NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of IDO Security Inc. (hereinafter, “IDO” or the “Company”) have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2013, are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, as filed with the Securities and Exchange Commission.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. At June 30, 2013, the Company had not achieved profitable operations, had accumulated losses of $53.3 million (since inception), a working capital deficiency of $23 million and expects to incur further losses in the development of its business. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
The Company’s ability to continue as a going concern is dependent upon its ability to generate future profitable operations or management’s ability to find sources of equity capital. The Company needs to raise significant funds on an immediate basis in order to continue to meet its liquidity needs, realize its business plan and maintain operations. The Company’s current cash resources are not sufficient to support its operations as presently conducted or permit it to take advantage of business opportunities that may arise. Management of the Company is continuing its efforts to secure funds through equity and/or debt instruments for its operations. Presently, the Company does not have any financing commitment from any person, and there can be no assurance that additional capital will be available to the Company on commercially acceptable terms or at all.
The Company has been funding its operations from the net proceeds from the private placements of its convertible securities. From December 2007 through June 2013, the Company received net proceeds of approximately $7.6 million from the proceeds of the private placement to certain accredited investors of its Secured Convertible Promissory Notes, Convertible Preferred Stock and Bridge Loans.
The financial statements do not include any adjustments that might result from the outcome of this uncertainty. There can be no assurance that management will be successful in implementing a business plan or that the successful implementation of a business plan will actually improve the Company’s operating results.
Effective April 2013, the Company’s subsidiary IDO Security Ltd. (“IDO Ltd.”), terminated all commercial activities in Israel. All employees have been terminated and office premises have been closed. The cessation of activities by IDO Ltd. is a result of the litigation outcome discussed in Note 11. Product manufacturing and sales and marketing have been outsourced to a third party on a non-exclusive basis.
NOTE 2 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Management does not believe that any other recently issued, but not yet effective, accounting standard if currently adopted would have a material effect on the accompanying financial statements.
N
OTE
3 - NET LOSS PER SHARE
Basic
loss per share is computed by dividing net income loss by the weighted-average number of shares of common stock
outstanding during the period. Diluted loss per share gives effect to dilutive convertible securities, options,
warrants and other potential common stock outstanding during the period, only in periods in which such effect is dilutive.
The following securities have been excluded from the calculation of net loss per share, as their effect would be
anti-dilutive:
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Shares of Common Stock
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Issuable upon
Conversion/Exercise
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as of
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June 30,
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2013
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2012
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Warrants
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4,014,477
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15,084
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Convertible notes
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21,044
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19,684
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Stock options
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667
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1,130
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Convertible preferred stock
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37,454
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32,665
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NOTE 4 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Substantially all of the Company’s financial instruments, consisting primarily of cash and cash equivalents, accounts payable and accrued expenses, other current liabilities and certain convertible notes, are carried at, or approximate, fair value because of their short-term nature or because they carry market rates of interest.
NOTE 5 – INVENTORIES
Inventories, consisting of completed devices, devices partially completed and components are valued at the lower of cost determined by the moving-average basis or market. The value of the inventories is adjusted for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions.
Inventories at June 30, 2013 consisted of components totaling $63,426 and partially completed and completed devices totaling $115,059. Inventories at December 31, 2012 consisted of components totaling $60,667 and partially completed and completed devices totaling $123,054.
NOTE 6 – BANK LINE OF CREDIT
During the six months ended June 30, 2013, one of the banks of IDO Ltd. in Israel honored credit card payment obligations to vendors. At June 30, 2013, the Company owed the bank $15, 377.
NOTE 7 – NOTES PAYABLE
In
November 2012, the Company issued a note to a 2008 Investor in the aggregate amount of $69,500. The note
bore interest at the rate of 2.5% and was due at the earlier of (i) April 1, 2014 or (ii) the receipt by the Company of the
amount of a Threshold New Transaction (as defined).
In
March 2013, the Company issued a note to a 2008 Investor in the aggregate amount of $100,000. The note
bore interest at the rate of 2.5% and was due at the earlier of (i) April 1, 2014 or (ii) the receipt by the Company of the
amount of a Threshold New Transaction (as defined).
In
April 2013, the Company issued a note to a 2008 Investor in the aggregate amount of $50,000. The note bore
interest at the rate of 2.5% and was due at the earlier of (i) April 1, 2014 or (ii) the receipt by the Company of the amount
of a Threshold New Transaction (as defined).
In
May 2013, the Company issued a note to a 2008 Investor in the aggregate amount of $120,000. The note bore interest
at the rate of 2.5% and was due at the earlier of (i) May 8, 2014 or (ii) the receipt by the Company of the amount of a
Threshold New Transaction (as defined).
All of the notes are secured by substantially all of the assets of the Company. At June 30, 2013 and December 31, 2012, notes payable amounted to $339,500 and $69,500, respectively.
On July 1, 2013, the Company refinanced these notes through the issuance of 10% secured convertible promissory notes (“2013 Notes”). See Note 8(v) for more details.
In
September 2013, the Company issued notes to two 2008 Investors in the aggregate amount of $30,200. The notes bear interest
at the rate of 2.5% and are due at the earlier of (i) September 10, 2014 and September 12, 2014 or (ii) the receipt by the
Company of the amount of a Threshold New Transaction (as defined). The notes are secured by substantially all of the assets
of the Company.
NOTE 8 - PRIVATE PLACEMENT OF CONVERTIBLE PROMISSORY NOTES
Convertible promissory notes consist of the following:
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June
30, 2013
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December 31,
2012
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(Unaudited)
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2008 Notes - secured and convertible - see (i) below
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$
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1,956,945
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$
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1,956,945
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December 2008 Notes - secured and convertible – see (ii) below
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815,062
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815,062
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2009 - 2011 Notes - secured and convertible - see (iii) below
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4,010,579
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4,010,579
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2012 Notes - secured and convertible - see (iv) below
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1,337,723
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1,337,723
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Total
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8,120,309
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8,120,309
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Less: Discount
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(3,518,986
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)
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(4,055,917
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)
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4,601,323
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4,064,392
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Less: Current Portion
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(2,142,529
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)
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(2,112,601
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)
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Total
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$
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2,458,794
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$
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1,951,791
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(i) Secured Convertible Promissory Notes
Between December 5, 2007 and January 24, 2008, the Company raised gross proceeds of $5,404,550 from the private placement to certain accredited institutional and individual investors (the “2008 Investors”) of its 10% Secured Convertible Promissory Notes (collectively, the “2008 Notes”, each a ”2008 Note”). The transactions were effected pursuant to a Subscription Agreement, dated as of December 5, 2007 between the Company and the 2008 Investors.
In connection with the issuance of the 2008 Notes, the Company issued to the 2008 Investors, warrants (the “2008 Investor Warrants”) to purchase up to 1,802 post-split shares of the Company’s Common Stock at an adjusted per share price of $450. The warrants include a ‘cashless exercise’ provision.
The 2008 Notes were originally convertible into shares of Common Stock at the holder’s option at any time at an initial conversion price of $3,000 per post-split share (the “Fixed Conversion Price”), subject to adjustment in the event of certain capital adjustments or similar transactions, such as a stock split or merger and as further described below. Interest on the 2008 Notes accrues at the rate of 10% per annum and is payable upon a required monthly repayment or upon maturity, whichever occurs first, and will continue to accrue until the 2008 Notes are fully converted and/or paid in full.
Commencing on the fourth month anniversary of the issuance of the 2008 Notes and on the same day of each month thereafter until the principal amount of the 2008 Notes has been paid in full, the Company was required to prepay 5% of the aggregate principal amount of the 2008 Notes originally issued, together with all accrued interest due and payable on the entire outstanding amount up to such repayment date (each such date, a “Scheduled Payment Date”).
The 2008 Notes were originally scheduled to mature in December 2009 and were extended several times to December 31, 2011. The non-payment of the outstanding balance of these notes upon maturity on December 31, 2011 constituted an Event of Default under the transaction documents with the 2008 Investors. The pertinent documents provide that any action by the investors upon such default (i.e., acceleration of the debt and other remedies) can only be initiated by the holders of 65% or more of the outstanding principal amount of the notes, representing the requisite Majority in Interest under the transaction documents. Such action had not been commenced by the note holders. In April 2012, the requisite Majority in Interest waived all existing Events of Default through June 30, 2012. In May 2012, the requisite Majority in Interest agreed to certain modifications of the terms of the 2008 Notes (see (vii) Modification of Debt).
To secure the Company’s obligations to the 2008 Investors, the Company granted a security interest in substantially all of its assets, including without limitation, its intellectual property. The security interest terminates upon payment or satisfaction of all of Company’s obligations under the 2008 Notes.
The Company undertook to file a registration statement by a prescribed period under the Securities Act of 1933, as amended (the “Registration Statement”) with respect to the resale of the Common Stock underlying the 2008 Notes and 2008 Investor Warrants. The Company has not filed the Registration Statement and accordingly, the Company owed to the holders of these notes approximately $540,000 in liquidated damages in respect of the delay in the filing of the Registration Statement beyond the time frame specified in the agreements with such holders. At December 31, 2012, the Company owed to the holders of these notes $516,137 in liquidated damages. The non-payment of liquidated damages constitutes an Event of Default under the 2008 Notes. The pertinent documents provide that any action by the investors upon such default (i.e., acceleration of the debt and other remedies) can only be initiated by the holders of 65% or more of the outstanding principal amount of the notes. Such action has not been commenced by the note holders. The Company does not currently intend to file such registration statement as the shares issuable upon conversion of the 2008 Notes and/or the 2008 Investor Warrants are eligible to be resold under Rule 144.
There were no payments of principal or interest in 2013
(ii) Secured Convertible Promissory Note and Series A Convertible Preferred Stock (“Series A Preferred”)
Pursuant to an offering dated October 31, 2008 (the “December 2008 Private Placement”) to the holders of the 2008 Notes, on December 17, 2008, the Company realized net proceeds of $548,474, after the payment of offering related fees and expenses of $19,250, from a private placement of $1,066,540 in principal amount of 10% Secured Convertible Promissory Notes due April 20, 2010 (“collectively the “December 2008 Notes”) and 8.9 post-split shares of Series A Preferred. In addition, the Company issued to the investors warrants (the “Warrants”; together with the December 2008 Notes and the Series A Preferred, the “Purchased Securities”) to purchase in the aggregate up to 2,370 post-split shares of the Company’s Common Stock at a per share exercise price equal to $750 exercisable through October 31, 2013. The warrants include a ‘cashless exercise’ provision.
The December 2008 Notes are convertible into shares of Common Stock at the holder’s option at any time at an initial conversion price of $450 per share (the “Fixed Conversion Price”), subject to adjustment in the event of certain capital adjustments or similar transactions, such as a stock split or merger and as further described below. Interest on the December 2008 Notes accrues at the rate of 10% per annum and is payable upon a required repayment (discussed below) or upon maturity, whichever occurs first, and will continue to accrue until the December 2008 Notes are fully converted and/or paid in full.
Commencing on April 30, 2009, and thereafter on the last day of each subsequent calendar month until the principal amount of the December 2008 Notes has been paid in full, the Company is required to prepay 8.33% of the aggregate principal amount of the December 2008 Notes originally issued, together with all accrued interest due and payable on the entire outstanding amount up to such repayment date. The amount may be paid, at the Company’s election, either in (i) cash, at 110% of the principal amount due and 100% of all other amounts due or (ii) shares of Common Stock as defined; provided, that, if such monthly amount is to be paid with shares of Common Stock, it will be automatically deferred unless the holder gives notice to the Company at least five (5) days before a repayment date that the holder will accept payment of such monthly amount in the form of Common Stock.
The
Company’s obligations under the December 2008 Notes are secured by a security interest in substantially all of its assets
pursuant to a prior Security Agreement dated as of December 24, 2007 between it and the purchasers of the 2008 Notes.
Holders
of the Purchased Securities are subject to certain limitations on their rights to convert the securities. The principal limitation
is that the holder may not, with certain limited exceptions, convert into a number of shares that would, together with other shares
held by the holder, exceed 4.99% or 9.99% of the then outstanding shares of the Company after such conversion and/or exercise.
The December 2008 Notes were originally scheduled to mature on April 30, 2010 and were extended several times to December 31, 2011. The non-payment of the outstanding balance of these notes upon maturity on December 31, 2011 constituted an Event of Default under the transaction documents. The pertinent documents provide that any action by the investors upon such default (i.e., acceleration of the debt and other remedies) can only be initiated by the holders of 65% or more of the outstanding principal amount of the notes, representing the requisite Majority in Interest under the transaction documents. Such action had not been commenced by the note holders. In April 2012, the requisite Majority in Interest waived all existing Events of Default through June 30, 2012. In May 2012, the requisite Majority in Interest agreed to certain modifications of the terms of the 2008 Notes (see (vii) Modification of Debt).
There were no payments of principal or interest in 2013.
(iii) 2009 - 2011 Notes and Series A Preferred
In April 2009, the holders of the 2008 Notes and the December 2008 Notes consented to the placement of 10% secured convertible promissory notes, Series A Preferred and warrants, all on the substantive terms identical to those prevailing with respect to the December 2008 Private Placement discussed at further length in Note 7(ii) above.
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In 2009, the Company raised net proceeds of $1,332,500 from the private placement to certain holders of the December 2008. The Company issued $1,432,500 in principal amount of 2009 Notes and 11.9 post-split shares of Series A Preferred. In connection with such investment, the Company issued to the holders of the 2009 Notes, five-year warrants to purchase in the aggregate up to 3,183 post-split shares of the Company’s common stock at per share exercise price equal to $750.
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In 2010, the Company raised net proceeds of $318,940 from the private placement to certain holders of the December 2008 Notes. The Company issued $318,940 in principal amount of 2010 Notes and 2.7 post-split shares of Series A Preferred. In connection with such investment, the Company issued to the holders of the 2010 Notes, five- year warrants to purchase in the aggregate up to 709 post-split shares of the Company’s common stock at per share exercise price equal to $750.
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In 2011, the Company raised net proceeds of $2,359,134 which includes $1,456,880 of rolled over notes payable and accrued interest in addition to $902,254 of new invested capital, from four holders of the December 2008 Notes. The Company issued $2,359,134 in principal amount of 2011 Notes and 19.7 post-split shares of Series A Preferred. In connection with such investments, the Company issued to the holders of the 2011 Notes, five year warrants to purchase in the aggregate up to 5,242 post-split shares of the Company’s Common Stock at per share exercise price equal to $750.
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The warrants include a ‘cashless exercise’ provision.
Commencing on the six month anniversary date of the various notes, and on the same day of each subsequent calendar month thereafter until the principal amount of the various notes has been paid in full, the Company is required to prepay 8.33% of the aggregate principal amount of the various notes originally issued, together with all accrued interest due and payable on the entire outstanding amount up to such repayment date.
The various notes were scheduled to mature at various dates and were extended to December 31, 2011. The non-payment of the outstanding balance of a significant portion of these notes upon maturity on December 31, 2011 constituted an Event of Default under the transaction documents. The pertinent documents provide that any action by the investors upon such default (i.e., acceleration of the debt and other remedies) can only be initiated by the holders of 65% or more of the outstanding principal amount of the notes. Such action had not been commenced by the note holders. In April 2012, the requisite Majority in Interest waived all existing Events of Default through June 30, 2012. In May 2012, the requisite Majority in Interest agreed to certain modifications of the terms of the various notes (see (vii) Modification of Debt).
There were no payments of principal or interest in 2013.
(iv) 2012 Notes and Series A Preferred
For the year ended December 31, 2012, the Company raised net proceeds $1,337,723 from holders of the December 2008 Notes and two new investors. The Company issued $1,337,723 in principal amount of 10% secured convertible promissory notes (“2012 Notes”) and 11.14 post-split shares of Series A Preferred. In connection with such investments, the Company issued five-year warrants to purchase in the aggregate up to 2,972 post-split shares of the Company’s Common Stock at per share exercise price equal to $750.The warrants include a ‘cashless exercise’ provision.
Commencing on the six month anniversary date of the 2012 Notes, and on the same day of each subsequent calendar month thereafter until the principal amount of the Notes has been paid in full, the Company is required to prepay 8.33% of the aggregate principal amount of the Notes originally issued, together with all accrued interest due and payable on the entire outstanding amount up to such repayment date. In May 2012, the requisite Majority in Interest agreed to certain modifications of the terms of the 2012 Notes (see (vii) Modification of Debt).
There were no payments of principal or interest in 2013.
(v) 2013 Notes and Series A Preferred
On July 1, 2013, the Company refinanced debt and accrued interest totaling $506,016 (see Notes 7 and 10) through the issuance of $506,016 in principal amount of 10% secured convertible promissory notes (“2013 Notes”) and 4.22 post-split shares of Series A Preferred. In connection with such investments, the Company issued five-year warrants to purchase in the aggregate up to 1,124 post-split shares of the Company’s Common Stock at per share exercise price equal to $750. The warrants include a 'cashless exercise' provision. Principal and accrued interest are due on December 23, 2014.
(vi) Priority of Payments of Notes
In December 2011, the holders of approximately 74% of the outstanding principal amount of the Notes at that time agreed that Notes issued after December 15, 2011 (“New Notes”) shall be accorded first lien priority in the collateral (as defined) and that any repayment obligations currently owing on Notes issued on or before October 26, 2011 shall be subordinated to the repayment obligations incurred by the Company in connection with the New Notes. The consenting holders represented more than the requisite Majority in Interest required under the transaction documents for this matter, and accordingly their agreement is binding upon all note holders.
(vii) Modification of Debt
In May 2012, the holders of approximately 73% of the outstanding principal amount of the Notes waived all Events of Default and consented to a modification of the note terms. Under the modification, effective January 1, 2012:
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The Company may deem the maturity date of the outstanding notes (including any issued after January 1, 2012) to be December 31, 2015
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The interest rate payable has been reduced to 2.5% per annum
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The determination of the number of shares of Common Stock for purposes of the repayment of the Monthly Amount through the issuance of Common Stock shall be made by dividing the Monthly Amount by $0.30 (post-split), subject to further adjustment as provided in the Notes with respect to certain corporate events.
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The Company accounted for the modification of the terms of the notes, as described above, as an extinguishment of debt in accordance with FASB ASC Subtopic 470-50, “
Debt: Modifications and Extinguishment
.” The Company deemed the terms of the modification to be substantially different and treated the Notes as extinguished and exchanged for new notes. As such, it was necessary to reflect the Notes at fair value. In addition, any remaining unamortized debt discounts were expensed.
In accordance with FASB ASC subtopic 820-10, “
Fair Value Measurement – Overall
,” the value of the Notes was determined utilizing level 3 inputs. The fair value of the Notes was determined based on an effective rate of return of approximately 31%, which approximates the return of a high risk note. As a result, the face amount of the remaining principal balance of $5,483,839 was written down to its fair market value of $1,566,704. This discount is being amortized to the amended date of maturity unless paid or converted earlier. The Company recognized a gain on debt extinguishment of $2,926,717, which included the expensing of unamortized debt discounts totaling $990,418.
(viii) Maturities of Convertible Promissory Notes
The maturities on the Notes are $2,122,164 were payable through 2013, $39,583 payable in 2014 and $5,958,562 payable in 2015.
NOTE 9 - CAPITAL TRANSACTIONS
Convertible Preferred Stock
Shares of Preferred Stock have not been registered and are restricted under the securities laws and pay a dividend of 10% per annum on the stated value. So long as the Series A Preferred is outstanding, unless waived by the holders of 66 2/3% of the Series A Preferred then outstanding, the dividend rate shall increase to 15%. In addition, shares of the Series A Preferred do not vote separately as a class (but do vote on an “as-converted” to common stock basis) and have a liquidation preference equal to the stated value of the shares. Each share of Preferred Stock has a stated post-split value of $300,000 and is convertible into post-split shares of the Company’s common stock at $450 per share.
Commencing on the issuance date, and thereafter on the last day of each subsequent calendar month, the Company is required to redeem 8.33% of the aggregate outstanding stated value of the Series A Preferred until the stated value and all accrued dividends have been paid in full. Redemption payments on the Series A Preferred may be made, at the election of the Company, in cash or shares of Common Stock, in the same manner as provided above with respect to the December 2008 Notes, subject to automatic deferral in the case of payment in shares unless the holder gives notice to the Company of such holder’s agreement to accept payment in shares. As a result of the redemption provisions, the Series A Preferred was not classified as permanent equity and dividends and deemed dividends are included in interest expense.
The dividends are cumulative commencing on the issue date whether or not declared. For the six months ended June 30, 2013 and 2012, the Company declared dividends totaling $183,577 and $173,897, respectively. For the three months ended June 30, 2013 and 2012, the Company declared dividends totaling $92,296 and $89,500, respectively. At June 30, 2013 and December 31, 2012, dividends payable total $2,533,848 and $2,350,272, respectively, and are included in accounts payable and accrued liabilities. For the six months ended June 30, 2013 and 2012, dividends and deemed dividends totaled $1,127,922 and $1,720,200, respectively. For the three months ended June 30, 2013 and 2012, dividends and deemed dividends totaled $516,067 and $899,733, respectively. Such amounts have been included in interest expense.
The non-payment of the accrued dividends and the redemption of the Series A Preferred constituted Events of Default under the Certificate of Designation. In May 2012, in connection with the note modification, the stockholders of approximately 71% of the outstanding amount of Series A Preferred agreed that effective January 1, 2012:
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Waived the Events of Default under the Certificate of Designation at any time prior to and through May 2012. In addition, the stockholders waived any Events of Default that may arise through December 31, 2015.
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To eliminate the 10% dividend on their holdings.
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They further agreed that the determination of the number of shares of Common Stock for purposes of the payment of the Monthly Amount through the issuance of Common Stock shall be made by dividing the Monthly Amount by $0.30 (post-split), subject to further adjustment as provided in the Notes with respect to certain corporate events.
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The maturities on the Series A Preferred Stock are $13,946,737 that were payable through 2013 and $373,712 payable in 2014.
On July 1, 2013, the Company issued 4.22 post-split shares of Series A Preferred as part of the refinancing of debt and accrued interest described above (see Note 8(v)).
Warrants
On July 1, 2013, the Company issued five-year warrants to purchase in the aggregate up to 1,124 post-split shares of the Company’s Common Stock at per share exercise price equal to $750 as part of the refinancing of debt and accrued interest described above (see Note 8(v)).
Derivative Liabilities
In connection with the issuances of equity instruments or debt, the Company may issue options or warrants to purchase common stock. In certain circumstances, these options or warrants may be classified as liabilities, rather than as equity. In addition, the equity instrument or debt may contain embedded derivative instruments, such as conversion options or listing requirements, which in certain circumstances may be required to be bifurcated from the associated host instrument and accounted for separately as a derivative liability instrument. The Company accounts for derivative liability instruments under the provisions of FASB ASC 815, “Derivatives and Hedging.”
The Company issued warrants, Series A Preferred and Notes under various private placements. On October 22, 2012, the Company issued Common Stock for the conversion of Series A Preferred and Notes. Due to these issuances, the Company did not have enough available shares of authorized Common Stock to issue to the various security holders had all of the convertible securities been converted and/or exercised. As a result, the value of the warrants has to be recognized as a liability. In addition, the Company evaluated the conversion terms of the Notes and Series A Preferred to determine if such terms gave rise to embedded derivatives that would need to be accounted for separately. The Company determined that the lack of authorized shares to satisfy the conversion requirements if all of the securities were converted resulted in the conversion features being embedded derivatives that must be bifurcated and recorded as derivative liabilities. In addition, the Company would be required to revalue the derivative liabilities at the end of each reporting period with the change in value reported on the statement of operations. The Company did not account for these derivative liabilities in its financial statements as it was determined to not be material.
On
November 8, 2012, the Company issued a warrant to purchase 4 million shares of Common Stock that contained a
put option. As defined in the warrant, the warrant holder has the right to put the warrant back to the Company if
the Company does not file a proxy statement (as defined) on or before May 6, 2013 to increase the number of shares of
its authorized common stock. As of May 6, 2013, such proxy statement was not filed. The warrant holder is entitled to
receive the greater of (i) the difference between the exercise price of the warrants of $0.30 and the 20-day average price of
the Company’s Common Stock for the period preceding May 6, 2013 and (ii) $0.10 per share. The put option
created a derivative liability which the Company valued at $0.10 per share as the Company’s stock price was below the
strike price and has declined further since issuance. At both June 30, 2013 and December 31, 2012, the value of
the warrant liability was $400,000.
Deferred
Compensation and Stock Based Compensation
As discussed above, a warrant to purchase 4 million shares of Common Stock, valued at $895,745, was issued on November 8, 2012 as partial consideration for a nine-month advisory agreement. The value of the warrant was recognized as deferred compensation and is being amortized over the term of the agreement. At June 30, 2013 and December 31, 2012, the unamortized balance of deferred compensation was $99,527 and $696,691, respectively. For the six and three months ended June 30, 2013, the Company recognized stock compensation expense of $597,163 and $298,581, respectively, and such expense is included in selling and general and administrative expenses.
NOTE 10 – RELATED PARTY TRANSACTIONS
At June 30, 2013 and December 31, 2012, loans payable to related parties amounted to $161,376 and $159,480, respectively. Transactions were as follows:
IDO Ltd. received non-interest bearing advances from a 2008 Investor (as defined in Note 8(i)). The advances are due on demand. At both June 30, 2013 and December 31, 2012, the Company owed $38,821.
In November 2012, IDO Ltd. borrowed $75,000 under a loan agreement with the same 2008 Investor. The loan bears interest at the rate of 10% per annum and is secured by the inventory held by IDO Ltd. The principal and accrued interest are due on demand. At both June 30, 2013 and December 31, 2012, the Company owed principal of $75,000. Accrued interest owed at June 30, 2013 and December 31, 2012 was $2,729 and $833, respectively.
The Company received working capital loans from certain non-management affiliated stockholders of IDO Ltd. Amounts owed on the loans aggregated to $44,826 at both June 30, 2013 and December 31, 2012.
On July 1, 2013, the Company refinanced these loans through the issuance of the 2013 Notes. See Note 8(v) for more details.
NOTE 11 – COMMITMENT AND CONTINGENCIES
Lawsuits
(i) As the Company previously disclosed, in November 2012, the Tel-Aviv District Labor Court (the “District Court”) ruled in favor of Mr. Gil Stiss (“Stiss”), a former officer/director of IDO Ltd., in the lawsuit brought by Stiss against IDO Ltd. In the lawsuit which Stiss commenced in October 2009 against IDO Ltd. and a former director and the then General Manager of IDO Ltd., and which was first disclosed in the Company’s quarterly report on Form 10-Q for the quarter ended September 30, 2009, Stiss sought the payment of amounts purportedly due and payable to him under his employment agreement with IDO Ltd. Stiss was awarded judgment in the approximate amount of 1,475,000 in New Israeli Shekels (ILS), with interest and cost of living index adjustments computed from May 10, 2009 (“Judgment”). Stiss’ suit against the then officers/directors of IDO Ltd. was dismissed. The Company was not a party to the lawsuit.
On December 20, 2012, IDO Ltd. filed a motion with the District Court to stay execution of the Judgment pending appeal and, on December 23, 2012, IDO Ltd. filed its appeal (the “Appeal”) of the Judgment with the National Labor Court (“National Court”). On January 13, 2013, the District Court partially accepted the motion to stay execution of the Judgment in excess of ILS 500,000 provided that, IDO Ltd. paid the amount of ILS 500,000 into the District Court by February 15, 2013. IDO Ltd. elected to not make such payment. On January 17, 2013, IDO Ltd. filed a follow-up motion with the National Court to stay execution of the Judgment pending appeal. On March 5, 2013 the National Court dismissed the motion to stay execution of the Judgment. In March 2013, Stiss moved to collect on the judgment and in connection therewith, has obtained liens on assets and bank accounts of IDO Ltd. As of the filing of this report, the Company estimates that the total amount due under the Judgment, including interest and living costs adjustments amounts as well as collection costs are approximately ILS 2,000,000, which is equivalent to approximately $552,000 at June 30, 2013 and $549,000 at the time of the filing of this report. Contacts with Stiss respecting a resolution and settlement of the matter are ongoing. No assurance can be provided that any successful resolution is possible or will in fact be reached. A reserve for lawsuit in the amount of $548,000 and $470,000 has been accrued at June 30, 2013 and December 31, 2012, respectively.
As of the date of this report, the Appeal of the Judgment with the National Court is pending and no assurances can be provided as to the ultimate disposition of the Appeal. In April 2013, Stiss filed a motion to dismiss the Appeal as IDO Ltd. has not complied with the Judgment (payment of amounts due). On August 8, 2013, the National Court rejected Stiss’ motion, provided that IDO Ltd. paid into the National Court ILS 7,500, which is equivalent to approximately $2,100 at the time of the filing of this report by August 29, 2013, to cover anticipated court costs of Stiss. Such amount was paid into the court by the specified date.
In light of the foregoing, in April 2013, IDO Ltd. terminated all commercial activities in Israel. All employees have been terminated and office premises have been closed. There is no substantial activity currently being undertaken by IDO Ltd. and IDO Ltd. disposed of or abandoned most of its property and equipment. For the six and three months ended June 30, 2013, the Company recognized a loss of $42,604 and $11,517, respectively, which is included in selling and general and administrative expenses.
Effective March 11, 2013, we and a third party engaged in the distribution, operation and maintenance of medical devices entered into a representation and manufacturing agreement pursuant to which the third party has been granted non-exclusive manufacturing rights of Company products and will also be granted the right to assist the Company in the management of sales, marketing and distribution of our products. While no assurance can be provided, we believe that the manufacturing activities formerly conducted by IDO Ltd. can be satisfactorily performed by such third party.
(ii)
On July 23, 2012, a complaint was filed in the San Diego Superior Court against the Company, certain officers and
directors, and other unrelated companies, alleging violations of California restrictions on unsolicited commercial e-mails.
Under the relevant California statute, violators are subject to pay damages of up to $1,000 for each spam email
to each recipient. The plaintiff alleges he received 19 spam emails relating to the Company. The plaintiff
dismissed his second cause of action for violations of the Consumer Legal Remedies Act and is no longer seeking
a preliminary injunction.
On
September 24, 2012, the Company filed its answer denying the allegations and asserted affirmative defenses and in response to
a motion to quash service of process, on November 30, 2012, the court dismissed the Company’s officers and directors
who were named in the Complaint. We believe that this lawsuit, as it applies to the Company, is baseless and we intend
to vigorously defend our rights.
Representation and Manufacturing Agreement
As discussed above, the Company signed a representation and management agreement. In consideration for all services rendered, the Company agreed to pay a monthly fee of $40,000 commencing January 1, 2013.
Employment Agreement
On June 5, 2013, the Company appointed Magdiel Rodriguez as its
Chief Executive Officer. Effective September 16, 2013, the Company and Mr. Rodriguez entered into an Employment Agreement
(the “Employment Agreement”) relating to Mr. Magdiel’s remuneration. Pursuant to the Employment Agreement,
Mr. Rodriguez will receive an annual base salary of $100,000, the payment of which is being deferred until such
time as our financial condition permits us to make payments thereon. In addition, subject to his continued employment and subject
further to the increase in the number of our authorized and unissued shares of Common Stock, in the event of Change in Control
(as defined in the Employment Agreement) Mr. Rodriguez will be entitled to 3.5 million shares of our common stock (the “Shares”). In
the event the employment of Mr. Rodriguez is terminated for any reason other than cause, then he is entitled to receive the Shares.
NOTE 12 – SUBSEQUENT EVENTS
Management has evaluated subsequent events through the date of this filing.