Attached files
file | filename |
---|---|
EX-32.2 - M WISE INC | v203358_ex32-2.htm |
EX-32.1 - M WISE INC | v203358_ex32-1.htm |
EX-31.1 - M WISE INC | v203358_ex31-1.htm |
EX-31.2 - M WISE INC | v203358_ex31-2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended September 30, 2010
¨
|
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: 001-51743
m-Wise,
Inc.
(Exact
name of Registrant as specified in its charter)
Delaware
|
11-3536906
|
||
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
No.)
|
3
Sapir Street, Herzeliya Pituach, Israel 46852
(Address
of principal executive offices)
+972-73-2620000
(Registrant’s
telephone number, including area code)
All
Correspondence to:
Arthur S.
Marcus, Esq.
Gersten
Savage LLP
600
Lexington Avenue, 9th
Floor
New York,
New York 10022
(212)
752-9700
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes x No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes ¨ No ¨
Indicate
by check mark whether the Registrant is a large accelerated filer,, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
Non-accelerated
filer ¨ (Do not check if
a smaller reporting company)
|
Smaller
reporting company x
|
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes ¨ No x
The
number of shares outstanding of the issuer's common stock, as of November 21,
2010, was 149,974,952.
Index
Page
|
|||
PART
I: FINANCIAL INFORMATION
|
1
|
||
Item
1:
|
Financial
Statements
|
1
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
2
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
11
|
|
Item
4.
|
Controls
and Procedures
|
11
|
|
PART
II: OTHER INFORMATION
|
11
|
||
Item
1.
|
Legal
Proceedings
|
11
|
|
Item
1A.
|
Risk
Factors
|
12
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
12
|
|
Item
3.
|
Defaults
upon Senior Securities
|
12
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
12
|
|
Item
5.
|
Other
Information
|
12
|
|
Item
6.
|
Exhibits
|
12
|
|
SIGNATURES
|
15
|
i
PART
I:
FINANCIAL
INFORMATION
Item
1: Financial Statements
M-WISE,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
THREE
MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
UNAUDITED
CONTENTS
Condensed
Consolidated Balance Sheets
|
F-1 | |||
Condensed
Consolidated Statements of Operations and Comprehensive (Loss)
Income
|
F-2 - F-3 | |||
Condensed
Consolidated Statements of Cash Flows
|
F-4 | |||
Notes
to Condensed Consolidated Financial Statements
|
F-5 - F-15 |
1
M-WISE,
INC. AND SUBSIDIARIES
Condensed
Consolidated Balance Sheets
As of
September 30, 2010 and December 31, 2009
September 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
(Unaudited)
|
(Audited)
|
|||||||
ASSETS
|
||||||||
Current
|
||||||||
Cash
|
$ | 68,507 | $ | 165,504 | ||||
Restricted
cash (note 12)
|
85,000 | - | ||||||
Short-term
investment
|
7,846 | 7,837 | ||||||
Accounts
receivable - trade (net of allowance for doubtful accounts of $30,642;
2009 - $12,563)
|
421,177 | 822,741 | ||||||
Prepaid
expenses and other assets
|
27,321 | 47,729 | ||||||
Government
grants receivable (note 13)
|
- | 87,026 | ||||||
Total
Current Assets
|
609,851 | 1,130,837 | ||||||
Deposits
|
12,909 | 10,930 | ||||||
Plant and Equipment,
net (note
3)
|
63,634 | 71,891 | ||||||
Total
Long-term Assets
|
76,543 | 82,821 | ||||||
Total
Assets
|
$ | 686,394 | $ | 1,213,658 | ||||
LIABILITIES
|
||||||||
Current
|
||||||||
Accounts
payable - trade
|
$ | 55,738 | $ | 46,541 | ||||
Other
payables and accrued expenses (note 8)
|
1,059,898 | 1,136,324 | ||||||
Advances
from stockholder (note 4)
|
291,794 | 304,688 | ||||||
Billings
in excess of costs on uncompleted contracts
|
7,000 | 24,400 | ||||||
Total
Current Liabilities
|
1,414,430 | 1,511,953 | ||||||
Accrued Severance
Pay (note
5)
|
140,574 | 127,493 | ||||||
Total
Liabilities
|
1,555,004 | 1,639,446 | ||||||
Commitments
and Contingencies (notes 11 and 12)
|
||||||||
STOCKHOLDERS'
DEFICIT
|
||||||||
Capital Stock (note 6) (149,974,951 common
stock; 2009 - 139,322,145 common stock)
|
254,958 | 236,848 | ||||||
Additional
Paid-in Capital
|
12,222,540 | 11,850,838 | ||||||
Accumulated
Deficit
|
(13,346,108 | ) | (12,513,474 | ) | ||||
Total Stockholders' Deficit
|
(868,610 | ) | (425,788 | ) | ||||
Total
Liabilities and Stockholders' Deficit
|
$ | 686,394 | $ | 1,213,658 |
(The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.)
F-1
M-WISE,
INC. AND SUBSIDIARIES
Condensed
Consolidated Statements of Operations and Comprehensive (Loss)
Income
For the
Nine Months Ended September 30, 2010 and 2009
Unaudited
Nine Months
|
Nine Months
|
|||||||
Ended
|
Ended
|
|||||||
September 30,
|
September 30,
|
|||||||
2010
|
2009
|
|||||||
Sales
|
||||||||
Customer
services and technical support
|
$ | 1,260,911 | $ | 978,698 | ||||
Revenue
share
|
402,334 | 776,594 | ||||||
Product
sales and license
|
403,347 | 629,825 | ||||||
2,066,592 | 2,385,117 | |||||||
Cost
of Sales
|
863,758 | 666,377 | ||||||
Gross
Profit
|
1,202,834 | 1,718,740 | ||||||
Expenses
|
||||||||
General
and administrative
|
1,675,527 | 1,177,613 | ||||||
Research
and development
|
355,980 | 437,659 | ||||||
Total
Expenses
|
2,031,507 | 1,615,272 | ||||||
(Loss)
Earnings from Operations
|
(828,673 | ) | 103,468 | |||||
Other
(Expenses) Income
|
||||||||
Extinguishment
of debt
|
37,413 | 37,798 | ||||||
Interest
and other
|
(14,943 | ) | (4,840 | ) | ||||
Total
Other (Expenses) Income
|
22,470 | 32,958 | ||||||
(Loss)
Earnings before Income Taxes
|
(806,203 | ) | 136,426 | |||||
Provision for
Income Taxes (note
7)
|
- | - | ||||||
Net
(Loss) Earnings
|
(806,203 | ) | 136,426 | |||||
Foreign
currency translation adjustment
|
(26,431 | ) | - | |||||
Comprehensive
(Loss) Income
|
$ | (832,634 | ) | $ | 136,426 | |||
Net
(Loss) Earnings Per Share - Basic and Diluted
|
$ | (0.01 | ) | $ | 0.00 | |||
Weighted
Average Number of Common Shares Outstanding - Basic and
Diluted
|
147,850,830 | 139,322,145 |
(The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.)
F-2
M-WISE,
INC. AND SUBSIDIARIES
Condensed
Consolidated Statements of Operations and Comprehensive (Loss)
Income
For the
Three Months Ended September 30, 2010 and 2009
Unaudited
Three Months
|
Three Months
|
|||||||
Ended
|
Ended
|
|||||||
September 30,
|
September 30,
|
|||||||
2010
|
2009
|
|||||||
Sales
|
||||||||
Customer
services and technical support
|
$ | 400,322 | $ | 403,861 | ||||
Revenue
share
|
57,470 | 269,783 | ||||||
Product
sales and license
|
72,672 | 236,878 | ||||||
530,464 | 910,522 | |||||||
Cost
of Sales
|
252,184 | 303,483 | ||||||
Gross
Profit
|
278,280 | 607,039 | ||||||
Expenses
|
||||||||
General
and administrative
|
566,647 | 443,956 | ||||||
Research
and development
|
147,094 | 145,356 | ||||||
Total
Expenses
|
713,741 | 589,312 | ||||||
(Loss)
Earnings from Operations
|
(435,461 | ) | 17,727 | |||||
Other
(Expenses) Income
|
||||||||
Extinguishment
of debt
|
12,925 | 12,600 | ||||||
Interest
and other
|
(7,528 | ) | (1,787 | ) | ||||
Total
Other (Expenses) Income
|
5,397 | 10,813 | ||||||
(Loss)
Earnings Before Income Taxes
|
(430,064 | ) | 28,540 | |||||
Provision for Income
Taxes (note 7)
|
- | - | ||||||
Net
(Loss) Earnings
|
(430,064 | ) | 28,540 | |||||
Foreign
currency translation adjustment
|
(24,317 | ) | - | |||||
Comprehensive
(Loss) Income
|
$ | (454,381 | ) | $ | 28,540 | |||
Net
(Loss) Earnings Per Share - Basic and Diluted
|
$ | 0.00 | $ | 0.00 | ||||
Weighted
Average Number of Common Shares Outstanding - Basic and
Diluted
|
148,777,951 | 139,322,145 |
(The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.)
F-3
M-WISE,
INC. AND SUBSIDIARIES
Condensed
Consolidated Statements of Cash Flows
For the
Nine Months Ended September 30, 2010 and 2009
Unaudited
Nine Months
|
Nine Months
|
|||||||
Ended
|
Ended
|
|||||||
September 30,
|
September 30,
|
|||||||
2010
|
2009
|
|||||||
Cash
Flows from Operating Activities
|
||||||||
Net
(loss) earnings
|
$ | (832,634 | ) | $ | 136,426 | |||
Adjustments
to reconcile net (loss) earnings to net cash provided by (used in)
operating activities:
|
||||||||
Consulting
fees paid by issuance of common stocks
|
75,000 | - | ||||||
Depreciation
|
22,505 | 21,780 | ||||||
Stock
based compensation
|
230,451 | 162,387 | ||||||
Net
changes in assets and liabilities:
|
||||||||
Accounts
receivable - trade
|
401,564 | (237,786 | ) | |||||
Prepaid
expenses and other assets
|
18,429 | 3,186 | ||||||
Government
grants receivable
|
87,026 | - | ||||||
Accounts
payable - trade
|
13,925 | (3,673 | ) | |||||
Other
payables and accrued expenses
|
(76,426 | ) | (132,873 | ) | ||||
Billings
in excess of costs on uncompleted contracts
|
(17,400 | ) | 12,120 | |||||
Accrued
severance pay
|
13,081 | 9,459 | ||||||
Net
Cash Used in Operating Activities
|
(64,479 | ) | (28,974 | ) | ||||
Cash
Flows from Investing Activities
|
||||||||
Acquisition
of plant and equipment
|
(14,248 | ) | (28,007 | ) | ||||
Short-term
investment
|
(9 | ) | (68 | ) | ||||
Net
Cash Used in Investing Activities
|
(14,257 | ) | (28,075 | ) | ||||
Cash
Flows from Financing Activities
|
||||||||
Advances
from stockholder
|
(12,894 | ) | 26 | |||||
Proceeds
from issuance of common stock
|
79,633 | - | ||||||
Net
Cash Provided by Financing Activities
|
66,739 | 26 | ||||||
Net
Decrease in Cash
|
(11,997 | ) | (57,023 | ) | ||||
Cash
- Beginning of Period
|
165,504 | 169,206 | ||||||
Cash
- End of Period
|
$ | 153,507 | $ | 112,183 | ||||
Cash
|
||||||||
Cash
|
$ | 68,507 | $ | 112,183 | ||||
Restricted
cash
|
85,000 | - | ||||||
$ | 153,507 | $ | 112,183 | |||||
Interest
and Income Taxes Paid
|
||||||||
During
the period, the Company had cash flows arising from income taxes and
interest paid as follows:
|
||||||||
Interest
|
$ | 89 | $ | 178 | ||||
Income
taxes
|
$ | - | $ | - |
(The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.)
F-4
M-WISE,
INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
September
30, 2010 and 2009
Unaudited
1.
|
Description
of Business and Going Concern
|
a)
|
Description
of Business
|
m-Wise
Inc. (the "Company") is a Delaware corporation that develops interactive
messaging platforms for mobile phone-based commercial applications,
transactions, and information services with internet billing
capabilities.
The
Company's wholly-owned subsidiaries are: m-Wise Ltd., which is located in Israel
and was incorporated in 2000 under the laws of Israel; and m-Wise Tecnologia
LTDA., which is located in Brazil and was incorporated in 2009 under the laws of
Brazil.
b)
|
Going
Concern
|
The
Company's unaudited consolidated financial statements are presented on a going
concern basis, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. The Company's negative working
capital raises substantial doubt as to its ability to continue as a going
concern. As at September 30, 2010 and December 31, 2009, the Company experienced
a working capital deficit of $804,579 and $381,116, respectively. The
Company is currently being investigated by the United States Exchange Commission
("SEC") as disclosed in note 12(a), which could result in significant adverse
effects to the Company including potential revoking of the Company's
registration and/or significant fines and penalties.
The
Company's ability to continue as a going concern is also contingent upon its
ability to secure additional financing, continuing sale of its products and
attaining profitable operations.
The
Company is pursuing additional financing, but there can be no assurance that the
Company will be able to secure financing when needed or obtain financing on
terms satisfactory to the Company, if at all.
The
unaudited 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 that may result from the
possible inability of the Company to continue as a going concern.
F-5
M-WISE,
INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
September
30, 2010 and 2009
Unaudited
2.
|
Summary
of Significant Accounting Policies
|
The
accounting policies of the Company are in accordance with generally accepted
accounting principles in the United States of America, and their basis of
application is consistent with that of the previous year. Outlined
below are those policies considered particularly significant:
a)
|
Basis
of Presentation
|
The
unaudited consolidated financial statements presented herein have been prepared
by the Company in accordance with accounting principles generally accepted in
the United States of America ("GAAP") for interim financial statements and in
accordance with the instructions to Form 10-Q. Accordingly, they do
not include all information and notes required by GAAP for complete financial
statements. The unaudited consolidated financial statements reflect all
adjustments, consisting of normal recurring adjustments and accruals which, in
the opinion of management, are considered necessary for a fair presentation of
the Company's consolidated financial position, results of operations and cash
flows for the interim periods presented.
Results
of operations for the interim periods are not necessarily indicative of results
of operations for future interim periods or for the full fiscal year ending
December 31, 2010. The accompanying unaudited consolidated financial statements
should be read in conjunction with the audited consolidated financial statements
of the Company for the fiscal year ended December 31, 2009.
b)
|
Recent
Accounting Pronouncements Affecting the
Company
|
In
February 2010, the FASB issued ASU 2010-09, “Subsequent Events (Topic 855);
Amendments to Certain Recognition and Disclosure Requirements” (“ASU 2010-09”).
The standard amends Subtopic 855-10, “Subsequent Events” to remove the
requirement for a SEC filer to disclose the date through which subsequent events
have been evaluated. ASU 2010-09 is effective upon issuance of the final update.
The Company does not expect the adoption of ASU 2010-09 to have a material
impact on its financial statements.
In July
2010, the FASB issued ASU 2010-20, “Disclosures about the Credit Quality of
Financing Receivables and the Allowance for Credit Losses” (“ASU 2010-20”). The
standard amends ASC Topic 310, “Receivables” to enhance disclosures about the
credit quality of financing receivables and the allowance for credit losses by
requiring an entity to provide a greater level of disaggregated information and
to disclose credit quality indicators, past due information, and modifications
of its financing receivables. ASU 2010-20 is effective for interim and annual
fiscal years beginning after December 15, 2010 for public entities and for
interim and annual fiscal years beginning after December 15, 2011 for nonpublic
entities. The Company does not expect the adoption of ASU 2010-20 to have a
material impact on its financial statements.
F-6
M-WISE,
INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
September
30, 2010 and 2009
Unaudited
3.
|
Plant
and Equipment
|
Plant and
equipment is comprised of the following:
September 30,
2010
|
December 31,
2009
|
|||||||||||||||
|
Accumulated
|
|
Accumulated
|
|||||||||||||
Cost
|
Depreciation
|
Cost
|
Depreciation
|
|||||||||||||
Furniture
and equipment
|
$ | 73,559 | $ | 46,620 | $ | 73,559 | $ | 42,590 | ||||||||
Computer
equipment
|
189,226 | 152,687 | 174,978 | 134,292 | ||||||||||||
Leasehold
improvements
|
2,592 | 2,436 | 2,592 | 2,356 | ||||||||||||
$ | 265,377 | $ | 201,743 | $ | 251,129 | $ | 179,238 | |||||||||
Net
carrying amount
|
$ | 63,634 | $ | 71,891 |
Depreciation
expenses of $20,501 (2009 - $19,797) and $2,004 (2009 - $1,983) have been
included in research and development, and general and administrative expenses,
respectively.
4.
|
Advances
from Stockholder
|
The
advances from the Company's major stockholder are non-interest bearing,
unsecured and have no fixed terms of repayment.
5.
|
Accrued
Severance Pay
|
The
Company accounts for its potential severance liability of its Israeli subsidiary
in accordance with ASC 715, "Compensation - Retirement Benefits". The Company's
liability for severance pay is calculated pursuant to applicable labour laws in
Israel on the most recent salary of the employees multiplied by the number of
years of employment as of the balance sheet date for all employees. The
Company's liability is fully accrued and reduced by monthly deposits with
severance pay funds and insurance policies. As at September 30, 2010
and December 31, 2009, the amount of the liabilities accrued were $440,236 and
$353,880, respectively. Severance pay expenses for the nine months ended
September 30, 2010, and 2009 were $75,456 and $59,590,
respectively.
The
Company makes monthly payments to the severance funds with insurance companies,
that the employees choose. The amounts deposited with the insurance companies
are not under the control or administration of the Company. The insurance
companies are governed by local regulations that limit the asset allocation in
high risk assets.
F-7
M-WISE,
INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
September
30, 2010 and 2009
Unaudited
5.
|
Accrued Severance
Pay (cont'd)
|
The
deposit funds include profits accumulated up to the balance sheet date from the
Israeli company. The deposited funds may be withdrawn only upon the fulfillment
of the obligation pursuant to Israeli severance pay laws or labour
agreements. Cash surrender values of the deposit funds as of
September 30, 2010, and December 31, 2009, were $299,662 and $226,387,
respectively. Income earned from the deposit funds for 2010 and 2009
was immaterial.
6.
|
Capital
Stock
|
Authorized:
310,000,000
|
Common
stock, par value $0.0017 per share
|
|
170,000,000
|
Preferred
stock
|
|
Series
"A":
|
convertible,
voting, par value of $0.0017 per share
|
|
Series
"B":
|
10%
non-cumulative dividend, redeemable, convertible, voting, par
value of $0.0017 per share
|
|
Series
"C":
|
10%
non-cumulative dividend, convertible, voting, par value of $0.0017 per
share
|
September
30,
2010
|
December
31,
2009
|
|||||||
Issued:
|
||||||||
149,974,951 Common
stock (2009 - 139,322,145)
|
$ | 254,958 | $ | 236,848 |
Stock
Options and Warrants:
The
Company has accounted for its stock options and warrants in accordance with SFAS
No. 123(R) "Share-Based Payments" ("FAS No. 123(R)"), and SFAS No. 148,
"Accounting for Stock - Based Compensation - Transition and Disclosure - an
amendment of FASB Statements No. 123" ("SFAS No. 148"). The value of options
granted has been estimated by the Black Scholes option pricing model. The
assumptions are evaluated annually and revised as necessary to reflect market
conditions and additional experience. The following assumptions were
used:
2010
|
2009
|
|||||||||||||||
Israel
|
International
|
Israel
|
International
|
|||||||||||||
Expected
discount yield
|
- | % | - | % | - | % | - | % | ||||||||
Interest
rate
|
2.1 | % | 1.5 | % | 2.1 | % | 2.1 | % | ||||||||
Expected
volatility
|
122 | % | 122 | % | 122 | % | 122 | % | ||||||||
Expected
life in years
|
1.25 | 3.25 | 2 | 4 |
F-8
M-WISE,
INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
September
30, 2010 and 2009
Unaudited
6.
|
Capital Stock (cont'd)
|
On
December 18, 2009, the exercise price of the 5,263,158 warrants originally
issued to Syntek was changed to $0.015, resulting in additional compensation
cost of $17,369 included in interest and other.
On
January 7, 2010, 2,248,251 warrants were converted into 2,057,148
common shares, in a cashless exercise.
On
January 12, 2010, 5,263,158 warrants were converted into 5,263,158 common shares
at an exercise price of $0.015 per warrant, and cash received was
$79,633.
On
February 1, 2010, the Company issued 750,000 common shares, valued at $30,000,
for consulting services.
On March
22, 2010, the Company issued 1,000,000 common shares, valued at $20,000, for
consulting services.
On August
30, 2010, the Company issued 625,000 common shares, valued at $25,000, for
consulting services.
On
September 14, 2010, 1,000,000 warrants were converted into 957,500 common
shares, in a cashless exercise.
Stock
Options:
Under the
Israel 2001 Share Option Plan, management authorized stock options for
2,403,672 common shares of the Company, and under the International
2001 Share Option Plan, stock options for 300,000 common shares. As
of September 30, 2010, 3,672 options under the Israel 2001 Share Option Plan for
common stock were not yet granted and available for future grant.
F-9
M-WISE,
INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
September
30, 2010 and 2009
Unaudited
6.
|
Capital Stock (cont'd)
|
Stock
Options (cont'd):
Under the
Israel 2003 Stock Option Plan, management authorized stock options (on a post
conversion, post split basis) for 16,094,106 preferred Class "B"
shares. On January 5, 2006, the share option plan was amended to
authorize an additional 1,260,000 stock options. On August 14, 2006, the share
option plan was amended to authorize an additional 6,000,000 stock options. On
August 3, 2009, the exercise price of 5,000,000 options granted under the Israel
2003 Stock Option Plan and 11,000,000 options granted under the 2003
International Share Option Plan was amended to $0.02. As of September 30, 2010,
38,256 options under the Israel 2003 Stock Option Plan were not yet granted and
available for future grant.
On August
3, 2009, the Company lowered the exercise price of 5,000,000 options in its
Israel 2003 Stock Option Plan and 11,000,000 options in the International 2003
Share Option Plan to $0.02, resulting in additional compensation costs of
$28,800 in accordance with SFAS 123(R), Paragraph A150. $28,800 was included in
general and administrative expense.
On August
18, 2009, 180,000 stock options at an exercise price of $0.02 were granted under
the International 2003 Share Option Plan.
On August
25, 2009, 60,000 stock options at an exercise price of $0.0017 were granted
under the International 2003 Share Option Plan.
On
October 22, 2009, 200,000 stock options at an exercise price of $0.03 were
granted under the International 2003 Share Option Plan.
On
December 30, 2009, 4,000,000 stock options at an exercise price of $0.02 and
7,000,000 stock options at an exercise price of $0.03 were granted under the
International 2003 Share Option Plan.
On
December 30, 2009, 13,000,000 stock options at an exercise price of $0.02 were
granted under the Israel 2003 Stock Option Plan.
On March
23, 2010, 500,000 stock options at an exercise price of $0.03 were granted under
the International 2003 Share Option Plan.
The
options vest gradually over a period of four years from the date of grant for
the Israel Plan and ten years (no less than 20% per year for five years for
options granted to employees) for the International Plan. The term of each
option shall not be more than eight years from the date of grant in Israel and
ten years from the date of grant in the International Plan.
The
Company's results of operations for the nine months ended September 30, 2010 and
2009 include share-based employee compensation expense totaling $230,451 and
$162,387, respectively. Such amounts have been included in the Condensed
Consolidated Statements of Operations and Comprehensive (Loss) Income in general
and administrative, and research and development expenses.
F-10
M-WISE,
INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
September
30, 2010 and 2009
Unaudited
6.
|
Capital Stock (cont'd)
|
Stock
Options (cont'd):
The
following table summarizes the activity of common stock options during the nine
months ended September 30, 2010 and the year ended December 31,
2009:
2010
|
2009
|
|||||||||||||||
Israel
|
International
|
Israel
|
International
|
|||||||||||||
Outstanding,
beginning of year
|
38,901,400 | 39,616,797 | 25,901,400 | 28,176,797 | ||||||||||||
Granted
|
- | 500,000 | 13,000,000 | 11,440,000 | ||||||||||||
Exercised
|
- | - | - | - | ||||||||||||
Cancelled
|
- | - | - | - | ||||||||||||
Forfeited
|
(361,250 | ) | - | - | - | |||||||||||
Outstanding,
end of year
|
38,540,150 | 40,116,797 | 38,901,400 | 39,616,797 | ||||||||||||
Weighted
average fair value of options granted during the year
|
$ | - | $ | 0.0236 | $ | 0.0157 | $ | 0.0153 | ||||||||
Weighted
average exercise price of common stock options, beginning of
year
|
$ | 0.0262 | $ | 0.0286 | $ | 0.0315 | $ | 0.0356 | ||||||||
Weighted
average exercise price of common stock options granted in the
year
|
$ | - | $ | 0.0300 | $ | 0.0200 | $ | 0.0262 | ||||||||
Weighted
average exercise price of common stock options, end of
year
|
$ | 0.0262 | $ | 0.0356 | $ | 0.0262 | $ | 0.0286 | ||||||||
Weighted
average remaining contractual life of common stock options
|
1.81
years
|
1.9
years
|
2.5
years
|
2.63
year
|
7.
|
Income
Taxes
|
The
Company accounts for income taxes in accordance with ASC 740, "Income Taxes"
("ASC 740"). This standard prescribes the use of the liability method whereby
deferred tax asset and liability account balances are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates. The effects of future changes in
tax laws or rates are not anticipated.
F-11
M-WISE,
INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
September
30, 2010 and 2009
Unaudited
7.
|
Income Taxes (cont'd)
|
Under ASC
740, income taxes are recognized for the following: a) amount of tax payable for
the current year, and b) deferred tax liabilities and assets for future tax
consequences of events that have been recognized differently in the financial
statements than for tax purposes. Management determined that the values of its
assets and liabilities recorded for financial reporting purposes are not
materially different from their values for income tax purposes and therefore, no
deferred tax assets/liabilities have been recorded in the accompanying financial
statements to account for the temporary differences.
There are
no differences between the Company's reported income tax expense on operating
income and the expense that would otherwise result from the application of
statutory rates. The Company's non capital loss carryforwards are being used to
offset the current income tax expense.
The
Company has deferred income tax assets as follows:
September
30,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
Deferred
income tax assets
|
||||||||
Loss
carryforwards
|
$ | 3,239,000 | $ | 3,027,000 | ||||
Less:
Valuation allowance
|
(3,239,000 | ) | (3,027,000 | ) | ||||
Total
net deferred tax assets
|
$ | - | $ | - |
For the
nine months ended September 30, 2010 and the year ended December 31, 2009, the
Company provided a valuation allowance equal to the deferred income tax assets
because it is not presently more likely than not that they will be
realized.
As of
September 30, 2010, the Company had approximately $12,671,000 tax loss
carryforwards in the United States. Tax loss carryforwards in the United States,
if not utilized, will expire in 20 years from the year of origin as
follows:
December
31, 2020
|
$ | 751,500 | ||
2021
|
2,398,000 | |||
2022
|
778,000 | |||
2023
|
5,005,000 | |||
2024
|
581,000 | |||
2025
|
560,500 | |||
2026
|
196,000 | |||
2027
|
700,000 | |||
2028
|
945,000 | |||
2029
|
756,000 | |||
$ | 12,671,000 |
F-12
M-WISE,
INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
September
30, 2010 and 2009
Unaudited
7.
|
Income Taxes (cont'd)
|
As of
September 30, 2010, the Company had approximately $204,000 (December 31, 2009 -
$187,000) and approximately $60,000 (December 31, 2009 - nil) in tax losses in
its Israeli subsidiary and Brazil subsidiary, respectively, which will
carryforward indefinitely.
8.
|
Related
Party Transactions
|
During
the nine months ended September 30, 2010, the Company incurred directors'
consulting fees and salaries in the amount of $104,994 (2009 - $104,994). As of
September 30, 2010, $664,953 (December 31, 2009 - $623,924) was unpaid and
included in other payables and accrued expenses.
9.
|
Significant
Customers
|
For the
nine months ended September 30, 2010, the Company had four major customers which
primarily accounted for 23%, 17%, 15% and 13% of total revenues. For the nine
months ended September 30, 2009, the Company had three major customers which
primarily accounted for 33%, 20% and 12% of total revenues.
10.
|
Segmented
Information
|
Israel
|
USA
|
Brazil
|
Total
|
||||||||||||||
Gross
revenue
|
September
30, 2010
|
$ | 395,360 | $ | 1,622,391 | $ | 48,841 | $ | 2,066,592 | ||||||||
September
30, 2009
|
$ | 710,780 | $ | 1,674,337 | $ | - | $ | 2,385,117 | |||||||||
Net
income (loss)
|
September
30, 2010
|
$ | (16,809 | ) | $ | (756,121 | ) | $ | (59,704 | ) | $ | (832,634 | ) | ||||
September
30, 2009
|
$ | 52,403 | $ | 84,023 | $ | - | $ | 136,426 | |||||||||
Total
assets
|
September
30, 2010
|
$ | 225,340 | $ | 445,759 | $ | 15,295 | $ | 686,394 | ||||||||
December
31, 2009
|
$ | 636,617 | $ | 577,041 | $ | - | $ | 1,213,658 |
For the
nine months ended September 30, 2010, the Company derived 15% (2009 - 12%) of
its revenues from sales to the Far East, 24% from sales to Europe (2009 - 16%)
and 61% (2009 - 72%) from sales to America.
F-13
M-WISE,
INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
September
30, 2010 and 2009
Unaudited
11.
|
Commitments
|
Operating
Vehicle Leases and Rent Expense
The
Company is committed under an operating lease for its premises expiring June 30,
2011. Minimum annual payments (exclusive of taxes, insurance, and maintenance
costs) are as follows:
2010
|
$ | 19,200 | ||
2011
|
38,400 | |||
$ | 57,600 |
In
addition, the Company is committed under operating vehicle leases as
follows:
2010
|
$ | 17,190 | ||
2011
|
61,460 | |||
2012
|
34,340 | |||
2013
|
10,690 | |||
$ | 123,680 |
Rent
expense paid during the nine months ended September 30, 2010 and 2009 was
$79,118 and
$58,991, respectively.
F-14
M-WISE,
INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
September
30, 2010 and 2009
Unaudited
12.
|
Contingencies
|
|
a)
|
SEC
investigation
|
The SEC
commenced an investigation concerning the Company, certain Officers and
Directors of the Company, and certain other unrelated entities for violations of
Sections 10(b) and 13(a) of the Securities Exchange Act of 1934 (the “Exchange
Act”) and Sections 5 and 17(a) of the Securities Act of 1933. The
activity that is subject of the alleged violations occurred in 2005. The SEC
issued a Wells Notice on September 14, 2010 stating that it was its intention to
recommend to the SEC that it bring a civil injunctive action against the
Company. In connection with the contemplated civil action, the SEC
may seek a permanent injunction, disgorgement plus pre judgment interest and
civil penalties. In addition, the SEC indicated that it intends to
recommend that the SEC institute an administrative proceeding pursuant to
Section 12(j) of the Exchange Act against the Company to determine whether it is
appropriate to suspend or revoke the registration of the Company’s
securities. The SEC has not brought a formal action against the
Company, accordingly, the Company cannot predict the outcome of the
matter.
|
b)
|
Letter
of Credit
|
As at
September 30, 2010, the Company had a standby letter of credit outstanding of
$85,000 (December 31, 2009 - $0). The facility is secured by cash of $85,000
(December 31, 2009 - $0).
13.
|
Government
Grants
|
In 2009,
the Israeli subsidiary was authorized to receive approximately $253,000 from the
Israeli government grant program. The Israeli subsidiary is required to pay the
government agency royalties in the amount of 3% of gross sales from the products
and services being developed relating to the grant during the initial 2 years
and 3.5% per annum thereafter. As at September 30, 2010, the Company received
approximately $230,315 with no further funds to be received from the government.
No royalties have been paid as there have been no sales from the related
products for the nine month period ending September 30, 2010. The amount was
recorded as a reduction of the research and development expense incurred in the
period. The Company completed the project in May 2010.
14.
|
Comparative
Information
|
Certain
comparative figures have been reclassified to conform to the current period’s
financial statement presentation.
F-15
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
The
following discussion should be read in conjunction with our consolidated
financial statements and related notes included elsewhere in this Quarterly
Report.
This
filing contains forward-looking statements. The words "anticipate," "believe,"
"expect, "plan," "intend," "seek," "estimate," "project," "will," "could,"
"may," and similar expressions are intended to identify forward-looking
statements. These statements include, among others, information regarding future
operations, future capital expenditures, and future net cash flow. Such
statements reflect our management’s current views with respect to future events
and financial performance and involve risks and uncertainties, including,
without limitation: (a) the timing of our sales could fluctuate and lead to
performance delays; (b) without additional equity or debt financing we cannot
carry out our business plan; (c) our stockholders have pre-emptive rights to
purchase securities of m-Wise, which could impair our ability to raise capital;
(d) we operate internationally and are subject to currency fluctuations, which
could cause us to incur losses even if our operations are profitable; (e) we are
dependent upon certain major customers, and the loss of one or more of such
customers could adversely affect our revenues and profitability; (f) our
research and development facilities are located in Israel and we have important
facilities and resources located in Israel which could be negatively affected
due to military or political tensions; (g) certain of our officers and employees
are required to serve in the Israel defense forces and this could force them to
be absent from our business for extended periods; (h) the rate of inflation in
Israel may negatively impact our costs if it exceeds the rate of devaluation of
the NIS against the U.S. Dollar. Should one or more of these risks or
uncertainties occur, or should underlying assumptions prove to be incorrect,
actual results may vary materially and adversely from those anticipated,
believed, estimated or otherwise indicated. These forward-looking statements
speak only as of the date of this Quarterly Report. Subject at all
times to relevant federal and state securities law disclosure requirements, we
expressly disclaim any obligation or undertaking to disseminate any update or
revisions to any forward-looking statement contained herein to reflect any
change in our expectations with regard thereto or any changes in events,
conditions or circumstances on which any such statement is
based. Consequently, all of the forward-looking statements made in
this Quarterly Report are qualified by these cautionary statements and there can
be no assurance of the actual results or developments.
OVERVIEW
We were
incorporated in February 2000, and commenced operations immediately thereafter.
We initially primarily provided pan-European wireless application service
provider operations by hosted MOMA Platform services to customers in the United
Kingdom, Spain, France and Italy. We established data centers in Spain, Italy,
and France that were connected to our main data center in the United Kingdom. We
had connectivity and billing arrangements with cellular operators that enabled
us to provide our hosted services. We gained strong credibility and experience
as a wireless application service provider during calendar years 2000 and 2001,
while we continued to build and develop our wireless middleware product.
However, due to the high costs and low revenues in the European wireless
application service provider (ASP) market, in 2002, our management decided to
transition our focus away from pan-European wireless application service
providers, toward installing and licensing our middleware technology at cellular
operators and wireless application service providers worldwide, and to operate
through original equipment manufacturers (OEMs) and regional sales
representatives to sell our products. Our shift away from hosted
wireless application services using our Platform enabled us to focus more on the
core middleware benefits of our technology in fiscal 2002.
2
During
calendar 2002, we channeled our research and development efforts to enhance and
update our middleware technology to interface with advanced and emerging
wireless technologies such as MMS (Multimedia Messaging Service - delivery of
highly enhanced images and audio files) and J2ME, which utilizes Java
programming technology built into certain cellular phones, enables applications
to be written once for a wide range of devices, to be downloaded dynamically,
and to leverage each device’s native capabilities. We also upgraded our
middleware platform to incorporate modules for application deployment and
management, for centralized management of multiple value added services and
multiple third-party content and media providers, and for managing increased
data traffic and real-time billing and reporting requirements. In
addition, we restructured our sales efforts toward establishing distribution
channels via OEMs and partnerships with major IT vendors and system
integrators. In fiscal 2003, we had to direct our research and
development resources in an effort to respond to specific business opportunities
that were introduced to us by our distributors and original equipment
manufacturers, and to be able to meet our customers’ enhanced requirements in
elements such as increased transactions volume support and new J2ME
possibilities.
During
calendar 2004, we followed the market evolution with respect to the enhanced
ability to deliver downloadable content directly to mobile phones and invested
significant research and development efforts to comply with such new market
trends. We substantially improved the MOMA Platform mobile content management
abilities, especially with respect to content adaptation to a growing number and
types of mobile handsets, and connectivity between the MOMA platform and content
presentation layers such as Internet and WAP interfaces. We also concluded sales
agreements with new wireless operators and wireless application service provider
clients, and at the same time, improved our product positioning in the
market.
During
calendar 2005, we continued to follow-up with the rapid changes in the mobile
entertainment market, especially with the growing introduction of enhanced
mobile entertainment services through the third generation infrastructure for
wireless services, and the continuous development of wireless handsets and their
ability to present higher levels of multi media. We invested significant
research and development efforts in complying with these changes, and indeed,
the delivery of enhanced mobile entertainment services became a central part of
the MOMA Platform functionalities. We also identified a growing trend in the
market that many potential customers preferred to outsource platform
functionalities to service providers (ASPs) rather than to purchase platform and
install on site (Customer Premises Model) and we invested significant funds and
efforts in the infrastructure that was required for this ASP model. During 2006,
we invested extensive efforts in establishing our customer base and expanding
our distribution channels, by enhancing our technology and expanding the terms
and scope of our relationships with our customers.
During
calendar 2007, we were able to acquire prestige and market leader customers, and
strengthen the profit share model that we began developing in 2005. We signed
profit share based deals with News International, part of the News Corp group,
to deliver mobile entertainment services in conjunction of leading UK
newspapers, The Sun and The Times. We signed a profit share based deal with
Telcogames, a leading mobile games company, to provide a hosted environment for
the delivery of their services to their customers. This deal expanded the reach
of our technology and it made it available to the large market of mobile games
provider which we actively pursue. We signed a deal with Arvato Mobile, part of
the great media group Bertelsmann and one of the largest leaders in mobile
entertainment worldwide, to provide large variety of mobile content management
and delivery services on a profit share model. We also strengthened our
relationships with existing customers such as Thumbplay, SupportComm, Logia
Mobile and Interchan (formerly Comtrend) by providing the needed support and
technical expertise to their expansion and expanding the basis for cooperation.
We clearly saw that our business shift made in 2005 from a license model to
profit share model started to bear the desired outcome by generating a
stable business environment for recurring revenues and consistently increasing
profitability. Also during 2007, we made considerable business development
investments in the penetration into the US market and the establishment of a
local sales and marketing presence.
3
During
calendar 2008, we expanded our business in our primary markets of the USA and
Brazil. Our US presence, which we established in 2007, developed and expanded as
we had hoped, and we signed new deals in this territory during 2008. We geared
our special expertise in the mobile entertainment industry and signed deals with
records labels such as Universal Motown Republic Group and Interscope which are
part of the Universal Records Group, to deliver various artist specific mobile
content experience. We started working with the leading WPP advertising agency,
Burson Marsteller, and delivered a relatively small mobile marketing project for
them with the expectation to become their selected technology partner in this
market segment and launch additional projects in the future. We also laid the
groundwork for two additional significant business deals in the US which we
expect to execute early in 2009. We also secured two major deals in the
territory of Brazil with Zero 9 and David2Mobile’s Boltcel, leaders in the
Italian mobile entertainment market that plan to launch their services in Brazil
using our technology. We have also been able to strengthen our partnerships with
existing customers, Thumbplay, Arvato Mobile, Interchan, Logia Mobile and
Supportcomm and have been able to benefit from the revenue share model that we
have established with some of them and see growth in our revenues following
their growth in business. Unfortunately we have had to depart from customers
such as The Sun newspaper (one of the accounts we had in News International),
due to expiration of our contract, and Telcogames, due to Telcogames bankruptcy
procedures. We have seen the implication of the global economy downturn
reflected in the activity of some of our customers, yet despite that, we
experienced significant improvement in our revenue growth of 23%
since 2007.
During
2009, we expanded and further established our presence in the Americas. We
increased volume of sales in the US market and engaged and expanded
relationships with many key players in the entertainment industry such as
Fox Mobile Group, Universal Records and Warner Music. We also significantly
strengthened our position as a mobile marketing leader and executed mobile
marketing campaigns for companies like Kodak and WPP's Burson Marsteller
agency.
Additionally,
we expanded our penetration into the Latin and Central America markets. We
established a local presence in Brazil and launched new mobile entertainment
services for local market leaders such as Zero 9, Mega-Vas and Boltcel. We see
Brazil as a key market for m-Wise and we plan to expand our presence in this
country and use it to establish access additional Latin American markets such as
Mexico and Argentina. We also signed an agreement with the Digicel Group of
mobile carriers who selected us to deliver mobile content services in
26 Caribbean and Central and Latin American markets. We expect to see the
results of this agreement in 2010.
Calendar
year 2009 was a significant year for m-Wise as we have been able
to emphasize our unique position as an off-deck mobile marketing and
mobile entertainment service provider. We have significantly enhanced the
underlying technology of our content management and delivery platform and apply
many improvements that would make it an off-the-shelf platform that
significantly minimizes time-to-market for entertainment companies, content
storefronts and mobile marketing campaigns.
4
Further,
calendar year 2009 was a key year in the evolution of mobile entertainment as
the expansion and further penetration of improved mobile networks and mobile
devices became a clear phenomena during this year. We foresee the
expansion of mobile video and other rich media services as a result of improved
mobile bandwidth and the growth of wide screen mobile devices and
we continuously expand our investments in relevant and supporting
technologies. With this evolution we expect to see in 2010 more and more
businesses looking to establish and expand their presence and services in the
mobile world and we believe that our one stop shop mobile platform
will become very attractive for such companies and that we will continue to
expand the reach of our business and our path of profit and growth.
During
the first quarter of 2010, we made a strong investment effort in the expansion
of our presence in the Brazilian market. We expanded the team dedicated to our
Brazilian operations and set our first local human resources in the country. We
strengthened our relationships with existing customers and other key players in
Brazil such as mobile billing aggregators, local content providers and mobile
carriers and we expect to see the results in significant growth in operation in
this market towards the fourth quarter of fiscal 2010 and into 2011. We
anticipate that this investment will have an impact on our balance sheets during
2010. Brazil is one of the largest and fastest growing mobile markets worldwide
and this market plays a key role in our growth strategy.
During
the second quarter of 2010 we have expanded the foundation of our position as a
full service provider comparing to the technology orientation of our position so
far. We signed an agreement with Universal Music where in addition to our
technical platform services we also offer billing and customer care services and
we expect to gain as a result a more significant role in our relationship with
our partners and therefore higher revenues and profit rates.
During
the second quarter of 2010, we also signed a number of deals with companies like
Latcel and Snackable Media which validate our position as a strong player in
mobile content and delivery in the US market and we expect to see the results in
the coming quarters.
During
the third quarter of 2010, we have encountered
some disappointing results from marketing campaigns of one of our key
customers which, based on the revenue share nature of our partnership, resulted
in significantly less revenues from that customer comparing to what was
expected. While we continue to work with that customer to improve the results of
its marketing campaigns, we had to review the use of relevant resources on our
end and re-organize the use of these resources in a way that will be
reflected in cost cutting in Q4 2010. At the same time we were able to secure a
few more deals in the US and Brazilian market and we expect these
deals to add considerable contribution to our balance sheet as of Q4 2010
or Q1 2011.
For the
rest of calendar year 2010 we plan to continue to establish our growing position
as a full service provider in the US and at the same
time strengthen our position as a technology player in
Brazil.
5
Revenues
Our
revenues dropped from $2,385,117 in the nine months ended September 30, 2009 to
$2,066,592 in the nine months ended September 30, 2010 and grew from $2,833,626
in the year ended December 31, 2008 to $3,166,276 in the year ended December 31,
2009. Management believes that our efforts to refocus our resources towards
building relationships with OEMs may yield additional contracts. Although we are
in negotiations for several new contracts there can be no assurance that such
contracts will be secured or that they will generate significant revenue. We
derive revenues from product sales, licensing, revenue share, customer services
and technical support.
When we
license our MOMA Platform solutions to our customers, we generate revenues by
receiving a license payment, ongoing support fees which are typically 15% of the
annual license payment, and professional service fees which are generated from
our customers’ request for additional training, IT administration and tailoring
of our products for their specific needs. When we license our products to our
customers, we install our product at a location specified by our client. We also
derive revenue through our hosted services, whereby we enable customers to
remotely use features of our MOMA Platform (such as a mobile content sales and
delivery service for ring tones and color images), which is installed and hosted
at our location, and receive a set-up fee for launching the services for them,
as well as a portion of our customer's revenues generated through our platform.
When we provide hosted services, we maintain the MOMA Platform at our location
on behalf of our customer.
Geographical
breakdown. We sell our products primarily to customers in America and Europe.
For the nine months ended September 30, 2010, we derived 61% of our revenues
from sales in America, 24% from sales in Europe and 15% from sales in the Far
East. Of these revenues, 79% were derived from sales by the Company, and 21% of
our revenues were derived from sales by our subsidiaries. For the nine months
ended September 30, 2009, we derived 72% of our revenues from sales in America,
12% from sales in the Far East and 16% from sales in Europe. Of these
revenues, 70% were derived from sales by the Company, and 30% of our revenues
were derived from sales by our subsidiaries
For the
year ended December 31, 2009, we derived 76% of our revenues from sales in
America, 14% from sales in Europe and 10% from sales in the Far East. Of these
revenues, 69% were derived from sales by the Company, and 31% of our revenues
were derived from sales by our subsidiary.
Cost
of revenues
Customer
services and technical support cost of revenues consist of the salary and
related costs for our technical staff that provide those services and support
and related overhead expenses.
Operating
expense
Research
and development. Our research and development expenses consist primarily of
salaries and related expenses of our research and development staff, as well as
subcontracting expenses. All research and development costs are expensed as
incurred except equipment purchases that are depreciated over the estimated
useful lives of the assets.
6
General
and administrative. Our general and administrative expenses consist primarily of
salaries and related expenses of our executive, financial, administrative and
sales and marketing staff. These expenses also include costs of professional
advisors such as legal and accounting experts, depreciation expenses as well as
expenses related to advertising, professional expenses and participation in
exhibitions and tradeshows.
Financing
income and expenses
Financing
income consists primarily of interest earned on our cash equivalents balances
and other financial investments and foreign exchange gains. Financing expenses
consist primarily of interest payable on bank loans and foreign exchange
losses.
Critical
Accounting Policies.
We
prepare our consolidated financial statements in conformity with accounting
principles generally accepted in the United States. As such, we are required to
make certain estimates, judgments and assumptions that we believe are reasonable
based upon the information available.
These
estimates and assumptions affect the reported amounts of assets and liabilities
at the date of the consolidated financial statements and the reported amounts of
the periods presented. To fully understand and evaluate our reported
consolidated financial results, we believe it is important to understand our
revenue recognition policy.
Revenue
recognition. Revenues from products sales are recognized on a completed-contract
basis, in accordance with Staff Accounting Bulletin No. 101 "Revenue Recognition
in Financial Statements" ("SAB No. 101"), Statement of Position 97-2 "Software
Revenue Recognition" and Statement of Position 81-1 "Accounting for Performance
of Construction-Type and Certain Production-Type Contracts". The Company has
primarily short-term contracts whereby revenues and costs in the aggregate for
all contracts is expected to result in a matching of gross profit with period
overhead or fixed costs similar to that achieved by use of the
percentage-of-completion method. Accordingly, financial position and results of
operations would not vary materially from those resulting from the use of the
percentage-of- completion method. Revenue is recognized only after all the three
stages of deliverables are complete; installation, approval of acceptance tests
results by the customer and when the product is successfully put into real-life
application. Customers are billed, according to individual agreements, a
percentage of the total contract fee upon completion of work in each stage;
approximately 40% for installation, 40% upon approval of acceptance tests by the
customer and the balance of the total contract price when the software is
successfully put into real-life application. The revenues, less its associated
costs, are deferred and recognized on completion of the contract and customer
acceptance. Amounts received for work performed in each stage are not
refundable.
On-going
service and technical support contracts are negotiated separately at an
additional fee. The technical support is separate from the functionality of the
products, which can function without on-going support.
Technology
license revenues are recognized in accordance with SAB No. 101 at the time the
technology and license is delivered to the customer, collection is probable, the
fee is fixed and determinable, a persuasive evidence of an agreement exists, no
significant obligation remains under the sale or licensing agreement and no
significant customer acceptance requirements exist after delivery of the
technology.
7
Revenue
share is recognized as earned based on a certain percentage of our clients'
revenues from selling services to end users. Usage is determined by receiving
confirmation from the clients.
Revenues
relating to customer services and technical support are recognized as the
services are rendered ratably over the period of the related
contract.
RESULTS
OF OPERATIONS
THREE
MONTHS ENDED SEPTEMBER 30, 2010, COMPARED WITH THE THREE MONTHS ENDED SEPTEMBER
30, 2009.
Revenues.
License
fees and products. Revenues from license fees and products decreased 69% to
$72,672 for the three months ended September 30, 2010, from $236,878 for the
same period in 2009. The decrease is primarily due to $111,666 in revenues which
was derived from two contracts with two customers during 2009.
Revenue
share. Revenues from revenue share decreased 79% to $57,470 for the three months
ended September 30, 2010, from $269,783 for the same period in
2009. The decrease is primarily due to a loss of one customer
during the three months ended September 30, 2010.
Customer
services and technical support. Revenues from customer services and technical
support decreased 1% to $400,322 for the three months ended September 30, 2010,
from $403,861 for the same period in 2009.
Cost of
revenues.
Cost of
revenues decreased 17% to $252,184 for the three months ended September 30,
2010, from $303,483 for the same period in 2009. The decrease was primarily due
to a decrease in payroll and related expenses during the three month period
ended September 30, 2010.
Operating
expenses.
Research
and development. Research and development expenses increased 1% to $147,094 for
the three months ended September 30, 2010, from $145,356 for the same period in
2009. Research and development expenses, stated as a percentage of revenues
increased to 28% for the three months ended September 30, 2010, from 16% for the
same period in 2009.
General and
administrative.
General
and administrative expenses increased 28% to $566,647 for the three months ended
September 30, 2010, from $443,956 for the same period in 2009. This increase was
primarily due to a $78,430 increase in consulting expenses and a $57,513
increase in professional services expenses. General and administrative expenses,
stated as a percentage of revenues increased to 107% for the three months ended
September 30, 2010 from 49% for the same period in 2009.
8
Other
income
Other
Incomes for the three months ended September 30, 2010 decreased 50% to $5,397
from $10,813 for the same period in 2009.
NINE
MONTHS ENDED SEPTEMBER 30, 2010 COMPARED WITH THE NINE MONTHS ENDED SEPTEMBER
30, 2009.
Revenues
License
fees and products. Revenues from license fees and products decreased 36% to
$403,347 for the nine months ended September 30, 2010, from $629,825 for the
same period in 2009.
The
decrease is primarily due to $414,612 in revenues which was derived from two
contracts with two customers during 2009, partially offset by $151,700 in
revenues which was derived from seven contracts with seven customers during
2010.
Revenue
share. Revenues from revenue share decreased 48% to $402,334 for the nine months
ended September 30, 2010, from $776,594 for the same period in
2009. The decrease is primarily due to a loss of one customer
during the nine months ended September 30, 2010.
Customer
services and technical support. Revenues from customer services and technical
support increased 29% to $1,260,911 for the nine months ended September 30,
2010, from $978,698 for the same period in 2009.
Cost of
revenues.
Cost of
revenues increased 30% to $863,758 for the nine months ended September 30, 2010,
from $666,377 for the same period in 2009. The increase was primarily due to
increase in revenues from customer services and technical support during the
nine month period ended September 30, 2010.
Operating
expenses.
Research
and development. Research and development expenses decreased 19% to $355,980 for
the nine months ended September 30, 2010, from $437,659 for the same period in
2009. This decrease was primarily due to an increase of $101,919 in government
grant income, partially offset by a $16,899 increase in stock options expenses.
Research and development expenses, stated as a percentage of revenues, decreased
to 17% for the nine months ended September 30, 2010, from 18% for the same
period in 2009.
9
General and
administrative.
General
and administrative expenses increased 42% to $1,675,527 for the nine months
ended September 30, 2010, from $1,177,613 for the same period in 2009. This
increase was primarily due to a $213,694 increase in consulting expenses, a
$152,909 increase in payroll and related expenses and a $83,366 increase in
professional services expenses. General and administrative expenses, stated as a
percentage of revenues, increased to 81% for the nine months ended September 30,
2010, from 49% for the same period in 2009.
Other
income
Other
Income for the nine months ended September 30, 2010 decreased 32% to $22,470
from $32,958 for the same period in 2009.
Liquidity
and Capital Resources
Our
principal sources of liquidity since our inception have been private sales of
equity securities, stockholder loans, borrowings from banks and to a lesser
extent, cash from operations. We had cash and cash equivalents of $153,507 as of
September 30, 2010 and $165,504 as of December 31, 2009. Our initial capital
came from an aggregate investment of $1.3 million from Cap Ventures Ltd. To
date, we have raised an aggregate of $5,300,000 from placements of our equity
securities (including the investment by Cap Ventures and a $4,000,000 investment
by Syntek Capital AG and DEP Technology Holdings Ltd.). We have also borrowed an
aggregate of $1,800,000 from Syntek Capital AG and DEP Technology Holdings Ltd.
and as of the date of this quarterly report we have no funds available to us
under bank lines of credit. We have a credit line agreement for $500,000 with
Miretzky Holdings Limited. As of September 30, 2010, $291,794 is outstanding
under the credit line. The credit line has no termination date and does not
provide for interest payments.
Other
than the credit line agreement with Miretzky, we do not have any commitments
from any of our affiliates or current stockholders, or any other non-affiliated
parties, to provide additional sources of capital to us. We have an equity line
for $10.0 million with Dutchess Private Equity Fund and as of November 15, 2010
we have drawn $828,675 under the Equity Line. We will need approximately $1.2
million for the next twelve months for our operating costs which mainly include
salaries, office rent and network connectivity, which we estimate will total
approximately $80,000 per month, and for working capital. We intend to finance
this amount from our ongoing sales and through the sale of either our debt or
equity securities or a combination thereof, to affiliates, current stockholders
and/or new investors. Currently we do not believe that our future capital
requirements for equipment and facilities will be material.
Operating
activities.
For the
nine months ended September 30, 2010, net cash used in operating activities was
$64,479 primarily due to our net loss of $832,634, partially offset by a
$401,564 decrease in accounts receivable and a $230,451 in employee vested
options expense. In the same period in 2009, net cash used in operating
activities was $28,974 primarily due to a $ 237,786 increase in accounts
receivable, partially offset by a $162,387 in employee vested options
expense.
Investing and financing
activities.
Property
and equipment consist primarily of computers, software, and office equipment.
For the nine months ended September 30, 2010, net cash used in investing
activities was $14,257 consisting of an investment of $14,248 in equipment and a
$9 increase in short-term investment. In the same period in 2009, net cash used
in investing activities was $28,075 consisting of an investment of $28,007 in
equipment and a $68 increase in short-term investment. For the nine months ended
September 30, 2010, net cash provided by financing activities was $66,739
consisting of $79,633 proceeds from issuance of common stock, partially offset
by a $12,894 decrease in advances from shareholders.. In the same period in
2009, net cash provided by financing activities was $26 due to an increase in
advances from shareholders.
10
Dividends
We have
not paid any dividends on our common stock. We currently intend to retain any
earnings for use in our business, and therefore do not anticipate paying cash
dividends in the foreseeable future.
Off
Balance Sheet Arrangements
None.
Item
3.
|
Quantitative
and Qualitative Disclosures about Market
Risk
|
Not
applicable.
Item
4.
|
Controls
and Procedures
|
Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the
period covered by this Quarterly Report. Based upon this
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are effective in ensuring that that
information required to be disclosed is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms, and is accumulated and communicated to management,
to allow for timely decisions regarding required disclosure of material
information required to be disclosed in the reports that we file or submit under
the Exchange Act.
There
were no changes in our internal control over financial reporting identified in
connection with the evaluation described above during the period covered by this
report that has materially affected or is reasonably likely to materially affect
our internal controls over financial reporting.
PART
II:
OTHER
INFORMATION
Item
1.
|
Legal
Proceedings
|
The
United States Securities Exchange Commission commenced an investigation titled
“Score One, Inc.” concerning the Company, certain Officers and Directors of the
Company and certain other unrelated entities for violations of Sections 10(b)
and 13(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) and
Sections 5 and 17(a) of the Securities Act of 1933. The activity that
is the subject of the alleged violations occurred in 2005. The SEC
issued a Wells Notice on September 14, 2010 stating that it was its intention to
recommend to the SEC that it bring a civil injunctive action against the
Company. In connection with the contemplated civil action, the SEC
may seek a permanent injunction, disgorgement plus pre judgment interest and
civil penalties. In addition, the SEC indicated that it intends to
recommend that the SEC institute an administrative proceeding pursuant to
Section 12(j) of the Exchange Act against the Company to determine whether it is
appropriate to suspend or revoke the registration of m-Wise’s
securities. The investigation is still in the non-public phase and
the SEC has not brought a formal action against the Company. The
Company cannot predict the outcome of the matter. In addition, the SEC issued
Wells Notices to certain Officers and Directors of the Company. The SEC may seek
disgorgement, prejudgment interest, civil penalties, an officer and director
bar, and a penny stock bar against them.
11
Item
1A.
|
Risk
Factors
|
Not
applicable.
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
|
Not
applicable.
Item
5.
|
Other
Information
|
Not
applicable.
Item
6.
|
Exhibits
|
Exhibit No.
|
Description
|
|
3.1
|
Amended
and Restated Certificate of Incorporation(2)
|
|
3.2
|
Bylaws(2)
|
|
4.1
|
Purchase
and registration rights agreement and schedule of details(2)
|
|
10.1
|
Amended
and Restated Employment Agreement with Mordechai Broudo(2)
|
|
10.2
|
Amendment
to Amended and Restated Employment Agreement with Mordechai Broudo(2)
|
|
10.3
|
Amended
and Restated Employment Agreement with Shay Ben-Asulin(2)
|
|
10.4
|
Amendment
to Amended and Restated Employment Agreement with Shay Ben-Asulin(2)
|
|
10.5
|
Employment
Agreement, Gabriel Kabazo(2)
|
12
10.6
|
Confidentiality
Rider to Gabriel Kabazo Employment Agreement(2)
|
|
10.7
|
Employment
Agreement Asaf Lewin(2)
|
|
10.8
|
2003
International Share Option Plan(2)
|
|
10.9
|
Form
of Option Agreement, 2003 International Share Option Plan(2)
|
|
10.10
|
2001
International Share Option Plan(2)
|
|
10.11
|
Form
of Option Agreement, 2001 International Share Option Plan(2)
|
|
10.12
|
2003
Israel Stock Option Plan(2)
|
|
10.13
|
Form
of Option Agreement, 2003 Israel Stock Option Plan(2)
|
|
10.14
|
2001
Israel Share Option Plan(2)
|
|
10.15
|
Form
of Option Agreement, 2001 Israel Share Option Plan(2)
|
|
10.16
|
Investors'
Rights Agreement dated January 11, 2001(2)
|
|
10.17
|
Stockholders
Agreement(2)
|
|
10.18
|
Agreement
for Supply of Software and Related Services dated October 14, 2002, by and
between i Touch plc and m-Wise, Inc.
(2)
|
|
10.19
|
Purchase
Agreement between m-Wise, Inc. and Comtrend Corporation dated May 22,
2002(2)
|
|
10.20
|
Amended
and Restated Consulting agreement between Hilltek Investments Limited and
m-Wise dated November 13, 2003(2)
|
|
10.21
|
Consulting
Agreement between Hilltek Investments Limited and m-Wise dated June 24,
2003, subsequently amended (see Exhibit 10.20 above)
(2)
|
|
10.22
|
Amendment
to Investors' Rights Agreement dated October 2, 2003(2)
|
|
10.23
|
Appendices
to 2003 Israel Stock Option Plan(2)
|
|
10.24
|
Appendices
to 2001 Israel Share Option Plan(2)
|
|
10.25
|
Credit
Line Agreement between m-Wise, Inc. and Miretzky Holdings, Limited dated
January 25, 2004(2)
|
|
10.26
|
Termination
and Release Agreement by and among the Company and Syntek capital AG.(3)
|
|
10.27
|
Termination
and Release Agreement dated February 2, 2006, by and among the Company and
DEP Technology Holdings Ltd.
(4)
|
|
21
|
List
of Subsidiaries
(2)
|
|
31.1
|
Rule
13a-14(a)/15d-14(a) Certification.
(1)
|
|
31.2
|
Rule
13a-14(a)/15d-14(a) Certification.
(1)
|
|
32.1
|
Certification
by the Chairman Relating to a Periodic Report Containing Financial
Statements.
(1)
|
|
32.2
|
Certification
by the Chief Financial Officer Relating to a Periodic Report Containing
Financial Statements.
(1)
|
13
(1) Filed
herewith.
(2) Incorporated
by reference from the registration statement filed with the Securities and
Exchange Commission Registration Statement on Form SB-2 (Reg. No.
333-106160).
(3) Incorporated
by reference to Exhibit 10.1 of the Current Report on Form 8-K filed on January
13, 2006.
(4) Incorporated
by reference to Exhibit 10.1 of the Current Report on Form 8-K filed on February
7, 2006.
14
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this Report to be signed on its behalf by the undersigned thereunto
duly authorized.
m-Wise,
Inc.
(Registrant)
|
||
Date: November
22, 2010
|
By:
|
/s/ Mordechai
Broudo
|
Name:
Mordechai Broudo
Title:
Chairman
|
||
Date: November
22, 2010
|
By:
|
/s/ Gabriel Kabazo
|
Name:
Gabriel Kabazo
Title:
Chief Financial Officer and Principal
Accounting
Officer
|
15