UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2005
OR
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from ___________________ to ___________________
Commission File No. 0-11772
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SPO MEDICAL INC.
----------------
(Exact name of small business issuer as specified in its charter)
Delaware 25-1411971
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation of organization)
21860 Burbank Blvd., North Building, Suite 380
Woodland Hills, California 91367
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (818) 888-4380
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(Former name, former address and former fiscal year, if changed since last
report.)
Check whether the Registrant (1) filed all documents and reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or 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 |_|
As of July 12, 2005, there were issued and outstanding 17,053,621 shares
of common stock of the registrant.
Transitional small business disclosure format
Yes |_| No |X|
1
SPO Medical Inc.
Quarterly Report on Form 10-QSB
Table of Contents
PAGE
PART I FINANCIAL INFORMATION
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets as of March 31, 2005 (unaudited)
and December 31, 2004 3
Condensed Consolidated Statements of Operations for the three
months ended March 31, 2005 and 2004 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2005 and 2004 (unaudited) 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis or Plan of Operation 10
Item 3. Controls and Procedures 13
PART II OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits 14
SIGNATURES 16
CERTIFICATIONS 17
2
SPO Medical Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
March 31 December 31
2005 2004
(Unaudited)
------------ ------------
ASSETS
Current assets:
Cash $ 633 $ 7,597
Prepaid expenses and other current assets 14,000 16,339
------------ ------------
Total current assets $ 14,633 $ 23,936
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Notes payable, in default $ 65,888 $ 65,888
Advances on potential acquisition 2,384 18,850
Accounts payable 206,941 197,176
Accrued expenses 55,514 54,069
Due to related parties 284,785 284,785
Contract payable 55,571 55,571
------------ ------------
Total current liabilities 671,083 676,339
------------ ------------
Commitments and Contingencies
Stockholders' deficiency
Series A convertible preferred stock, $.01 par value;
2,000,000 authorized; none issued and outstanding -- --
Common stock, $.01 par value; 50,000,000 shares authorized;
1,722,034 shares issued and outstanding at
March 31, 2005 and December 31, 2004 17,220 17,220
Additional paid-in capital 59,786,689 59,786,689
Accumulated deficit (60,460,359) (60,456,312)
------------ ------------
Total stockholders' deficiency (656,450) (652,403)
------------ ------------
Total liabilities and stockholders' deficiency $ 14,633 $ 23,936
============ ============
See notes to unaudited condensed consolidated financial statements
3
SPO Medical Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
For the Three Months Ended March 31
2005 2004
-----------------------------------
Revenues:
$ -- $ --
-----------------------------------
Operating costs and expenses:
General and administrative 2,482 143
-----------------------------------
Total operating costs and expenses 2,482 143
-----------------------------------
Operating loss (2,482) (143)
-----------------------------------
Other income (expense):
Interest expense (1,565) (1,565)
-----------------------------------
Total other income (expenses) (1,565) (1,565)
-----------------------------------
Net loss $ (4,047) $ (1,708)
===================================
Net loss per common share - basic and diluted Nil Nil
===================================
Weighted average shares outstanding - basic and diluted 1,722,034 1,267,717
===================================
See notes to unaudited condensed consolidated financial statements
4
SPO Medical Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For the three months ended March 31
2005 2004
--------------------------------------
Operating activities:
Net loss $ (4,047) $ (1,708)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Changes in operating assets and liabilities:
Prepaid expenses and other current assets 2,339 58
Accounts payable 9,766 --
Accrued expenses 1,444 1,650
--------------------------------------
Net cash provided by operating activities 9,502 --
--------------------------------------
Financing activities:
Repayment of funds related to advances for reverse merger (16,466) --
--------------------------------------
Net cash used in financing activities (16,466) --
--------------------------------------
Net decrease in cash (6,964) --
Cash at beginning of period 7,597 --
--------------------------------------
Cash at end of period $ 633 $ --
======================================
See notes to unaudited condensed consolidated financial statements
5
SPO Medical Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended March 31, 2005
(Unaudited)
1. Basis of Presentation
SPO Medical Inc., formerly known as United Diagnostic, Inc. (hereinafter
referred to as "SPO" or the "Company"), was originally organized under the laws
of the State of Delaware in September 1981 under the name "Applied DNA Systems,
Inc." On November 16, 1994, the Company changed its name to "Nu-Tech Bio-Med,
Inc." On December 23, 1998, the Company changed its name to United Diagnostic,
Inc. Effective April 21, 2005, the Company changed its name to its present name,
SPO Medical Inc. pursuant to a Capital Stock Exchange Agreement ("Exchange
Agreement") entered into on February 28, 2005, as amended and restated on April
21, 2005. One of the Company's wholly-owned subsidiaries, Analytical Biosystems
Corp. ("ABC") (inactive since November 3, 1997), was organized under the laws of
the State of Delaware in August, 1985. On October 21, 1996, the Company acquired
substantially all of the medical billing service assets of Prompt Medical
Billing, Inc. through the Company's wholly-owned subsidiary, NTBM Billing
Services Inc. (inactive since April, 1998), organized under the laws of the
State of Delaware on September 10, 1996. .
The unaudited accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial information and
with the instructions to Form 10-QSB and Article 10 of Regulation S-B.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States of America for
complete financial statements. In the opinion of management of SPO, the
accompanying unaudited condensed consolidated financial statements contain all
adjustments necessary to make the financial statements not misleading. Operating
results for the three months ended March 31, 2005, are not necessarily
indicative of the results that may be expected for the year ending December 31,
2005. For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's annual report on Form 10-KSB for
the year ended December 31, 2004.
The condensed consolidated financial statements have been prepared on the
basis that the Company will continue as a going concern, which assumes the
realization of assets and satisfaction of liabilities in the normal course of
business. The Company, for the three months ended March 31, 2005, did not have
any revenue generating operations, had sustained net losses of $4,047 and
$1,708, respectively during the three months ended March 31, 2005, and 2004, is
not in compliance with certain terms of its notes payable, and has expended
virtually all of its cash. The amount of stockholders' deficiency and working
capital deficiency at March 31, 2005, was $656,450. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
During April and May 2005, the Company, in connection with the reverse
acquisition
6
1. Basis of Presentation - continued
discussed in Note 5, raised approximately $420,000. The Company will continue to
seek to raise additional debt and/or equity financing; however, there is no
assurance that it will be successful in that endeavor and liquidate its
liabilities. The condensed consolidated 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 or any
other adjustments that might be necessary should the Company be unable to
continue as a going concern.
Pursuant to the Acquisition Transaction, the Financial Statements have
been retroactively restated for a forward split of 2.65285 to 1 basis during
2005.
2. Due to Related Parties
Due to related parties aggregating $284,785 at March 31, 2005, represent
advances through December 31, 2004, to the Company by its former Chief Executive
Officer and a former board member and accrued and unpaid salary to the Company's
former Chief Executive Officer. Such advances are non-interest bearing and are
due on demand.
3. Note Payable-Default
In connection with a series of loans obtained during 1993 and 1994 by the
Company from the State of Rhode Island Economic Development Small Business Loan
Fund Corporation ("SBLFC") in the principal aggregate amount of $791,000, the
Company executed two patent security agreements granting the SBLFC a security
interest in ABC's patents to secure $541,000 of the $791,000 of SBLFC loans. All
of the SBLFC loans, including those subject to patent security interests, were
further secured by a security interest in the Company's accounts receivable,
inventory and equipment. Each of these loans were for a term of five years from
its respective loan date, bearing interest at the rate of 5.4% per annum and, as
to each loan, after the first year, is amortized monthly as to principal and
interest. In June 1998, the terms of these loans were modified to 9.5% interest
with principal due on demand. The aggregate amount of monthly interest payments
is approximately $600 per month. The Company is not in compliance with certain
terms of these loans which have an outstanding balance of $65,888 at March 31,
2005. In the event that the Company, for whatever reason, is unable to continue
to meet its loan repayment obligations, the assets which are pledged will be
subject to the rights of the SBLFC as a secured party. Further, until the SBLFC
loans are repaid, it is unlikely that the Company or ABC will be able to obtain
additional secured financing utilizing this collateral as security for new
loans.
7
4. Advances from Target Company on Potential Acquisition
In connection with the transaction discussed in Note 5, the Company, as of
March 31, 2005 was advanced an aggregate of $128,800 from the target company for
the purpose of paying certain costs associated with the transaction and to
liquidate certain liabilities. Of the $128,800 advanced to the Company, $126,416
has been used to pay for expenses related to the potential acquisition. The
balance amounting to $2,384 is carried as an advance on the balance sheet until
it is utilized.
5. Subsequent Event
Effective February 28, 2005, the Company entered into an Exchange
Agreement among the Company, SPO Ltd., and the shareholders of SPO Ltd.,
providing for the acquisition by the Company of all of the issued and
outstanding shares of SPO Ltd. (the "Acquisition Transaction") in exchange for
5,769,106 of the Company's common stock. On April 21, 2005, the Exchange
Agreement was amended and restated. The closing of the transactions contemplated
in the Restated Exchange Agreement and the acquisition by the Company of all of
the issued and outstanding ordinary shares of SPO Ltd. was completed on April
21, 2005. Pursuant to Restated Exchange Agreement, the Company issued to the
shareholders of SPO Ltd. an aggregate of 5,769,106 shares of Common Stock,
representing approximately 90% of the Common Stock issued and outstanding. As a
result of the Acquisition Transaction, SPO Ltd. became a wholly owned subsidiary
of the Company as of April 21, 2005. Upon consummation of the Acquisition
Transaction, the Company effectuated a forward stock split of the Company's
Common Stock issued and outstanding after giving effect to the transactions
contemplated by Restated Exchange Agreement on a 2.65285:1 basis. As the former
shareholders of SPO Ltd. own 90% of the Company's issued and outstanding shares,
the acquisition of SPO Ltd. is deemed to be a reverse acquisition for accounting
purposes.
8
5. Subsequent Event - continued
In order to facilitate the Acquisition Transaction, and to raise working
capital, on April 21, 2005, the Company commenced a private placement (the
"Private Placement") to certain private and institutional investors of up to
$1,150,000 by the sale of units of its securities, with each unit comprised of
(i) its 18 month 6% Promissory Note (the "Notes") and (ii) two year warrants
(the "Warrants") to purchase up to such number of shares of Common Stock of the
Company as are determined by the principal amount of the Note being purchased by
such investor divided by $ 0.85, at a per share exercise price of $0.85. If
Notes in the aggregate principal amount of $1,150,000 are issued, the maximum
number of shares of Common Stock issuable upon exercise of the Warrants will be
1,352,942. Under the Private Placement, subscription amounts are deposited into
an escrow account. As of July 7, 2005, an aggregate of $419,827 in principal
amount of notes were sold to accredited investors and, in connection therewith,
warrants to purchase up to approximately 493,915 shares of the Company's common
stock were issued. The securities were issued in reliance upon an exemption from
registration under the Securities Act of 1933, as amended.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Safe Harbor Statement
Certain statements in this Form 10-QSB, including information set forth
under Item 2 "Management's Discussion and Analysis of Financial Condition and
Results of Operations" constitute or may constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 (the
"Act"). Forward-looking statements included in this Form 10-QSB or hereafter
included in other publicly available documents filed with the Securities and
Exchange Commission, reports to the Company's stockholders and other publicly
available statements issued or released by the Company involve known and unknown
risks, uncertainties, and other factors, including, but not limited to, the
ability of the Company to identify and acquire a viable operating business and
all of the risks (known and unknown) relating to any such acquired business; and
the ability of the Company to obtain additional funds from either the sale of
equity securities or from loans on commercially reasonable terms satisfactory to
the Company. These and other risks could cause the Company's actual results,
performance (financial or operating) or achievements to differ from the
anticipated future results, performance (financial or operating) achievements
expressed or implied by such forward-looking statements. Such anticipated future
results are based upon management's best estimates based upon current conditions
and the most recent results of operations.
Three months ended March 31, 2005, compared with three months ended March 31,
2004
Results of Operations
The Company reported no operating revenues for the three months ended
March 31, 2005, and 2004.
Total operating costs and expenses for the three months ended March 31,
2005, were $2,482 (net of a reimbursement from the target company of $61,916 for
expenses associated with a potential acquisition) compared to $143 for the three
months ended March 31, 2004. The target company has agreed to reimburse the
Company for expenses associated with the potential acquisition.
Interest expense for the three months ended March 31, 2005, and 2004 was
$1,565 for interest associated with the State of Rhode Island Small Business
Loan Fund outstanding loan principal.
Net loss for the three months ended March 31, 2005, was $4,047 as compared
to $1,708 for the three months ended March 31, 2004.
10
Liquidity and Capital Resources
At March 31, 2005, the Company had $633 in cash. In connection with the
transaction discussed in Note 5, the Company, as of March 31, 2005 was advanced
$128,800 from the target company for expense reimbursements to provide cash for
certain expenses associated with the preparation, printing and filing of certain
SEC documents. The Company has expended virtually all of its cash as of March
31, 2005.
Total current assets were $14,633 at March 31, 2005, as compared to
$23,936 at December 31, 2004. Prepaid expenses and other current assets are
primarily due to a credit balance with the State of Delaware due to the
overpayment of franchise taxes.
Total current liabilities at March 31, 2005, were $671,083 as compared to
$676,339 at December 31, 2004. The decrease of $5,256 is primarily due to the
reduction of advances payable from the target company which are being used to
fund the costs of the reverse acquisition.
Plan of Operations and Requirement for Additional Funds
The Company, as of March 31, 2005, did not have any revenue generating
operations, had sustained net losses of $4,047 and $1,708, respectively during
the three months ended March 31, 2005, and 2004, is not in compliance with
certain terms of its notes payable, and has expended virtually all of its cash.
The amount of stockholders' deficiency and working capital deficiency at March
31, 2005, was $656,450. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. During April and May 2005, the
Company, in connection with the reverse acquisition discussed below, raised
approximately $420,000. The Company will continue to seek to raise additional
debt and/or equity financing; however, there is no assurance that it will be
successful in that endeavor and liquidate its liabilities. The condensed
consolidated 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 or any other adjustments that
might be necessary should the Company be unable to continue as a going concern.
Effective February 28, 2005, the Company entered into a Capital Stock
Exchange Agreement (the "Exchange Agreement") among the Company, SPO Medical
Equipment Ltd., a company incorporated under the laws of the State of Israel
("SPO Ltd."), and the shareholders of SPO Ltd., providing for the acquisition by
the Company of all of the issued and outstanding shares of SPO Ltd. (the
"Acquisition Transaction") in exchange for 5,769,106 shares of the Company's
common stock, par value $0.01 per share (the "Common Stock"). On April 21, 2005,
the Exchange Agreement was amended and restated (as so amended and restated the
"Restated Exchange Agreement"). The closing of the transactions contemplated in
the Restated Exchange Agreement and the acquisition by the Company of all of the
issued and outstanding shares of SPO Ltd. was completed on April 21, 2005.
Accordingly, SPO Ltd. became a wholly-owned subsidiary of the Company.
SPO Medical Equipment Ltd. ("SPO Ltd."), was organized under the laws of
the State of Israel in August 1995. SPO Ltd. develops biosensor and
microprocessor technologies using
11
Plan of Operations and Requirement for Additional Funds - continued
reflectance pulse oximetry techniques for use in portable monitoring devices to
capture life-saving and life-enhancing information within four key markets:
medical care; home and remote-care; sports and wellness; and general security.
SPO Ltd. has developed and patented proprietary technology that enables the use
of pulse oximetry in a reflectance mode of operation i.e. a sensor that can be
affixed to a single side of a body part. This technique is known as Reflectance
Pulse Oximetry (RPO). Using RPO, a sensor can be positioned on various places of
the body, hence minimizing problems of motion and poor profusion. In addition,
its unique design results in substantially lower power requirements, which
enable a wireless configuration with expanded commercial possibilities.
Pursuant to the Acquisition Transaction, the financial statements have
been retroactively restated for a forward stock split of 2.65285 to 1 basis
effected during April 2005.
Pledge of Principal Assets to Secure Existing Loans from the State of Rhode
Island
In connection with a series of loans obtained during 1993 and 1994 by the
Company from the State of Rhode Island Economic Development Small Business Loan
Fund Corporation ("SBLFC") in the principal aggregate amount of $791,000, the
Company executed two patent security agreements granting the SBLFC a security
interest in ABC's patents to secure $541,000 of the $791,000 of SBLFC loans. All
of the SBLFC loans, including those subject to patent security interests, were
further secured by a security interest in the Company's accounts receivable,
inventory and equipment. Each of these loans were for a term of five years from
its respective loan date, bearing interest at the rate of 5.4% per annum and, as
to each loan, after the first year, is amortized monthly as to principal and
interest. In June 1998, the terms of these loans were modified to 9.5% interest
with principal due on demand. The aggregate amount of monthly interest payments
is approximately $600 per month. The Company is not in compliance with certain
terms of these loans which have an outstanding balance of $65,888 at March 31,
2005. In the event that the Company, for whatever reason, is unable to continue
to meet its loan repayment obligations, the assets which are pledged will be
subject to the rights of the SBLFC as a secured party. Further, until the SBLFC
loans are repaid, it is unlikely that the Company or ABC will be able to obtain
additional secured financing utilizing this collateral as security for new
loans.
12
ITEM 3. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. We maintain disclosure
controls and procedures that are designed to ensure that information required to
be disclosed in our Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms, and
that such information is accumulated and communicated to management, including
our Chief Executive Officer (and Principal Financial Officer), as appropriate,
to allow timely decisions regarding required disclosure based closely on the
definition of "disclosure controls and procedures" in Rule 13a-14(c).
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with participation of management,
including our Chief Executive Officer (and Principal Financial Officer), of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on the foregoing, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were
effective.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING. During the quarter ended
March 31, 2005, there have been no changes in our internal controls over
financial reporting that have materially affected, or are reasonably likely to
materially affect, these controls.
13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
During the period commencing January 1, 2005, until the date of filing of
this Report, the following reports were filed on Form 8-K by the Company:
Date of Report Item Reported Description of Item
-------------- ------------- -------------------
March 2, 2005 Item 1.01 Entry into a The Company reported it entered into a
Material Definitive Capital Stock Exchange Agreement to acquire
Agreement all of the issued and outstanding equity capital
of SPO Medical Equipment Ltd.
April 21, 2005 Item 1.01 Entry into a Set forth under Item 2.01
Material Definitive
Agreement
Item 2.01 Completion of The Company reported the completion of an
Acquisition acquisition transaction as described in the
amended and restated Capital Stock Exchange
Agreement
Item 2.03 Creation of a Set forth under Item 3.02
Direct Financial Obligation
Item 3.02 Unregistered Sales The Company reported it conducted an initial
Of Equity Securities closing on a private placement of $225,000
14
Item 5.01 Changes in Control The Company reported a change of control
Of Registrant as a result of the completion of an acquisition
Transaction
Item 5.02 Departure of The Company reported the resignation of
Directors or Principal Officers; existing directors and the appointment of new
Election of Directors; directors
Appointment of Prinicipal
Officers
Item 5.03 Amendments to The Company reported a name change and
Articles of Incorporation the filing of an amended and restated Certificate
And Bylaws of Incorporation and Bylaws
Item 9.01 Financial Statements The Company reported that financial statements
And Exhibits of business acquired and pro forma financial
Information will be filed with 60 days of this
Report and exhibits identified in report are
attached
Exhibit No. Description
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31.1 Certification of Michael Braunold pursuant to Exchange Act
Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Michael Braunold pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
15
SIGNATURES
In accordance with requirements of the Securities Exchange Act, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPO MEDICAL INC.
Dated: July 12, 2005 by: /s/ Michael Braunold
--------------------
Michael Braunold
Chief Executive Officer and
Principal Financial Officer
16