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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Quarterly Report. This filing contains forward-looking statements. The words "anticipate," "believe," "expect, "plan," "intend," "seek," "estimate," "project," "will," "could," "may," and similar expressions are intended to identify forward-looking statements. These statements include, among others, information regarding future operations, future capital expenditures, and future net cash flow. Such statements reflect our management's current views with respect to future events and financial performance and involve risks and uncertainties, including, without limitation: (a) the timing of our sales could fluctuate and lead to performance delays; (b) without additional equity or debt financing we cannot carry out our business plan; (c) our stockholders have pre-emptive rights to purchase securities of m-Wise, which could impair our ability to raise capital; (d) we operate internationally and are subject to currency fluctuations, which could cause us to incur losses even if our operations are profitable; (e) we are dependent upon certain major customers, and the loss of one or more of such customers could adversely affect our revenues and profitability; (f) our research and development facilities are located in Israel and we have important facilities and resources located in Israel which could be negatively affected due to military or political tensions; (g) certain of our officers and employees are required to serve in the Israel defense forces and this could force them to be absent from our business for extended periods; (h) the rate of inflation in Israel may negatively impact our costs if it exceeds the rate of devaluation of the NIS against the U.S. Dollar. Should one or more of these risks or uncertainties occur, or should underlying assumptions prove to be incorrect, actual results may vary materially and adversely from those anticipated, believed, estimated or otherwise indicated. These forward-looking statements speak only as of the date of this Quarterly Report. Subject at all times to relevant federal and state securities law disclosure requirements, we expressly disclaim any obligation or undertaking to disseminate any update or revisions to any forward-looking statement contained herein to reflect any change in our expectations with regard thereto or any changes in events, conditions or circumstances on which any such statement is based. Consequently, all of the forward-looking statements made in this Quarterly Report are qualified by these cautionary statements and there can be no assurance of the actual results or developments. OVERVIEW m-Wise, Inc. (the "Company") was incorporated in February 2000, and commenced operations immediately thereafter. We initially primarily provided pan-European wireless application service provider operations by hosted MOMA Platform services to customers in the United Kingdom, Spain, France and Italy. We established data centers in Spain, Italy, and France that were connected to our main data center in the United Kingdom. We had connectivity and billing arrangements with cellular operators that enabled us to provide our hosted services. We gained strong credibility and experience as a wireless application service provider during calendar years 2000 and 2001, while we continued to build and develop our wireless middleware product. However, due to the high costs and low revenues in the European wireless application service provider (ASP) market, in 2002, our management decided to transition our focus away from pan-European wireless application service providers, toward installing and licensing our middleware technology at cellular operators and wireless application service providers worldwide, and to operate through original equipment manufacturers (OEMs) and regional sales representatives to sell our products. Our shift away from hosted wireless application services using our MOMA Platform enabled us to focus more on the core middleware benefits of our technology in fiscal 2002. 16 --------------------------------------------------------------------------------During calendar 2002, we channeled our research and development efforts to enhance and update our middleware technology to interface with advanced and emerging wireless technologies such as MMS (Multimedia Messaging Service - delivery of highly enhanced images and audio files) and J2ME, which utilizes Java programming technology built into certain cellular phones, enables applications to be written once for a wide range of devices, to be downloaded dynamically, and to leverage each device's native capabilities. We also upgraded our middleware platform to incorporate modules for application deployment and management, for centralized management of multiple value added services and multiple third-party content and media providers, and for managing increased data traffic and real-time billing and reporting requirements. In addition, we restructured our sales efforts toward establishing distribution channels via OEMs and partnerships with major IT vendors and system integrators. In fiscal 2003, we had to direct our research and development resources in an effort to respond to specific business opportunities that were introduced to us by our distributors and original equipment manufacturers, and to be able to meet our customers' enhanced requirements in elements such as increased transactions volume support and new J2ME possibilities. During calendar 2004, we followed the market evolution with respect to the enhanced ability to deliver downloadable content directly to mobile phones and invested significant research and development efforts to comply with such new market trends. We substantially improved the MOMA Platform mobile content management abilities, especially with respect to content adaptation to a growing number and types of mobile handsets, and connectivity between the MOMA platform and content presentation layers such as Internet and WAP interfaces. We also concluded sales agreements with new wireless operators and wireless application service provider clients, and at the same time, improved our product positioning in the market. During calendar 2005, we continued to follow-up with the rapid changes in the mobile entertainment market, especially with the growing introduction of enhanced mobile entertainment services through the third generation infrastructure for wireless services, and the continuous development of wireless handsets and their ability to present higher levels of multi media. We invested significant research and development efforts in complying with these changes, and indeed, the delivery of enhanced mobile entertainment services became a central part of the MOMA Platform functionalities. We also identified a growing trend in the market that many potential customers preferred to outsource platform functionalities to service providers (ASPs) rather than to purchase platform and install on site (Customer Premises Model) and we invested significant funds and efforts in the infrastructure that was required for this ASP model. During 2006, we invested extensive efforts in establishing our customer base and expanding our distribution channels, by enhancing our technology and expanding the terms and scope of our relationships with our customers. During calendar 2007, we were able to acquire prestige and market leader customers, and strengthen the profit share model that we began developing in 2005. We signed profit share based deals with News International, part of the News Corp group, to deliver mobile entertainment services in conjunction of leading UK newspapers, The Sun and The Times. We signed a profit share based deal with Telcogames, a leading mobile games company, to provide a hosted environment for the delivery of their services to their customers. This deal expanded the reach of our technology and it made it available to the large market of mobile games provider which we actively pursue. We signed a deal with Arvato Mobile, part of the great media group Bertelsmann and one of the largest leaders in mobile entertainment worldwide, to provide large variety of mobile content management and delivery services on a profit share model. We also strengthened our relationships with existing customers such as Thumbplay, SupportComm, Logia Mobile and Interchan (formerly Comtrend) by providing the needed support and technical expertise to their expansion and expanding the basis for cooperation. We clearly saw that our business shift made in 2005 from a license model to profit share model started to bear the desired outcome by generating a stable business environment for recurring revenues and consistently increasing profitability. Also during 2007, we made considerable business development investments in the penetration into the US market and the establishment of a local sales and marketing presence. 17 --------------------------------------------------------------------------------During calendar 2008, we expanded our business in our primary markets of the USA and Brazil. Our US presence, which we established in 2007, developed and expanded as we intended, and we signed new deals in this territory during 2008. We geared our special expertise in the mobile entertainment industry and signed deals with records labels such as Universal Motown Republic Group and Interscope which are part of the Universal Records Group, to deliver various artist specific mobile content experience. We started working with the leading WPP advertising agency, Burson Marsteller, and delivered a relatively small mobile marketing project for them with the expectation to become their selected technology partner in this market segment and launch additional projects in the future. We also laid the groundwork for two additional significant business deals in the US which we expect to execute early in 2009. We also secured two major deals in the territory of Brazil with Zero 9 and David2Mobile's Boltcel, leaders in the Italian mobile entertainment market that plan to launch their services in Brazil using our technology. We have also been able to strengthen our partnerships with existing customers, Thumbplay, Arvato Mobile, Interchan, Logia Mobile and Supportcomm and have been able to benefit from the revenue share model that we have established with some of them and see growth in our revenues following their growth in business. We had to depart from customers such as The Sun newspaper (one of the accounts we had in News International), due to expiration of our contract, and Telcogames, due to Telcogames bankruptcy procedures. We have seen the implication of the global economic downturn reflected in the activity of some of our customers, yet despite that, we experienced significant improvement in our revenue growth of 23% since 2007. In 2009, we expanded and further established our presence in the Americas. We increased volume of sales in the US market and engaged and expanded relationships with many key players in the entertainment industry such as Fox Mobile Group, Universal Records and Warner Music. We also significantly strengthened our position as a mobile marketing leader and executed mobile marketing campaigns for companies like Kodak and WPP's Burson Marsteller agency. Additionally, we expanded our penetration into the Latin and Central America markets. We established a local presence in Brazil and launched new mobile entertainment services for local market leaders such as Zero 9, Mega-Vas and Boltcel. We see Brazil as a key market for m-Wise and we plan to expand our presence in this country and use it to establish access additional Latin American markets such as Mexico and Argentina. We also signed an agreement with the Digicel Group of mobile carriers who selected us to deliver mobile content services in 26 Caribbean and Central and Latin American markets. Calendar year 2009 was a significant year for m-Wise as we were able to emphasize our unique position as an off-deck mobile marketing and mobile entertainment service provider. We significantly enhanced the underlying technology of our content management and delivery platform and apply many improvements that would make it an off-the-shelf platform that significantly minimizes time-to-market for entertainment companies, content storefronts and mobile marketing campaigns. 18 --------------------------------------------------------------------------------Further, calendar year 2009 was a key year in the evolution of mobile entertainment as the expansion and further penetration of improved mobile networks and mobile devices became a clear phenomena this year. We foresee the expansion of mobile video and other rich media services as a result of improved mobile bandwidth and the growth of wide screen mobile devices and we continuously expand our investments in relevant and supporting technologies. With this evolution we expect to see in 2010 more and more businesses looking to establish and expand their presence and services in the mobile world and we believe that our one stop shop mobile platform will become very attractive for such companies and that we will continue to expand the reach of our business and our path of profit and growth. Calendar year 2010 has been a challenging and exciting year for m-Wise. The rapid changes in the mobile technology world forced the Company to deal with many quick changes in the way mobile entertainment consumption has evolved in the last couple of years as well as with the changes in policies and regulations of mobile carriers. The investment we made in initiating our local presence in Brazil has not created the desired results and we have also experienced some disappointing results in some of our revenue share based business clients, which altogether lead us to the implementation of company re-organization and overall cost cutting. We were able to acquire new important customers such as Snackable Media, Universal Music Group and Latcel, all are leading businesses in their respective space, and we continue to see demand for our technology and services. We are also witnessing many consolidations in the mobile technology space and we believe that it would be beneficial to pursue an active participation in a larger range of mobile services. We have actively started to explore opportunities in these directions and we regularly report about any significant development in this respect. However, no assurance can be given that we will be successful in our efforts to pursue active participation in a larger range of mobile services. During the first quarter of 2011 m-Wise signed a non binding letter of intent ("LOI") to sell substantially all of our assets to Vringo, Inc. (NYSE Amex: VRNG). Under the terms of the LOI, Vringo will issue m-Wise 1.9 million shares of its common stock, provide m-Wise's management with a retention package comprised of options to purchase 500,000 shares of common stock, and assume and pay over a two year period certain of m-Wise's expenses and related costs in the amount of $615,000. Vringo will also issue a five-year promissory note for $320,000 convertible into 200,000 shares of its common stock for certain services provided in connection with the transaction. The execution of this LOI is followed by a due diligence process conducted by Vringo with the objective of executing a definite asset purchase agreement. The proposed transaction with Vringo is further subject to regulatory approval and the approval of both the boards of directors and stockholders of Vringo and the Company. Our participation in this transaction with Vringo is based on our understanding and expectation that the merger of the assets of m-Wise and Vringo has the potential to create an increased value to the share holders of both companies as Vringo represents an advance technological approach towards mobile video and entertainment services for the rapidly growing market of smart phones, while m-Wise provides a robust and highly mature infrastructure and backbone for the management and delivery of such services. However, no assurance can be given that such agreement will result in increased value for either our or Vringo's shareholders. 19 --------------------------------------------------------------------------------In addition, in Q1 2011 we have been witnessing the consolidation and change of ownership of some of our major clients and we have been handling some of the implications of such transactions. Fox Mobile Group has been acquired by Jesta Digital and Thumbplay Ringtones business was acquired by Send Me Mobile. Our operational teams were introduced to a number of changes in the operation of these clients and we hope to benefit from these transitions by enhancing the business relationships with our new partners. We have also been able to promote and advance the services of some of other clients like Latcel, CPA Lead and ReminderToPhone and we expect to see the results of these new services in 2011. For the rest of the calendar year 2011 we plan to continue and expand the scope and magnitude of our current mobile entertainment services and upon a successful execution of a definite agreement with Vringo, which is currently pending, we plan to invest efforts in a combined offering of services and products that would generate a new and attractive business potential for the combined companies. However, no assurance can be given that we will be able to execute a definitive agreement with Vringo or that we will be able to implement our plans for the rest of calendar year 2011. Revenues Our revenues decreased from $914,519 in the three months ended March 31, 2010 to $789,414 in the three months ended March 31, 2011 and from $3,166,276 in the year ended December 31, 2009 to $2,767,959 in the year ended December 31, 2010. Management believes that our efforts to refocus our resources towards building relationships with OEMs may yield additional contracts. Although we are in negotiations for several new contracts there can be no assurance that such contracts will be secured or that they will generate significant revenue. We derive revenues from product sales, licensing, revenue share, customer services and technical support. When we license our MOMA Platform solutions to our customers, we generate revenues by receiving a license payment, ongoing support fees which are typically 15% of the annual license payment, and professional service fees which are generated from our customers' request for additional training, IT administration and tailoring of our products for their specific needs. When we license our products to our customers, we install our product at a location specified by our client. We also derive revenue through our hosted services, whereby we enable customers to remotely use features of our MOMA Platform (such as a mobile content sales and delivery service for ring tones and color images), which is installed and hosted at our location, and receive a set-up fee for launching the services for them, as well as a portion of our customer's revenues generated through our platform. When we provide hosted services, we maintain the MOMA Platform at our location on behalf of our customer. Customers and customer concentration. Historically we have derived the majority of our revenues from a small number of customers and, although our customer base is expanding, we expect to continue to do so in the future. For the three months ended March 31, 2011, approximately 36% of our sales were derived from sales to Comtrend, 25% to Jesta Digital (formerly Fox Mobile Group) and 13% to Thumbplay. For the three months ended March 31, 2010, approximately 24% of our sales were derived from sales to Comtrend, 20% to Thumbplay and 16% to Boltcel... In the year ended December 31, 2010, approximately 22% of our sales were derived from sales to Thumbplay, 19% to Jesta Digital (formerly Fox Mobile Group) and 16% to Comtrend. 20 --------------------------------------------------------------------------------Geographical breakdown. We sell our products primarily to customers in America and Europe. For the three months ended March 31, 2011, we derived 36% of our revenues from sales in North and South America, 28% from sales in Europe and 36% from sales in the Far East. Of these revenues, 86% was derived from sales by the Company, and 14% of our revenues were derived from sales by our subsidiaries For the three months ended March 31, 2010, we derived 62% of our revenues from sales in North and South America, 14% from sales in Europe and 24% from sales in the Far East. Of these revenues, 75% was derived from sales by the Company, and 25% of our revenues were derived from sales by our subsidiary. For the year ended December 31, 2010, we derived 58% of our revenues from sales in North and South America, 26% from sales in Europe and 16% from sales in the Far East. Of these revenues, 80% were derived from sales by the Company, and 20% of our revenues were derived from sales by our subsidiaries. Cost of revenues Customer services and technical support cost of revenues consist of the salary and related costs for our technical staff that provide those services and support and related overhead expenses. Operating expense Research and development. Our research and development expenses consist primarily of salaries and related expenses of our research and development staff, as well as subcontracting expenses. All research and development costs are expensed as incurred except equipment purchases that are depreciated over the estimated useful lives of the assets. General and administrative. Our general and administrative expenses consist primarily of salaries and related expenses of our executive, financial, administrative and sales and marketing staff. These expenses also include costs of professional advisors such as legal and accounting experts, depreciation expenses as well as expenses related to advertising, professional expenses and participation in exhibitions and tradeshows. Financing income and expenses Financing income consists primarily of interest earned on our cash equivalents balances and other financial investments and foreign exchange gains. Financing expenses consist primarily of interest payable on bank loans and foreign exchange losses. Critical Accounting Policies. We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of the periods presented. To fully understand and evaluate our reported consolidated financial results, we believe it is important to understand our revenue recognition policy. 21 --------------------------------------------------------------------------------Revenue recognition - Revenues from products sales are recognized on a completed-contract basis, in accordance with Accounting Standard Codification ("ASC") 605 "Revenue Recognition". We have primarily short-term contracts whereby revenues and costs in the aggregate for all contracts is expected to result in a matching of gross profit with period overhead or fixed costs similar to that achieved by use of the percentage-of-completion method. Accordingly, financial position and results of operations would not vary materially from those resulting from the use of the percentage-of- completion method. Revenue is recognized only after all the three stages of deliverables are complete; installation, approval of acceptance tests results by the customer and when the product is successfully put into real-life application. Customers are billed, according to individual agreements, a percentage of the total contract fee upon completion of work in each stage; approximately 40% for installation, 40% upon approval of acceptance tests by the customer and the balance of the total contract price when the software is successfully put into real-life application. The revenues, less its associated costs, are deferred and recognized on completion of the contract and customer acceptance. Amounts received for work performed in each stage are not refundable. On-going service and technical support contracts are negotiated separately at an additional fee. The technical support is separate from the functionality of the products, which can function without on-going support. Technology license revenues are recognized in accordance with ASC 605 at the time the technology and license is delivered to the customer, collection is probable, the fee is fixed and determinable, a persuasive evidence of an agreement exists, no significant obligation remains under the sale or licensing agreement and no significant customer acceptance requirements exist after delivery of the technology. Revenue share is recognized as earned based on a certain percentage of our clients' revenues from selling services to end users. Usage is determined by receiving confirmation from the clients. Revenues relating to customer services and technical support are recognized as the services are rendered ratably over the period of the related contract. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2011, COMPARED WITH THE THREE MONTHS ENDED MARCH 31, 2010. Revenues. License fees and products. Revenues from license fees and products decreased 65% to $74,885 for the three months ended March 31, 2011, from $216,646 for the same period in 2010. The decrease is primarily due to $95,102 in revenues which was derived from four contracts with four customers during 2010 that was not earned in 2011. 22 --------------------------------------------------------------------------------Revenue share. Revenues from revenue share increased 46% to $368,292 for the three months ended March 31, 2011, from $252,016 for the same period in 2010. The increase is primarily due to $106,026 in revenues which were derived from customers during 2011 that were not earned in 2010. Customer services and technical support. Revenues from customer services and technical support decreased 22% to $346,237 for the three months ended March 31, 2011, from $445,857 for the same period in 2010. The decrease is primarily due to a decrease in orders and corresponding demand for customer services during the three month period ended March 31, 2011. Cost of revenues. Cost of revenues decreased 11% to $301,787 for the three months ended March 31, 2011, from $338,453 for the same period in 2010. The decrease was primarily due to decrease in revenues from customer services and technical support during the three month period ended March 31, 2011. Operating expenses. Research and development. Research and development expenses decreased 7% to $115,612 for the three months ended March 31, 2011, from $124,540 for the same period in 2010. This decrease was primarily due to a $74,772 decrease in payroll and related expenses, partially offset by a $15,361 increase in subcontractors expenses and a decrease of $54,249 in government grant income. Research and development expenses, stated as a percentage of revenues increased to 15% for the three months ended March 31, 2011, from 14% for the same period in 2010. General and administrative. General and administrative expenses increased 1% to $604,901 for the three months ended March 31, 2011, from $596,366 for the same period in 2010... General and administrative expenses, stated as a percentage of revenues increased to 77% for the three months ended March 31, 2011 from 65% for the same period in 2010. Liquidity and Capital Resources Our principal sources of liquidity since our inception have been private sales of our equity securities, stockholder loans, borrowings from banks and to a lesser extent, cash from operations. We had cash and cash equivalents of $138,766 as of March 31, 2011 and $219,625 as of December 31, 2010. Our initial capital came from an aggregate investment of $1.3 million from Cap Ventures Ltd. To date, we have raised an aggregate of $5,300,000 from placements of our equity securities (including the investment by Cap Ventures and a $4,000,000 investment by Syntek Capital AG and DEP Technology Holdings Ltd.). We have also borrowed an aggregate of $1,800,000 from Syntek Capital AG and DEP Technology Holdings Ltd. and as of the date of this quarterly report we have no funds available to us under bank lines of credit. We have a credit line agreement for $500,000 with Miretzky Holdings Limited. As of March 31, 2011, $295,615 is outstanding under the credit line. The credit line has no termination date and does not provide for interest payments. 23 --------------------------------------------------------------------------------Other than the credit line agreement with Miretzky, we do not have any commitments from any of our affiliates or current stockholders, or any other non-affiliated parties, to provide additional sources of capital to us. We have an equity line for $10.0 million with Dutchess Private Equity Fund and as of May 16, 2011 we have drawn $828,675 under the Equity Line. We will need approximately $1.2 million for the next twelve months for our operating costs which mainly include salaries, office rent and network connectivity, which we estimate will total approximately $80,000 per month, and for working capital. We intend to finance this amount from our ongoing sales and through the sale of either our debt or equity securities or a combination thereof, to affiliates, current stockholders and/or new investors, however, no assurance can be given that we will be able to secure enough revenue from ongoing sales or from the sale of either our debt or equity securities to fund our operating expenses for the next twelve months. Currently we do not believe that our future capital requirements for equipment and facilities will be material. Operating activities. For the three months ended March 31, 2011, net cash used in operating activities was $82,316 primarily due to our net loss of $248,664, a $80,524 increase in accounts receivable-trade, partially offset by $199,760 in stock issued for services expense. In the same period in 2010, net cash provided by operating activities was $53,125 primarily due to a $68,850 in employee vested options expense, a $60,120 decrease in government grants receivable and a $50,000 consulting fees paid by issuance of common stock, partially offset by our net loss of $ 147,998. Investing and financing activities. Property and equipment consist primarily of computers, software, and office equipment. For the three months ended March 31, 2010, net cash used in investing activities was $10,041 consisting of an investment of $10,036 in equipment and a $5 increase in short-term investment.. For the three months ended March 31, 2011, net cash provided by financing activities was $1,457 consisting of an increase in advances from stockholder. In the same period in 2010, net cash provided by financing activities was $65,805 consisting of $79,633 proceeds from issuance of common stock, partially offset by a $13,828 decrease in advances from shareholders Dividends We have not paid any dividends on our common stock. We currently intend to retain any earnings for use in our business, and therefore do not anticipate paying cash dividends in the foreseeable future. Off Balance Sheet Arrangements None. |