subsidiary account for income taxes in accordance with
Statement of Financial Accounting Standard No. 109, "Accounting for Income
Taxes". This Statement requires the use of the liability method of
accounting for income taxes, whereby deferred tax asset and liability
account balances are determined based on the differences between financial
reporting and tax bases of assets and liabilities and are measured using
the enacted tax rates and laws that will be in effect when the differences
are expected to reverse. The Company and its subsidiary provide a
valuation allowance, if necessary, to reduce deferred tax assets to their
estimated realizable value.
BASIC AND DILUTED NET EARNINGS (LOSS) PER SHARE
Basic and diluted net earnings and loss per common share are presented in
accordance with FAS No. 128 "Earning per share" ("FAS 128"), for all
periods presented. The computation of diluted EPS shall not assume
conversion, exercise, or contingent issuance of securities that would have
an antidilutive effect on earnings per share Outstanding warrants have
been excluded from the calculation of the diluted loss per share because
such securities have an anti-dilutive effect for all periods presented.
The total number of shares of common stock outstanding excluded 14,566,665
warrants. The diluted net earning per share includes 22,222,222, shares to
be exercised into the Company's Common stock by converting debentures that
were issued 6,666,667 shares upon a default event (calculated according
the market price as of June 30 2006). 8,348,531 options, which 3,561,528
were cancelled were taken into consideration during the period they were
outstanding.
10
SAFETEK INTERNATIONAL, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
STOCK BASED COMPENSATION
In December 2004, the Financial Accounting Standards Board ("FASB") issued
the revised Statement of Financial Accounting Standards ("FAS") No. 123,
"Share-Based Payment" (FAS 123R), which addresses the accounting for
share- based payment transactions in which the Company obtains employee
services in exchange for (a) equity instruments of the Company or (b)
liabilities that are based on the fair value of the Company's equity
instruments or that may be settled by the issuance of such equity
instruments. The Statement will be effective as of the beginning of the
first interim or annual reporting period that begins after December 15,
2005, for small business issuers. The Company decided to adopt FAS 123R
and to reflect the fair value of the options granted to employees during
the year 2005.
NOTE 4: BIOLOGICAL MATERIALS SUPPLY INVENTORY
On March 27, 2006 the Company exercised its right that was given to it in
a Letter Agreement dated December 1, 2005 to purchase certain biological
materials from Serapis Biotech Ltd ( "Serapis") for a purchase price of
$100,000 plus value added tax (VAT). The purchase price was paid by the
forgiveness of $29,906 debt owed to the Company, and 12 equal monthly
payments, with the first payment on the signing date. With these
biological materials, the Company intended to develop a technology that
will assist and accelerate the identification of new generation of lead
compounds stimulating the activity of muscarinic receptors for the
development of new therapies for variety of diseases such as Alzheimer's
disease, glaucoma, and over active bladder.
The Company hasn't yet started the project and has only paid the first
installment. The Company is reconsidering whether to invest in the
project, or to negotiate with Serapis on canceling the transaction.
NOTE 5: PROPERTY AND EQUIPMENT
Property and equipment consist of the following at June 30, 2006:
USEFUL LIFE
-----------
Computer Equipment & Hardware 3 $ 6,679
Office Furniture and Equipment 7 4,715
Leasehold Improvement 2 2,854
Website 2 4,410
Communication 6.7 1,660
--------
TOTAL 20,318
ACCUMULATED DEPRECIATION (4,659)
--------
PROPERTY AND EQUIPMENT, NET $ 15,659
========
Depreciation expense totaled $3,431 and 1,694 in the six and the three months
ended June 30, 2006, respectively.
NOTE 6: ACCOUNTS PAYABLE
Consist of $37,397 of old debt from the Company's business activity from
the years 2001- 2003, $54,500 owed Howden Insurance Broker for D&O
insurance and $64,242 owed to Serapis for biological materials that the
Company purchased.
NOTE 7: ACCRUED EXPENSES
Consist of accrued auditing fees,, payments to advisors, legal fees and
office and general expenses.
NOTE 8: LOANS PAYABLE
The Company has a total of $69,647 of loans payable as of June 30, 2006
which is due on demand and is non-interest bearing.
NOTE 9: REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Company's redeemable convertible preferred stock were issued prior to
2001. The shares may be converted to common shares at a rate of one-half
common share for each preferred stock and were redeemable on February 21,
2002 at $50 per share. The shares are presented at their obligation amount
of $232,400 associated with the redemption feature.
11
SAFETEK INTERNATIONAL, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
NOTE 10: DEBENTURES AND EMBEDDED DERIVATIVE INSTRUMENTS (2005)
1. On November 18, 2005 the Company signed an agreement with 4 investors
(together, the "Investors") to issue an aggregate of $750,000 as
convertible debentures (the "Notes") due three years after issuance. The
issuance is to be made in three installments, the first, in the amount of
$250,000 was received upon signing the definitive investment agreements,
the second in the amount of $250,000 was received upon the filing of a
registration statement covering the shares underlying the Notes and the
warrants referred to below. On July 10, 2006, the Company filed a
prospectus under Rule 424(b) (3) of the Securities Act of 1933 and issued
an additional $250,000 of such Notes. The Notes bear interest at the rate
of 8% per annum payable quarterly in cash. Interest on delayed payments
shall be 15% annually. No interest shall be due and payable for any month
in which the trading price is greater than $0.1875 for each trading day of
the month.
The Notes can be immediately convertible into shares of the Company's
common stock. The conversion price will be equal to the lesser of: (i)
$0.15 and (ii) the average of the lowest 3 intra-day trading prices during
the 20 trading days immediately prior to the conversion date discounted by
50%.
In addition, the Company issued to the Investors 1,000,000 warrants with
an exercise price of $0.30.
According to the agreement, the Company was obligated to file, on or prior
to thirty days from November 18, 2005, a registration statement, to
register the shares of common stock underlying the Notes and warrants
issued to the investors and to receive the effectiveness of the
registration statement. The Company has been delayed in its obligation and
is currently in default. As a result, the Company will have to pay
penalties at a rate of 2% of the outstanding amount of debentures for each
month of delay. The penalties can be paid in cash or at the Company's
option, in shares of common stock priced at the conversion price (as
defined in the Notes) on such payment date. The Company notified the
debentures holders of the delay in filing.
At a default event the holders of a majority of the aggregate principal
amount of the outstanding Notes issued have the option to ask for
immediate due and payable and the Company shall pay to the holders, an
amount equal to the greater of (i) 130% times the sum of the outstanding
principal amount, plus accrued and unpaid interest on the unpaid principal
amount, plus default interest, if any, and/or any other amounts owed to
the holders under the Registration Rights Agreement or (ii) the highest
number of shares of common stock issuable upon conversion of or otherwise
pursuant to such default sum in accordance with the trading day
immediately preceding the mandatory prepayment date as the "Conversion
Date" for purposes of determining the lowest applicable Conversion Price,
unless the Default Event arises as a result of a breach in respect of a
specific Conversion Date in which case such Conversion Date shall be the
Conversion Date), multiplied by (b) the highest Closing Price for the
Common Stock during the period beginning on the date of first occurrence
of the Event of Default and ending one day prior to the Mandatory
Prepayment Date. Because of the delay in filing the registration statement
the Company is also in a delay in declaration of effectiveness by the
Securities and Exchange Commission. The Company received effectiveness of
the registration statement on July 10, 2006.
2. The Company applied the provisions of APB 14 and allocated the proceeds to
the detachable warrants and the convertible notes based on their
respective fair values. The Company further evaluated the convertible
notes to determine if they contain derivatives that warrant bifurcation.
The Company concluded that in accordance with EITF 05-2 the convertible
debentures do not meet the definition of conventional convertible debt
instruments for purposes of evaluating the existence of embedded
derivatives under EITF 00-19. The Company further concluded that as a
freestanding derivative, the embedded feature would not be classified as
equity under EITF 00-19, and as such, determined that the embedded feature
needs to be bifurcated from the host contract.
In addition, the Company determined that the liquidated damages clause
contained in the registration rights agreement needs to be bifurcated as
well. The clause requires the Company to pay 2% per month of the
outstanding principal amount of the debentures, in cash, to the debenture
holders in the event that a registration statement covering the shares
underlying the convertible debentures is not declared effective within 120
days of the date the debentures were issued. The probability that the
holders will announce a default event is remote due to the economic
motivation to receive registered shares.
12
SAFETEK INTERNATIONAL, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
The Company also determined that a contingent interest payment feature
exists and needs to be bifurcated from the host instrument. That feature
exempts the Company from having to pay the stated interest on the
debentures if the stock price reaches a price of $0.1875. In order to
evaluate the embedded derivatives, the Company estimated the fair market
values using the Binomial model and the Black - Scholes model. Since the
Company is in default and since the fair value of the embedded feature
exceeded the value of the debt, the Company presented the excess
derivative liability separate from the debentures.
Because there is a possibility that the Company will be required to issue
more shares then are authorized, the Company recorded the warrants as a
derivative liability.
The Company remeasured the embedded features in the debentures as of June
30, 2006 to reflect their updated fair value. The Company also updated the
allowance it made for possible penalties due to not filing on time the
registration statement on time as disclosed above, and remeasured the
derivative liability for the fair value of the detachable warrants.
The fair value of the derivative liability relating to the convertible
debentures at June 30, 2006 is $1,156,480. The Company recorded $611,001
as the fair value of $250,000 debentures that were issued on May 17, 2006,
and charged $329,745 as derivative liability income to adjust the fair
value as of June 30, 2006. The fair value of the detachable warrants is
$40,425. The Company recorded $44,866 as the fair value of the detachable
warrants to the debentures that were issued in May 17, 2006 and charged
$78,866 as a derivative liability income to adjust the fair value as of
June 30, 2006. The updated allowance for the possible penalties is
$52,927, after the Company made additional charge of $13,300. The
Derivative Liability - convertible debentures and warrants detachable are
presented together in amount of $1,249,832.
The following assumptions were used for purposes of determining the fair
value of the features at June 30, 2006:
MAY 17, 2006 JUNE 30, 2006
------------ -------------
Exercise price The lower of $0.15 or 50% of the market price
Expected dividend yield 0% 0%
Expected volatility 306% 206%
Risk free interest rate 5% 5%
Expected life of Derivative 3 years 3 years
liability
The following weighted average assumptions were used for determining the
fair value of the freestanding warrants at June 30, 2006:
JUNE 30, 2006
-------------
Exercise price $0.3
Expected dividend yield 0%
Expected volatility 206%
Risk free interest rate 5%
Expected life 5 years
The Company remeasured the class A and class B warrants that it issued
during 2005. As a result of the remeasurment, the Company recorded the
Class A warrants at June 30, 2006 at $241,781 and the class B at $315,429.
As a result, the Company charged derivative liabilities income of
$2,129,342.
NOTE 11: STOCKHOLDERS' EQUITY
A. CAPITAL STOCK
During the six months ended June 30, 2006, the Company did not issue
shares.
13
SAFETEK INTERNATIONAL, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
B. WARRANTS
A summary of the warrant activity for the six months ended June30, 2006 is
as follows (there were no warrants outstanding in 2004):
WEIGHTED
SHARES AVERAGE
UNDERLYING EXERCISE
WARRANTS PRICE
---------- ---------
$
Outstanding at January 1, 2006 14,233,332 1.23
Granted -- --
Forfeited -- --
---------- -----
Outstanding at March 31, 2006 14,233,332 1.23
========== =====
Warrants exercisable at March 31, 2006 14,233,332 1.23
========== =====
Outstanding at April 1, 2006 14,233,332 1.207
Granted 333,333 --
Forfeited -- --
---------- -----
Outstanding June 30, 2006 14,566,665 1.207
========== =====
Warrants exercisable at June, 2006 14,566,665 1.207
========== =====
The following table summarizes information concerning warrants outstanding
at June 30, 2006:
NUMBER OUT WEIGHTED AVERAGE
STANDING EXERCISE PRICE
$
6,950,000 1
6,950,000 1.5
666,665 0.3
----------------------
14,566,665 1.23
======================
As described in note 10, the Company presented the warrants as derivative
liabilities according to EITF 00-19.
The following assumptions were used in calculating the fair value at March
31, 2006:
o Dividend yield - 0%,
o Expected volatility - 306%,
o Risk free interest rate - 5%.
As a result of the remeasurment, the Company recorded the Class A warrants
at June 30, 2006 at $241,781 and the class B at $315,429. The Company
charged derivative liabilities income of $2,129,342.
14
SAFETEK INTERNATIONAL, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
C. STOCK OPTIONS TO EMPLOYEES
The Company follows fair value accounting and the related provisions of
SFAS No. 123R for all share based payment awards. The fair value of each
option or warrant granted is estimated on the date of grant using the
Black-Scholes option-pricing model. The following is a summary of all
stock options granted to employees.
WEIGHTED
SHARES AVERAGE
UNDERLYING EXERCISE
OPTIONS PRICE
$
Outstanding at April 1, 2006 8,348,531 0.146
Granted -- --
Forfeited 3,561,528 0.1
------------------
Outstanding at June, 2006 4,787,003 0.154
==================
Options exercisable at June 30, 2006 -- --
==================
On June 21, 2006, the Company received a notice of resignation from each
of the following directors: Dr. Shay Goldstein, Jean-Pierre Elisha
Martinez, and Gilad Yoeli Dr. Goldstein also resigned as the Chief Medical
Officer of the Company on June 11, 2006. Subsequently, the 3,561,528
options that were granted to them forfeited in a value of $893,857
pursuant to SFAS 123R were forfeited.
NOTE 12: BUSINESS DEVELOPMENT COSTS
Business development costs primarily consist of $75,000 payment to Matrix
as a consideration for an option to an Exclusive Patent and Know How
License to Thrombin Inhibitor compounds. The Company decided not to
exercise the option, because the technologies are in pre-development stage
and will require a significant amount of capital to bring them to market.
Upon termination of the agreement the company is entitled to receive from
Matrix partial reimbursement of its investment if Matrix will
commercialize the compounds.
NOTE 13: SUBSEQUENT EVENTS
As detailed in note 10, on November 18, 2005 the Company signed an
agreement with 4 investors to issue an aggregate of $750,000 of
convertible debentures. On July 10, 2006, the registration statement
covering, among other securities, the shares underlying the debentures was
declared effective. Subsequently, on July 17, 2006 the Company issued a
third Note in the amount of $250,000.
During July the Debentures' holders converted notes at amount of $35,670
into 4,000,000 shares.
15
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
FORWARD LOOKING STATEMENT
The following discussion should be read in conjunction with the financial
statements of Safetek International, Inc. (the "Company"), which are
included elsewhere in this Form 10-QSB. This Quarterly Report on Form
10-QSB contains forward-looking information. Forward-looking information
includes statements relating to the ability of the Company to consummate
the transaction contemplated by the term sheet it has executed with IHPS,
the ability of the Company to raise capital, future performance, costs and
expenses, interest rates, outcome of contingencies, financial condition,
results of operations, liquidity, business strategies, cost savings,
objectives of management, and other such matters of the Company. The
Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking information to encourage companies to provide
prospective information about themselves without fear of litigation so
long as that information is identified as forward-looking and is
accompanied by meaningful cautionary statements identifying important
factors that could cause actual results to differ materially from those
projected in the information. Forward-looking information may be included
in this Quarterly Report on Form 10-QSB or may be incorporated by
reference from other documents filed with the Securities and Exchange
Commission (the "SEC") by the Company. You can find many of these
statements by looking for words including, for example, "believes,"
"expects," "anticipates," "estimates" or similar expressions in this
Quarterly Report on Form 10-QSB or in documents incorporated by reference
in this Quarterly Report on Form 10-QSB. The Company undertakes no
obligation to publicly update or revise any forward-looking statements,
whether as a result of new information or future events.
The Company has based the forward-looking statements relating to the
Company's operations on management's current expectations, estimates, and
projections about the Company and the industry in which it operates. These
statements are not guarantees of future performance and involve risks,
uncertainties and assumptions that the Company cannot predict. In
particular, the Company has based many of these forward-looking statements
on assumptions about future events that may prove to be inaccurate.
Accordingly, the Company's actual results may differ materially from those
contemplated by these forward-looking statements. Any differences could
result from a variety of factors, including, but not limited to general
economic and business conditions, competition, and other factors.
PLAN OF OPERATION
As of April 15, 2005, Dr. Goldstein was appointed as the Company's
Chairman, Chief Executive Officer and Secretary, and since then the
Company has been focusing on screening new technologies in the life
sciences and health care fields and other business opportunities in the
life science field. On May 17, 2005, the Company established an Israeli
wholly owned subsidiary under the laws of the State of Israel, called
"Oriens Life Sciences Ltd. (the "Subsidiary") , to serve as a platform for
the Company to screen the Israeli life sciences and health care industry
and identify, analyze, and acquire or invest in technologies in this
field. On December 1, 2005, Mr. Amnon Presler was appointed as the Chief
Executive Officer and Dr. Goldstein was appointed as the Chief Medical
Officer on December 7, 2005. On March 12, 2006 Dr. Goldstein resigned from
serving as the Company's Chairman and Mr. Jean-Pierre Elisha Martinez was
appointed as the Company's Chairman.
In accordance with Financial Accounting Standards Board (FASB) No. 7, the
Company is considered a development stage company, beginning on April 16,
2005, the date it commenced with its new business activity.
During the fiscal year ended December 31, 2005, the Company signed 4 term
sheets to purchase technologies in the life science field. On January 4,
2006, the Company closed on a transaction contemplated by the Exclusive
Patent and Know How License Option Agreement dated December 28, 2005 with
Matrix Pharma Inc., a Delaware corporation ("Matrix") to purchase an
exclusive, world-wide license in all of Matrix's intellectual property
rights in its Thrombin inhibition compounds. On March 30, 2006, the
Company and Matrix signed an amendment, extending the exercise date of the
option to May 15, 2006.
On March 27, 2006 the Company exercised its right that was given to it in
a Letter Agreement dated December 1, 2005 to purchase certain biological
materials from Serapis Biotech Ltd ( "Serapis") for a purchase price of
$100,000 plus value added tax (VAT). The purchase price was paid by the
forgiveness of $29,906 debt owed to the Company, and the balance to be
paid in 12 equal monthly payments, with the first payment on the signing
date. Other than this purchase of equipment, after conducting its due
diligence and reconsidering its business focus, the company decided not to
proceed with any of the transactions contemplated by any of the 4 term
sheets signed during 2005. The Company has also decided not to exercise
the option agreement with Matrix.
On March 23, 2006, the Company entered into a term sheet with Resdevco
Ltd, a company incorporated under the laws of Israel ("Resdevco"). For an
exclusive, worldwide license in Resdevco's Antioxidant salicylate
compounds. After conducting a due diligence process the company found that
the probability and the potential uses of those compounds are not as
expected and subsequence, decided not to proceed with the transaction
contemplated by the term sheet.
16
On March 27, 2006 the Company exercised its right that was given to it in
a Letter Agreement dated December 1, 2005 to purchase certain biological
materials from Serapis for a purchase price of $100,000 plus value added
tax (VAT). The purchase price was paid by the forgiveness of $29,906 debt
owed to the Company, and the balance to be paid by Serapis in 12 equal
monthly payments, with the first payment on the signing date.
The Company didn't start yet the project it intended to conduct, and paid
only the first instilment. The Company is reconsidering if to invest in
this project, or to negotiate with Serapis on canceling the transaction.
On April 25, 2006, the Company entered into a term sheet with Interactive
Health Pharmacy Services, Inc. ("IHPS"). The term sheet sets forth the
principal terms of a proposed agreement between the Company and IHPS,
pursuant to which the Company will acquire IHPS at the closing, after the
parties agree to a mutually acceptable definitive acquisition agreement.
In consideration therefore at the closing of the acquisition, the Company
will issue to IHPS shares of common stock in an amount equal to 50.01% of
the issued and outstanding shares of common stock. In addition, at the
closing of the acquisition the Company is obligated to have no less than
$1,500,000 in cash and working capital. Anticipate date for the definitive
agreement is June 25, 2006.
IHPS is a New York area specialty pharmacy provider (SPP) whose goal is to
increase HIV/AIDS patients' compliance with their prescribed treatments by
providing confidential, home-delivery of prescriptions drugs, Package by
dose, with therapy management and educational materials that help a
patient optimally control his or her condition. Services include
counseling by a highly trained pharmacist and patient specialist,
compliance monitoring, refill reminders, automated reorder capabilities,
and direct shipments to patients. The company was founded in 1995 by
Marvin Sirota.
The Company is currently investing its efforts in negotiating a definitive
agreement with IHPS and raising the necessary capital to consummate the
transaction.
As part of a debentures agreement from November 18, 2006 , to fund its
ongoing operations, On May 16, 2006 the Company issued $250,000 of such
notes after it filed a registration statement under the Securities Act of
1933 to register the shares underlying such notes. On July 10, 2006, the
Company filed a prospectus under Rule 424(b) (3) of the Securities Act of
1933 and issued an additional $250,000 of such Notes.
On June 21, 2006, the Company received a separate notice of resignation
from each of the following directors: Dr. Shay Goldstein, Jean-Pierre
Elisha Martinez, and Gilad Yoeli (collectively, the "Resigning
Directors"). Dr. Goldstein also resigned as the Chief Medical Officer of
the Company. Pursuant to such notices of resignation, the Resigning
Directors resigned from their positions with the Company and its
wholly-owned subsidiary, Oriens Life Sciences (Israel) Ltd., effective as
of June 21, 2006.
As of June 30, 2006, the Company has an accumulated deficit of $6,236,374.
Our prospects must therefore be evaluated in light of the problems,
expenses, delays and complications associated with the financial situation
of the Company. The Company is in the process of raising funds to finance
its activities, including without limitation, the completion of the above
described prospective transactions, and other potential business
opportunities. The Company requires funds in order to execute the term
sheet with IHPS, to finance its current activities and in order to begin
the development of the technologies it has the opportunity to purchase, if
and when definitive agreements will be executed.
On June 21, 2006, the Board appointed Amnon Presler, the Chief Executive
Officer of the Company, as a director of the Company.
RESULTS OF OPERATIONS
Comparison of the Six and the Three Months Ended June 30, 2006 to the Six
and the Three Months Ended June 30, 2005.
REVENUES
For the six and the three months ended June 30, 2006, there were no
revenues.
OPERATING EXPENSES
The following table summarizes the Company's operating expenses for the
six and the three months ended June 30, 2006 and 2005:
17
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2006 2005 2006 2005
------------------------------------------------------
(UNUADITED) (UNUADITED) (UNUADITED) (UNUADITED)
OPERATING EXPENSES
Payroll and Related Expenses $236,187 15,303 $124,431 15,303
Office & General Expenses 70,310 17,725 41,593 13,636
Professional Fees 107,253 58,904 45,639 47,083
Business Development Costs 130,493 -- 37,070 --
-------- -------- -------- --------
TOTAL OPERATING EXPENSES 544,243 91,932 248,733 76,021
====================== ======================
For the six months ended June 30, 2006, our operating expenses were
$544,243 as compared to $ $91,932 for the six months ended June 30, 2005.
Our expenses increased mainly as a result of our efforts of screening
technologies and other business opportunities in the life sciences field
and as a result of the due diligence procedures and the efforts invested
in executing the signed term sheets and progressing to definitive
agreements. For the three months ended June 30, 2006, the Company total
operation expenses were $248,733.
The main expenses in the period consist of payroll and related expenses to
our management of $236,187 and $124,431 for the six and the three months
ended June 30, 2006.
Business development costs consisted primarily of payment of $75,000 to
Matrix, as a consideration to an option to an Exclusive Patent and Know
How License to Thrombin Inhibitor compounds. Professional fees expenses
consist primarily auditing and legal consulting regarding the Company's
transactions. During the period, the Company decided not to exercise the
option.
OTHER INCOME AND EXPENSES
For the six and the three months ended June 30, 2006, The following table
presents the Company's other expenses, for the six and the three months
ended June 30, 2006:
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30,
2006 2005 2006 JUNE 30, 2005
------------------------------------------------------------------
(UNUADITED) (UNUADITED) (UNUADITED) (UNUADITED)
OTHER INCOME (EXPENSES)
Income from Cancellation of Indebtedness $ -- 181,311 $ -- 181,311
Gain from Securities 2,263 -- -- --
Interest Income 1,404 55 212 55
Exchange Rate Loss 115 -- 1,853 --
Interest Expenses Convertible Debentures (12,329) -- (7,397) --
Amortization of Convertible Debentures and
Warrant Discount (65,945) -- (37,715) --
Derivative Liability Income 1,543,250 -- 2,101,029 --
----------------------------- -----------------------------
TOTAL OTHER INCOME 1,468,758 181,366 2,057,982 181,366
============================= =============================
1. Interest expenses includes, $12,329 and $7,397 interest for the six and
the three months ended June 30, 2006 related to the convertible debentures
that the Company issued on November 18, 2005.
2. The Warrants that the Company issued presented at their fair value and
classified as liabilities, according to paragraphs 20 and 24 of EITF 00-19
"Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock,". The derivative liability
expenses reflect an adjustment to the fair value as of June 30, 2006. The
fair value was reduced as a result of a decrease in the company's market
share price.
3. Adjustment of the debentures issued on November 18, 2005 to their fair
value as of June 30, 2006.
4. Adjustment the Company's penalties allowance. According to the debentures
terms, the Company was obligated to file a registration statement on or
prior to thirty days from November 18, 2005, to register the shares of
common stock underlying the notes and warrants issued to the investors.
The Company has been delayed in its obligation and is currently in
default.
18
NET INCOME (LOSS)
During the six and the three months period ended June 30, 2006, we
reported a net income of $924,515 and $1,809,249compared to a net income
of $89,434 and $105,345 for the six and the three months ended June 30,
2005. The difference is primarily attributable financing expenses as a
result of adjusting the derivative liabilities to their fair value. The
fair value was reduced as a result of a decrease in the company's market
price.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents as June 30 2006 were $119,912 compared to
$106,218 as of June 30, 2005. The increase in the cash and cash
equivalents is primarily a result of receiving $685,000 in consideration
for Units consisting of common stock and warrants subscribed, and $190,000
as a result of debentures issuance during 2005.
During the six months ended June 2006, the Company receives proceeds from
Issuance of Debentures, net of Issuance Expenses of $407,500.
Net cash used in operating activities decreased mainly as result of
increase in the Company's business activity and an increase in our
accounts payable and accrued expenses. The primary finance source to our
operating during the period was consideration from a securities sale.
We are in the process of attempting to raise funds in order to have the
capability of conducting our activity. The Company intends to finance its
operations by private placements, stocks and debt issuance and financial
arrangements. There are currently no plans or arrangements regarding any
of the foregoing.
We currently have no revenues. We currently have no commitments or
agreements with any third party to provide financial accommodations to us.
Any proceeds we may receive from private placements and additional capital
that the Company maynot be sufficient to satisfy the Company's cash
requirements for the next twelve (12) months.
GOING CONCERN
As of June 30, 2006, we have cash on hand of $119,912. This amount is
inadequate for us to effectuate our planned activities during the next 12
months. Accordingly, we may be unable to continue operations in the future
as a going concern. Our plans to deal with this uncertainty include
raising additional capital or entering into a strategic arrangement with a
third party. There can be no assurance that our plans can be realized.
There can be no assurance that we will be able to obtain additional
financing if and when needed or that, if available, financing will be on
acceptable terms. Additional equity financings may be dilutive to holders
of our common stock and debt financing, if available, and may involve
significant payment obligations and covenants that restrict how we operate
our business.
The consolidated financial statements have been prepared assuming that the
Company will continue as a going concern. The Company's auditors on their
Report of independent registered public accounting firm for the financial
statement for the year ended December 31, 2005, raised substantial doubt
about the Company's ability to continue as a going concern.
Certain conditions raise substantial doubt about the Company's ability to
continue as a going concern beyond the next twelve (12) month period. As
of June 30, 2006, the Company had stockholders' deficit of $2,178,746 and
an accumulated deficit of $6,236,374. Our balance sheet as of June 30,
2006 reflects total liabilities of $2,595,243. The Company needs to obtain
additional financing to fund payment of its obligations and to provide
working capital for operations.
OFF BALANCE SHEET ARRANGEMENTS
None
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our financial statements and accompanying notes have been prepared in
accordance with generally accepted accounting principles in the United
States of America. The preparation of these financial statements requires
our Management to make estimates, judgments and assumptions that affect
the reported amounts of assets, liabilities, revenues and expenses. We
continually evaluate the accounting policies and estimates we use to
prepare the consolidated financial statements. We base our estimates on
historical experiences and assumptions believed to be reasonable under
current facts and circumstances. Actual amounts and results could differ
from these estimates made by Management. We do not participate in, nor
have we created, any off-balance sheet special purpose entities or other
off-balance sheet financing. In addition, we have not and do not
anticipate entering into any derivative financial instruments for
speculative purposes or use derivative financial instruments primarily for
managing our exposure to changes in interest rates. Significant estimates
include the useful life of property and equipment and the fair value of
derivative liability.
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ITEM 3 - CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as
of December 31, 2005, the Company's management carried out an evaluation
of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. This evaluation was carried out by the
Company's Chief Executive Officer, and the Company's Chief Financial
Officer. Based upon that evaluation, the Company's Chief Executive Officer
and Chief Financial Officer concluded that as of December 31, 2005, the
Company's disclosure controls and procedures were effective except as set
forth below, in the following paragraph, in timely alerting them to
material information required to be included in the Company's periodic SEC
reports.
The Company's independent auditors, in conjunction with their audit of the
Company's financial statements for the year ended December 31, 2005,
advised the Company and the Audit Committee that in the auditors' view,
the Company's disclosure controls and procedures were subject to a
material weakness resulting from inadequate segregation of duties related
to accounting controls caused by the limited number of personnel available
for accounting duties. Management plans to expand personnel to provide for
adequate segregation of duties when it is cost beneficial to the Company
and, in the interim, has implemented mitigating controls wherever possible
in consideration of the limited segregation of duties.
It should be noted that the design of any system of controls is based in
part upon certain assumptions about the likelihood of future events and
there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions, regardless how remote.
Disclosure controls and procedures are controls and other procedures that
are designed to ensure that information required to be disclosed in the
Company's reports filed or submitted under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in
the SEC's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that
information required to be disclosed in the Company's reports filed under
the Exchange Act is accumulated and communicated to management, including
the Company's Chief Executive Officer and Chief Financial Officer, to
allow timely decisions regarding required disclosure.
There were no changes in the Company's internal control over financial
reporting identified in connection with the evaluation required by
paragraph (d) of Rule 13a-15 under the Exchange Act with respect to the
three months ended March 31, 2006 that have materially affected, or are
reasonably likely to materially affect, the Company's internal control
over financial reporting.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING
There have been no changes in the Company's internal control over
financial reporting during the last quarterly period covered by this
report that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial
reporting.
PART II
OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDING
We are not a party to any legal proceeding.
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS EXHIBITS
31.1 Certification of the Chief Executive Officer pursuant to Rule
13a-14 of the Securities and Exchange Act of 1934, as amended,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
31.2 Certification of the Chief Financial Officer pursuant to Rule
13a-14 of the Securities and Exchange Act of 1934, as amended,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
32.1 Certification of the 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 the Chief Financial Officer pursuant to 18
U.S.C. Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
20
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized..
Signature Capacity Date
/s/ Amnon Presler Chief Executive Officer August 18, 2006
(principal executive officer)
/s/ Tamar Tzaban-Nahomov Chief Financial Officer August 18, 2006
(principal financial officer)
21