ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATION

 

We urge you to read the following discussion in conjunction with our condensed consolidated financial statements and the notes thereto included elsewhere herein.

 

CAUTION REGARDING FORWARD-LOOKING STATEMENTS

 

Our prospects are subject to uncertainties and risks. In this Quarterly Report on Form 10-Q, we make forward-looking statements in this Item 2 and elsewhere that also involve substantial uncertainties and risks. These forward-looking statements are based upon our current expectations, estimates and projections about our business and our industry, and reflect our beliefs and assumptions based upon information available to us at the date of this report. In some cases, you can identify these statements by words such as “if,” “may,” “might,” “will, “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue,” and other similar terms. These forward-looking statements include, among other things, our ability to continue as a going concern, our ability to secure additional financing, projections of our future financial performance and our anticipated growth, descriptions of our strategies, our product and market development plans, the trends we anticipate in our business and the markets in which we operate, and the competitive nature and anticipated growth of those markets.

 

We caution readers that forward-looking statements are predictions based on our current expectations about future events. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Our actual results, performance or achievements could differ materially from those expressed or implied by the forward-looking statements as a result of a number of factors, including but not limited to the risks and uncertainties discussed in our other filings with the SEC, including the risk factors section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 filed with the Securities and Exchange Commission. We undertake no obligation to revise or update any forward-looking statement for any reason.

 

Company Overview

   

IDO Security Inc. (“we”, “IDO” or the “Company”) is engaged in the design, development and marketing of a shoe scanning device (SSD) for the homeland security and loss prevention markets intended for use in security screening procedures to detect metallic objects concealed on or in footwear, ankles and feet through the use of electro-magnetic fields. These devices were designed specifically for applications in the security screening to complement the current methods for the detection of metallic items during security screenings and at security checkpoints in venues such as airports, prisons, schools, stadiums, high security places and other public locations requiring individual security screening. Our common stock trades on the OTC Bulletin Board under the symbol IDOI.

 

We believe that the market for security and inspection products will continue to be positively impacted by the threat of terrorist activities and by new government regulations and appropriations for security and inspection products and procedures. In addition, we believe that the increasing awareness of security, in general, will bring increased awareness of available products and methods, such as ours, for anti-crime and loss prevention fields.

 

We have designed and developed a security screening device containing proprietary and patented technology known as the MagShoe™. The MagShoe™ creates specific electro-magnetic fields that can intelligently detect the presence of metallic objects inside a person’s footwear as well as next to or above the ankles. The proprietary software included in the MagShoe™ provides for the collation and delivery of the screening data to the operator for immediate analysis. The MagShoe™ obviates the need to remove the footwear being inspected. Our technology is designed to distinguish between a person’s left and right shoe, analyzing anomalies for each foot but also for both together, and provides comparative screening results. The technology allows for both the detection and assessment of possible threats from the shoe and ankle area posed by foreign metal objects based upon the analysis of the detected metal material(s) and their location in shoes. The MagShoe™ device has been designed to integrate into and complement current security screening arrays and systems. The new G3 generation MagShoe™ is portable and, depending on the model, weighs 48 kilograms (and can scan up to 18 inches from the base of the passenger’s footwear) and 33 kilograms (and scans up to 8 inches from the base of the passenger’s footwear) and can be deployed quickly by existing security personnel, who can integrate the MagShoe™ into their current security routine. The subject being screened places his feet on the device in the designated areas for each foot and in three to six  seconds, depending on the model, the scan is completed.  An audio-visual signal alerts the operator of the results of the check and provides a read-out on the control panel in an easily readable format.

 

 

MagShoe™ fills a critical void in today’s detectors by extending screening to the lower body and feet. MagShoeTM’s “shoes-on” design maximizes security, thoroughness and accuracy while eliminating the need to remove shoes for increased convenience and safety. The MagShoe™ is neither invasive nor harmful to the body as some of the other screening devices currently use in the marketplace. Ideal for security and loss prevention at virtually any facility, MagShoe™ is currently in use at international airports, cruise lines, government agencies and more.

 

The MagShoe™ has been deployed and is in operation in various countries including Israel, China, Spain, Poland, The Czech Republic, Australia, the Philippines and Germany.  In January 2006, the MagShoe™ was approved for use by the Department for Transport in the United Kingdom, after field trials were conducted for the Home Office’s Police Scientific Development Branch. In addition, we have been certified by the International Organization for Standardization (“ISO”) under ISO 9001:2000 compliance for the design, development and manufacture of electronic, electro-optic and electro-mechanical systems. In December of 2008, we received our certification from the Underwriter’s Laboratory (UL) in the United States, which signifies that the MagShoe™ is safe for sale in the United States.     

 

Worldwide, we believe that there are in excess of 1,200,000 walk through metal detectors (WTMD) installed in various high security locations and that detection devices, such as the MagShoe™, are a necessary part of any security measures in place in those installations as well as other areas where there are no walk through metal detectors. The MagShoe™ acts as a complementary device to any and all walk through metal detectors, insuring that all who pass through have no metallic weapons in the area that the metal detectors are inherently weak.

 

Current Operational Highlights 

 

Effective April 2013, our subsidiary, IDO Security Ltd. (“IDO Ltd.”) has 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 Item 1 of Part II in this Quarterly Report on Form 10-Q.

 

In order to maintain orderly operations, we and a third party who is engaged in the distribution, operation and maintenance of medical devices, have entered, as of April 15, 2013, into a representation and manufacturing agreement pursuant to which the third party has been granted non-exclusive manufacturing rights of our products as well as the right to assist us in the management of sales, marketing and distribution of our products. While no assurance can be provided, subject to raising additional capital, we believe that the manufacturing activities formerly conducted by IDO Ltd. can be satisfactorily performed by such third party.

 

If a resolution or settlement is not reached with respect to the litigation discussed in Item 1 of Part II in this Quarterly Report on Form 10-Q , no assurance can be provided that the proposed restructure of our activities will not be legally challenged and, if so challenged, no assurance can be provided that such challenge will not succeed. In addition, IDO Ltd. is subject to litigation by terminated employees in respect of severance and other payments that may be due to them under Israeli law.

 

Under the agreement with such third party, we undertook to remit to it $40,000 on a monthly basis in respect of the costs of manufacturing and marketing. While we have remitted the required amounts in respect of the period from January through March 2013,  our inability to raise the capital needed to remit these amounts has prevented us from making timely payments on the subsequent period.

 

 

In addition, on June 13, 2013, we entered into a letter of intent with Duos Technologies Inc. (“Duos”), a Florida-based company providing intelligent video surveillance systems as well as physical security information management solutions, respecting a share exchange transaction. The letter of intent contemplates that, subject to the satisfaction of certain conditions, we issue shares of our common stock equal to a majority of the total outstanding shares of our common stock as of consummation of the contemplated share exchange to the current shareholders of Duos. The letter of intent is subject to various contingencies, including the finalization and entering into of a set of definitive legal agreements relating to the contemplated share exchange as well as satisfaction following due diligence investigations of each of ourselves and Duos. As definitive agreements were not entered into within 30 days of the execution of the letter of intent, either party is entitled to terminate the letter of intent.

 

The lack of operating capital and the difficulty we encountered in raising working capital to consummate the contemplated transaction prevented us from working to close the transaction.

 

If and when consummated, the contemplated transaction would result in a change of control and fundamental restructuring of our company and business, including not only our board of directors and operating officers, but also our business operations and strategic direction.

 

The lack of operating funds has greatly hindered our ability to actively market our products as well as take advantage of various opportunities. We need to raise additional funds on an immediate basis in order to further explore these options as well as to meet our on-going operating requirements and to realize our business plan.

 

RESULTS OF OPERATIONS

 

COMPARISON OF THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2013 TO THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2012

 

Revenues and costs of goods sold – No revenues were recorded for the three months ended September 30, 2013. Revenues for the nine months ended September 30, 2013 were $15,043. Revenues for the nine and three months ended September 30, 2012 were $299,712 and $14,232, respectively. All revenues were derived from sales of our MagShoe™ device.   Costs of goods sold during each of the nine and three months ended September 30, 2013 were $256,757 respectively, as compared to $222,212 and $30,827 for the corresponding periods in 2012.

 

The decrease  in revenues during each of the nine and three months ended September 30, 2013 compared to the corresponding periods in 2012 is primarily attributable to the substantial decrease in the number of MagShoe™ devices delivered to customers worldwide.  The Company had a gross loss in 2013 due to fixed manufacturing overhead.

 

Research and development expenses - Research and development expenses consist primarily of expenses incurred in designing, developing and field testing the MagShoe™ device. These expenses consist primarily of salaries and related expenses for personnel, contract design and testing services, supplies used and consulting and license fees paid to third parties. We incurred research and development expenses for the nine months ended September 30, 2013 of $53,202. No research and development expenses were recorded for the three months ended September 30, 2013. We incurred research and development expenses of $158,152 and $57,964, respectively, for the nine and three months ended September 30, 2012. The decrease in research and development expenses is principally attributable to the  completion of the new product design and modifications and the shutdown of the operations of our subsidiary IDO Ltd.

 

Selling, general and administrative expenses - Selling, general and administrative expenses primarily consist of salaries/fees and other related costs for personnel in marketing, sales, executive and other administrative functions and consultants. Other significant costs include professional fees for legal, accounting and other services. We incurred selling, general and administrative expenses for the nine and three months ended September 30, 2013 of $775,146 and $98,096, respectively, compared to $1,174,214 and $389,158, respectively, for the corresponding periods in 2012. The decrease in selling and general and administrative expenses during the nine and three months ended September 30, 2013 compared to the corresponding periods in 2012 is principally attributable to decreased sales, marketing and management operations resulting, in part, from the shutdown of the operations of our subsidiary IDO Ltd.

 

 

Interest expense- Interest expense for the nine and three months ended September 30, 2013 was $282,556 and $94,471, respectively, compared to $274,507 and $107,135 in the corresponding period in 2012. Interest expense relates primarily to the placement of our convertible promissory notes. Interest expense increased slightly in 2013 as there was more debt outstanding in 2013 than in 2012.

 

Amortizations — The amortizations are included in interest expense in the statement of operations. During the nine and three months ended September 30, 2013, we recorded amortization of $828,199 and $291,268 compared to $458,225 and $174,809 for the corresponding periods in 2012. Amortization represents the accretion of interest relating to the write-down to fair value of extinguished debt as well as amortization related to the debt discount incurred in connection with the placement of our convertible promissory notes. These costs are amortized to the date of maturity of the debt unless converted earlier.

 

Gain on extinguishment of debt – In May 2012, the holders of approximately 73% of the outstanding principal amount of the Notes agreed to waive all existing defaults and consented to a modification of the terms of the Notes. We accounted for the modification of the terms as an extinguishment of debt. In accordance with FASB ASC subtopic 470-50, the face amount of the remaining balance of $5,483,839 was written down to its fair market value of $1,566,704.  We recognized a gain on debt extinguishment of $2,926,717, which included the expensing of unamortized debt discounts totaling $990,418. The reduction to the fair market value will be accreted to interest expense through the new maturity date of December 31, 2015, the date consented to by the waiving note holders.

 

Preferred stock dividends– In connection with our financing arrangements we have issued Series A Preferred Stock. The shares accrue a dividend of 10% per annum. Effective January 1, 2012, a majority of the Series A Preferred stockholders eliminated their dividends. The dividends are cumulative commencing on the issue date whether or not declared. For financial reporting purposes, we recorded a discount to reflect the difference in the amount of proceeds allocable to the Series A Preferred Stock in the offering based on relative fair values and the stated value. The discounts were being amortized as deemed dividends on preferred stock to the date of maturity unless converted earlier. Commencing on July 1, 2009, the Series A Preferred Stock is now being classified as a liability. As such, all dividends accrued and/or paid and any accretions are now classified as part of interest expense and are no longer classified as preferred stock dividends and deemed dividends.  For the nine and three months ended September 30, 2013, dividends and deemed dividends totaled $1,601,163 and $473,240, respectively.   For the nine and three months ended September 30, 2012, dividends and deemed dividends totaled $2,472,051 and $760,851, respectively.

 

Net loss – For the nine and three months ended September 30, 2013, we had a net loss of $4,620,552 and $1,176,602, respectively, compared to a net loss of $1,525,024 and $1,493,177 for the corresponding periods in 2012, for the reasons stated above.

 

LIQUIDITY AND CAPITAL RESOURCES

 

We need to raise additional funds on an immediate basis in order to be able to satisfy our cash requirements and fulfill our business plan over the next twelve months. Without raising additional funds on an immediate basis, whether through the issuance of our securities, licensing fees for our technology or otherwise, we will also not be able to maintain operations as presently conducted. At the present time, we have no commitments for financing and no assurance can be given that we will be able to raise capital on commercially acceptable terms or at all. Even if we raise cash to meet our immediate working capital needs, our cash needs could be heavier than anticipated in which case we could be forced to raise additional capital. Our auditors included a “going concern” qualification in their auditors’ report for the three months ended September 30, 2013. Such “going concern” qualification may make it more difficult for us to raise funds when needed. Moreover, the current economic situation may further complicate our capital raising efforts.

 

As of September 30, 2013, we had a cash balance of $194 compared to $125,982 at December 31, 2012.   

 

 

Cash used in operating activities was $444,765 for the nine months ended September 30, 2013. The decrease in cash was primarily attributable to funding the operating loss for the period.

 

Cash provided by investing activities was $900 during the nine months ended September 30, 2013 and represented the proceeds from the sale of  property and equipment resulting from the termination of operations of our facility in Israel.

 

Cash provided by financing activities was $318,077.  We received proceeds of $302,700 from the issuance of notes and $15,377 was drawn by our wholly-owned subsidiary on its line of credit.

 

To date, we have financed our operations primarily from the sale of our securities (secured convertible notes, Series A Preferred Stock and warrants). See Notes 8 and 9 in our Condensed Consolidated Financial Statements.

 

ITEM 4.

CONTROLS AND PROCEDURES

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our acting Chief Executive Officer (and Principal Financial and Accounting Officer), to allow timely decisions regarding required disclosure based closely on the definition of “disclosure controls and procedures” in Rule 13a-14(c).

 

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with participation of management, including our acting Chief Executive Officer (and Principal Financial and Accounting Officer), of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our acting Chief Executive Officer (and Principal Financial and Accounting Officer) concluded that our disclosure controls and procedures were effective.

 

During the quarter ended September 30, 2013, there have been no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, these controls.

 

 PART II - OTHER INFORMATION

  

ITEM 1.

LEGAL PROCEEDINGS.

 

(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 the Company’s wholly-owned subsidiary, 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), which is equivalent to approximately $418,000 at the time of the filing of this report, 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 $566,000 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.

 

 

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. has 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.

 

On April 15, 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 provided, we believe that the manufacturing activities formerly conducted by IDO Ltd. can be satisfactorily performed by such third party.

 

In addition, IDO Ltd. is subject to litigation by terminated employees in respect of severance and other payments that may be due to them under Israeli law. As of the date of the filing of this report, the Company cannot estimate the amount of any loss that may result.

 

(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.

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

No equity securities were sold by us during the three months ended September 30, 2013 without registration under the Securities Act:

   

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

ITEM 4.

MINE SAFETY DISCLOSURES

 

None.

   

ITEM 5.

OTHER INORMATION

 

None

 

 

 

ITEM 6.

EXHIBITS.

   

Exhibit Number		Description
31		Certification Pursuant to Rule 13a-14a of the Securities Exchange Act of 1934, as amended
32		Certification Pursuant to Section 906 of  Sarbanes-Oxley Act of 2002
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema
101.CAL		XBRL Taxonomy Extension Calculation Linkbase
101.DEF		XBRL Taxonomy Extension Definition Linkbase
101.LAB		XBRL Taxonomy Extension Label Linkbase
101.PRE		XBRL Taxonomy Extension Presentation Linkbase

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		IDO SECURITY INC.
Date: November 19, 2013		/s/ MAGDIEL RODRIGUEZ
		MAGDIEL RODRIGUEZ CHIEF EXECUTIVE OFFICER (PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER) AND PRESIDENT