Manuka, Inc. - Quarter Report: 2008 March (Form 10-Q)

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

     In this section, "Management's Discussion and Analysis or Plan of
Operation," references to "we," "us," "our," and "ours" refer to InkSure
Technologies Inc. and its consolidated subsidiaries.

     This Quarterly Report on Form 10-Q contains statements that may constitute
"forward-looking statements" within the meaning, and made pursuant to the Safe
Harbor provisions, of the Private Securities Litigation Reform Act of 1995.
Generally, forward-looking statements include words or phrases such as
"anticipates," "believes," "estimates," "expects," "intends," "plans,"
"projects," "could," "may," "might," "should," "will" and words and phrases of
similar impact. Such statements are based on management's current expectations
and are subject to a number of risks and uncertainties, including, but not
limited to, the difficulty inherent in operating an early-stage company in a new
and rapidly evolving market, market and economic conditions, the impact of
competitive products, product demand and market acceptance risks, changes in
product mix, costs and availability of raw materials, fluctuations in operating
results, delays in development of highly complex products, risk of customer
contract or sales order cancellations and other risks detailed from time to time
in our filings with the Securities and Exchange Commission. These risks and
uncertainties could cause our actual results to differ materially from those
described in the forward-looking statements. Any forward-looking statement
represents our expectations or forecasts only as of the date it was made and
should not be relied upon as representing its expectations or forecasts as of
any subsequent date. Except as required by law, we undertake no obligation to
correct or update any forward-looking statement, whether as a result of new
information, future events or otherwise, even if our expectations or forecasts
change.

     The following discussion and analysis should be read in conjunction with
the financial statements, related notes and other information included in this
Quarterly Report on Form 10-Q.

     OVERVIEW

     We specialize in comprehensive security solutions, designed to protect
branded products and documents of value from counterfeiting, fraud, and
diversion. By creating "Smart Protection" systems from proprietary
machine-readable authentication technologies, we help companies and
organizations worldwide regain control over their most valuable assets, their
products, their reputation and their revenues. We employ a team of experts in
the fields of material science, electro-optics and software. We utilize
cross-disciplinary technological innovations to implement customized and cost
efficient security systems for data and asset integrity within the customer's
existing infrastructure and environment.

     Our SmartInk(TM) solutions enable authentication and tracking of documents
and products by adding special chemical markers to standard inks and coatings.
The combination of markers, inks and materials produce electro-optic
"signatures", unique codes that are seamlessly incorporated into the printed
media used by the customer. Proprietary computerized readers, available in
hand-held, stationary and modular kit configurations, quickly verify these codes
by manual or automatic operation. By focusing on customer driven solutions, we
are able to offer added value through enhanced reader functionality, including
high-speed automatic sorting, one-to-many code matching, first and second level
track and trace, code activation at the point of distribution and detrimental
authentication for debit applications. The inherent flexibility of our
technology also enables overlaying the machine-readable codes onto holograms and
other overt features, resulting in multi-layered security that is both effective
and economical.

     FACTORS AFFECTING FUTURE RESULTS

     INDUSTRY AND ECONOMIC FACTORS: Our operations and earnings are affected by
local, regional and global events or conditions that affect supply and demand
for products and services. These events or conditions are generally not
predictable and include, among other things, general economic growth rates and
the occurrence of economic recessions; the development of new supply sources;
supply disruptions; technological advances, including advances in security
technology and advances in technology relating to security usage; changes in
demographics, including population growth rates and consumer preferences; and
the competitiveness of alternative security sources or product substitutes. As a
result, raising capital may become difficult, and there is pressure on the
pricing of our products and services.

     COMPETITIVE FACTORS: The brand and document protection industry is
competitive. There is competition with the traditional document protection
suppliers (mainly protection for bank notes) and also with other emergent "next
generation" technology providers. We compete with other firms in the sale and
purchase of various products and services in many national and international
markets and employ all methods of competition, which are lawful and appropriate
for such purposes. We believe that a key component of our competitive position
is our technology.

     POLITICAL FACTORS: Our operations and earnings have been, and may in the
future be, affected from time to time in varying degree by political instability
and by other political developments and laws and regulations, such as forced
divestiture of assets; restrictions on production; imports and exports; war or
other international conflicts; civil unrest and local security concerns that
threaten the safe operation of our facilities, particularly those that are
located in Israel; price controls; expropriation of property; and the
cancellation of contract rights. Both the likelihood of such occurrences and
their overall effect upon us vary greatly from country to country and are not
predictable.


                                       9

     PROJECT FACTORS: In addition to the factors cited above, the advancement,
cost and results of particular projects depend on the outcome of negotiations
with potential partners, governments, suppliers, customers or other third
parties; changes in operating conditions or costs; and the occurrence of
unforeseen technical difficulties.

     These factors should be read in connection with the Risk Factors set forth
in the 2007 10-KSB.

     REVENUES

     We are currently concentrating on entering and implementing large-scale
projects. These potential contracts are subject to a long sales cycle and the
timetable is lengthy for entering and implementing such projects. These projects
involve high volume sales through multiple-year sales contracts. We have
completed several successful field trials during the last year related to these
projects. Our revenues in the first quarter of 2008 include revenues from (i)
our sales agreements with six North American customers; and (ii) sales related
to projects in Turkey (iii) initial sales to new customers. In the first quarter
of 2008, approximately 79% of our revenues were earned from customers located in
the United States.

     COSTS AND OPERATING EXPENSES

     Costs and operating expenses consist of cost of revenues, research and
development expenses, selling and marketing expenses, general and administrative
expense and depreciation.

     Our cost of revenues consists primarily of materials including taggants and
electronic and optical parts, payments to sub-contractors and compensation costs
for our operations staff.

     Our research and development expenses consist primarily of costs associated
with development of new generic products and the development of new products
related to customer projects. These expenses may fluctuate as a percentage of
revenue depending on the projects undertaken during the reporting period. Since
our inception, we have expensed all research and development costs in each of
the periods in which they were incurred.

     Our selling and marketing expenses consist primarily of costs associated
with our direct sales force that have been incurred to attract potential
business customers, professional advisors and commissions. We anticipate that as
we add new customers we will be able to spread these costs over a larger revenue
base and accordingly improve our operating margins.

     Our general and administrative expenses consist primarily of costs related
to compensation and employees benefits of our management (including the costs of
directors' and officers' insurance), legal and accounting fees, as well as the
expenses associated with being a publicly traded company.

     We have not recorded any income tax benefit for net losses and credits
incurred for any period from inception to March 31, 2008. The utilization of
these losses and credits depends on our ability to generate taxable income in
the future. Because of the uncertainty of our generating taxable income, we have
recorded a full valuation allowance with respect to these deferred assets.

CRITICAL ACCOUNTING POLICIES

     Our financial statements are prepared in accordance with US GAAP. The
significant accounting policies followed in the preparation of the financial
statements, applied on a consistent basis and which have been prepared in
accordance with the historical cost convention, are set forth in Note 2 to the
Consolidated Financial Statements as of December 31, 2007 that are included in
the 2007 10-KSB.

     Of these significant accounting policies, certain policies may be
considered critical because they are most important to the portrayal of our
financial condition and results, and they require management's most difficult,
subjective or complex judgments, often as a result of the need to make estimates
about the effect of matters that are inherently uncertain. We believe the
following critical accounting policies affect our more significant judgments and
estimates used in the preparation of our consolidated financial statements.

     REVENUE RECOGNITION. Revenues from product sales are recognized in
accordance with Staff Accounting Bulletin No. 104, "Revenue Recognition in
Financial Statements" when delivery has occurred, persuasive evidence of an
agreement exists, the vendor's fee is fixed or determinable, no further
obligation exists and collectability is probable. Delivery is considered to have
occurred upon shipment of products. We do not grant a right of return to our
customers. Had we had a right of return we would have deferred revenues until
the right of return expired.

     Revenues from certain arrangements may include multiple elements within a
single contract. Our accounting policy complies with the provisions of Emerging
Issues Task Force Issue 00-21, "Revenue Arrangements with Multiple Deliverables"
relating to the separation of multiple deliverables into individual accounting
units with determinable fair value.

     In cases where we have partial delivery at the cut off dates and no fair
value exist for the undelivered elements revenues are being deferred and
recognized only at the point where the entire arrangement has been delivered.


                                       10

     INVENTORIES. Inventories are stated at the lower of cost or net realizable
value. Cost is determined by calculating raw materials, work in process and
finished products using the "first in, first out" method.

     OTHER ACCRUED EXPENSES. We also maintain other accrued expenses. These
accruals are based on a variety of factors including past experience and various
actuarial assumptions and, in many cases, require estimates of events not yet
reported to us. If future experience differs from these estimates, operating
results in future periods would be impacted.

THREE MONTHS ENDED MARCH 31, 2008 COMPARED WITH THREE MONTHS ENDED MARCH 31,
2007

     REVENUES. Revenues consist of gross sales of products less discounts. We
are currently concentrating on entering and implementing large-scale projects.
In the three months ended March 31, 2008, we had revenue of $219,000, compared
to $696,000 in the three months ended March 31, 2007. The decrease in the
revenue is mainly due to lack of orders from two major customers as compared to
the three months ended on March 31, 2007. The compnay is now seeking new
projects or orders from existing and new customers.

     COST OF REVENUES. Our costs of revenues consist of materials,
sub-contractors and compensation costs. Cost of revenues was $125,000 in the
three months ended March 31, 2008, compared to $255,000 in the three months
ended March 31, 2007. Cost of revenues as a percentage of sales was 57% in the
three months ended March 31, 2008, compared with 36.6% in the three months ended
March 31, 2007. The increase in costs of revenue, as a percentage of sales, in
the three months ended on March, 31 2008 was primarily related to fixed
compensation costs charged to our cost of revenues regardless of our revenue
figures.

     Cost of revenue included non-cash expenses of $366 related to the
implementation of SFAS No. 123(R).

     RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
consist primarily of compensation costs attributable to employees engaged in
ongoing research and development activities, development-related raw materials
and sub-contractors, and other related costs. Research and development expenses
increased by $301,000, or 100%, to $602,000 in the three months ended March 31,
2008 from $301,000 in the three months ended March 31, 2007. This increase in
research and development expenses is primarily related to higher research and
development expenses related to our RFID project.

     Research and Development Expenses included non-cash expenses of $12,000
related to the implementation of SFAS No. 123(R).

     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, advertising, trade shows and
exhibitions, sales support, travel, commissions and related expenses. Selling
and marketing expenses decreased by $75,000, or 17%, to $370,000 in the three
months ended March 31, 2008 from $445,000 in the three months ended March 31,
2007. This decrease in selling and marketing expenses was primarily due to a
decrease in our sales force labor costs.

     GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
consist primarily of compensation costs for administration, finance and general
management personnel, insurance, legal, accounting and administrative costs.
General and administrative expenses decreased by $5,000, or 2%, to $279,000 in
the three months ended March 31, 2008 from $284,000 in the three months ended
March 31, 2007.

     FINANCIAL EXPENSES, NET. Financial income, net was $74,000 in the three
months ended March 31, 2008. Financial expenses, net was composed of: (i)
Interest expense, net of $75,000 and (ii) non cash financial income of $149,000
related to the convertible note.

     NET LOSS. We had a net loss of $1,083,000 in the three months ended March
31, 2008, compared with a net loss of $1,093,000 in the three months ended March
31, 2007. The 1% decrease in net loss in the three months ended March 31, 2008
compared to the three months ended March 31, 2007 is attributable to the
decrease in our gross profit ($347,000) and increase in our R&D expenses
($301,000), which were offset by the change of ($613,000) in the non-cash
financial income (expenses) related to the convertible note.


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B.   LIQUIDITY AND CAPITAL RESOURCES

     We have incurred substantial losses since our inception in May 2000. We had
an accumulated deficit of approximately $19,259,000 as of March 31, 2008, and
had a negative working capital (current assets less current liabilities) of
approximately $57,000 as of March 31, 2008. Losses are continuing and will
continue in the foreseeable future.

     Capital expenditures were approximately $12,000 in the three months ended
March 31, 2008 and $11,000 in the three months ended March 31, 2007. These
expenditures were principally for computers and research and development
equipment purchases. We do not have any material commitments for capital
expenditures as of March 31, 2008.

     As of March 31, 2008, we had cash, cash equivalents and short-term deposits
of approximately $345,000, compared to $820,000 as of March 31, 2007. This
decrease is primarily the result of our continuing investments in research and
development and selling and marketing expenses.

     We had negative cash flow from operating activities of approximately
$463,000 during the three months ended on March 31, 2008 compared to $320,000
during the three months ended on March 31, 2007. The negative cash flow from
operating activities during the three months ended on March 31, 2008 was
attributed to the net loss of approximately $1,083,000, partially offset by
$346,000 decrease in trade receivables, non cash expenses of $116,000 related to
the implementation of FSAS No. 123 and $195,000 increase in other payables.

     We had negative cash flow from investing activities of approximately
$12,000 during the three months ended on March 31, 2008 compared to positive
cash flow of $361,000 during the three months ended on March 31, 2007. The
negative cash flow from investing activities during the three months ended on
March 31, 2008 was solely due to purchase of fixed assets.

     We believe that our existing cash, together with cash received on April 9,
2008 (see details hereinafter), will be sufficient to support our operations for
the next twelve months. Continuing product development and enhancement, expected
new product launches, corporate operations and marketing expenses will continue
to require additional capital. Our current revenues from operations are
insufficient to cover our projected expansion plans.

     On September 30, 2005, we completed a private placement of convertible
notes, in the aggregate principal amount of $6,000,000. The notes were
interest-only, with interest payments due quarterly at the rate of 4% per year.
The convertible notes were unsecured and will become due on September 30, 2010;
the investors have the option to cause us to redeem the notes on September 30,
2009. These notes were exchanged for new notes with the terms as per the new
$3,000,000 notes issued on April 9, 2008.

     On April 9, 2008, we completed a private placement of senior secured
convertible notes in an aggregate principal amount of $3,000,000 pursuant to
Amendment, Exchange and Purchase Agreements. The private placement resulted in
gross proceeds of $3,000,000, of which $750,000 was placed in a cash collateral
account to secure interest payments under the notes.

     Pursuant to the agreements, the investors were issued $3,000,000 principal
amount of new notes and exchanged their $6,000,000 principal amount of existing
notes for the same principal amount of amended and restated senior secured
convertible notes (together with the $3,000,000 principal amount of new notes,
referred to as the "new notes") each of which is convertible into shares of
common stock at a conversion price is $0.60, subject to adjustment. The new
notes are secured by our assets and the assets of our subsidiaries and are
guaranteed by each of our subsidiaries. In addition, all of the shares of each
of our subsidiaries are pledged as collateral to secure our obligations under
the new notes, the security agreements and related documents. The investors may
require us to redeem all or any portion of the outstanding principal amount of
the new notes in cash plus accrued but unpaid interest on or after September 30,
2009. We may require the investors to convert all or any portion of the new
notes into shares of common stock upon the occurrence of certain conditions
relating to the trading price of our common stock. Upon any such conversion, the
investors will be entitled to receive a pro rata amount of the cash remaining on
deposit in the collateral account which we have established to secure interest
payments under the new notes based on the principal amount of the new notes that
we require to be converted. We may also redeem the new notes at any time by
paying the buyers a premium of 5%-25% of the outstanding principal amount of the
notes (based upon the time of redemption) plus interest and the amounts in the
collateral account; at the time of such redemption we will also issue to the
buyers warrants to purchase common stock, expiring on September 30, 2010, at an
exercise price of $0.60. If we sell or license all or substantially all of the
assets in our ink business, we may be required to redeem the new notes at 100%
of their outstanding principal amount up to the net proceeds of such sale or
licensing transaction. If we consummate a transaction that results in a change
of control or other merger or reorganization or recapitalization, we may be
required to redeem the new notes at 125% of their outstanding principal amount.
The new notes are due on September 30, 2010, unless they are redeemed or
converted earlier. In addition, we issued to the buyers warrants to acquire
3,570,337 shares at an exercise price of $0.60. These warrants have a term of
ten years.


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C.   RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES

     We believe that our future success will depend upon our ability to enhance
our existing products and systems and introduce new commercially viable products
and systems addressing the demands of the evolving markets for brand and
document protection. As part of the product development process, we work closely
with current and potential customers, distribution channels and leaders in
certain industry segments to identify market needs and define appropriate
product specifications. Our employees also participate in industry forums in
order to stay informed about the latest industry developments.

     Our research and development expenses were approximately $602,000 during
the three months ended March 31, 2008, compared to $301,000 during the three
months ended March 31, 2007. To date, all research and development expenses have
been charged to operating expense as incurred.

     With respect to the RFID technology being developed by us, we have filed
five patent families related to various aspects of the RFID technology. Two of
our patent families have already matured into patents granted in the following
jurisdictions: United States (US6,819,244 and US6,997,388), France, Germany,
Switzerland and United Kingdom (EP1374156 and EP1599831). Our third patent
family has been matured into a patent granted in the United States
(US6,922,146), while it is still being examined in Europe. Regarding our fourth
patent family, we have recently filed an International Patent Application (PCT).
In addition, regarding our fifth patent family, we have filed a Provisional
Patent Application with the United Stated Patent and Trademark Office, and we
will file by May 7, 2008 International Patent Application (PCT).

     With respect to the product-authentication being developed by us, we have
entered into an assignment agreement by which InkSure has acquired
AuthentiForm's entire intellectual property portfolio of enhanced
product-authentication technology. The AuthentiForm portfolio includes methods
to establish authenticity and identify products at the item level by encoding
high information-density, invisible, and essentially tamper-proof signatures
within a product's formulation, on its surface, or through incorporation into
its packaging. AuthentiForm technology enables dynamic codes without
substantially changing the chemical composition of a product or its components,
which makes the AuthentiForm technology particularly attractive for use with
pharmaceutical products.

D.   CONTRACTUAL OBLIGATIONS AND COMMITMENTS

     Our contractual obligations and commitments at March 31, 2008 principally
include obligations associated with operating lease obligations and the lease of
several automobiles. Our total future obligation is approximately $32,000 until
the end of 2008. We expect to finance these contractual commitments from cash on
hand and cash generated from operations.

     During 2007-2008, we received a governmental R&D grant of approximately
US$400,000 from the Office of the Chief Scientist (OCS) at the Ministry of Trade
and Industry of the Government of Israel. This royalties-bearing grant partially
covers our innovative RFID R&D project expenses. The royalties would become due
to OCS only if the RFID R&D project materializes into a successful
commercialization phase and results in sales revenues based on the know-how
developed during the RFID project. The royalties rate is 3% of the sales
revenues based on the know-how developed, capped at the grant amount actually
received from the OCS. We have no assurance that the RFID project or
commercialization plan would be successful.



                                       13

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES

     (a) Evaluation of Disclosure Controls and Procedures. Our principal
executive officer and principal financial officer, after evaluating the
effectiveness of our disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this
Quarterly Report on Form 10-Q, have concluded that, based on such evaluation,
our disclosure controls and procedures were adequate and effective to ensure
that material information relating to us, including our consolidated
subsidiaries, was made known to them by others within those entities,
particularly during the period in which this Quarterly Report on Form 10-Q was
being prepared.

     (b) Changes in Internal Controls. There were no changes in our internal
control over financial reporting, identified in connection with the evaluation
of such internal control that occurred during our last fiscal quarter that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     On December 12, 1999, Secu-Systems filed a lawsuit with the District Court
in Tel Aviv-Jaffa against Supercom Ltd. (InkSure Delaware's former parent
company) and InkSure Ltd. seeking a permanent injunction and damages. The
plaintiff asserted in its suit that the printing method applied to certain
products that have been developed by InkSure Ltd. constitutes, inter alia: (a)
breach of a confidentiality agreement between the plaintiff and Supercom; (b)
unjust enrichment of Supercom and InkSure Ltd.; (c) a breach of fiduciary duties
owed to the plaintiff by Supercom and InkSure Ltd.; and (d) a tort of
misappropriation of trade secret and damage to plaintiff's property. As part of
its complaint, Secu-Systems sought, among other things, an injunction and a 50%
share of profits from the printing method at issue.

     On March 15, 2006, the court rendered a decision (i) denying the claim for
breach of contract; (ii) finding that there was a misappropriation of trade
secret, but not assessing any damages with respect thereto; (iii) requiring the
defendants to cease all activities involving the use of any confidential
information; and (iv) awarding the plaintiff reimbursement of the costs of the
litigation in the amount of NIS 130,000 (about $37,600 at the exchange rate as
of May 1(,) 2008), plus interest and VAT, which the defendants intend to split
equally. InkSure recorded in its 2006 financial statements a provision of NIS
65,000 (about $18,800 at the exchange rate as of May 1(,) 2008).

Both the plaintiff and the defendants appealed the court's decision.

On November 1, 2007, the Supreme Court ruled in favor of Secu-Systems' appeal.
This ruling accepts that InkSure and Supercom have breached the confidentiality
agreement. Consequently, the appeal that had been filed by InkSure and Supercom
was dismissed. The Supreme Court instructed that the case will be returned to
the District Court for determining the remedies to which Secu-Systems is
entitled.

On February 18, 2008, Secu-Systems filed a petition with the district court to
amend the amount for which it has sued to NIS 25,000,000 (Approx. $ 7,000,000).
The company intends to file an answer to the petition.

On March 24, 2008, SuperCom (which changed its name to Vuance Ltd.) provided us
with an opinion according to which, the following conclusions can be drawn:

a.   In light of the costs analysis, SuperCom had no economical profit from the
     sale of Inksure's shares.

b.   The consideration received from the sale of Inksure's shares on 2002,
     incorporates the value of the cash flow of InkSure following the sale.
     Therefore, a calculation based upon both the sale price and the future cash
     flow of InkSure is not accurate and does not agree with customary
     accountant standards, since it calculates the factor of the future cash
     flow twice.

c.   The examination of the outcome of InkSure's business activity from
     2002-2007, as reflected in its financial reports, show that InkSure had not
     made any profit, and incurred losses during such period. The financial
     statements also reflect that InkSure had negative cash flow during these
     years, which was financed by bank loans and fund raising.

In light of the above, provided that the opinion is adopted by the court, the
management of InkSure and its counsel handling the lawsuit believe that no
material amounts will be awarded to Secu-System in these proceedings.


                                       14

ITEM 6.  EXHIBITS

The following exhibits are being filed with this Report:

   EXHIBIT
    NUMBER          DESCRIPTION
---------------     -----------

10.1*               Employment Agreement, dated April 18, ,2008, between InkSure
                    Technologies Inc. and Tzlil Peker.

31.1*               Certification of Principal Financial Officer Pursuant to
                    Section 302 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
                    Sections 1350.

31.2*               Certification of Principal Executive Officer Pursuant to
                    Section 302 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
                    Section 1350.

32.1*               Certification of Principal Executive Officer and Principal
                    Financial Officer Pursuant to Section 906 of the
                    Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.

* Filed herewith.


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                                   SIGNATURES

     In accordance with the requirements of the Exchange Act, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.

                                            INKSURE TECHNOLOGIES INC.

Dated: May 15, 2008                         By: /s/ Tzlil Peker
                                            ------------------------
                                            Tzlil Peker
                                            Chief Financial Officer,
                                            Secretary and Treasurer
                                            (Principal Financial Officer)

Dated: May 15, 2008                         By: /s/ Elie Housman
                                            ------------------------
                                            Elie Housman
                                            Chief Executive Officer and Chairman
                                            (Principal Executive Officer)



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