As Filed With the Securities and Exchange Commission on April 16, 2007

 

Registration No. 333-___________

 

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM SB-2

 

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

SPO MEDICAL INC. 

(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)

DELAWARE	3829	11-3223672
(STATE OR JURISDICTION OF	PRIMARY STANDARD INDUSTRIAL	(I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION)	CLASSIFICATION CODE NUMBER	IDENTIFICATION NUMBER)

21860 Burbank Blvd., North Building,

Suite 380, Woodland Hills, California 91367

(818) 888-4380

(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,

OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

MICHAEL BRAUNOLD

21860 Burbank Blvd., North Building,

Suite 380, Woodland Hills, California 91367

(818) 888-4380

(Name, address and telephone number of agent for service)

 

Copies of all communications, including all communications

sent to the agent for service, should be sent to:

 

JONATHAN FREEDMAN,ESQ.		DAVID ABOUDI, ESQ.
ABOUDI & BROUNSTEIN		ABOUDI & BROUNSTEIN
174 FIFTH AVENUE, SUITE 204		3 GAVISH STREET
NEW YORK, NY 10010		KFAR SABA, 44641, ISRAEL
212-202-0783		972-9-764-4833

 

APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: From time to time after the effective date of the Registration Statement.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. x

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

 

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(3) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(c) under the Securities Act of 1933, as amended, based upon the average of the high and low sale price of the Common Stock as reported on the Pink Sheets LLC's Electronic Inter-dealer Quotation and Trading System on April 12, 2007.

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Act or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission (the "SEC"), acting pursuant to said Section8(a), may determine.

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SUBJECT TO COMPLETION, DATED ________, 2007

 

PROSPECTUS

 

SPO MEDICAL INC.

 

4,586,109 shares of Common Stock

 

This Prospectus relates to the resale by the selling stockholders of up to 4,586,109 shares of our common stock, par value $0.001 (the "Common Stock") including 948,949 shares of Common Stock and up to 3,637,160 Common Shares issuable upon exercise of our convertible securities.

 

We will not receive any of the proceeds from the sale of the shares by the selling stockholders.

 

The selling stockholders may sell the shares from time to time at the prevailing market price or in negotiated transactions. Each of the selling stockholders may be deemed to be an "underwriter," as such term is defined in the Securities Act of 1933, as amended (the "Act").

 

Our Common Stock is quoted on the Pink Sheets under the trading symbol "SPOM". The last reported sales price per share of our Common Stock as quoted by the Pink Sheets on April 12 was $2.00.

 

AS YOU REVIEW THIS PROSPECTUS, YOU SHOULD CAREFULLY CONSIDER THE MATTERS DESCRIBED IN THE SECTION OF THIS PROSPECTUS TITLED "RISK FACTORS" BEGINNING ON PAGE 3.

 

NEITHER THE SECURITIES EXCHANGE AND COMMISSION (THE "SEC") NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

 

The date of this Prospectus is _________, 2007

PRINCIPAL EXECUTIVE OFFICE:

 SPO Medical Inc.

21860 Burbank Blvd., North Building,

Suite 380, Woodland Hills, California 91367

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TABLE OF CONTENTS

 

		PAGE
PROSPECTUS SUMMARY		1
RISK FACTORS		3
USE OF PROCEEDS		8
DESCRIPTION OF THE AGREEMENTS WITH THE SELLING STOCKHOLDERS		9
DIVIDEND POLICY		11
PRICE RANGE OF COMMON STOCK
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF FINANCIAL OPERATION		12
BUSINESS		16
DESCRIPTION OF PROPERTY		19
LEGAL PROCEEDINGS		19
MANAGEMENT		20
EXECUTIVE COMPENSATION		21
BENEFICIAL OWNERSHIP OF CERTAIN STOCKHOLDERS, DIRECTORS AND EXECUTIVE OFFICERS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS		23
SELLING STOCKHOLDERS		24
PLAN OF DISTRIBUTION		27
DESCRIPTION OF CAPITAL STOCK		28
DISCLOSURE OF SEC POSITION OF INDEMNIFICATION FOR SECURITIES ACT LIABILITIES		28
LEGAL MATTERS		28
AUDITOR CHANGE		28
EXPERTS		29
WHERE YOU CAN FIND MORE INFORMATION		29
INDEX TO FINANCIAL STATEMENTS		F-1

 

We have not authorized anyone to provide you with information different from that contained or incorporated by reference in this Prospectus. The selling stockholders are offering to sell, and seeking offers to buy, shares of our Common Stock only in jurisdictions where offers and sales are permitted. The information contained in this Prospectus is accurate only as of the date of this Prospectus, regardless of the time of delivery of this Prospectus or of any sale of Common Stock.

 

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PROSPECTUS SUMMARY

 

THIS IS ONLY A SUMMARY AND DOES NOT CONTAIN ALL OF THE INFORMATION THAT MAY BE IMPORTANT TO YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS, ESPECIALLY THE SECTION TITLED "RISK FACTORS" AND OUR FINANCIAL STATEMENTS AND THE RELATED NOTES INCLUDED IN THIS PROSPECTUS, BEFORE DECIDING TO INVEST IN SHARES OF OUR COMMON STOCK.

 

SPO MEDICAL INC.

 

SPO Medical Inc. is engaged in the design, development and marketing of non-invasive pulse oximetry technologies to monitor blood oxygen saturation and heart rate for a variety of markets, including medical, homecare, sports and search & rescue. Pulse oximetry is a non-invasive process used to measure blood oxygen saturation levels and is an established procedure in medical practice. We utilize proprietary and patented technologies to deliver oximetry functionality through innovative commercial products that address such applications as emergency care, home monitoring, sleep apnea, cardiovascular performance, cardiac rehabilitation and the physiological monitoring of military personnel and safety care workers. We have 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 body parts, hence minimizing problems of motion and poor profusion. The unique design features contribute to substantially lower electric power requirements and enable a wireless, stand-alone configuration with expanded commercial possibilities.

 

We were originally organized under the laws of the State of Delaware in September 1981 under the name "Applied DNA Systems, Inc." On November 16, 1994, we changed our name to "Nu-Tech Bio-Med, Inc." On December 23, 1998, we changed our name to "United Diagnostic, Inc." Effective April 21, 2005, we acquired 100% of the outstanding capital stock of SPO Medical Equipment Ltd., an Israeli company (“SPO Ltd.”) pursuant to a Capital Stock Exchange Agreement dated as of February 28, 2005 among our company, SPO Ltd. and the shareholders of SPO Ltd., as amended and restated on April 21, 2005 pursuant to which we issued to the former shareholders of SPO Ltd. a total of 5,769,106 shares of our common stock, par value $0.01 (the "Common Stock") representing approximately 90% of the Common Stock then issued and outstanding (the “Acquisition Transaction”). As a result of the Acquisition Transaction, SPO Ltd. became our wholly owned subsidiary and we changed our name from United Diagnostic Inc. to "SPO Medical Inc." Upon consummation of the Acquisition Transaction, we effected a forward subdivision of our Common Stock issued and outstanding on a 2.65285:1 basis.

Responding to the need for life-saving information in the field where people cannot be absolutely stationary, we have developed patented sensors that work accurately during mild physical activity. This technique uses a reflectance method (known as RPO) whereby a very small sensor placed on the body at various locations has the ability to measure oxygen saturation and heart pulse rate. We have incorporated our patented reflectance technology into portable devices for medical and consumer applications. We hold three patents issued by the United States Patent and Trademark Office covering various aspects of our unique RPO based technology.  

 

We currently have three commercial products utilizing our unique oximtery technology. These are the (i) PulseOx 5500TM -- a stand-alone commercial RPO spot check monitor for SpO2 and heart rate, (ii) Check MateTM--- addresses the sports and aviation market’s demand for a lightweight, inexpensive monitor for measuring SpO2 and heart rate during physically active and high-altitude activities and the PulseOx 7500TM --a monitor for extended monitoring of SpO2 and heart rate by means of RPO (the monitor is being initially marketed for pre screening of sleep apnea sufferers). The PulseOx 5500 was first commercially available in the fourth quarter of 2004. We currently have in various stages of development other devices utilizing its oximetry technology. Our mission is to build a profitable business that develops and commercializes medical biosensor products that improve people's lives and increases stockholder value. We intend to leverage our core technologies to develop new, innovative product applications.

 

 

SHARES BEING REGISTERED

 

We are filing this registration statement, including the prospectus attached to it, in satisfaction of undertakings that we undertook in connection with the certain private placements of our debt securities and warrants that we completed in 2005 and 2006, pursuant to which we raised in the aggregate $2,094,000 in gross proceeds. See “Agreements with the Selling Stockholders”. In connection with these private placements, we are registering the resale of 3,316,327 shares of our common stock, par value $0.001 (the “Common Stock”) issuable upon exercise of warrants issued to the investors in these private placements and upon conversion of interest due on the notes that we issued in the 2005 private placement.

 

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CORPORATE INFORMATION

 

Our principal offices are located at 21860 Burbank Blvd., North Building, Suite 380, Woodland Hills, California, 91367 and our telephone number is (818) 888-4380. We maintain a website at www.spomedical.com. Information contained on our website is not part of this Prospectus.

 

 

RISK FACTORS

 

 

 

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RISK FACTORS

 

INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER THE RISKS AND UNCERTAINTIES DESCRIBED BELOW BEFORE YOU PURCHASE ANY OF OUR COMMON STOCK. IF ANY OF THESE RISKS OR UNCERTAINTIES ACTUALLY OCCURS, OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS COULD BE MATERIALLY ADVERSELY AFFECTED. IN THIS EVENT YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.

WE HAVE A HISTORY OF LOSSES AND EXPECT TO INCUR LOSSES AND NEGATIVE OPERATING CASH FLOWS IN THE FUTURE.

 

Our accumulated deficit was approximately $11,049,000 as at December 31, 2006. We expect our operating losses to continue as we continue to expend resources to further develop and enhance our existing product lines, to complete development of new generation products, obtain regulatory clearances or approvals, expand our marketing, sales, manufacturing and finance capabilities and conduct further research and development.

 

We also expect to experience negative cash flow in the future as we fund our operating losses and capital expenditures. We currently have three products that are commercially available. In order to achieve and maintain profitability we must expand our existing product lines.

 

WE MAY NEED TO RAISE ADDITIONAL FUNDS TO IMPLEMENT OUR BUSINESS PLAN AND THERE IS NO ASSURANCE THAT SUCH FUNDS CAN BE RAISED ON TERMS THAT WE WOULD FIND ACCEPTABLE, OR AT ALL.

 

Although management believes funds on hand as well as revenues that we expect to generate in the ordinary course of our business may enable us to meet our operating liquidity needs as they arise, circumstances may arise that would require us to raise additional capital in order to meet our liquidity needs and satisfy our current business plan.   We do not know whether additional financing will be available when needed, or on terms favorable to our stockholders or us. We may raise any necessary funds through public or private equity offerings, debt financings or additional corporate collaboration and licensing arrangements. Any failure to achieve adequate funding in a timely fashion would delay our development programs and could lead to abandonment of one or more of our development initiatives. To the extent we cannot obtain additional funding, our ability to continue to develop and introduce products to market will be limited. Any additional equity financing may be dilutive to stockholders, and debt and certain types of equity financing, if available, may involve restrictive covenants or other provisions that would limit how we conduct our business or finance our operations.

 

WE ARE CURRENTLY DEPENDENT ON LIMITED NUMBER OF PRODUCTS AND IN ORDER TO SUCCEED WE WILL NEED TO DEVELOP AND COMMERCIALIZE OTHER PRODUCTS CURRENTLY UNDER DEVELOPMENT.

 

Unlike many of our competitors which have commercialized a number of products, we are currently dependent on our three pulse oximetry products for the generation of revenues. The PulseOx 5500 was first commercially available in the fourth quarter of 2004. While our core technology has a number of potentially beneficial uses, if that core technology is not widely accepted in the marketplace, we currently do not have other commercialized products to fall back on.

 

We began commercial distribution of the PulseOx 7500TM first quarter 2007. Commercial distribution of the PedOMetrixTM, a monitor being designed specifically for the use with infants and also currently under development, is expected to commence during late fourth quarter of 2007. However, potential products that appear to be promising at any development stage may not reach the market for a number of reasons. These reasons include the possibility that the potential products may:

 

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be found ineffective or cause harmful side effects;

 

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fail to receive necessary regulatory approvals;

 

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be precluded from commercialization by proprietary rights of third parties;

 

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be difficult to manufacture on a large scale; or

 

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be uneconomical or fail to achieve market acceptance.

 

If any of these potential problems occur, we may not successfully market these products.

 

WE DO NOT HAVE A LONG OPERATING HISTORY, WHICH MAKES IT DIFFICULT FOR YOU TO EVALUATE OUR BUSINESS.

 

SPO Ltd. commenced operations in 1998. We introduced our first product into the marketplace in the fourth quarter of 2004. Accordingly, there is limited historical information regarding our revenue trends and operations upon which investors can evaluate our business. Our prospects must be considered in light of the substantial risks, expenses, uncertainties and difficulties encountered by entrants into the medical device industry, which is characterized by increasing intense competition and the relative failure rates.

 

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THE SALE OF OUR PRODUCTS IN THE UNITED STATES IS SUBJECT TO GOVERNMENT REGULATIONS AND WE MAY NOT BE ABLE TO OBTAIN CERTAIN NECESSARY CLEARANCES OR APPROVALS.

 

The design, manufacturing, labeling, distribution and marketing of medical device products in the United States is subject to extensive and rigorous regulation by the Food and Drug Administration (FDA). In order for us to market our products in the United States, we must obtain clearance or approval from the FDA. which can be expensive and uncertain and can cause lengthy delays before we can begin selling our products. We cannot be sure:

 

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that we, or any collaborative partner, will make timely filings with the FDA;

 

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that the FDA will act favorably or quickly on these submissions;

 

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that we will not be required to submit additional information or perform additional clinical studies;

 

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that we would not be required to submit an application for pre-market approval, rather than a 510(k) pre-market notification submission as described below; or

 

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that other significant difficulties and costs will not be encountered to obtain FDA clearance or approval.

 

The FDA may impose strict labeling or other requirements as a condition of its clearance or approval, any of which could limit our ability to market our products. Further, if we wish to modify a product after FDA clearance of a pre-market notification or approval of a pre-market approval application, including changes in indications or other modifications that could affect safety and efficacy, additional clearances or approvals will be required from the FDA. Any request by the FDA for additional data, or any requirement by the FDA that we conduct additional clinical studies or submit to the more rigorous and lengthier pre-market approval process, could result in a significant delay in bringing our products to market and substantial additional research and other expenditures. Similarly, any labeling or other conditions or restrictions imposed by the FDA on the marketing of our products could hinder our ability to effectively market our products. Any of the above actions by the FDA could delay or prevent altogether our ability to market and distribute our products. Further, there may be new FDA policies or changes in FDA policies that could be adverse to us.

 

OUTSIDE THE UNITED STATES, WE ARE SUBJECT TO GOVERNMENT REGULATION, WHICH COULD DELAY OR PREVENT OUR ABILITY TO SELL OUR PRODUCTS IN CERTAIN JURISDICTIONS.

 

In order for us to market our products in Europe and some other international jurisdictions, we and our distributors and agents must obtain required regulatory registrations or approvals. We must also comply with extensive regulations regarding safety, efficacy and quality in those jurisdictions. We may not be able to obtain the required regulatory registrations or approvals, or we may be required to incur significant costs in obtaining or maintaining any regulatory registrations or approvals we receive. Delays in obtaining any registrations or approvals required to market our products, failure to receive these registrations or approvals, or future loss of previously obtained registrations or approvals would limit our ability to sell our products internationally. For example, international regulatory bodies have adopted various regulations governing product standards, packaging requirements, labeling requirements, import restrictions, tariff regulations, duties and tax requirements. These regulations vary from country to country.

 

EVEN IF WE OBTAIN CLEARANCE OR APPROVAL TO SELL OUR PRODUCTS, WE ARE SUBJECT TO ONGOING REQUIREMENTS AND INSPECTIONS THAT COULD LEAD TO THE RESTRICTION, SUSPENSION OR REVOCATION OF OUR CLEARANCE.

 

We are required to adhere to applicable FDA regulations and ISO standards regarding good manufacturing practice, which include testing, control, and documentation requirements. We are subject to similar regulations in foreign countries. Ongoing compliance with good manufacturing practice and other applicable regulatory requirements will be strictly enforced in the United States through periodic inspections by state and federal agencies, including the FDA, and in international jurisdictions by comparable Notified Body for CE Marking and ISO Standards. Failure to comply with these regulatory requirements could result in, among other things, warning letters, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, failure to obtain premarket clearance or premarket approval for devices, withdrawal of approvals previously obtained, and criminal prosecution. The restriction, suspension or revocation of regulatory approvals or any other failure to comply with regulatory requirements would limit our ability to operate and could increase our costs.

 

OUR SUCCESS LARGELY DEPENDS ON OUR ABILITY TO OBTAIN AND PROTECT THE PROPRIETARY INFORMATION ON WHICH WE BASE OUR PRODUCTS.

 

Our success depends in large part upon our ability to establish and maintain the proprietary nature of our technology through the patent process, as well as our ability to license from others patents and patent applications necessary to develop our products. If any of our patents are successfully challenged, invalidated or circumvented, or our right or ability to manufacture our products was to be limited, our ability to continue to manufacture and market our products could be adversely affected.

 

The defense of patent infringement suits is costly and time-consuming and their outcome is uncertain. An adverse determination in litigation could subject us to significant liabilities, require us to obtain licenses from third parties, or restrict or prevent us from selling our products in certain markets. Although patent and intellectual property disputes are often settled through licensing or similar arrangements, costs associated with such arrangements may be substantial and could include ongoing royalties. Furthermore, the necessary licenses may not be available to us on satisfactory terms, if at all. Thus, as discussed above, if third party patents cover any aspect of our products or processes, then we may lack freedom to operate in accordance with our business plan.

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We have been issued three United States patents. One or more of the patents for our existing or future products, may be successfully challenged, invalidated or circumvented, or we may otherwise be unable to rely on these patents. These risks are also present for the process we use or will use for manufacturing our products. In addition, our competitors, many of whom have substantial resources and have made substantial investments in competing technologies, may apply for and obtain patents that prevent, limit or interfere with our ability to make, use and sell our products, either in the United States or in international markets.

 

The medical device industry has been characterized by extensive litigation regarding patents and other intellectual property rights. In addition, the United States Patent and Trademark Office may institute interference proceedings. The defense and prosecution of intellectual property suits, Patent and Trademark Office proceedings and related legal and administrative proceedings are both costly and time consuming. Moreover, we may need to litigate to enforce our patents, to protect our trade secrets or know-how, or to determine the enforceability, scope and validity of the proprietary rights of others. Any litigation or interference proceedings involving us may require us to incur substantial legal and other fees and expenses and may require some of our employees to devote all or a substantial portion of their time to the proceedings. An adverse determination in the proceedings could subject us to significant liabilities to third parties, require us to seek licenses from third parties or prevent us from selling our products in some or all markets. We may not be able to reach a satisfactory settlement of any dispute by licensing necessary patents or other intellectual property. Even if we reached a settlement, the settlement process may be expensive and time consuming, and the terms of the settlement may require us to pay substantial royalties. An adverse determination in a judicial or administrative proceeding or the failure to obtain a necessary license could prevent us from manufacturing and selling our products.

 

In addition to patents, we rely on trade secrets and proprietary know-how, which we seek to protect, in part, through confidentiality and proprietary information agreements. The other parties to these agreements may breach these provisions, and we may not have adequate remedies for any breach. Additionally, our trade secrets could otherwise become known to or be independently developed by competitors.

 

Finally, our PulseOx 7500TM utilizes third party owned proprietary licensed software. If for, whatever reason, we are unable to maintain the license or renew it on commercially acceptable terms (or at all) or if such party’s right to such proprietary rights are challenged and we are unable to maintain these licenses or obtain or develop replacement technologies, our business may be adversely affected.

 

WE ARE DEVELOPING OUR CURRENT PRODUCT LINES INDEPENDENTLY FROM ANY COLLABORATIVE PARTNERS, WHICH WILL REQUIRE US TO ACCESS ADDITIONAL CAPITAL AND TO DEVELOP ADDITIONAL SKILLS TO PRODUCE, MARKET AND DISTRIBUTE THESE PRODUCTS.

 

We are independently finishing development, building up production capacity, launching, marketing and distributing our oximetry line of products. These activities require additional resources and skills that we will need to secure. There is no assurance that we will be able to raise sufficient capital or attract and retain skilled personnel to enable us to finish development, launch and market these products. Thus, there can be no assurance that we will be able to commercialize all, or any, of these products.

 

OUR PRODUCTS USE NOVEL TECHNOLOGIES OR APPLY TECHNOLOGIES IN MORE INNOVATIVE WAYS THAN OTHER COMPETING MEDICAL DEVICES AND ARE OR WILL BE NEW TO THE MARKET;ACCORDINGLY, WE MAY NOT BE SUCCESSFUL IN ACHIEVING WIDE ACCEPTANCE OF OUR PRODUCTS AND OUR OPERATIONS AND GROWTH WOULD BE ADVERSELY AFFECTED.

 

Our products are based on new methods of reflective pulse oximetry. If our products do not achieve significant market acceptance, our sales will be limited and our financial condition may suffer. Physicians and individuals may not recommend or use our products unless they determine that these products are an attractive alternative to current tests that have a long history of safe and effective use. To date, few independent studies regarding our products have been published. The lack of independent studies limits the ability of doctors or consumers to compare our products to conventional products.

 

IF WE ARE UNABLE TO COMPETE EFFECTIVELY IN THE HIGHLY COMPETITIVE MEDICAL DEVICE INDUSTRY, OUR FUTURE GROWTH AND OPERATING RESULTS WILL SUFFER.

 

The medical device industry in general, and the markets in which we expect to offer products in particular, are intensely competitive. Many of our competitors have substantially greater financial, research, technical, manufacturing, marketing and distribution resources than we possess and have greater name recognition and lengthier operating histories in the health care industry. We may not be able to effectively compete against these and other competitors. A number of competitors offer oximetry products. These products and monitors are widely accepted in the health care industry and have a long history of accurate and effective use. Further, if our products are not available at competitive prices, health care administrators who are subject to increasing pressures to reduce costs may not elect to purchase them.

 

Furthermore, our competitors may succeed in developing, either before or after the development and commercialization of our further products, devices and technologies that permit more efficient, less expensive non-invasive and less invasive pulse oximetry monitoring.

 

WE HAVE LIMITED MANUFACTURING EXPERIENCE, WHICH COULD LIMIT OUR GROWTH.

 

We do not have sufficient internal manufacturing experience that would enable us to make products in the volumes that would be necessary for us to achieve significant commercial sales, and we rely upon our suppliers. In addition, we may not be able to establish and maintain reliable, efficient, full scale manufacturing at commercially reasonable costs, in a timely fashion. Difficulties we encounter in manufacturing scale-up, or our failure to implement and maintain our manufacturing facilities in accordance with good manufacturing practice regulations, international quality standards or other regulatory requirements, could result in a delay or termination of production. We may decide to manufacture these products ourselves in the future or may decide to manufacture products that are currently under development in this market segment. Companies often encounter difficulties in scaling up production, including problems involving production yield, quality control and assurance, and shortages of qualified personnel.

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Since we are relying on third party manufacturing for our initial product offerings in the pulse oximetry product line, we are dependent upon those parties for product supply. Any delay in initiating production or scaling production to higher volumes could result in delays of product introduction, or create lower availability of product than our expectations. These delays could lead to lower revenue achievement and additional cash requirements for us.

 

CONCENTRATIONS OF AVAILABLE SOURCES OF SUPPLY OF PRODUCTS

 

Certain components used in the Company's products are currently available to the Company from only one source and other components are currently available from only a limited number of sources. The Company does not have long-term supply contracts with its suppliers. In addition, the Company employs several unaffiliated subcontractors outside of Israel for the manufacture of its chipsets. While the Company has been able to obtain adequate supplies of components and has experienced no material problems with subcontractors to date, in the event that any of these suppliers or subcontractors is unable to meet the Company's requirements in a timely manner, the Company may experience an interruption in production. Any such disruption, or any other interruption of such suppliers' or subcontractors' ability to provide components to the Company and manufacture its chipsets, could result in delays in making product shipments, which could have a material adverse impact on the Company's business, financial condition and results of operations.

 

OUR LIMITED MARKETING AND SALES EXPERIENCE MAKES OUR REVENUE UNCERTAIN.

 

We are responsible for marketing our oximetry product line. We have relatively limited experience in marketing or selling medical device products and only have a two person internal marketing and sales team. In order to successfully continue to market and sell our products, we must either develop a marketing and sales force or expand our arrangements with third parties to market and sell our products. We may not be able to successfully develop an effective marketing and sales force, and we may not be able to enter into and maintain marketing and sales agreements with third parties on acceptable terms, if at all. If we develop our own marketing and sales capabilities, we will compete with other companies that have experienced and well-funded marketing and sales operations. If we enter into a marketing arrangement with a third party, any revenues we would receive will be dependent on this third party, and we will likely be required to pay a sales commission or similar compensation to this party. The efforts of these third parties for the marketing and sale of our products may not be successful.

 

BECAUSE WE OPERATE IN AN INDUSTRY WITH SIGNIFICANT PRODUCT LIABILITY RISK, AND WE HAVE NOT SPECIFICALLY INSURED AGAINST THIS RISK, WE MAY BE SUBJECT TO SUBSTANTIAL CLAIMS AGAINST OUR PRODUCTS.

 

The development, manufacture and sale of medical products entail significant risks of product liability claims. We currently have limited product liability insurance coverage beyond that provided by our general liability insurance. Accordingly, we may not be adequately protected from any liabilities, including any adverse judgments or settlements, we might incur in connection with the development, clinical testing, manufacture and sale of our products. A successful product liability claim or series of claims brought against us that result in an adverse judgment against or settlement by us in excess of any insurance coverage could seriously harm our financial condition or reputation. In addition, product liability insurance is expensive and may not be available to us on acceptable terms, if at all.

 

THE AVAILABILITY OF THIRD-PARTY REIMBURSEMENT FOR OUR PRODUCTS IS UNCERTAIN, WHICH MAY LIMIT CONSUMER USE AND THE MARKET FOR OUR PRODUCTS.

 

In the United States and elsewhere, sales of medical products are dependent, in part, on the ability of consumers of these products to obtain reimbursement for all or a portion of their cost from third-party payors, such as government and private insurance plans. Any inability of patients, hospitals, physicians and other users of our products to obtain sufficient reimbursement from third-party payors for our products, or adverse changes in relevant governmental policies or the policies of private third-party payors regarding reimbursement for these products, could limit our ability to sell our products on a competitive basis. We are unable to predict what changes will be made in the reimbursement methods used by third-party health care payors. Moreover, third-party payors are increasingly challenging the prices charged for medical products and services, and some health care providers are gradually adopting a managed care system in which the providers contract to provide comprehensive health care services for a fixed cost per person. Patients, hospitals and physicians may not be able to justify the use of our products by the attendant cost savings and clinical benefits that we believe will be derived from the use of our products, and therefore may not be able to obtain third-party reimbursement.

 

Reimbursement and health care payment systems in international markets vary significantly by country and include both government sponsored health care and private insurance. We may not be able to obtain approvals for reimbursement from these international third-party payors in a timely manner, if at all. Any failure to receive international reimbursement approvals could have an adverse effect on market acceptance of our products in the international markets in which approvals are sought.

 

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OUR SUCCESS DEPENDS ON OUR ABILITY TO ATTRACT AND RETAIN SCIENTIFIC, TECHNICAL, MANAGERIAL AND FINANCE PERSONNEL.

 

Our ability to operate successfully and manage our future growth depends in significant part upon the continued service of key scientific, technical, managerial and finance personnel, as well as our ability to attract and retain additional highly qualified personnel in these fields. We may not be able to attract and retain key employees when necessary, which would limit our operations and growth. In addition, if we are able to successfully develop and commercialize our products, we will need to hire additional scientific, technical, marketing, managerial and finance personnel. We face intense competition for qualified personnel in these areas, many of whom are often subject to competing employment offers.

 

WE ARE SIGNIFICANTLY INFLUENCED BY OUR DIRECTORS, EXECUTIVE OFFICERS AND THEIR AFFILIATED ENTITIES.

 

Our directors, executive officers and entities affiliated with them beneficially owned an aggregate of approximately 29% of our outstanding Common Stock as of December 31, 2006. These stockholders, acting together, would be able to exert significant influence on substantially all matters requiring approval by our stockholders, including the election of directors and the approval of mergers and other business combination transactions.

 

THERE IS NO ACTIVE MARKET FOR OUR COMMON STOCK AND NONE MAY DEVELOP OR BE SUSTAINED

 

Our Common Stock is quoted on the Pink Sheets under the symbol "SPOM". The Pink Sheets is a centralized quotation service that collects and publishes market maker quotes in real time, primarily through its web site, http://www.pinksheets.com. Because our stock trades on the Pink Sheets, rather than on a national securities exchange or event the NASDAQ over-the counter Bulletin Board (OTC) market, you may find it difficult to either dispose of, or to obtain quotations as to the price of, our Common Stock.

 

There has only been very limited trading activity in our Common Stock. There can be no assurance that a more active trading market will commence in our securities either before or following any new business transaction. Further, in the event that an active trading market commences, there can be no assurance as to the level of any market price of our shares of common stock, whether any trading market will provide liquidity to investors, or whether any trading market will be sustained.

 

We can provide no assurance when, if ever, our board of directors, will take action to have our Common Stock quoted on the NASDAQ over-the-counter Bulletin Board (OTC) or, even, if the Board were to take such action, no assurance can be given that our Common Stock will in fact be quoted on the OTC Bulletin Board market. Failure to develop or maintain an active trading market could negatively affect the price of our securities.

 

ADDITIONAL BURDENS IMPOSED UPON BROKER-DEALERS BY THE APPLICATION OF THE "PENNY STOCK" RULES TO OUR COMMON STOCK MAY LIMIT THE MARKET FOR OUR COMMON STOCK.

 

Broker-dealer practices in connection with transactions in "penny stocks" are regulated by certain penny stock rules adopted by the Securities and Exchange Commission. Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the Nasdaq system, provided that current prices and volume information with respect to transactions in such securities are provided by the exchange or system). If our Common Stock continues to be offered at a market price less than $5.00 per share, and does not qualify for any exemption from the penny stock regulations, our Common Stock will continue to be subject to these additional regulations relating to low-priced stocks.

 

The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer's account. In addition, the penny stock rules generally require that prior to a transaction in a penny stock the broker-dealer make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. These requirements have historically resulted in reducing the level of trading activity in securities that become subject to the penny stock rules.

 

The additional burdens imposed upon broker-dealers by these penny stock requirements may discourage broker-dealers from effecting transactions in the Common Stock, which could severely limit the market liquidity of our Common Stock and our shareholders' ability to sell our Common Stock in the secondary market.

 

OUR BOARD OF DIRECTORS' RIGHT TO AUTHORIZE THE ISSUANCE OF ADDITIONAL SHARES OF PREFERRED STOCK COULD ADVERSELY IMPACT THE RIGHTS OF HOLDERS OF OUR COMMON STOCK.

 

Our board of directors currently has the right to designate and authorize the issuance of our preferred stock, in one or more series, with such voting, dividend and other rights as our directors may determine. The board of directors can designate new series of preferred stock without the approval of the holders of our Common Stock. The rights of holders of our Common Stock may be adversely affected by the rights of any holders of shares of preferred stock that may be issued in the future, including without limitation dilution of the equity ownership percentage of our holders of Common Stock and their voting power if we issue preferred stock with voting rights. Additionally, the issuance of preferred stock could make it more difficult for a third party to acquire a majority of our outstanding voting stock.

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RISKS RELATED TO OPERATIONS IN ISRAEL

 

WE DEPEND ON A SINGLE FACILITY IN ISRAEL AND ARE SUSCEPTIBLE TO ANY EVENT THAT WOULD ADVERSELYAFFECT ITS CONDITION.

 

Most of our laboratory capacity and principal research and development and manufacturing facilities are located in the State of Israel. Fire, natural disaster or any other cause of material disruption in our operation in this location could have a material adverse effect on our business, financial condition and operating results. As discussed above, to remain competitive in the network communications industry, we must respond quickly to technological developments. Damage to our facility in Israel could cause serious delays in the development of new products and services and, therefore, could adversely affect our business. In addition, the particular risks relating to our location in Israel are described below.

 

THE TRANSFER AND USE OF SOME OF OUR TECHNOLOGY AND ITS PRODUCTION IS LIMITED BECAUSE OF THE RESEARCH AND DEVELOPMENT GRANTS WE RECEIVED FROM THE ISRAELI GOVERNMENT TO DEVELOP SUCH TECHNOLOGY. SUCH LIMITATIONS MAY RESTRICT OUR BUSINESS GROWTH AND PROFITABILITY.

 

Our research and development efforts associated with the development of oximetry products have been partially financed through grants from the Office of the Chief Scientist of the State of Israel (the "Chief Scientist"). We are subject to certain restrictions under the terms of the Chief Scientist grants. Specifically, the products developed with the funding provided by these grants may not be manufactured, nor may the technology which is embodied in our products be transferred outside of Israel without appropriate governmental approvals and/or fines. These restrictions do not apply to the sale or export from Israel of our products developed with this technology. These restrictions could limit or prevent our growth and profitability.

 

POLITICAL AND ECONOMIC CONDITIONS IN ISRAEL MAY LIMIT OUR ABILITY TO PRODUCE AND SELL OUR PRODUCTS. THIS COULD RESULT IN A MATERIAL ADVERSE EFFECT ON OUR OPERATIONS AND BUSINESS.

 

Our research and development and manufacturing facilities are located Israel,. Political, economic and security conditions in Israel directly influence us. Since the establishment of the State of Israel in 1948, Israel and its Arab neighbors have engaged in a number of armed conflicts. A state of hostility, varying in degree and intensity, has led to security and economic problems for Israel. Major hostilities between Israel and its neighbors may hinder Israel's international trade and lead to economic downturn. This, in turn, could have a material adverse effect on our operations and business.

 

Since October 2000, there has been substantial deterioration in the relationship between Israel and the Palestinian Authority that has resulted in increased violence. The future effect of this deterioration and violence on the Israeli economy and our operations is unclear. Ongoing violence between Israel and the Palestinians as well as tension between Israel and the neighboring Syria and Lebanon may have a material adverse effect on our business, financial conditions or results of operations.

 

Generally, male adult citizens and permanent residents of Israel under the age of 51 are obligated to perform up to 36 days of military reserve duty annually. Additionally, these residents may be called to active duty at any time under emergency circumstances. The full impact on our workforce or business if some of our officers and employees are called upon to perform military reserve service is difficult to predict.

 

 

USE OF PROCEEDS

 

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AGREEMENTS WITH THE SELLING STOCKHOLDERS

 

THE FOLLOWING IS A SUMMARY OF CERTAIN PROVISIONS OF THE AGREEMENTS BETWEEN US AND CERTAIN OF THE SELLING STOCKHOLDERS RELATING TO THE PURCHASE BY THESE SELLING STOCKHOLDERS OF OUR SECURITIES. WE ARE REGISTERING THE RESALE OF THE SHARES OFFERED BY THIS PROSPECTUS IN ORDER TO SATISFY OUR OBLIGATIONS TO THE HOLDERS OF THESE CONVERTIBLE DEBENTURES AND WARRANTS.

 

The 2005 Private Placement

Pursuant to Subscription Agreements entered into between April and December 2005 (the "Subscription Agreement") between us and certain accredited institutional and individual investors, we issued units of our securities, with each unit comprised of (i) our 18 month 6% promissory note (collectively, the "April 2005 Notes") and (ii) three year warrants to purchase up to such number of shares of our Common Stock as are determined by dividing the principal amount of the Note purchased by such investor by $ 0.85 (collectively the "April 2005 Warrants"). In December 2005, we completed the private placement and raised the maximum gross proceeds of $1,544,000.

In September 2006, we offered to the holders of the April 2005 Notes to revise certain of the terms of the original offering in order to facilitate an extension to the scheduled maturity date of such notes, (hereinafter the "Amendment"). Pursuant to the Amendment, the (a) maturity date of the April 2005 Notes was extended through March 31, 2008; (b) the exercise period of the April 2005 Warrants was extended through September 30, 2010 and the per share exercise price was adjusted to $0.60 and (c) the interest rate on the amounts outstanding under the April 2005 Notes was increased to 8% per annum, effective July 12, 2006. The Amendment also provides that if we subsequently issue shares of our Common Stock at an effective per share exercise price less than that of the adjusted per share exercise price of the April 2005 Warrants during the adjusted exercise period, then the exercise price of the April 2005 Warrants is to be reduced to such lower exercise price; provided, that, this protection will not apply to certain of our equity or debt issuances (i) from approved stock option plans to employees, directors and other service providers, (ii) upon exercise of options and warrants outstanding as of September 27, 2006 and (iii) to our consultants that an unaffiliated third party would deem to be commercially reasonable and fair. The Amendment became effective as of September 27, 2006.

Under the Amendment, at all times the subscriber has the right to convert all, or any portion of the accrued interest due on the April 2005 Note to Common Stock at the April 2005 Warrant exercise price.

In addition, the Amendment also provided that, subject to certain qualifications, our obligation to file a registration statement under the Securities Act of 1933, as amended, relating to the resale of our Common Stock underlying the April 2005 Warrants is extended to April 15, 2007. We are filing this registration statement in fulfillment of our obligation thereunder.

Under the terms of the April 2005 Notes, a holder may declare such note immediately due and payable upon the occurrence of any of the following events of default (each an “Event of Default”): (i) our failure to pay the principal, interest or any other sum when due, (ii) any material representation or warranty that we make in the Note or certificate furnished in connection therewith shall be false or misleading in any material respect, (iii) our breach of any material covenant or other term or condition of the Agreement or the Note in any material respect, if such breach continues for 5 business days after notice thereof from the holder, (iv) the assignment by us for the benefit of creditors or application for or consent to the appointment of a receiver or trustee, or such receiver or trustee shall otherwise be appointed, (v) ) our insolvency or liquidation or a bankruptcy event or (vi) the entry of a monetary judgment or similar process in excess of $200,000 if such judgment remains unvacated for 30 days.

Three holders of the April 2005 Notes in the aggregate principal amount of $105,000 did not sign the Amendment and one such holder was repaid $50,000 plus accrued interest upon maturity of their April 2005 Note. Accordingly, the per share exercise price of the April 2005 Warrants held by these persons was not modified to $0.60 and remained at $0.85, and the exercise period of such warrant was not extended by two years.

In total, we are registering the resale of 2,958,827 shares of our Common Stock issuable upon exercise of the April 2005 Warrants and upon conversion of the interest due on the April 2005 Notes pursuant to the registration statement of which this prospectus forms a part.

 

The description above is qualified in its entirety by reference to the forms of Subscription Agreement, the April 2005 Note and the April 2005 Warrant attached to the Current Report on Form 8-K that we filed on April 27, 2005 and the form of Amendment attached as an Exhibit to our quarterly report on Form 10-QSB for the three months ended September 30, 2006. We urge you to read these documents carefully for more details regarding the provisions we describe below and for other provisions that may be important to you.

The 2006 Private Placement

Pursuant to Subscription Agreements entered into between July and October 2006 (the "2006 Subscription Agreement") between us and certain accredited institutional and individual investors, we issued units of our securities, with each unit comprised of (i) an 8% promissory note (collectively, the “July 2006 Notes”) that becomes due 12 months following issuance and (ii) warrants as described below (collectively, the “July 2006 Warrants”). In October 2006, we raised $550,000 in aggregate gross proceeds from this offering, which represents the maximum amount that could be raised under this offering.

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The principal and accrued interest on the July 2006 Notes is scheduled to be paid in one balloon payment at the end of the twelve month period. Under the terms of the July 2006 Notes, a holder may declare such note immediately due and payable upon the occurrence of any of the following events of default (each an “Event of Default”): (i)our failure to pay the principal, principal or other sum when due, (ii) any material representation or warranty that we make in the Note or certificate furnished in connection therewith shall be false or misleading in any material respect, (iii) our breach of any material covenant or other term or condition of the 2006 Subscription Agreement or the Note in any material respect, if such breach continues for 5 business days after notice thereof from the holder, (iv) the assignment by us for the benefit of creditors or application for or consent to the appointment of a receiver or trustee, or such receiver or trustee shall otherwise be appointed, (v) ) our insolvency or liquidation or a bankruptcy event or (vi) the entry of a monetary judgment or similar process in excess of $200,000 if such judgment remains unvacated for 30 days.

 

Each purchaser of the July 2006 Notes received warrants, exercisable over a period of two years form the date of issuance, to purchase 16,250 shares of our Common Stock for each $25,000 of principal loaned, at a per share exercise price equal to the lower of $1.50 or 35% less than the offering price at an initial public offering of our Common Stock during the warrant exercise period.

 

In the 2006 Subscription Agreements, we undertook to register the shares issuable upon the exercise of the July 2006 Warrants by April 18, 2007. We are registering 357,500 shares of our Common Stock issuable upon exercise of the July 2006 Warrants.

 

The description above is qualified in its entirety by reference to the forms of 2006 Subscription Agreement, the July 2006 Notes and the July 2006 Warrants attached to the Quarterly Report on 10-QSB for the three months ended September 30, 2006 that we filed on November 14, 2006. We urge you to read these documents carefully for more details regarding the provisions we describe below and for other provisions that may be important to you.

 

Holders of the Piggy Back Rights

 

We are also registering 948,949 shares of our Common Stock as well as an additional 1,269,782 shares of our Common Stock issuable upon exercise of warrants that are unrelated to the private placements referred to above held by persons with piggy back rights. Below is a summary of the terms of these warrants.

 

In January 2005 (prior to the Acquisition Transaction), SPO Ltd. issued to each of 10 investors its convertible promissory note in the aggregate principal amount of $300,000 (the “SPO 2005 Promissory Notes”). These notes, which were amended in July 2005 and December 2005, bore interest at an annual rate of 8%, and were payable on September 30, 2006. Pursuant to the amendment in December 2005, the Company assumed the SPO 2005 Promissory Notes. At the election of the holder, the notes are convertible into the Company’s Common Stock at a per share price equal to the lesser of (i) 60% of the per share purchase price of any Company security subsequently sold by the Company (excluding certain shares issued upon exercise of securities outstanding on date of last amendment or subsequently issued to consultants) and (ii) $0.705. In September 2006 the holders of the SPO 2005 Promissory Notes converted all principal and interest accrued under the notes at a per share conversion price of $0.36 and, in respect thereof, a total of 948,949 shares of our Common Stock were issued to them.

 

In connection with the Acquisition Transaction, certain warrants issued by SPO Ltd. prior to the Acquisition transaction to a total of three persons in consideration of services rendered were transferred to us and, pursuant to such transfer, we are registering the resale of 83,333 shares issuable upon such warrants. As transferred to us, these warrants were exercisable for three years from the closing of a single transaction in which we raise at least $2 million in gross proceeds from the sale of our equity securities, at a per share exercise price equal to 40% less than the per share price in such transaction. In September 2006 the warrants were amended and pursuant thereto the exercise period was extended to August 31, 2009 and the exercise price was changed to the lesser of 60% of any new issuance from the date of the original warrant or $0.705 per share. As of the date of this Registration Statement the per share exercise price is $0.36, subject to adjustment as provided above. The description above is qualified in its entirety by reference to the form of warrant attached as Exhibit 4.5 to this Registration Statement.

 

In connection with the Acquisition Transaction and as consideration for a loan in the principal amount of $100,000 advanced to SPO Ltd., we issued to the lender warrants for 25,000 shares of our Common Stock exercisable through August 31, 2008 at a per share exercise price of $0.75. The description above is qualified in its entirety by reference to the warrant attached as Exhibit 4.6 to this Registration Statement.

 

In connection with the Acquisition transaction and as consideration for a loan in the principal amount of $100,000 advanced to SPO Ltd., we issued to the lender warrants for 15,000 shares of our Common Stock exercisable through August 31, 2008 at a per share exercise price of $0.75. The description above is qualified in its entirety by reference to the warrant attached as Exhibit 4.7 to this Registration Statement.

 

In connection with a credit line agreement for up to $150,000, in February 2006 we issued to the provider of the credit line warrants for 60,000 shares of Common Stock exercisable through January 31, 2009 at a per share exercise price of $0.85. The description above is qualified in its entirety by reference to the warrant attached as Exhibit 4.8 to this Registration Statement.

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In April 2006, we issued to two members of our advisory board warrants for a total of 30,000 shares of our Common Stock exercisable through November 14, 2009 at a per share exercise price of $0.60. The description above is qualified in its entirety by reference to the form of warrant attached as Exhibit 4.9 to this Registration Statement.

 

 

		LOW			HIGH
2007
First Quarter		$	1.80		$	2.15
Year Ended December 31, 2006
First Quarter		$	1.25		$	2.25
Second Quarter		$	1.5		$	2.5
Third Quarter		$	1.9		$	3
Fourth Quarter		$	1.5		$	2.5
Year Ended December 31, 2005
First Quarter		$	—			—
Second Quarter		$	0.20			1.00
Third Quarter		$	0.65			1.00
Fourth Quarter		$	0.65			1.25

 

As of April 12, 2007, there were approximately 118 holders of record of our Common Stock. We believe that a number of shares of our Common Stock are held in either nominee name or street name brokerage accounts and, consequently, we are unable to determine the exact number of beneficial owners of our stock.

 

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RESULTS OF OPERATIONS

 

COMPARISON OF THE YEAR ENDED DECEMBER 31, 2006 (the “2006 Period”) AND THE YEAR ENDED DECEMBER 31, 2005 (the “2005 Period”)

 

REVENUES. Revenues for the 2006 Period were $3,714,000, an increase of 103% over revenues of $1,825,000 for the 2005 Period. Revenues were derived primarily from sales of our PulseOX 5500 TM designed for the medical and homecare markets.

 

COSTS OF REVENUES. Costs of revenues for the 2006 Period were $1,809,000 compared to $843,000 for 2005 Period. Costs of revenues include all costs related to manufacturing products and services and consist primarily of direct material costs, shipping and salaries and related expenses for personnel. Included in cost of revenues were non cash compensation benefits of $13,000 and $4,000 in respect of 2006 and 2005 respectively.

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RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses consist primarily of expenses incurred in the design, development and testing of our products. These expenses consist primarily of salaries and related expenses for personnel, contract design and testing services, supplies used and consulting and license fees paid to third parties and are net of any government grants and development fees charged to third parties. Research and development expenses for the 2006 Period were $972,000 compared to $584,000 for the 2005 Period. The increase in research and development expenses for the 2006 Period as compared to 2005 Period is primarily attributable to the increase in employee and related compensation costs. Included in research and development expenses were non cash compensation benefits of $176,000 and $66,000 in respect of 2006 and 2005.

 

SELLING AND MARKETING EXPENSES. Selling and marketing expenses consist primarily of costs relating to compensation attributable to employees engaged in sales and marketing activities, promotion, sales support, travel and related expenses. Selling and marketing expenses for the 2006 Period and 2005 Period were $671,000 and $786,000, respectively. The decrease in sales and marketing during the 2006 Period is primarily attributable to the decrease of non cash compensation benefits to consultants and employees which amounted to $99,000 and $349,000 for the 2006 Period and 2005 Period, respectively, offset by the increase of employees engaged in sales and marketing activities and related compensation .

 

LIQUIDITY AND CAPITAL RESOURCES

 

At December 31, 2006, we had cash and cash equivalents of $836,000 compared to $493,000 at December 31, 2005. The increase in available cash resources is primarily attributable to the funds raised from the private placement of our securities discussed below.

 

We generated negative cash flow from operating activities of approximately $443,000 during the 2006 Period compared to $1,209,000 for the 2005 Period.

 

In December 2005 we completed the private placement to certain accredited investors that we commenced in April 2005 for the issuance of up to $1,544,000 of units of our securities, with each unit comprised of (i) our 18 month 6% promissory note (collectively, the "April 2005 Notes") and (ii) three year warrants to purchase up to such number of shares of our Common Stock as are determined by the principal amount of the Note purchased by such investor divided by $ 0.85 (collectively the "April 2005 Warrants"). In September 2006, we offered to the holders of the April 2005 Notes to revise certain of the terms of the original offering in order to facilitate an extension to the scheduled maturity date of the Note, (hereinafter the "Amendment"). The Amendment provides that (a) the maturity date of the April 2005 Notes is to be extended by one year from the original maturity date on the original note, (b) the exercise period of the April 2005 Warrants is to be extended from three to five years and the per share exercise price was adjusted to $0.60 and (c) the interest rate on the amounts outstanding under the April 2005 Notes was increased to 8% per annum, effective July 12, 2006. The Amendment also provides that if we subsequently issue shares of our Common Stock at an effective per share exercise price less than that of the adjusted per share exercise price of the April 2005 Warrants during the adjusted exercise period, then the exercise price thereof is to be reduced to such lower exercise price; provided, that, this protection will not apply to certain of our equity or debt issuances (i) from approved stock option plans to employees, directors and other service providers, (ii) upon exercise of options and warrants outstanding as of September 27, 2006 and (iii) to our consultants that an unaffiliated third party would deem to be commercially reasonable and fair. In addition, the Amendment also provides that, subject to certain qualifications, our obligation to file a registration statement under the Securities Act of 1933, as amended, relating to the resale of our Common Stock underlying the April 2005 Warrants is extended to April 15, 2007. The Amendment became effective as of September 30, 2006. The Amendment resulted in a one time non-cash finance expense in the amount of approximately $2,500,000 being recognized in 2006. As of March 19, 2007, holders of Notes in the principal amount $1,414,000 have signed the Amendment and the holder of a note in the principal amount of $50,000 which matured on November 30, 2006 has requested repayment of principle and accrued interest. The Company is currently in contact with the remaining note holders of $80,000 of the April 2005 Notes with respect to obtaining their formal execution of the Amendment.

 

Our recent financings in 2006 are discussed below.

 

On February 1, 2006 we borrowed the principal amount of $150,000. This loan bears interest at an annual rate of prime plus 4% and is repayable in four equal installments every three calendar months through January 31, 2007. We issued to the holder of this indebtedness a three year warrant to purchase up to 60,000 shares of Common Stock at a per share exercise price of $0.85. As of December 31, 2006, we repaid $119,000 representing principal and accrued interest then due. On January 31, 2007 the final installment of $48,000 including accrued interest was repaid.

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In January 2006 we and an institutional investor entered into an agreement pursuant to which we agreed to sell to such investor shares of our Common Stock at $0.70 per share for aggregate gross proceeds of $600,000. The private placement was completed in June 2006.

 

 

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MANAGEMENT

The individuals who serve as our executive officers and directors are:

NAME		AGE		POSITION
Michael Braunold		47		President, Chief Executive Officer and Director
Richard H. Ryan		55		Chief Operating Officer
Jeff Feuer		42		Chief Financial Officer
Israel Sarussi		56		Chief Technology Officer
Pauline Dorfman		42		Director (1)
Sidney Braun		47		Director (1)

 

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(1)	Audit Committee and Compensation Committee Member.

 

The business experience, principal occupations and employment, as well as the periods of service, of each of our directors and executive officers during at least the last five years are set forth below.

 

MICHAEL BRAUNOLD has been Chief Executive Officer of SPO Ltd. since March 1998 and the President and Chief Executive Officer of the Company since May 18, 2005. Prior to March 1998, Mr. Braunold was Senior Director of Business Development at Scitex Corporation Ltd., a multinational corporation specializing in visual information communication. In such capacity, Mr. Braunold played a strategic role in managing a team of professionals assigned to M&A activities. During his 12-year tenure at Scitex, he held various positions within the worldwide organization, including a period in the United States as Vice President of an American subsidiary of Scitex specializing in medical imaging. From March 2000 through September 2000, Mr. Braunold was also the Chief Executive Officer and Chairman of Ambient Corporation, a Delaware company, that specializes in the implementation of a proposed comprehensive high-speed communication infrastructure that is designed to utilize existing electrical power distribution lines as a high-speed communication medium. Mr. Braunold served as a director of Amedia Networks, Inc. (formerly TTR Technologies, Inc.) from February 2000 through August 2002. Mr. Braunold obtained a Bachelor of Science degree with honors in Engineering and Management Sciences from Imperial College Business School, London.

 

RICHARD H. RYAN has been Chief Operating Officer of the Company since May 2005. Prior to joining Philips Medical Systems in 2001, Mr. Ryan was contracted by Agilent Technologies, where he assisted in the successful divestiture of its Healthcare Solutions Group to Philips Medical Systems; he also oversaw the transfer of three production lines from Xing Dao, in Mainland China, to a local subsidiary in California. Following the acquisition by Philips, he was asked to join the corporate management team to help set up their new Global Materials Organization (the GMO) and was a founding member of its Executive Board. During his tenure at Philips Medical Systems, Mr. Ryan was instrumental in driving a cultural change in supplier management, creating new supply chain opportunities in Asia while reducing costs at most of the company's manufacturing sites worldwide.

 

JEFF FEUER has been Chief Financial Officer of the Company since July 14, 2005. Prior to joining the Company, Mr. Feuer served in similar capacities at Transpharma Medical Ltd., a biomedical device start-up company (January 2004 through May 2005), and Finjan Software Inc., a security software company (September 1999 through September 2003). From July 1996 to September 1999, he served as corporate controller of Aladdin Knowledge Systems, Ltd., an Israeli based NASDAQ company. Prior to this he was a senior auditor in public accounting both in Israel and the UK.

 

ISRAEL SARUSSI has been the Chief Technology Officer of SPO Ltd. since its inception in 1996 and Chief Technology Officer of the Company since April 21, 2005. Prior to joining SPO Ltd., Mr. Sarussi established a private company specializing in computer systems for agricultural applications. Israel has held various technical positions at several hi-tech Israeli companies including Elta Electronics, a company specializing in military communications, where he was assigned to advanced development projects for the Israeli Air Force. He holds a degree in Electronic Engineering from Ben Gurion University, Be'ersheba.

 

PAULINE DORFMAN has served as a director since April 21, 2005. Since January 2001 Ms. Dorfman, a qualified chartered accountant and chartered business valuator, has been a consultant that assists government, commercial business, law and accounting firms in the area of valuations, forensic investigations, litigation support and dispute resolution. Ms. Dorfman specializes in conducting analysis and financial investigations in connection with valuations for various purposes such as international development disputes, income tax, estate planning, matrimonial disputes, and economic damage quantification for breach of contract and insurance related matters such as expropriations, business interruptions and personal injuries. Prior to this assignment, Ms. Dorfman worked for 10 years with the Toronto Dominion Bank in the finance and commercial lending areas analyzing the financial risk of various bank investments and strategies, assisting in the development of new bank products, developing accounting policies and controls and meeting the external and internal financial reporting requirements of the bank..

 

SIDNEY BRAUN has served as a director since April 21, 2005. From June 2004 to September 2006, Mr. Braun has served as the President and Chief Operating Officer for Med-Emerg International Inc. (MEII), a company incorporated in the Province of Ontario and continues to serve on the board of directors of MEII. Since September 2006, Mr. Braun is also a director of Romlight International Inc., a developer and manufacturer of electronic ballasts and Romlight International (Canada) Inc.. Mr. Braun has extensive experience in commerce both in North America and Europe, including manufacturing, distribution and trading. Prior to his position at MEII and Romlight, Mr. Braun worked for 7 years as an independent consultant to several large state-owned corporations from the former Eastern European block on developing business strategies and adapting to new working conditions in western markets. In addition, Mr. Braun developed expertise in emerging financial markets in Europe and introduced several companies to the UK and German capital markets.

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Committees of the Board of Directors

Our Board of Directors operates with the assistance of the Audit Committee and the Compensation Committee. Due to the small size of our Board, we do not presently maintain a formal nominating committee. The entire Board participates in the process of nominating candidates for the Board of Directors.

The function of the Audit Committee is to (i) make recommendations to the full Board of Directors with respect to appointment of our independent public accountants, and (ii) meet periodically with our independent public accountants to review the general scope of audit coverage, including consideration of internal accounting controls and financial reporting.

The Board of Directors has determined that Pauline Dorfman is an "Audit Committee Financial Expert" for purposes of the SEC's rules. The Board believes that Ms. Dorfman meets the independence criteria set out in Rule 4200(a)(14) of the Marketplace Rules of the National Association of Securities Dealers and the rules and other requirements of the SEC.

The Compensation Committee sets compensation policy and administers our cash and equity incentive programs for the purpose of attracting and retaining skilled executives who will promote the Company’s business goals and build shareholder value. The committee is also responsible for reviewing and making recommendations to the Board regarding all forms of compensation to be provided to the Company’s named executive officers, including stock compensation and bonuses.

Board of Directors; Appointment of Officers

All directors are elected by a plurality vote at the annual meeting of the shareholders, and shall hold office until his successor is duly elected and qualified. Any vacancy occurring in the Board of Directors may be filled by the shareholders, the Board of Directors, or if the Directors remaining in office constitute less than a quorum of the Board of Directors, they may fill the vacancy by the affirmative vote of a majority of the Directors remaining in office. A director elected to fill a vacancy is elected for the unexpired term of his predecessor in office. Any directorship filled by reason of an increase in the number of directors shall expire at the next shareholders' meeting in which directors are elected, unless the vacancy is filled by the shareholders, in which case the term shall expire on the later of (i) the next meeting of the shareholders or (ii) the term designated for the director at the time of creation of the position being filled.

 

Our executive officers are appointed by our board of directors. Each officer shall hold office until the earlier of: his death; resignation or removal from office; or the appointment and qualification of his successor.

 

CODE OF ETHICS

 

We have adopted a code of ethics that applies to our chief executive officer, president, chief financial officer, controller and others performing similar executive and financial functions at the Company. A copy of our policy was attached as an exhibit to our annual report on Form 10-KSB for the year ended December 31, 2005. We intend to satisfy the disclosure requirement under Item 10 of Form 8-K regarding an amendment to, or waiver from, a provision of this code of ethics by posting such information on our Website, at the address and location specified above.

 

 

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END — DECEMBER 31, 2006

 

Name		Number of Securities Underlying Unexercised Options (#) Exercisable			Number of Securities Underlying Unexercised Options (#) Unexercisable			Equity Incentive Plan Awards: Number of Securities Underlying Unexercsied Unearend Options (#)			Option Exercise Price ($)			Option Expiration Date
Michael Braunold			250,000	(1)		—			—		$	0.60			12/22/15
Israel Sarusi			—	(2)		—			—			—			—
Richard H. Ryan			150,000	(3)		50,000			—		$	0.05			5/1/15

 

---

(1)	Options were issued under our 2005 Equity Incentive Plan on December 22, 2005 and were fully vested upon issuance.

 

(2)	Does not include Warrants for 446,383, issued to Mr. Sarusi on April 21, 2005 in exchange for warrants in SPO Ltd held prior to Acquisition Transaction.

 

(3)	Options were issued under our 2005 Equity Incentive Plan on May 1, 2005. Options for 150,000 shares had vested as of December 31, 2006. Options for the remaining 50,000 shares are scheduled to vest on May 1, 2007.

 

EMPLOYMENT AGREEMENTS WITH EXECUTIVE OFFICERS

 

MICHAEL BRAUNOLD. On May 18, 2005, we entered into an employment agreement with Michael Braunold, pursuant to which he serve as our Chief Executive Officer and President. On such date, Mr. Braunold and SPO Ltd., entered into an employment agreement pursuant to which Mr. Braunold serves as SPO Ltd.'s Chief Executive Officer. Each of the agreements with us and SPO Ltd. has an initial term of three years commencing on the date of the agreement and is automatically renewable for successive two year terms unless we or Mr. Braunold indicate in writing, upon 90 days prior to the scheduled termination of the initial term or any renewal term, that such party does not intend to renew the agreement. Mr. Braunold is paid a monthly salary of $13,250 under the agreement with SPO Ltd. Mr. Braunold is not entitled to a salary under the agreement with us but has been granted options under our 2005 Equity Incentive Plan to purchase 250,000 shares of our Common Stock at a per share exercise price of $0.60. The agreements may be terminated by Mr. Braunold for any reason on 60 days written notice or for Good Reason (as defined in the employment agreement) or by us for Just Cause (as defined in the employment agreement) or for any other reason. In the event of a termination by Mr. Braunold for Good Reason or by us for any reason other than Just Cause, we are to pay Mr. Braunold an amount equal to (i) if such termination occurs during the initial term of the agreement, the base salary then payable, if any, for the longer of (a) the period from the date of such termination to the end of the initial term as if the agreement had not been so terminated and (b) twelve months and (ii) if such termination occurs after the initial term, the base salary then payable, if any, for a period of twelve months as if the agreement had not been so terminated.

 

ISRAEL SARUSSI. In January 1998 SPO Ltd. entered into an employment agreement with Israel Sarussi and which was subsequently amended in 2002 and 2005. Pursuant to the agreement Mr. Sarussi serves as the SPO Ltd.'s Chief Technical Officer. The agreement with SPO Ltd. terminates on the earlier of: (i) Mr. Sarussi's death or disability, (ii) termination by SPO Ltd. without cause upon 12 months written notice; or (iii) termination of Mr. Sarussi with cause. Mr. Sarussi is paid a monthly salary of $13,250 under the agreement with SPO Ltd.

22

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Each of these agreements includes certain customary intellectual property development rights, confidentiality and non-compete provisions that prohibit the executive from competing with us for one year, or soliciting our employees for one year, following the termination of his employment.

 

 

COMPENSATION OF DIRECTORS

 

We paid each outside director $15,000 per annum for service on our Board of Directors in 2006. In addition, we have granted stock options to directors to compensate them for their services. In June 2006 we issued to each of Pauline Dorfman and Sidney Braun options under our 2005 Non-Employee Directors Stock Option to purchase up to 25,000 shares of our Common Stock each at a per share exercise price of $0.85. In January 2007, we increased the Director fees in respect of each of our directors to $25,000 per annum

The following table summarizes data concerning the compensation of our non-employee directors for the fiscal year ended December 31, 2006.

		Fees Earned			Option
		or paid			Awards($)			Total
Sidney Braun		$	15,000			35,535	(1)	$	50,535
Pauline Dorfman		$	15,000			35,535	(1)	$	50,535

 

---

(1)

Amounts in this column reflect the expense recognized by the Company for accounting purposes calculated in accordance with FASB Statement of Financial Accounting Standards No. 123R (“FAS 123R”) with respect to employee stock options issued under the Company's 2005 Non-Employee Directors Stock Option Plan in 2005.   For information on the assumptions used to calculate the value of stock option grants under FAS 123R, see Note 13 of the Company’s financial statements for the year ended December 31, 2006 included elsewhere in this report. Options are discussed in further detail in the Outstanding Equity Awards at Fiscal Year End Table. The assumptions used to calculate the fair value of stock option grants under FAS 123R, were: expected holding period of 3.5 years, risk free interest rate of 4.28%, no dividend yield and volatility of 100%.

 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

None

 

STOCK OWNERSHIP OF MANAGEMENT AND CERTAIN

BENEFICIAL HOLDERS

The following table sets forth information as of the close of business on April 12, 2007, concerning shares of our common stock beneficially owned by each director and named executive officer, each other person beneficially owning more than 5% of our Common Stock and by all directors and executive officers as a group.

 

In accordance with the rules of the SEC, the table gives effect to the shares of common stock that could be issued upon the exercise of outstanding options and warrants within 60 days of April 12, 2007. Unless otherwise noted in the footnotes to the table and subject to community property laws where applicable, the following individuals have sole voting and investment control with respect to the shares beneficially owned by them. We have calculated the percentages of shares beneficially owned based on 19,335,525 shares of common stock outstanding at April 12, 2007.

		Common Stock Percentage of
Name of Beneficial Owner (1)		Beneficially Owned (2)			Common Stock
Michael Braunold			993,922	(3)		5.14	%
Richard H. Ryan			200,000	(4)		1.03	%
Jeff Feuer			120,000	(5)		*
Israel Sarussi			4,165,776	(6)		21.54	%
Pauline Dorfman			75,000	(7)		*
Sidney Braun			75,000	(7)		*
All officers and directors as a group (6 persons)			5,629,698			29.12	%

 

---

*	Less than 1%

 

(1)	Except as otherwise indicated, the address of each beneficial owner is c/o SPO Medical Inc., 21860 Burbank Blvd., North Building, Suite 380, Woodland Hills, CA 91367.

 

(2)

Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to the shares shown. Except where indicated by footnote and subject to community property laws where applicable, the persons named in the table have sole voting and investment power with respect to all shares of voting securities shown as beneficially owned by them.

23

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(3)	Includes 250,000 shares of our Common Stock that are issuable upon exercise of vested options issued under our 2005 Equity Incentive Plan (the "2005 Plan").

 

(4)	Represents shares issuable upon exercise of vested options under the Company's 2005 Plan.

 

(5)	Represents shares issuable upon exercise of options under the Company's 2005 Plan.

 

(6)	Comprised of 3,719,393 shares of the Company's Common Stock and 446,383 shares of Common Stock issuable upon exercise of currently exercisable warrants.

 

(7)	Represents shares issuable upon exercise of currently exercisable options under the Company's 2005 Non-Employee Directors Stock Option Plan (the "2005 Directors Plan").

 

SELLING STOCKHOLDERS

 

 

SELLING		NUMBER OF SHARES OWNED BEFORE			SHARES OFFERED PURSUANT TO THIS			COMMON STOCK TO BE BENEFICIALLY OWNED IF ALL SHARES OFFERED HEREUNDER ARE SOLD
STOCKHOLDER		OFFERING			PROSPECTUS			SHARES			PERCENT
TOWER CAPITAL CORP			382,758			98,000	(1)		284,758			1.47	%
AARON & MINDA WAGSCHAL			117,000			49,000	(2)		68,000			*
BERNARDO GRAJOWER			49,062			49,062	(3)		—			—
MILDRED SEIDENFELD FAMILY TRUST			196,247			196,247	(4)		—			—
DAVID SCHWAB			58,824			58,824	(5)		—			—
ELIOT SEIDENFELD			98,123			98,123	(6)		—			—
CARTER & KATHLEEN UTZIG			41,667			29,412	(7)		—			—
ELLIOT SINGER			147,185			147,185	(8)		—			—
STUART ELFLAND			98,278			98,278	(9)		—			—
SIDNEY BRAGINSKY			98,324			98,324	(10)		—			—
MIKE YEROUSHALMI			98,507			98,507	(11)		—			—
ELLIOT & RUTHIE SEIDENFELD			98,507			98,507	(12)		—			—
BARRY McDONALD			235,507			98,507	(13)		137,000			*
SY MARCUS			246,472			246,472	(14)		—			—
MITCHELL OZERI			49,295			49,295	(15)		—			—
MY BOSS’S DAUGHTER			295,767			295,767	(16)		—			—
JAY MARKOFF LIVING TRUST			63,111			63,111	(17)		—			—
BRAD MARKOFF AS TRUSTEE OF MRT			63,111			63,111	(18)		—			—
UVE PARTNERS LTD.			296,418			317,022	(19)		—			—

 

24

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MURRAY RUBIN			109,032			109,032	(20)		—			—
KLONDIKE RESOURCES, INC.			213,399			213,399	(21)		—			—
BEN BEAVERS			121,496			121,496	(22)		—			—
JOSEPH LOBEL			51,363			51,363	(23)		—			—
HOWARD BRESSLER			144,222			144,222	(24)		—			—
JEFF EISENBERG			283,203			299,495	(25)		—			—
RABBI Y LANDAU			98,909			98,908	(26)		—			—
SIMON VOGEL			35,294			35,294	(27)		—			—
JOSEPH ROSS			49,457			49,457	(28)		—			—
SOLOMON ROSS			49,457			49,457	(29)		—			—
HOWARD RUBIN			99,077			99,077	(30)		—			—
JOEL KESSLER M.D. PROFIT SHARING PLAN			99,022			99,022	(31)		—			—
MORALO BUSINESS S.A.			97,500			97,500	(32)		—			—
AVI HAUPTMAN			16,250			16,250	(32)		—			—
JOSH WANDERER			81,250			81,250	(32)		—			—
RABBI Y. BENDER			32,500			32,500	(32)		—			—
EDWARD LIFSHITZ			300,000			7,800	(32)		292,200			1.51	%
YDT ENDOWMENT FUND			32,500			32,500	(32)		—			—
HESHY SHERTZ			16,250			16,250	(32)		—			—
V-1 LLC			32,500			32,500	(32)		—			—
HCI PARTNERSHIP			21,450			21,450	(32)		—			—
BRAD MARKOFF AS TRUSTEE OF MARKOFF TRUST			19,500			19,500	(32)		—			—
1270 CAPITAL LLC			223,971			244,575	(33)		—			—
JOEL MALIN			6,944			6,944	(34)		—			—
INNOPEX LIMITED.			135,000			135,000	(35)		—			—
711129 ONTARIO LTD.			15,000			15,000	(34)		—			—
ARTHUR EDELMAN			15,000			15,000	(34)		—			—
SIDNEY BRAGINSKY			15,000			15,000	(34)		—			—
THEODORE KOMPA			79,079			79,079	(36)		—			—
JEFFREY GOLDRICH			79,079			79,079	(36)		—			—
CHAGAI ZAMIR			15,816			15,816	(36)		—			—

 

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(1) Represents 83,333 shares of Common Stock issuable upon exercise of the April 2005 Warrants and 14,667 shares of Common Stock issuable upon conversion of the interest payable with respect to the April 2005 Notes (“Interest Shares”).

(2) Represents 41,667 shares of Common Stock issuable upon exercise of the April 2005 Warrants and 7,333 Interest Shares.

(3) Represents 41,667 shares of Common Stock issuable upon exercise of the April 2005 Warrants and 7,395 Interest Shares.

(4) Represents 166,667 shares of Common Stock issuable upon exercise of the April 2005 Warrants and 29,580 Interest Shares.

(5) Represents 58,824 shares of Common Stock issuable upon exercise of the April 2005 Warrants and 7,333 Interest Shares.

25

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(6) Represents 83,333 shares of Common Stock issuable upon exercise of the April 2005 Warrants and 14,790 Interest Shares.

(7) Represents 29,412 shares of Common Stock issuable upon exercise of the April 2005 Warrants.

(8) Represents 125,000 shares of Common Stock issuable upon exercise of the April 2005 Warrants and 22,185 Interest Shares.

(9) Represents 83,333 shares of Common Stock issuable upon exercise of the April 2005 Warrants and 14,945 Interest Shares.

 

(10) Represents 83,333 shares of Common Stock issuable upon exercise of the April 2005 Warrants and 14,991 Interest Shares.

 

(11) Represents 83,333 shares of Common Stock issuable upon exercise of the April 2005 Warrants and 15,174 Interest Shares.

 

(12) Represents 83,333 shares of Common Stock issuable upon exercise of the April 2005 Warrants and 15,174 Interest Shares.

 

(13) Represents 83,333 shares of Common Stock issuable upon exercise of the April 2005 Warrants and 15,174 Interest Shares.

 

(14) Represents 208,333 shares of Common Stock issuable upon exercise of the April 2005 Warrants and 38,139 Interest Shares.

 

(15) Represents 41,667 shares of Common Stock issuable upon exercise of the April 2005 Warrants and 7,628 Interest Shares.

 

(16) Represents 250,000 shares of Common Stock issuable upon exercise of the April 2005 Warrants and 45,767 Interest Shares.

 

(17) Represents 53,333 shares of Common Stock issuable upon exercise of the April 2005 Warrants and 9,778 Interest Shares.

 

(18) Represents 53,333 shares of Common Stock issuable upon exercise of the April 2005 Warrants and 9,778 Interest Shares.

 

(19) Represents 250,333 shares of Common Stock issuable upon exercise of the April 2005 Warrants and 46,085 Interest Shares and 20,604 shares of Common Stock issuable upon exercise of other warrants (the “Other Warrants”).

 

(20) Represents 25,000 shares of Common Stock issuable upon exercise of the April 2005 Warrants and 4,593 Interest Shares and 79,079 shares of Common Stock.

 

(21) Represents 46,667 shares of Common Stock issuable upon exercise of the April 2005 Warrants and 8,574 Interest Shares and 158,158 shares of Common Stock.

 

(22) Represents 35,833 shares of Common Stock issuable upon exercise of the April 2005 Warrants and 6,584 Interest Shares and 79,079 shares of Common Stock.

 

(23) Represents 16,667 shares of Common Stock issuable upon exercise of the April 2005 Warrants and 3,064 Interest Shares and 31,632 shares of Common Stock.

 

(24) Represents 41,667 shares of Common Stock issuable upon exercise of the April 2005 Warrants and 7,660 Interest Shares and 94,895 shares of Common Stock.

 

(25) Represents 83,333 shares of Common Stock issuable upon exercise of the April 2005 Warrants, 15,320 Interest Shares, 42,684 shares of Common Stock issuable upon exercise Other Warrants and 158,158 shares of Common Stock.

 

(26) Represents 83,333 shares of Common Stock issuable upon exercise of the April 2005 Warrants and 15,575 Interest Shares.

 

(27) Represents 35,294 shares of Common Stock issuable upon exercise of the April 2005 Warrants.

 

(28) Represents 41,667 shares of Common Stock issuable upon exercise of the April 2005 Warrants and 7,790 Interest Shares.

 

(29) Represents 41,667 shares of Common Stock issuable upon exercise of the April 2005 Warrants and 7,790 Interest Shares.

 

(30) Represents 83,333 shares of Common Stock issuable upon exercise of the April 2005 Warrants and 15,744 Interest Shares.

 

(31) Represents 83,333 shares of Common Stock issuable upon exercise of the April 2005 Warrants and 15,689 Interest Shares.

 

(32) Represents shares of Common Stock issuable upon exercise of the July 2006 Warrants.

 

(33) Represents shares of Common Stock issuable upon exercise of Other Warrants and 173,974 shares of Common Stock.

 

(34) Represents shares of Common Stock issuable upon exercise of Other Warrants.

 

(35) Represents (i) 25,000 of Common Stock issuable upon exercise of Other Warrants and (ii) 110,000 shares upon exercise of warrants issued in connection with line of credit facilities.

 

(36) Represents shares of Common Stock.

26

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27

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The selling stockholders may also transfer the shares in other circumstances, in which case the transferees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this Prospectus.

 

The selling stockholders and any broker-dealers or agents that are involved in selling the shares may be deemed to be "underwriters" within the meaning of the Act in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Act. Discounts, concessions, commissions and similar selling expenses, if any, that can be attributed to the sale of securities will be paid by the applicable selling stockholder and/or the purchasers.

 

If a selling stockholder uses this Prospectus for any sale of the shares, it will be subject to the prospectus delivery requirements of the Act. The selling stockholders will be responsible to comply with the applicable provisions of the Act and the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder, including, without limitation, Regulation M, as applicable to such selling stockholders in connection with resales of their respective shares under this Registration Statement.

 

 

DESCRIPTION OF CAPITAL STOCK

 

We are authorized to issue up to 50,000,000 shares of Common Stock. of which 19,335,525 were outstanding as of April 12, 2007. Holders of the Common Stock are entitled to one vote per share on all matters to be voted upon by the stockholders. Holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared by the Board of Directors out of funds legally available therefore. Upon the liquidation, dissolution, or winding up of our company, the holders of Common Stock are entitled to share ratably in all of our assets which are legally available for distribution after payment of all debts and other liabilities and liquidation preference of any outstanding common stock. Holders of common stock have no preemptive, subscription, redemption or conversion rights. The holders of shares of the Common Stock do not have cumulative voting rights for the election of directors and, accordingly, the holders of more than 50% of the shares of Common Stock are able to elect all directors.

 

Preferred Stock

 

We are authorized to issue up to 2,000,000 shares of preferred stock, par value $.001 per share. Currently, no preferred stock is issued and outstanding.

 

The shares of preferred stock are issuable in series, and in connection with the issuance of any series of preferred stock and to the extent now or hereafter permitted by law, the board of directors is authorized to fix by resolution the designation of each series, the stated value of the shares of each series, the dividend rate or rates of each series and the date or dates and other provisions respecting the payment of dividends, the provisions, if any, respecting the redemption of the shares of each series and, subject to requirements of law, the voting rights, the terms, if any, upon which the shares of each series shall be convertible into or exchangeable for any other shares of stock of the Company and any other relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, of the shares of each series.

 

LEGAL MATTERS

 

AUDITOR CHANGE

Our auditor prior to the Acquisition Transaction was Marcum & Kliegman LLP ("MKLLP"). The auditor of SPO Ltd., the acquired company, prior to the Acquisition Transaction and thereafter, is Brightman Almagor & Co., certified public accountants (Israel) and a member of Deloitte Touche Tohmatsu ("Brightman"). Following the Acquisition Transaction, effective November 18, 2005, the audit committee and our board of directors dismissed MKLLP as our independent accountant and engaged the services of Brightman as new independent accountants.

28

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The reports of MKLLP did not contain an adverse opinion or disclaimer of opinion but were qualified as to going concern limitations. During our two most recent fiscal years and subsequent interim periods there were no disagreements with MKLLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of MKLLP, would have caused MKLLP to make reference to the subject matter of the disagreements in their report on the financial statements for such years.

 

EXPERTS

The financial statements for the years ended December 31, 2006 and December 31, 2005 included in this Prospectus have been so included in reliance on the report of Brightman Almagor & Co., Certified Public Accountants, member firm of Deloitte Touche Tohmatsu, given on the authority of said firm as experts in auditing and accounting.

 

WHERE YOU CAN FIND MORE INFORMATION

 

We file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy any reports, statements or other information on file at the SEC public reference room in Washington, D.C. You can request copies of those documents, upon payment of a duplicating fee, by writing to the SEC.

 

We have filed with the SEC under the Act a Registration Statement on Form SB-2, of which this Prospectus is a part, with respect to the shares offered hereby. This Prospectus, which constitutes a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement, certain items of which are contained in exhibits and schedules as permitted by the rules and regulations of the SEC. You can obtain a copy of the Registration Statement from the SEC at the address listed above or from the SEC's Internet website at www.sec.gov.

 

Statements made in this Prospectus as to the contents of any contract, agreement or other document referred to herein are not necessarily complete. With respect to each contract, agreement or other document filed as an exhibit to the Registration Statement or in a filing incorporated by reference herein or otherwise, reference is made to the exhibit for a more complete description of the matters involved, and each statement shall be deemed qualified in its entirety by this reference.

 

We are subject to the informational requirements of the Exchange Act and file periodic reports, proxy statements and other information with the SEC. Reports and other information filed by us may be inspected and copied at the public reference facilities maintained by the SEC at:

 

100 F Street, N.E.

 

Room 1580

Washington, D.C. 20549

 

Copies of such material may be obtained by mail from the Public Reference Room of the SEC at 100 F Street, N.E., Washington, D.C. 20549, at prescribed rates. In addition, the SEC maintains a Web site at www.sec.gov containing reports, proxy and information statements and other information regarding registrants that file electronically with the SEC, including us. The SEC's telephone number is 1-800-SEC-0330.

 

Prospective investors may rely on the information contained in this Prospectus. Neither we nor the selling stockholders have authorized anyone to provide prospective investors with information different from that contained in this Prospectus. The information in this Prospectus is correct only as of the date of this Prospectus, regardless of the time delivery of this Prospectus or any sale of these securities.

29

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SPO MEDICAL INC.

 

up to 4,586,109 shares of Common Stock

 

PROSPECTUS

 

________, 2007

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SPO MEDICAL INC. AND ITS SUBSIDIARY

 

CONSOLIDATED FINANCIAL STATEMENTS

 

AS OF DECEMBER 31, 2006

 

U.S. DOLLARS IN THOUSANDS

 

INDEX

		Page
Report of Independent Registered Public Accounting Firm			F-2
Consolidated Balance Sheet			F-3 - F-4
Consolidated Statements of Operations			F-5
Statements of Changes in Stockholders' Deficiency			F-6
Consolidated Statements of Cash Flows			F-7
Notes to Consolidated Financial Statements			F-8

F-1

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Stockholders of

SPO MEDICAL INC.

We have audited the accompanying consolidated balance sheet of SPO MEDICAL INC. ("the Company") and its subsidiary as of December 31, 2006, and the related statements of operations, changes in stockholders' equity and cash flows for each of the two years in the period ended December 31, 2006. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above, present fairly, in all material respects, the consolidated financial position of the Company and its subsidiary as of December 31, 2006, and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered recurring losses from operations and has a shareholders' deficiency that raises doubt about its ability to continue as a going concern. Management's plans concerning these matters are also described in Note 2. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Brightman Almagor & Co.

Certified Public Accountants

A member firm of Deloitte Touche Tohmatsu

Tel-Aviv, Israel

March 19, 2007

F-2

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SPO MEDICAL INC

CONSOLIDATED BALANCE SHEET

U.S. dollars in thousands (except share data)

					December 31,
		Note			2006
ASSETS
CURRENT ASSETS
Cash and cash equivalents					$	836
Trade receivables						568
Prepaid expenses						202
Other accounts receivable						48
Inventories			4			811
						2,465
LONG TERM INVESTMENTS
Deposits						11
Severance pay fund						209
						220
PROPERTY AND EQUIPMENT, NET			5			106
Total net assets					$	2,791

 

The accompanying notes to these financial statements are an integral part thereof.

 

F-3

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SPO MEDICAL INC

CONSOLIDATED BALANCE SHEET

U.S. dollars in thousands (except share data)

					December 31,
		Note			2006
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
Current Liabilities
Short-term loans, net			6		$	710
Trade payables						488
Employees and Payroll accruals						214
Deferred revenues			9			395
Accrued expenses and other liabilities			10			572
						2,379
Long-Term Liabilities
Long term loans, net			6			983
Accrued severance pay			11			331
						1,314
COMMITMENTS AND CONTINGENT LIABILITIES			14
STOCKHOLDERS’ DEFICIENCY
Stock capital			15
Preferred stock of $0.01 par value Authorized - 2,000,000 shares, issued and outstanding - none
Common stock $0.01 par value- Authorized - 50,000,000 shares, issued and outstanding - 19,335,525 shares						193
Additional paid-in capital						9,954
Accumulated deficit						(11,049	)
						(902	)
Total liabilities and stockholders’ deficiency					$	2,791

The accompanying notes to these financial statements are an integral part thereof.

F-4

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SPO MEDICAL INC

CONSOLIDATED STATEMENT OF OPERATIONS

U.S. dollars in thousands (except share data)

 

		Year ended December 31
		2006			2005
Revenues		$	3,714		$	1,825
Cost of revenues			1,809			843
Gross profit			1,905			982
Operating expenses
Research and development			972			584
Selling and marketing			671			786
General and administrative			923			782
Merger expenses			—			251
Total operating expenses			2,566			2,403
Operating loss			661			1,421
Financial expenses, net			4,302			617
Net Loss for the year		$	4,963		$	2,038
Basic and diluted loss per ordinary share		$	0.26		$	0.11
Weighted average number of shares outstanding used in computation of basic and diluted loss per share			19,069,380			17,882,715

The accompanying notes to these financial statements are an integral part thereof.

F-5

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SPO MEDICAL INC

STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY

U.S. dollars in thousands (except share data)

 

		Share capital			Additional paid-in capital			Deferred compensation						Accumulated deficit			Total
Balance as of January 1, 2005		$	600		$	2,675					$	—		$	(4,048	)	$	(773	)
Issuance of ordinary shares upon conversion of loans			35			224												259
Warrants issued in private placement						949												949
Warrants issued in connection with loans						22												22
Deferred stock-based compensation related to options granted to employees and consultants						762						(762	)					—
Amortization of deferred Stock-based compensation related to options granted to employees												187						187
Amortization of deferred Stock-based compensation related to options granted to consultants												348						348
Reverse merger transaction and forward split of issued share capital			(465	)		201												(264	)
Net Loss															(2,038	)		(2,038	)
Balance as of December 31, 2005			170			4,833						(227	)		(6,086	)		(1,310	)
Deferred compensation reclassified due to FAS 123R implementation for the first time						(227	)					227						—
Warrants issued in connection with loans						530												530
Amortization of deferred stock-based compensation related to options granted to consultants						893												893
Exercise of warrants by external consultant			5															5
Benefit resulting from changes to warrant terms						2,534												2,534
Exercise of convertible notes			9			560												569
Amortization of deferred stock-based compensation related to options granted to employees						189												189
Amortization of deferred stock-based compensation related to options granted to directors						71												71
Issuance of ordinary shares			9			571												580
Net Loss															(4,963	)		(4,963	)
Balance as of December 31, 2006		$	193		$	9,954					$	—		$	(11,049	)	$	(902	)

 

The accompanying notes to these financial statements are an integral part thereof.

F-6

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NOTES TO THE FINANCIAL STATEMENTS

U.S. dollars in thousands (except share data)

 

NOTE 1  -  GENERAL

SPO Medical Inc. (hereinafter referred to as "SPO" or the "Company") was originally incorporated 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 acquired (the "Acquisition Transaction") 100% of the outstanding capital stock of SPO Medical Equipment Ltd., a company incorporated under the laws of the State of Israel ("SPO Ltd."), pursuant to a Capital Stock Exchange Agreement dated as of February 28, 2005 between the Company, SPO Ltd. and the shareholders of SPO Ltd., as amended and restated on April 21, 2005 (the "Exchange Agreement"). In exchange for the outstanding capital stock of SPO Ltd., the Company issued to the former shareholders of SPO Ltd. a total of 5,769,106 shares of the Company's common stock, par value $0.01 per share ("Common Stock"), representing approximately 90% of the Common Stock then issued and outstanding after giving effect to the Acquisition Transaction. As a result of the Acquisition Transaction, SPO Ltd. became a wholly owned subsidiary of the Company as of April 21, 2005 and, subsequent to the Acquisition Transaction, the Company changed its name to "SPO Medical Inc." Upon consummation of the Acquisition Transaction, the Company effectuated a forward subdivision of the Company's Common Stock issued and outstanding on a 2.65285:1 basis.  

The merger between UNDI and the SPO Ltd was accounted for as a reverse merger. As the shareholders of SPO Ltd received the largest ownership interest in the Company, SPO Ltd was determined to be the "accounting acquirer" in the reverse acquisition. As a result, the historical financial statements of the Company were replaced with the historical financial statements of the SPO Ltd.

The Company and its subsidiary, SPO Ltd., are collectively referred to as the "Company".

NOTE 2  -  Going Concern

As reflected in the accompanying financial statements, the Company’s operations for the year ended December 31, 2006, resulted in a net loss of $4,963 and the Company’s balance sheet reflects a net stockholders’ deficit of $902. The Company’s ability to continue operating as a “going concern” is dependent on its ability to raise sufficient additional working capital. Management’s plans in this regard include raising additional cash from current and potential stockholders and increasing the marketing of its current and new products.

F-8

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SPO MEDICAL INC

NOTES TO THE FINANCIAL STATEMENTS

U.S. dollars in thousands (except share data)

 

NOTE 3  -  Significant Accounting Policies

The financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States of America.

a.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, SPO Ltd. All material inter-company accounts and transactions have been eliminated in consolidation.

b.

Use of estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

c.

Financial statements in U.S. dollars

The reporting currency of the Company is the U.S. dollar ("dollar"). The dollar is the functional currency of the Company. Transactions and balances originally denominated in dollars are presented at their original amounts. Non-dollar transactions and balances are remeasured into dollars in accordance with the principles set forth in Statement of Financial Accounting Standards ("SFAS") No. 52 “Foreign Currency Translation” (“SFAS No. 52”). All exchange gains and losses from remeasurement of monetary balance sheet items resulting from transactions in non-dollar currencies are recorded in the statement of operations as they arise.

d.

Cash and Cash Equivalents

The Company considers all highly liquid investments originally purchased with maturities of three months or less to be cash equivalents.

e.

Property and Equipment

Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, as follows:

Computer and peripheral equipment	3 - 7 years
Office furniture and equipment	7 - 15 years
Leasehold improvement	Over the term of the lease

F-9

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SPO MEDICAL INC

NOTES TO THE FINANCIAL STATEMENTS

U.S. dollars in thousands (except share data)

 

NOTE 3  -  Significant Accounting Policies (Cont.)

In accordance with SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets”, management reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable based on estimated future undiscounted cash flows. If so indicated, an impairment loss would be recognized for the difference between the carrying amount of the asset and its fair value. As of December 31, 2006, no impairment losses have been recorded.

f.

Revenue recognition

The Company generates its revenues mainly from sales of its products. Revenues are recognized when delivery has occurred, persuasive evidence of an arrangement exists, the vendor’s fee is fixed or determinable, no further obligation exists and collection is probable and there are no remaining significant obligations. Delivery is considered to have occurred upon shipment from the Company’s distribution centers of products to the reseller. All of the Company’s products that are sold through reseller agreements are non-exchangeable, non refundable and non returnable. Accordingly the resellers are considered end users.

g.

Inventory

 

Inventories are stated at the lower of cost or market. Cost is determined as follows:

Raw materials, components and finished products - on the FIFO basis.

Work-in-process - on the basis of direct manufacturing costs.

 

h.

Research and development costs

 

Research and development costs, net of government grants and participation by others, are charged to expenses as incurred.

i.

Income taxes

 

The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). This statement prescribes the use of the liability method whereby deferred tax assets 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 and laws that will be in effect when the differences are expected to reverse. The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value.

 

 

F-10

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SPO MEDICAL INC

NOTES TO THE FINANCIAL STATEMENTS

U.S. dollars in thousands (except share data)

 

NOTE 3  -  Significant Accounting Policies (Cont.)

 

j.

Fair value of financial instruments

 

The financial instruments of the Company consist mainly of cash and cash equivalents, short-term investments, trade receivables, accounts payable and short-term loans. In view of their nature, the fair value of the Company’s financial instruments is usually identical or close to their carrying value.

Additionally the financial instruments of the Company include long term loans which according to the Company’s management recorded close to their fair value.

k.

Concentrations of credit risk

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents. The majority of the Company’s cash and cash equivalents are invested in US dollar deposits. Management believes that the financial institutions that hold the Company’s investments are financially sound, and accordingly, minimal credit risk exists with respect to these investments.

l.

Stock-based compensation

Effective January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS No. 123R) requiring that compensation cost relating to share-based payment awards made to employees and directors be recognized in the financial statements. The awards issued under Company's stock-based compensation plans are described in Note 13, “Stockholder's Equity". The cost for such awards is measured at the grant date based on the calculated fair value of the award. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods (generally the vesting period of the equity award) in the Company's Consolidated Statement of Operations. The following table summarizes the effects of stock-based compensation resulting from the application of SFAS No. 123 (revised 2004) included in Statement of Operations : 

 

			Year ended December 31,
			2006
Cost of revenues		$	13
Research and development, net			176
Selling and marketing			99
General and administrative			122
		$	410

Prior to January 1, 2006, the Company accounted for share-based compensation cost using the intrinsic value method in accordance with Accounting Principles Board No. 25, “Accounting for Stock Issued to Employees” (APB No. 25), and related interpretations. The Company also followed disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation”, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure”.

The company adopted SFAS No. 123R using the modified prospective method and, accordingly, the Consolidated Statement of Operations for prior years has not been restated to reflect the fair value method of recognizing compensation cost relating to stock options. Share-based compensation cost relating to stock options recognized in 2006 is based on the value of the portion of the award that is ultimately expected to vest. SFAS No. 123R requires forfeitures to be estimated at the time of grant in order to estimate the portion of the award that will ultimately vest. Such portion is currently estimated at 0%, based on the Company's historical rates of forfeiture.

Compensation cost related to stock options is recognized in operating results (included in cost of revenues, research and development, selling and marketing, general and administrative expenses) under SFAS No. 123R in 2006 was $410 thousand. Compensation cost related to stock options recognized in our Consolidated Statement of Operations in 2006 includes (1) compensation cost for stock option awards granted prior to, but not yet vested as of December 31, 2005, based on the grant-date fair value estimated in accordance with the pro forma provisions of SFAS No. 123 and (2) compensation cost for stock option awards granted subsequent to December 31, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123R.

The following table illustrates the effect on net income and earnings per share as if we had applied the fair value recognition provisions of SFAS No. 123 in the year prior to the adoption of FAS No. 123R:

 

F-11

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SPO MEDICAL INC

NOTES TO THE FINANCIAL STATEMENTS

U.S. dollars in thousands (except share data)

 

NOTE 3  -  Significant Accounting Policies (Cont.)

 

		Year ended December 31,
		2005
Net Loss, as reported		$	2,038
Deduct: stock-based compensation determined under APB 25			193
Add: Stock-based compensation determined under SFAS123			599
Pro-forma net loss		$	2,444
Basic and fully diluted Loss per share as reported		$	0.11
Basic and fully diluted Loss per share proforma		$	0.14

Under SFAS 123, the fair market value of option grants was estimated on the date of grant using the “Black-Scholes option pricing” method with the following weighted-average assumptions: (1) expected life of 3.5 or 10 years (as per option's terms); (2) dividend yield of 0% (3) expected volatility of 100% and (4) risk-free interest rate of approximately 4.3%.

 

m.

Effects of recently issued accounting standards

(1)

SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments—an Amendment of FASB Statements No. 133 and 140” - In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments—an Amendment of FASB Statements No. 133 and 140” ("SFAS 155") to simplify and make more consistent the accounting for certain financial instruments. Namely, SFAS 155 amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” to permit fair value remeasurement for any hybrid financial instrument with an embedded derivative that otherwise would require bifurcation, provided that the whole instrument is accounted for on a fair value basis. SFAS 155 amends SFAS No. 140, “Accounting for the Impairment or Disposal of Long-Lived Assets” to allow for a qualifying special-purpose entity to hold a derivative financial instrument that relates to a beneficial interest other than another derivative financial instrument.

 

F-12

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SPO MEDICAL INC

NOTES TO THE FINANCIAL STATEMENTS

U.S. dollars in thousands (except share data)

 

NOTE 3  -  Significant Accounting Policies  

	m.	Effects of recently issued accounting standards (Cont.)

		SFAS 155 applies to all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006, with earlier application permitted. Accordingly, the Company is to adopt SFAS 155 on January 1, 2007. The adoption of SFAS 155 is not expected to have any effect on the Company's financial position or results of operations.
	(2)	FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109” - In June 2006, the FASB issued FASB Interpretation No. 48 (“FIN-48”), “Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109.” The interpretation clarifies the accounting for uncertainty in income taxes recognized in an entity's financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” Specifically, FIN-48 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken.
		The provisions of FIN-48 are effective for financial statements for fiscal years beginning after December 15, 2006. Accordingly, the Company is to adopt FIN-48 on January 1, 2007. The adoption of FIN-48 is not expected to have a material effect on the Company’s financial position or results of operations.

 

(3)

SFAS No. 157, “Fair Value Measurements” - In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157"), which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 applies whenever other accounting standards require or permit assets or liabilities to be measured at fair value. Accordingly, it does not expand the use of fair value in any new circumstances. Fair value under SFAS 157 is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This Standard clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability. In support of this principle, SFAS 157 establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data, for example, a reporting entity's own data. Under SFAS 157, fair value measurements would be separately disclosed by level within the fair value hierarchy. SFAS 157 is effective for fiscal years beginning after November 15, 2007. Accordingly, the Company is to adopt SFAS 157 on January 1, 2008. The adoption of SFAS 157 is not expected to have a material effect on the Company’s financial position or results of operations.

 

F-13

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SPO MEDICAL INC

NOTES TO THE FINANCIAL STATEMENTS

U.S. dollars in thousands (except share data)

 

NOTE 3  -  Significant Accounting Policies  

m.

Effects of recently issued accounting standards (Cont.)

 

	(4)	Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements" - In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements" ("SAB 108"), which provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment two approaches are commonly used to evaluate the materiality of misstatements or errors in financial statements: the roll-over, also known as the current-period or income-statement approach, and the iron curtain, also known as the cumulative or balance-sheet approach. The roll-over approach quantifies a misstatement based on the amount of the error originating in the current-period income statement. This approach could allow balance sheet items to grow each year by immaterial amounts, until the cumulative error becomes material. The iron curtain approach quantifies a misstatement based on the effects of correcting the misstatement existing in the balance sheet at the end of the current period. This approach does not consider the income statement effects of correcting prior year misstatements in the current year to be errors.
		The reliance on only one of these approaches, to the exclusion of the other, does not appropriately quantify all misstatements that could be material to financial-statement users. Accordingly, SAB 108 will require quantification of financial statement errors based on the effects of the error on each of an entity's financial statements and the related financial statement disclosures. This model is commonly referred to as a dual approach because it essentially requires quantification of errors under both the iron-curtain and the roll-over approaches.   SAB 108 is effective for annual financial statements covering the first fiscal year ending after November 15, 2006. From a transition perspective, SAB 108 permits companies to record the cumulative effect of initially applying the dual approach in the first year ending after November 15, 2006 by recording any necessary correcting adjustments to the carrying values of assets and liabilities as of the beginning of that year with the offsetting adjustment recorded to the opening balance of retained earnings. The initial adoption of SAB 108 had no affect on the Company's financial position, results of operations or cash flows.

 

(5)

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS No. 159). SFAS No. 159 permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. SFAS No. 159 is effective for the company beginning in the first quarter of fiscal year 2008, although earlier adoption is permitted. The company is currently evaluating the impact that SFAS No. 159 will have on its financial statements.

 

n.

Basic and diluted net loss per share:

Basic and diluted net loss per share is presented in accordance with Statement of Accounting Financial Standards No. 128, "Earnings Per Share" ("SFAS No. 128") for all periods presented. Basic and diluted net loss per share of Common stock was determined by dividing net loss attributable to Common stock holders by weighted average number of shares of Common stock outstanding during the period. Diluted net loss per share of Common stock is the same as basic net loss per share of Common stock for all periods presented as the effect of the Company's potential additional shares of Common stock were anti-dilutive.

F-14

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SPO MEDICAL INC

NOTES TO THE FINANCIAL STATEMENTS

U.S. dollars in thousands (except share data)

 

NOTE 3  -  Significant Accounting Policies  

o.

Basic and diluted net loss per share (Cont.)

All outstanding stock options and warrants have been excluded from the calculation of the diluted net loss per share of Common stock because all such securities are anti-dilutive since the Company reported losses for those years. The total number of shares related to the outstanding options and warrants excluded from the calculations of diluted net loss per share, was 5,472,838 and 3,614,545 for the years ended December 31, 2006 and 2005, respectively.

 

NOTE 4  -  Inventories

 

			December 31, 2006
Raw Materials		$	115
Work In Process			210
Finished Goods			486
		$	811

 

NOTE 5  -  Property and Equipment 

 

		December 31, 2006
Cost:
Computer and peripheral equipment		$	140
Leasehold Improvement			16
Office furniture and equipment			22
		$	178
Accumulated depreciation:
Computer and peripheral equipment		$	63
Leasehold Improvement			1
Office furniture and equipment			8
		$	72
Property and Equipment, net		$	106

Depreciation expenses for the years ended December 31, 2006 and 2005 amounted to $24 and $8 respectively.

F-15

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SPO MEDICAL INC

NOTES TO THE FINANCIAL STATEMENTS

U.S. dollars in thousands (except share data)

 

NOTE 6  -  Long -term and Short-term Loans

 

	a.	In December 2005 the Company completed a private placement to certain accredited investors that it commenced in April 2005 for the issuance of up to $1,544 of units of its securities, with each unit comprised of (i) the Company's 18 month 6% promissory note (collectively, the "April 2005 Notes") and (ii) three year warrants to purchase up to such number of shares of the Company's Common Stock as are determined by the principal amount of the Note purchased by such investor divided by $ 0.85 (collectively the "April 2005 Warrants").
		For financial reporting purposes, the Company recorded a discount of $949 to reflect the value of the warrants and is amortizing this amount to the date of maturity.   In September 2006, the Company offered to the holders of the April 2005 Notes to revise certain of the terms of the original offering in order to facilitate an extension to the scheduled maturity date of the Note, (hereinafter the "Amendment"). The Amendment provides that (a) the maturity date of the April 2005 Notes is to be extended by one year from the original maturity date on the original note, (b) the exercise period of the April 2005 Warrants is to be extended from three to five years and the per share exercise price was adjusted to $0.60 and (c) the interest rate on the amounts outstanding under the April 2005 Notes was increased to 8% per annum, effective July 12, 2006. The Amendment also provides that if the Company subsequently issues shares of its Common Stock at an effective per share exercise price less than that of the adjusted per share exercise price of the April 2005 Warrants during the adjusted exercise period, then the exercise price thereof is to be reduced to such lower exercise price; provided, that, this protection will not apply to certain Company equity or debt issuances (i) from approved stock option plans to employees, directors and other service providers, (ii) upon exercise of options and warrants outstanding as of September 27, 2006 and (iii) to Company consultants that an unaffiliated third party would deem to be commercially reasonable and fair.   In addition, the Amendment also provides that, subject to certain qualifications, the Company's obligation to file a registration statement under the Securities Act of 1933, as amended, relating to the resale of the Company's Common Stock underlying the April 2005 Warrants was extended to April 15, 2007.   As of the date of signing the financial statements holders of Notes in the principal amount $1,414 have signed the Amendment and the holder of a note in the principal amount of $50 received repayment of principle and accrued interest. The Company is currently in contact with the remaining note holders of $80 of the April 2005 Notes with respect to obtaining their formal execution of the Amendment.   The Amendment was effective as of September 30, 2006 and the accounting costs related to the Amendment has been fully recognized in the current accounting year. For financial reporting purposes, the Company recorded a one time non-cash finance expense in the amount of $2,534 in respect of the full amount of the April 2005 Note $1,494.

 

b.

On February 1, 2006 the Company borrowed the principal amount of $150. Interest accrued at an annual rate of prime plus 4% and was repayable in four equal installments every three calendar months (commencing June 30, 2006) through January 31, 2007. The Company issued to the holder of this indebtedness a three-year warrant to purchase up to 60,000 shares of Common Stock at a per share exercise price of $0.85. As of December 31, 2006, the Company repaid $119 representing principal and accrued interest then due. On January 31, 2007 the final installment of $48 including accrued interest was repaid.

F-16

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SPO MEDICAL INC

NOTES TO THE FINANCIAL STATEMENTS

U.S. dollars in thousands (except share data)

 

NOTE 6  -  Long -term and Short-term Loans (Cont.)

 

b.

In July 2006, the Company commenced a private placement of units of securities, with each unit comprised of (i) the Company's 8% month promissory note due 12 months from the date of issuance and (ii) warrants as described below. The principal and accrued interest are due in one balloon payment at the end of the twelve month period. Each purchaser of the note would receive warrants, exercisable over a period of two years from the date of issuance, to purchase16,250 shares of Common Stock for each $25 of principal loaned, at a per share exercise price equal to the lower of $1.50 or 35% less than any the offering price at an initial public offering of the Company's Common Stock during the warrant exercise period. The Company raised a gross amount of $550, which is the maximum amount that can be raised under the offering.   The Company recorded in the financial statements a discount of $463 to reflect the value of the warrants and is amortizing this amount through the date of the loans maturity.

NOTE 7 - Repayment of Outstanding Debt

a.

On September 6, 2005 the Company negotiated with a lender a loan in the principal amount of $100 plus a one time arrangement fee of $10. This loan was repaid in January 2006. The Company also issued to the holder of the debt a three-year warrant to purchase up to 25,000 shares of the Company’s Common Stock at a per share price of $0.75.   The Company recorded in the financial statements a discount of $14 to reflect the value of the warrants and amortized this amount through the date of the maturity of the loan.

 

b.

In August 2004 the Company negotiated with a lender the extension of the scheduled maturity date of indebtedness in the principal amount of $140 that was originally scheduled to mature on October 12, 2005. The maturity date of $100 of the original principal amount of this indebtedness was extended to March 31, 2006. In consideration of the extension of the principal amount of $100, the Company paid to the lender a one-time arrangement fee of $20 and issued to the holder of the debt a three-year warrant to purchase up to 15,000 shares of the Company's Common Stock at a per share price of $0.75. On March 31, 2006 the principal amount of $100 was repaid in full.

NOTE 8  -  Convertible Loans

In January 2005, the Company issued to 10 investors its convertible promissory notes (collectively the "Notes") in the aggregate principal amount of $300. The Notes became payable on September 30, 2006 and bore interest at an annual rate of 8%. Under the terms of the Notes at the election of the holder the Notes were convertible into the Company's Common Stock at a per share price equal to the lesser of (i) 60% of the per share purchase price of any Company security subsequently sold by the Company and (ii) $0.705. All the holders of these convertible promissory notes elected to convert the principal and the accrued interest. The conversion resulted in the issuance to these investors of a total of 948,949 shares of the Company's Common Stock.

In addition, the Company issued to three of the holders of these Notes, as compensation for their participation in raising the funds relating to the Notes, warrants, exercisable through April 21, 2008, to purchase such number of shares of Common Stock as is determined by dividing $30 by the Exercise Price.

F-17

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SPO MEDICAL INC

NOTES TO THE FINANCIAL STATEMENTS

U.S. dollars in thousands (except share data)

 

NOTE 9  - Deferred Revenues

In February 2006 the Company entered into a Distribution Agreement with a Distributor to market and distribute certain of the Company’s products. In accordance with this agreement, as at the balance sheet date, the distributor advanced the Company $395. This advance will be offsettable against future amounts due from the Distributor in respect of future sales of certain products subject to other commitments per the Distribution Agreement. Accordingly, this amount has been recorded as deferred revenues.

 

NOTE 10  -  Accrued Expenses and other liabilities 

 

		December 31,
		2006
Accrued expenses pre merger		$	263
Royalties			171
Other accrued expenses			138
		$	572

NOTE 11  -  Accrued Severance Pay

The Company's liability for severance pay is calculated in accordance with Israeli law based on the most recent salary paid to employees and the length of employment in the Company. The Company's liability for severance pay has been fully provided for. Part of the liability is funded through individual insurance policies. The policies are assets of the Company and, under labor agreements, subject to certain limitations, they may be transferred to the ownership of the beneficiary employees.

Severance pay expenses for the years ended December 31, 2006 and 2005 were $78 and $136 respectively.

NOTE 12 -  Private Placement

In January 2006, the Company entered into an agreement with an institutional investor for the private placement of 857,143 shares of its Common Stock for gross proceeds of $600 (prior to the payment of placement related expenses aggregating approximately to $20).

NOTE 13  -  Stockholder's Equity  

a.

Equity Incentive Plans

In April 2005, the Company adopted the 2005 Equity Incentive Plan (the "2005 Plan"). A total of 1.75 million shares of Common Stock were originally reserved for issuance under the 2005 Plan. The 2005 Plan provides for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, bonus stock, awards in lieu of cash obligations, other stock-based awards and performance units. The 2005 Plan also permits cash payments under certain conditions. The compensation committee of the Board of Directors is responsible for determining the type of award, when and to who awards are granted, the number of shares and the terms of the awards and exercise prices. The options are exercisable for a period not to exceed ten years from the date of grant. Vesting periods range from immediately to four years.

F-18

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SPO MEDICAL INC

NOTES TO THE FINANCIAL STATEMENTS

U.S. dollars in thousands (except share data)

 

NOTE 13  -  Stockholder's Equity (Cont.)

In April 2005, the Company adopted the 2005 Non-Employee Directors Stock Option Plan (the "2005 Directors Plan") providing for the issuance of up to 400,000 shares of Common Stock to non-employee directors. Under the 2005 Directors Plan, only non-qualified options may be issued and they will be exercisable for a period of six years from the date of grant.

 

The options granted vest over periods of up to five years from the date of the grant. Most of the options granted prior to 2005 expire after 10 years from the date of the grant while most of the options granted in 2005 expire after 6 years.

 

With respect to options granted through December 31, 2005 at exercise prices below the fair market value of the underlying shares at the date of grant, deferred compensation amortization totaling $187 was recorded and charged to earnings during 2005 in accordance with APB 25 and FIN 44.

 

With respect to compensation expenses recorded in 2006, relating to options granted through December 31 2006, the Company applied the provisions of SFAS No. 123(R) and SAB No. 107, using the prospective recognition method, which require employee share-based equity awards to be accounted for under the fair value method, and eliminates the ability to account for these instruments under the intrinsic value method prescribed by APB Opinion No. 25 and allowed under the original provisions of SFAS No. 123. SFAS No. 123(R) requires the use of an option pricing model for estimating fair value, which is then amortized to expense over the service periods.

 

During 2006 the Company recorded Stock-based compensation expenses in the amount of $1,152.

 

The following is a summary of the Company’s outstanding options and warrants:

b.

Stock Options:

NOTE 13  -  Stockholder's Equity (Cont.)

The options outstanding as of December 31, 2006, have been separated into ranges of exercise price as follows:

														Weighted
		Options			Weighted						Options			average
		outstanding			average			Weighted			exercisable			exercise
		as of			remaining			average			as of			price of
		December 31			contractual			exercise			December 31			options
Range of exercise price		2006			life (years)			price			2006			exercisable
$0.5-$0.55			300,000			8.42		$	0.05			250,000		$	0.05
$0.60			750,000			8.74		$	0.60			630,000		$	0.60
$0.85			110,000			7.14		$	0.85			50,000		$	0.85
$1.85			100,000			9.81		$	1.85			50,000		$	1.85
			1,260,000			8.61		$	1.24			980,000		$	0.54

c.

Stock warrants

The Company has issued warrants as follows:

 

				Outstanding				Exercisable
				as of				as of
				December 31,		Exercise		December 31,		Exercisable
Issuance date				2006		Price		2006		through
May 2005		(1)		88,236		0.85		88,236		May 2008
June 2005		(1)		382,354		0.85		382,354		June 2008
July 2005		(1)		117,648		0.85		117,648		September 2008
September 2005		(2)		40,000		0.75		40,000		September 2008
September 2005		(1)		910,003		0.85		910,003		November 2008
November 2005		(3)		406,925		0.01		406,925		November 2008
November 2005		(1)		152,942		0.85		152,942		December 2008
December 2005		(1)		117,648		0.85		117,648		December 2008
February 2006		(2)		60,000		0.85		60,000		January 2009
February 2006		(4)		500,000		0.01		—		—
September 2006		(5)		83,333		0.36		83,333		August 2009
September 2006		(5)		57,500		0.60		57,500		September 2010
September 2006		(6)		Up to 1,773,333		0.60		Up to 1,773,333		September 2010
October 2006		(7)		357,500		1.50 or 35% less than IPO		357,500		October 2008

F-20

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SPO MEDICAL INC

NOTES TO THE FINANCIAL STATEMENTS

U.S. dollars in thousands (except share data)

 

NOTE 13  -  Stockholders Equity (Cont.)

c.

Stock warrants

	(1)	Issued to investors in the private placement in connection with the April 2005 Notes. According to the Company offer all of these warrants except for 58, 823 shall be replaced to new warrants see (6) and Note 6a.
	(2)	Warrants issued to other lenders
	(3)	Warrants issued to service providers
	(4)	Warrants issued to service provider for consulting services relating to the development of financial and strategic business relationships. Warrants were exercisable through February 2010 and were exercised in full on February 22, 2006.
	(5)	Warrants issued to consultant for financial services.
	(6)	Warrants issued according to the Amendment and replace the warrants issued in connection with the April 2005 Notes see Note 6a.
	(7)	Issued in connection with a private placement of units of securities see Note 6b.
	(8)	This table does not include the 948,949 warrants related to the convertible loan converted on September 30, 2006 see Note 8.

d.

Dividends

The Company does not intend to pay cash dividends in the foreseeable future.

NOTE 14  -  Deferred Taxes

a.

Measurement of taxable income under the Income Tax Law (Inflationary Adjustments), 1985:

The results for tax purposes of the Israeli subsidiary are measured in terms of earnings in NIS, after certain adjustments for increases in the Israeli Consumer Price Index ("CPI"). As explained in Note 3c, the functional currency is the U.S. dollar. The difference between the annual change in the Israeli CPI and in the NIS/dollar exchange rate causes a further difference between taxable income and the income before taxes presented in the financial statements. In accordance with paragraph 9(f) of SFAS No. 109, the Company has not provided deferred income taxes on the difference between the functional currency and the tax bases of assets and liabilities at the Israeli subsidiary.

b.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

F-21

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SPO MEDICAL INC

NOTES TO THE FINANCIAL STATEMENTS

U.S. dollars in thousands (except share data)

NOTE 14  -  Deferred Taxes (Cont.)

 

In accordance with SFAS No. 109, the components of deferred income taxes are as follows:

		December 31,
		2006
Tax on net operating losses carryforward		$	1,037
Less - valuation allowance			(1,037	)
		$	—

c.

The Company has provided valuation allowances in respect of deferred tax assets resulting from tax loss carryforward and other temporary differences. Management currently believes that since the Company has a history of losses it is more likely than not that the deferred tax regarding the loss carryforward and other temporary differences will not be realized in the foreseeable future

Net operating loss carryforwards as of December 31, 2006 are as follows:

			December 31,
			2006
Israel		$	3,090
USA			827
Total		$	3,917

 

Net operating losses in Israel may be carried forward indefinitely. Net operating losses in the U.S. are available through 2031.

NOTE 15  -  Commitments and Contingencies

Lease Commitments

The Company maintains its principal offices in the Warner Gateway campus in Warner Center, Woodland Hills, CA, USA. The offices are leased at a monthly cost of approximately $2.6 and cover a square area of 60 square meters. The lease period for this office terminates in June 2007.The Company has an option to extend the lease a further six months through the end of December 2007. The Company intends to maintain the lease of the premises on a month-to-month basis. The offices provide accommodation for sales, internal administrative and external customer support operations.

F-22

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SPO MEDICAL INC

NOTES TO THE FINANCIAL STATEMENTS

U.S. dollars in thousands (except share data)

 

NOTE 15  -  Commitments and Contingencies (Cont.)

Research and development is carried out at the Company’s premises in Kiryat Malachi, Israel, which are comprised of laboratory and development facilities covering an area of 300 sq. m. In addition, the Company sub-leases a smaller facility of 112 square meters in Kfar Saba, Israel for local administrative staff. The facilities in Kiryat Malachi, Israel, are leased pursuant to a lease agreement that is to expire in July 2011 at an approximate per month rate of $1.5. The administrative facilities in Israel are leased pursuant to a lease agreement that terminates in December 2007 with an option to extend the lease for two additional 12 month periods at an approximate monthly rate of $0.7.

Government of Israel

The Company’s subsidiary, SPO Ltd., is committed to pay royalties of 3% to the Government of Israel on proceeds from the sale of products, the research and development of which the Government has participated in by way of grants, up to the amount of 100%-150% of the grants received plus interest at dollar LIBOR. The royalties are payable at a rate of 3% for the first three years of product sales and 3.5% thereafter. The total amount of grants received or accrued, net of royalties paid or accrued, as of December 31, 2006 was $1,371. The refund of the grants is contingent upon the successful outcome of the research and development and the attainment of sales. The Company has no obligation to refund these grants, if sales are not generated. The financial risk is assumed completely by the Government of Israel. The grants were received from the Government on a project-by-project basis. If the project fails the Company has no obligation to repay any grant received for the specific unsuccessful or aborted project. As of December 31, 2006 the Company has provided for $171 in royalties payable from such grants.

F-23

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ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS

 

Section 145 of the General Corporation Law of the State of Delaware (the "Delaware Corporation Law") empowers a Delaware corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and with respect to any criminal action or proceeding had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon plea of nolo contendere or its equivalent, does not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was lawful.

 

In the case of an action by or in the right of the corporation, Section 145 empowers a corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or complete action in any of the capacities set forth above against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in and not opposed to the best interests of the corporation, except that indemnification is not permitted in respect of any claim, issue or matter as to which such person is adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought determines upon application that, despite the adjudication of liability, but in view of all of the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such court deems proper.

 

Section 145 further provides: that a Delaware corporation is required to indemnify a director, officer, employee or agent against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with any action, suit or proceeding or in defense of any claim, issue or matter therein as to which such person has been successful on the merits or otherwise; that indemnification provided for by Section 145 not be deemed exclusive of any other rights to which the indemnified party may be entitled; that indemnification provided for by Section 145 shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of such person's heirs, executors and administrators; and empowers the corporation to purchase and maintain insurance on behalf of a director or officer against any such liability asserted against him in any such capacity or arising out of his status as such whether or not the corporation would have the power to indemnify him against liability under Section 145. A Delaware corporation may provide indemnification only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct. Such determination is to be made (i) by a majority vote of the directors who are not parties to such action, suit or proceeding, even through less than a quorum or (ii) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion or (iii) by the stockholders.

 

The Registrant's certificate of incorporation provides that:

 

“No director shall be personally liable to the Company or its stockholders for damages for breach of any fiduciary duty owed to the Company or its Stockholders, except for liability (a) for any breach of such person's duty of loyalty to the Company or its Stockholders, (b) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (c) under Section 174 of the DGCL, or (d) for any transaction from which the director derived an improper personal benefit. If the DGCL is amended after approval by the Shareholders of this provision to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director shall be eliminated or limited to the fullest extent permitted by the DGCL, as so amended. Any repeal or modification of the provision regarding limitation of liability shall be prospective and shall not affect the rights in effect under that provision at the time of the alleged occurrence of any act or omission to act giving rise to liability or indemnification.(x) The Bylaws may be altered or amended or new Bylaws adopted by the Board.

 

The Company shall indemnify any person who was or is an authorized representative of the Company, and who was or is a party, or is threatened to be made a party to any third party or corporate proceeding, by reason of the fact that such person was or is an authorized representative of the Company, against expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such third party or corporate proceeding. The indemnification of authorized representatives and advancement of expenses, shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled. Any repeal or modification of the provisions of this section by the stockholders of the Company shall not adversely affect any right or benefit of a director existing at the time of such repeal or modification.

 

 

No director shall be personally liable to the Company or its stockholders for monetary damages for breach of a fiduciary duty as a director; provided, however, that to the extent required by the provisions of Section 102(b)(7) of the DGCL or any successor statute, or any other laws of the State of Delaware, this provision shall not eliminate or limit the liability of a director (i) for any breach of the director’s duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL or (iv) for any transaction from which the director derived an improper personal benefit. If the DGCL hereafter is amended to authorize the further elimination or limitation of the liability of directors, then the liability of a director of the Company, in addition to the limitation on personal liability provided herein, shall be limited to the fullest extent permitted by the amended DGCL. Any repeal or modification of this section by the stockholders of the Company shall be prospective only.

 

30

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The Registrant's by-laws provide that:

 

“Except to the extent expressly prohibited by the DGCL, the Company shall indemnify each person made or threatened to be made a party to any action or proceeding, whether civil or criminal, by reason of the fact that such person or such person's testator or intestate is or was a director, officer or employee of the corporation, or serves or served at the request of the Company, any other person, against judgment, fines, penalties, amounts paid in settlement and reasonable expenses, including attorneys' fees, incurred in connection with such proceeding, provided that no such indemnification shall be made if a final adjudication adverse to such person establishes that his or her acts were committed in bad faith or were the result of active and deliberate dishonesty and were material to the cause of action so adjudicated, or that he or she personally gained in fact a financial profit or other advantage to which he or she was not legally entitled.

 

The Company may advance or promptly reimburse upon request any person entitled to indemnification hereunder for all expenses, including attorneys' fees, reasonably incurred in defending any action in advance of the final disposition thereof.”

 

ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

 

SEC FILING FEE		$	282.44
LEGAL FEES AND EXPENSES		$	10,000
BLUE SKY FILING FEES AND EXPENSES
(INCLUDING COUNSEL FEES)		$	5,000
ACCOUNTING FEES AND EXPENSES		$	0
PRINTING AND ENGRAVING EXPENSES		$	500
MISCELLANEOUS EXPENSES		$	0
TOTAL		$	15,782.44

31

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EXHIBIT NO.		EXHIBIT
2.1		Restated Capital Stock Exchange Agreement dated as of April 21, 2005 among the Company, SPO Ltd. and the SPO Ltd. shareholders specified therein. (1)
3.1		Amended and Restated Certificate of Incorporation of the Company. (1)
3.2		Bylaws of the Company (1)
3.3		Articles of Association of SPO Medical Equipment Ltd.
4.1		Form of Promissory Note issued to certain investors. (1)
4.2		Form of Warrant Instrument issued to certain investors.(1)
4.3		Form of Promissory Note issued in connection with the Subscription Agreement referred to in Item 10.1. (5)
4.4		Form of Warrant issued in connection with the Agreement referred to in Item 10.1 (5)
4.5		From of Warrant issued in September 2006 *
4.6		Warrant issued in April 2005 *
4.7		Warrant issued in April 2005 *
4.8		Warrant issued in February 2006 *
4.9		Form of Warrant issued in April 2006 *
4.10		Form of Warrant issued in September 2006 *
4.11		Warrant issued in March 2007 *
5.1		Opinion of Aboudi & Brounstein *
10.1		Form of subscription Agreement with certain investors.
10.2		Employment Agreement effective as of May 18, 2005 between the Company and Michael Braunold. (2)+
10.3		Employment Agreement effective as of May 18, 2005 between SPO Ltd. and Michael Braunold. (2)+
10.4		Employment Agreement effective as of May 18, 2005 between the Company and Richard Ryan. (2)+
10.5		Employment Agreement effective as of July 14, 2005 between the Company and Jeffrey Feuer. (3)
10.6		Employment Agreement effective as of July 14, 2005 between SPO Ltd. and Jeffrey Feuer. (3)
10.7		Company's 2005 Equity Incentive plan
10.8		Company's 2005 Non-Employee Directors Stock option Plan
10.9		Stock Purchase Agreement dated as of January 10, 2006 between SPO Medical Inc. and the investor specified therein. (4)
10.10		Form of Subscription Agreement between SPO Medical Inc. and certain Buyers (5)
10.11		Form of First Amendment to Subscription Agreement between SPO Medical Inc. and parties thereto. (5)
10.12		Line of Credit Facility dated as of March 27, 2007 between SPO Medical Inc. and Innopex Limited *
14.1		Code of Conduct (6)
23.1		Consent of Brightman Almagor & Co.
23.2		Consent of Aboudi & Brounstein (included in Exhibit 5.1)

 

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*	Attached hereto
(1)	Incorporated by reference to Current Report on Form 8-K filed April 27, 2005.
(2)	Incorporated by reference to the Company's Quarterly Report Form 10-QSB for the quarter ended June 30, 2005
(3)	Incorporated by reference to the Company's Quarterly Report Form 10-QSB for the quarter ended September 30, 2005
(4)	Incorporated by reference to the Company's Quarterly Report Form 10-QSB for the quarter ended March 31, 2006
(5)	Incorporated by reference to the Company's Quarterly Report Form 10-QSB for the quarter ended September 30, 2006
(6)	Incorporated by reference to the Company's Annual Report Form 10-KSB for the fiscal year ended December 31, 2006

34

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ITEM 28. UNDERTAKINGS.

 

SPO Medical Inc. hereby undertakes the following:

 

(a)(1) To file, during any period in which it offers or sells securities, post-effective amendment to this registration statement to:

 

(i) Include any prospectus required by Section 10(a)(3) of the Securities Act of 1933, as amended (the "Act");

 

(ii) Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement.

 

(iii) Include any additional or changed material information on the plan of distribution.

 

(2) For determining liability under the Act, to treat each post-effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering.

 

(3) To file a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering.

 

(b) Insofar as indemnification for liabilities arising under the Act may be permitted to directors, officers and controlling persons of the small business issuer pursuant to the foregoing provisions, or otherwise, the small business issuer has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable.

 

In the event that a claim for indemnification against such liabilities (other than the payment by the small business issuer of expenses incurred or paid by a director, officer or controlling person of the small business issuer in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the small business issuer will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

 

35

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SIGNATURES

 

In accordance with the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form SB-2 and authorized this Registration Statement on Form SB-2 to be signed on its behalf by the undersigned in Kfar Saba, Israel, on the 16th day of April, 2007.

 

SPO MEDICAL INC.

DATE: April 16, 2007	/s/ Michael Braunold
	Michael Braunold
	Chief Executive Officer and Director (Principal Executive Officer)

 

In accordance with the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed below by the following persons on behalf of the issuer and in the capacities and on the dates indicated.

SIGNATURE		TITLE		DATE
/s/ Sidney Braun		Chairman, Director		April 16, 2007
Sidney Braun
/s/ Michael Braunold		President, Chief Executive Officer and		April 16, 2007
Michael Braunold		Director (Principal Executive Officer)
/s/ Pauline Dorfman		Director		April 16, 2007
Pauline Dorfman

 

36

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